<PAGE> 1
Filed Pursuant to Rule 424(b)(4)
Registration Statement # 333-10161
PROSPECTUS
SEPTEMBER 19, 1996
$110,000,000
(SYGNET LOGO)
11 1/2% SENIOR NOTES DUE 2006
The 11 1/2% Senior Notes due 2006 (the "Notes") are being offered (the
"Offering") by Sygnet Wireless, Inc. (the "Company"). The net proceeds of the
Offering will be used to finance the acquisition (the "Horizon Acquisition") of
certain cellular telephone systems. See "Use of Proceeds." If the proceeds are
not used for such purpose within 120 days of the Offering, the Company must
offer to repurchase the Notes at 101% of the principal amount thereof plus
accrued interest. Use of such proceeds is also conditioned upon the receipt by
the Company of not less than $19.0 million in net proceeds from the Preferred
Stock Investment (as defined). See "Description of Notes -- Limitation on Use of
Proceeds; Proceeds Purchase Offer."
Interest on the Notes will be payable semi-annually on October 1 and April 1
of each year, commencing on April 1, 1997. The Notes will be redeemable, in
whole or in part, at the option of the Company, at any time on or after October
1, 2001 at the redemption prices set forth herein plus accrued and unpaid
interest, if any, to the date of redemption. In addition, at any time during the
first 36 months after the date of the original issuance of Notes, the Company
may redeem up to an aggregate of $38.5 million in principal amount of Notes at a
redemption price of 111.5% of the principal amount thereof, plus accrued and
unpaid interest thereon, with the net proceeds of an offering of Qualified
Capital Stock (as defined) of the Company; provided that at least $71.5 million
in aggregate principal amount of Notes remain outstanding immediately after the
occurrence of such redemption. See "Description of Notes."
The Notes will be general unsecured obligations of the Company and will rank
pari passu in right of payment with all future senior indebtedness of the
Company, if any, and senior in right of payment to all future subordinated
indebtedness of the Company, if any. However, the Company is a holding company
with no direct operations or assets other than the stock of Sygnet
Communications, Inc. (the "Subsidiary"), which holds substantially all of the
operating assets. The Notes will not be guaranteed by the Subsidiary. As a
result, all indebtedness of the Subsidiary, including the Subsidiary's secured
borrowings under the Bank Credit Facility (as defined below), will be
structurally senior to the Notes. In addition, borrowings under the Bank Credit
Facility are secured by a pledge of the stock of the Subsidiary and by all of
its operating assets. As of June 30, 1996, after giving effect to the Horizon
Acquisition and the related financing, the Subsidiary would have had $211.8
million of total outstanding liabilities which would have been structurally
senior to the Notes. See "Risk Factors -- Holding Company Structure; Structural
Subordination." The Company has no debt at the holding company level other than
the Notes.
SEE "RISK FACTORS" BEGINNING ON PAGE 12 HEREOF FOR CERTAIN INFORMATION THAT
SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE NOTES. THESE
SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
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PRICE UNDERWRITING PROCEEDS
TO THE DISCOUNTS AND TO THE
PUBLIC(1) COMMISSIONS(2) COMPANY(3)
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------
Per Note...................................... 100.0% 3.0% 97.0%
Total......................................... $110,000,000 $3,300,000 $106,700,000
- -------------------------------------------------------------------------------------------------------
</TABLE>
(1) Plus interest, if any, from the date of issuance.
(2) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting" for the indemnification arrangement with the
Underwriters.
(3) Before deducting expenses of the Offering payable by the Company, estimated
at $1.1 million.
The Notes are offered by the several Underwriters subject to prior sale,
when, as and if delivered to and accepted by them, and subject to various prior
conditions, including the right to reject any order in whole or in part. It is
expected that delivery of the Notes will be made against payment therefor in New
York, New York on or about September 26, 1996.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
LEHMAN BROTHERS
TORONTO DOMINION SECURITIES
<PAGE> 2
<TABLE>
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PAGE # DESCRIPTION
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<S> <C>
INSIDE FRONT COVER SPREAD The map depicts an enlargement of the Company's
cellular telephone service areas, which include
The Youngstown, OH MSA, Sharon, PA MSA, Erie,
PA MSA, OH-11 RSA, NY-3 RSA, PA-6 RSA, PA-7 RSA
and PA-2 RSA.
The map differentiates the properties The
Company currently owns from those it intends to
acquire pursuant to the Horizon Acquisition.
</TABLE>
<PAGE> 3
CERTAIN TERMS
For regulatory purposes, the Federal Communications Commission ("FCC") has
designated regions of the United States as either a Metropolitan Statistical
Area ("MSA") or Rural Service Area ("RSA"). Interests in cellular markets are
commonly measured on the basis of the population of the MSA or RSA served, with
each person in the market area referred to as a "Pop." The number of Pops (or
"Net Pops") owned is not the same as the number of subscribers, or even
potential subscribers. As used in this Prospectus, unless otherwise indicated,
the term "Pops" means the estimate of the population of an MSA or RSA, as
derived from the Rand McNally Commercial Atlas and Marketing Guide population
estimates. The term "Net Pops" means the estimated population with respect to a
given service area multiplied by the percentage interest that the Company owns
in the entity licensed in such service area (except in the case of the PA-2 RSA
which the Company does not own, but operates under an FCC grant of Interim
Operating Authority ("IOA")). Because the Company owns 100% of the interest in
each of its MSAs and RSAs, at this point in time, Net Pops equal Pops. Except
for historical financial information and unless otherwise indicated, all
references herein to Pops, Net Pops and the Company's systems give effect to
consummation of the Horizon Acquisition, which will occur simultaneously with
the closing of the Offering. The term "non-wireline" license refers to the
license for any market that was initially awarded to a company, individual or
group, not affiliated with any landline carrier providing service in the market.
The term "wireline" license refers to the license for any market that was
initially awarded to a company, individual or group, affiliated with a landline
carrier providing service in the market. There is, however, no technical
distinction between a wireline and a non-wireline license. The term "system"
means an FCC-licensed cellular telephone system. The term "cell" refers to the
service area of an individual transmitter location in a cellular system. The
term "footprint" refers to the total system coverage area represented by an MSA
or RSA served under FCC license by a given licensee. The term "TDMA" means a
digital technology that uses time division multiple access. The term "PCS" means
personal communications services. The term "churn" refers to the ratio of
disconnected monthly subscribers to average monthly subscribers. The term "CTIA"
means the Cellular Telecommunications Industry Association. The term "NACN"
means the North American Cellular Network.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"SEC") a Registration Statement on Form S-1 (the "Registration Statement") under
the Securities Act with respect to the Notes offered hereby. This Prospectus,
which constitutes a part of the Registration Statement, does not contain all of
the information set forth in the Registration Statement, certain items of which
are contained in schedules and exhibits to the Registration Statement as
permitted by the rules and regulations of the SEC. Any statements contained
herein concerning the provisions of any document filed as an Exhibit to the
Registration Statement or otherwise filed with the SEC are not necessarily
complete and, in each instance, reference is made to the copy of such document
so filed. Each such statement is qualified in its entirety by such reference.
The Company intends to furnish holders of the Notes annual reports
containing audited financial statements and quarterly reports for the first
three quarters of the fiscal year containing unaudited financial statements.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE NOTES AT A
LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED IN THE OPEN MARKET OR OTHERWISE. SUCH STABILIZING,
IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information (including the Company's combined financial statements and notes
thereto) contained elsewhere in this Prospectus. Unless the context otherwise
requires, references to the "Company" are to Sygnet Wireless, Inc., an Ohio
corporation, its wholly-owned subsidiary, Sygnet Communications, Inc., and their
respective predecessors prior to the corporate restructuring described elsewhere
in this Prospectus and include the operations to be acquired in part with the
proceeds of the Offering. The term "Horizon Acquisition" refers to the
acquisition under the agreement to purchase five RSAs in western Pennsylvania
and New York (PA-1, PA-2, PA-6, PA-7 and NY-3) from three Horizon Cellular
Telephone Company affiliates, as described more fully below under "Business --
The Horizon Acquisition."
THE COMPANY
Upon consummation of the Horizon Acquisition, the Company will own and
operate cellular telephone systems serving one large cluster with approximately
2.4 million Pops in northeastern Ohio, western Pennsylvania and western New
York. The Horizon Acquisition will add five RSAs (the "Horizon Systems") to the
three MSAs and one RSA currently operated by the Company (the "Existing
Systems"), providing the Company with over 89,000 subscribers. The Company's
cellular systems are located in Youngstown, Ohio and Erie, Pennsylvania and in
primarily suburban and rural areas between the Cleveland, Akron-Canton,
Pittsburgh, Buffalo and Rochester metropolitan areas. The Company believes that
its mix of suburban and rural locations provides it with advantages over
cellular operators in predominately urban areas, including greater roaming
revenue opportunities, lower distribution costs and higher costs of entry for
new competitors. The Company has converted all of its Existing Systems to TDMA
digital technology and will selectively convert the more densely populated
portions of the Horizon Systems to digital technology in early 1997. For a
general description of the cellular telephone industry and the regulation
thereof, see "Business -- Overview of the Cellular Telephone Industry" and
"Business -- Regulatory Overview."
The Company began operating cellular systems in 1985 in Youngstown, Ohio
and has expanded to cover nine contiguous markets through a series of
acquisitions. The Company is owned and controlled by the Williamson family,
which has owned and operated broadcast and other communications companies in
northeastern Ohio and western Pennsylvania since 1926. The following table
summarizes the Existing Systems and the Horizon Systems.
<TABLE>
<CAPTION>
DATE OF
TOTAL POPS OWNERSHIP NET POPS ACQUISITION
<S> <C> <C> <C> <C>
EXISTING SYSTEMS(1)
Youngstown, OH MSA............................... 491,900 100% 491,900 1985
Sharon, PA MSA................................... 122,100 100% 122,100 1987
Erie, PA MSA..................................... 280,600 100% 280,600 1995
Columbiana, OH, OH-11 RSA........................ 111,700 100% 111,700 1991
HORIZON SYSTEMS(1)(2)
Chautauqua, NY, NY-3 RSA......................... 485,200 100% 485,200 1996
Crawford, PA, PA-1 RSA........................... 197,200 100% 197,200 1996
Lawrence, PA, PA-6 RSA........................... 376,400 100% 376,400 1996
Indiana, PA, PA-7 RSA............................ 217,100 100% 217,100 1996
McKean, PA, PA-2 RSA(3).......................... 89,400 100% 89,400 1996
---------- ---------
Total.................................... 2,371,600 2,371,600
</TABLE>
- -----------------------------
(1) All of the Existing Systems and Horizon Systems licenses are non-wireline
licenses.
(2) To be acquired as described under "Business -- The Horizon Acquisition."
(3) The Horizon Acquisition includes the Pops in the PA-2 RSA where the Company
has IOA pending the FCC's final determination of the qualifications of the
initial lottery winner to hold the permanent license for the PA-2 RSA. The
Company will not be issued the permanent license to provide cellular service
in this RSA (unless the Company were to reach an agreement to purchase the
license from the eventual recipient of the license) and the Company's IOA
from the FCC will expire upon selection of the new licensee and the
commencement of operations by that licensee. Until the expiration of the
IOA, however, the Company is entitled to all revenue and income generated by
the PA-2 RSA. The Company believes that the expiration of such authority
will not have a material adverse effect on its results of operations,
financial position or cash flows.
3
<PAGE> 5
BUSINESS STRATEGY
The Company's goal is to become the leading full service provider of mobile
telecommunications services in its cluster by offering technically advanced
cellular service, superior coverage and a high level of customer service at
competitive prices. Specifically, the Company's business objectives are to
increase penetration and improve profitability in both the Horizon Systems and
its Existing Systems by taking advantage of its ability to operate in a much
larger regional footprint. In addition, the Company may in the future acquire
additional systems that provide the Company with the ability to further its
strategic objectives.
- Developing the Horizon Systems. The Company believes that the Horizon
Systems are underdeveloped and underpenetrated compared to its Existing
Systems and represent a substantial growth opportunity for the Company.
By taking advantage of marketing, operating and engineering synergies
arising from the Horizon Acquisition, the Company believes that it will
be able to decrease overall per subscriber operating costs and rapidly
increase penetration in the Horizon Systems to levels comparable to those
achieved in its Existing Systems. Immediately upon consummation of the
Horizon Acquisition, the Company will apply its business strategy to the
Horizon Systems, which strategy has generated significant subscriber and
revenue growth in its Existing Systems, including the Erie, PA MSA
acquired in September 1995 (the "Erie Acquisition").
- Aggressive Marketing and Promotion of Cellular Services. The Company
plans to implement the aggressive marketing programs that it has been
using in its Existing Systems to increase subscriber activations in the
Horizon Systems. These include competitive rate plans which provide low
priced regional roaming rates tailored for individual markets and
attractive equipment prices. In addition, the Company will use a mix of
advertising media such as television, radio and outdoor advertising to
reach potential new subscribers.
- Local Retail Outlets and Superior Customer Service. The Company strives
to provide a high level of customer service and the Company's use of
local retail stores is a key element of this local subscriber service
strategy. The Company's stores are staffed with sales and customer
service representatives who provide a more direct, specifically targeted
level of customer service than is ordinarily offered by larger
competitors relying on centralized customer service operations. By having
a permanent local retail presence, the sales staff can cultivate local
market knowledge that allows them to focus their efforts on the specific
demands of the market or markets in which they operate. This improves
their ability to establish relationships with customers, to understand
the customer's needs and to reduce churn. The sales team's ability to
promote the Company's services both inside and outside of its cluster is
enhanced by its license to market under the CELLULAR ONE(R) brand name
and its continuing participation in the NACN, a national cellular network
comprised principally of non-wireline carriers whose goal is to make
cellular service "seamless" throughout North America by facilitating
automatic roaming to and from member systems.
- Advanced Systems Design. The Company's system design and the TDMA
digital technology it employs provide the foundation for technically
superior cellular service. The Company has deployed a large number of
cell sites in each service area. Consequently, subscribers in the
Existing Systems enjoy a high level of local and regional coverage,
resulting in high quality hand-held coverage throughout most of its
population centers, minimal call blocking, seamless call delivery through
NACN and the availability of digital voice and data services. All of the
Company's existing cells have already been upgraded to offer TDMA digital
services and the Company intends to selectively improve the technology
being used in the Horizon Systems to match this high quality level. The
Company believes it is well positioned to address new technologies that
might become available in its markets.
- Decentralized Marketing Management. The Company has assembled
management, sales and operating staff with extensive experience and
relationships within each market. The decentralized market management
structure adopted by the Company allows it to tailor its service to meet
the needs of each market. This local approach to marketing is coordinated
with senior management of the Company and allows each market to benefit
from shared corporate resources.
4
<PAGE> 6
- Acquisition Strategy. The Company's primary external growth strategy has
been to develop its cellular system by pursuing acquisitions that expand
its regional footprint, can be operated efficiently, enhance its
reciprocal relationships with other cellular telephone carriers and
provide an opportunity to gain significant competitive advantages. As it
has done successfully in the past, the Company intends to pursue
acquisition opportunities which permit the Company to achieve these
strategic objectives either with respect to its current cluster or
elsewhere.
- Future Competition. The Company is preparing for what is expected to be
an increasingly competitive telecommunications environment by
aggressively working to attract new subscribers. The Company believes it
is prepared for this competition because it is not dependent on high
roaming or local rates. In addition, the Company believes that it can
effectively face this competition from its position as an incumbent in
the cellular field with a high quality network that is not capacity
constrained. The Company also has an extensive footprint, strong
distribution channels, superior customer service capabilities and an
experienced management team. Because the Company operates in medium to
small markets, the new PCS licensees may be unable or unwilling to offer
commercially viable wireless service in much of the Company's area in the
near term. The Company believes the extensive capital expenditures
required to deploy the infrastructure for PCS is more readily justifiable
from an economic standpoint in larger, more densely populated urban
areas. This constraint of PCS may position the Company to offer roaming
services to PCS customers, as well as to provide bulk lines of service
for resale to certain PCS companies. For example, the Company's existing
Youngstown and Erie systems are equipped to provide TDMA digital roaming
to AT&T Wireless PCS subscribers when AT&T Wireless introduces dual band
TDMA phones in the adjacent Cleveland and Buffalo-Rochester MTAs.
THE HORIZON ACQUISITION
On July 11, 1996, the Company signed an agreement with Horizon Cellular
Telephone Company of Chautauqua, L.P., Horizon Cellular Telephone Company of
Crawford, L.P. and Horizon Cellular Telephone Company of Indiana, L.P. (the
"Horizon Companies") to purchase for $250.0 million in cash (subject to net
working capital adjustment) the Horizon Systems, which consist of the PA-1,
PA-2, PA-6, PA-7 and NY-3 RSAs. Under the agreement, the Company is to become
the cellular licensee serving contiguous markets representing approximately 1.3
million Pops and covering over 16,125 square miles in western Pennsylvania and
New York. The PA-2 RSA, which represents 89,400 Pops, currently operates under
IOA pending the FCC's final determination of the qualifications of the initial
lottery winner to hold the permanent license for the PA-2 RSA. While the Company
is not acquiring a permanent license for the PA-2 RSA, it is entitled to all
revenue and income generated by the cellular system until the FCC resolves the
dispute. The Company is unable to predict when or how the FCC will resolve this
matter.
Simultaneously with the closing of the Horizon Acquisition, the Subsidiary
will obtain secured financing from a number of commercial lenders (the
"Lenders") under a $300.0 million revolving line of credit (the "Bank Credit
Facility"), the agents for which will be Toronto Dominion (Texas), Inc. and PNC
Bank, National Association. In addition, the Company will issue (the "Preferred
Stock Investment") $20.0 million liquidation amount of Cumulative Preferred
Stock (the "Preferred Stock") to Toronto Dominion Investments, Inc. or one or
more other affiliates of Toronto Dominion (Texas), Inc. Dividends on the
Preferred Stock will accrue at a rate of 15% per annum for the first four
quarters and will increase by 2% for each four quarter period thereafter until
reaching a maximum rate of 21% per year, and such dividends will be payable
solely through the issuance of additional Preferred Stock. If any event of
default under the terms of the Preferred Stock occurs and is continuing or if
the Company's Annualized Operating Cash Flow Ratio (using substantially the same
definition as that used in the Indenture) exceeds 12.0-to-1.0, then the
otherwise applicable dividend rate for the Preferred Stock will be increased by
5% per annum. In addition, Toronto Dominion Investments, Inc. is entitled to
warrants to purchase Class A Common Stock (as defined) of the Company unless the
Preferred Stock is redeemed with the proceeds of an initial public offering of
Class A Common Stock or from other permitted sources within nine months of the
date of the Preferred Stock Investment. See "Description of Capital
Stock -- Preferred Stock."
5
<PAGE> 7
Proceeds of the Offering, the Preferred Stock Investment and borrowings
under the Bank Credit Facility will be used to pay the purchase price in the
Horizon Acquisition and the related fees and expenses. See "Use of Proceeds." If
the proceeds of the Offering have not been so applied within 120 days of the
closing of the sale of the Notes, the Company will offer to purchase the Notes
at 101% of the principal amount thereof, plus accrued interest to the purchase
date. See "Description of Notes -- Limitation on Use of Proceeds; Proceeds
Purchase Offer." The remainder of availability under the Bank Credit Facility
will be used for working capital purposes, to refinance $71.5 million in
existing debt (unless repaid earlier using proceeds of the Offering) and for
system expansion. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources" and
"Description of Bank Credit Facility."
6
<PAGE> 8
THE OFFERING
The following summary description of the Notes is qualified in its entirety
by the more detailed information set forth under the caption "Description of
Notes" contained elsewhere in this Prospectus.
Notes Offered...................... $110,000,000 aggregate principal amount
of 11 1/2% Senior Notes due 2006.
Maturity Date...................... October 1, 2006.
Interest Payment Dates............. April 1 and October 1 of each year,
commencing April 1, 1997.
Mandatory Redemption............... None.
Optional Redemption................ The Notes will be redeemable, in whole or
in part, at the option of the Company at
any time on or after October 1, 2001 at
the redemption prices set forth herein,
plus accrued and unpaid interest, if any,
to the date of redemption. In addition,
at any time during the first 36 months
after the date of the original issuance
of Notes, the Company may redeem up to an
aggregate of $38.5 million in principal
amount of Notes at a redemption price of
111.5% of the principal amount thereof,
plus accrued and unpaid interest thereon,
with the net proceeds of an offering of
Qualified Capital Stock (as defined) of
the Company; provided that at least $71.5
million in aggregate principal amount of
Notes remain outstanding immediately
after the occurrence of such redemption.
See "Description of Notes -- Optional
Redemption."
Limitations on Use of Proceeds;
Proceeds Purchase Offer............ All net proceeds received by the Company
from the sale of the Notes shall be
applied to the purchase of assets in the
Horizon Acquisition or, as set forth
below, to repay indebtedness under the
Subsidiary's existing bank credit
facility pending such acquisition;
provided, however, that no such proceeds
may be applied to the purchase of assets
in Horizon Acquisition until the Company
has received at least $19.0 million in
proceeds from the Preferred Stock
Investment and the Trustee has received
certain opinions and certificates
regarding the Horizon Acquisition.
Pending the consummation of the Horizon
Acquisition, all such proceeds shall be
held by the Company in a separate bank
account, except that up to $71.5 million
of the net proceeds from the sale of the
Notes may be contributed to the
Subsidiary to repay indebtedness under
the Subsidiary's existing bank credit
facility, but only to the extent that the
banks thereunder consent to allow the
amounts repaid to be reborrowed and paid
as a dividend to the Company for the sole
purpose of funding a repurchase of the
Notes in the event that the Horizon
Acquisition does not occur within 120
days following the closing of the sale of
the Notes.
In the event that all of the net proceeds
of the sale of the Notes have not been so
applied, directly or indirectly, to the
purchase of assets in the Horizon
Acquisition within
7
<PAGE> 9
120 days of the closing of the sale of
the Notes, the Company will make an offer
(a "Proceeds Purchase Offer") to all
holders of Notes to purchase on a pro
rata basis, at a price of 101% of the
principal amount thereof plus accrued
interest to the purchase date, all Notes
that may be purchased at such price with
such unapplied net proceeds.
Ranking............................ The Notes will be general unsecured
obligations of the Company and will rank
pari passu with all senior indebtedness
of the Company, if any, and senior in
right of payment to all subordinated
indebtedness of the Company, if any. The
Company is a holding company with no
direct operations and assets other than
the stock of the Subsidiary. The Notes
will not be guaranteed by the Subsidiary,
therefore the Notes will be structurally
subordinated to all liabilities of the
Subsidiary. After giving effect to the
Horizon Acquisition and the other
transactions described under "Unaudited
Pro Forma Condensed Consolidated
Financial Data" (the "Related
Transactions") as if such transactions
had occurred on June 30, 1996, the
Subsidiary would have had $211.8 million
of total outstanding indebtedness
(including $204.4 million of secured
borrowings under the Bank Credit
Facility), all of which is structurally
senior in right of payment to the Notes.
The indenture governing the Notes (the
"Indenture") will allow the Company and
the Subsidiary to incur additional
indebtedness. See "Description of
Notes -- Certain Covenants."
Certain Covenants.................. The Indenture imposes certain limitations
on the ability of the Company and its
Restricted Subsidiaries (as defined) to,
among other things, incur Indebtedness
(as defined), make Restricted Payments
(as defined), effect certain Asset Sales
(as defined), enter into certain
transactions with Related Persons (as
defined), merge or consolidate with any
other person or transfer all or
substantially all of their properties and
assets. See "Description of Notes --
Certain Covenants."
Change of Control.................. Upon the occurrence of a Change of
Control (as defined in the Indenture),
each holder of Notes will have the right
to require the Company to repurchase such
holder's Notes at 101% of the principal
amount thereof plus accrued and unpaid
interest thereon, if any, to the
repurchase date. In addition, a Change in
Control (as defined in the Bank Credit
Facility) will result both in an event of
default under the Bank Credit Facility
permitting the Lenders to accelerate such
indebtedness and in a Mandatory
Redemption Event under the terms of the
Preferred Stock (as defined in the
Preferred Stock Investment). Under such
circumstances, the Company may be
obligated to redeem, repurchase or
otherwise satisfy up to as much as $110.0
million in principal under the Notes,
$300.0 million in principal under the
Bank Credit Facility, and $20.0 mil-
8
<PAGE> 10
lion face amount of the Preferred Stock
(plus, as applicable, associated accrued
interest, dividends, penalties, premiums
and expenses). The Bank Credit Facility
may restrict the ability of the Company
to obtain the funds necessary to
repurchase the Notes in the event of a
Change of Control, and the Company may
not have sufficient funds or financing
available to satisfy its obligations to
repurchase the Notes. See "Description of
Notes -- Certain Covenants -- Change of
Control" and "Description of Bank
Facility" and "Description of Capital
Stock -- Preferred Stock."
Events of Default.................. Events of Default under the Indenture
include failure to pay principal or
interest on the Notes, failure to make
payments on other indebtedness, breach of
certain covenants, certain events of
bankruptcy and insolvency and other
customary events. See "Description of
Notes -- Events of Default and Remedies."
Use of Proceeds.................... The Company intends to use the net
proceeds of the Offering to finance a
portion of the Horizon Acquisition. See
"Use of Proceeds" and "Business -- The
Horizon Acquisition."
RISK FACTORS
Certain factors should be considered in connection with an investment in
the Notes. See "Risk Factors."
9
<PAGE> 11
SUMMARY FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT OPERATING DATA)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA(1)
------------------------------------------- ---------------------------------
AS ADJUSTED
YEAR ENDED DECEMBER 31, SIX MONTHS SIX MONTHS
--------------------------- ENDED YEAR ENDED ENDED
1993 1994 1995 JUNE 30, 1996 DECEMBER 31, 1995 JUNE 30, 1996
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenue....................... $14,474 $18,048 $24,577 $17,227 $56,577 $ 32,803
Cost of services.................... 2,515 3,452 3,366 2,331 9,028 4,919
Cost of equipment sales............. 930 1,624 4,164 2,003 7,688 3,445
General and administrative
expense........................... 4,412 4,467 5,141 3,613 9,514 5,816
Selling and marketing expense....... 2,166 2,555 3,505 2,356 9,082 4,542
Depreciation and amortization....... 1,951 2,639 3,487 2,483 14,456 7,505
Operating income.................... 2,500 3,311 4,914 4,441 6,809 6,576
Interest expense, net............... 652 964 2,613 2,633 28,947 14,488
Other expense....................... 188 553 286 229 351 348
Net income (loss)................... 1,523 1,722 1,950 1,460 (22,489) (8,260)
Ratio of earnings to fixed
charges(2)........................ 3.11 2.60 1.67 1.56
OTHER FINANCIAL DATA:
EBITDA(3)........................... $ 4,451 $ 5,950 $ 8,401 $ 6,924 $21,265 $ 14,081
<CAPTION>
PRO FORMA(1)
HISTORICAL AS ADJUSTED
AS OF AS OF
JUNE 30, 1996 JUNE 30, 1996
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital..................... $ 3,484 $ 6,265
Property and equipment, net......... 22,430 43,267
Cellular licenses, net.............. 48,824 277,987
Total assets........................ 80,181 344,539
Long-term debt...................... 70,500 313,393
Total liabilities................... 74,695 321,834
Preferred stock..................... 19,000
Shareholders' equity................ 5,485 3,705
SELECTED OPERATING DATA:
Existing Systems(4)
Ending subscribers................ 18,037 24,124 44,665 50,797
Penetration(5).................... 2.5% 3.3% 4.4% 5.0%
Churn(6).......................... 1.3% 1.5% 1.4% 1.3%
Subscriber revenue per average
subscriber...................... $ 50 $ 45 $ 46 $ 45
Selling & marketing costs (all in)
per gross additional
subscriber(7)................... $ 416 $ 418 $ 396 $ 391
Horizon Systems(4)
Ending subscribers................ 9,530 17,188 33,226 38,371
Penetration(5).................... 0.9% 1.6% 2.4% 2.8%
Churn(6).......................... n/a 1.0% 1.1% 1.5%
Subscriber revenue per average
subscriber...................... n/a $ 38 $ 36 $ 36
Selling & market costs (all in)
per gross additional
subscriber(7)................... n/a $ 337 $ 328 $ 350
</TABLE>
- -----------------------------
n/a -- Information not available
(1) The unaudited pro forma statement of operations data and EBITDA for the year
ended December 31, 1995 and the six months ended June 30, 1996 include the
historical operations of the Company and give effect to the following as if
they occurred as of January 1, 1995, (i) the Erie Acquisition, (ii) the
Horizon Acquisition, (iii) the Offering, (iv) the repayment of existing
debt, (v) the borrowings under the Bank Credit Facility, (vi) the Preferred
Stock Investment and (vii) the corporate restructuring of the
10
<PAGE> 12
Company. The unaudited pro forma balance sheet data as of June 30, 1996
includes the historical accounts of the Company and gives effect to the
following as if they occurred as of June 30, 1996, (i) the Horizon
Acquisition, (ii) the Offering, (iii) the repayment of existing debt, (iv)
the borrowings under the Bank Credit Facility, (v) the Preferred Stock
Investment, (vi) the corporate restructuring of the Company and (vii) the
termination of Subchapter S status of the predecessor corporations for
federal and state income tax purposes. The unaudited pro forma condensed
consolidated financial information gives effect to the Erie and Horizon
Acquisitions under the purchase method of accounting.
(2) For the purposes of computing the ratio of earnings to fixed charges and pro
forma deficiency of earnings to fixed charges, "earnings" are defined as
earnings before extraordinary items and accounting changes, interest
expense, amortization of deferred financing costs, taxes and a portion of
rent expense representative of interest. Fixed charges consist of interest
expense, amortization of deferred financing costs and a portion of rent
expense representative of interest. On a pro forma basis, the Company would
include preferred stock dividend requirements in computing its ratio of
earnings to combined fixed charges and preferred stock dividends. The pro
forma deficiency of earnings to combined fixed charges and preferred stock
dividends was $30.1 million for the year ended December 31, 1995 and $12.7
million for the six months ended June 30, 1996.
(3) EBITDA means income before interest expense, income tax expense,
depreciation and amortization expense, minority interest and other non-cash
expenses. EBITDA is not intended to represent cash flows from operating
activities, as determined in accordance with generally accepted accounting
principles, nor has it been presented as an alternative to operating income
as an indicator of operating performance and should not be considered as a
substitute for measures of performance prepared in accordance with generally
accepted accounting principles.
(4) Existing Systems, which include the Company on a historical basis and Erie
Cellular Telephone Company for the period from September 30, 1993 through
December 31, 1995, represent certain operating data for the years ended
December 31, 1993, 1994 and 1995. Horizon Systems include certain operating
data for the Horizon Companies for the years ended December 31, 1993, 1994
and 1995.
(5) Represents the ratio of ending subscribers to total Pops of system.
(6) Represents the average of the monthly churn rates during the periods
presented. Churn equals the ratio of disconnected monthly subscribers to
average monthly subscribers.
(7) Includes selling and marketing expense, cost of equipment sales (net of
revenue) and cost of equipment rentals.
11
<PAGE> 13
RISK FACTORS
In addition to the other information contained in this Prospectus, the
following risk factors should be carefully considered in evaluating the Company
and its business before purchasing the Notes offered hereby.
LEVERAGE AND ABILITY TO MEET REQUIRED DEBT SERVICE
The Company considers itself highly leveraged. On a pro forma basis, after
giving effect to the Horizon Acquisition and the debt incurred to finance such
acquisition, including the Notes, the Company's ratio of EBITDA to total
interest expense would have been 0.7 and 1.0, for the year ended December 31,
1995 and the six months ended June 30, 1996, respectively, and the Company's net
loss and deficiency of earnings to combined fixed charges and preferred stock
dividends would have been $30.1 million and $12.7 million. The Company's high
degree of leverage could significantly limit its ability to make acquisitions,
withstand competitive pressures, weather adverse economic conditions, finance
its operations or take advantage of business opportunities that may arise.
The Company intends for the Subsidiary to finance its planned capital
expenditures and ongoing operations primarily using cash flow from operations
and credit availability under the Bank Credit Facility. Aggregate capital
expenditure levels are expected to range from approximately $25.0 million to
$30.0 million from the date of the Offering through December 31, 1997. While the
Company believes that the Subsidiary will have sufficient credit availability
under the Bank Credit Facility and its cash flow from operations to fund such
activities, if the Subsidiary is unable to satisfy any one of its covenants
under the Bank Credit Facility, including its five financial performance
covenants, then the Subsidiary will not be able to borrow under the Bank Credit
Facility during such time period to fund planned capital expenditures, its
ongoing operations or other permissible uses (including payment of dividends to
service interest on the Notes). See "Description of Bank Credit Facility." The
ability of the Subsidiary to fund its planned capital expenditures using credit
availability under the Bank Credit Facility and its cash flow from operations
will also be limited by the requirement under that Bank Credit Facility that, on
an annual basis beginning March 31, 2000, the Subsidiary must make additional
payments of principal thereunder equal to 50% of excess cash flow, which
payments will permanently reduce the amount of credit availability.
The Company's ability to service its debt will require significant and
sustained growth in the Company's cash flow. There can be no assurance that the
Company will be successful in improving its cash flow by a sufficient magnitude
or in a timely manner or in raising additional equity or debt financing to
enable the Company to meet its debt service requirements.
HOLDING COMPANY STRUCTURE; STRUCTURAL SUBORDINATION
The Company is a holding company with no direct operations and no
significant assets other than the stock of the Subsidiary. The Notes will be
general unsecured obligations of the Company and will rank pari passu in right
of payment with all future senior indebtedness of the Company, if any, and
senior in right of payment to all future subordinated indebtedness of the
Company, if any. The Company does not currently have any other existing debt
other than debt of the Subsidiary. The Notes will not be guaranteed by the
Subsidiary. As a result, all indebtedness of the Subsidiary, including the
Subsidiary's borrowings under the Bank Credit Facility, will be structurally
senior to the Notes. In addition, the Company will pledge the stock of the
Subsidiary to secure the borrowings under the Bank Credit Facility and the
Subsidiary and any other subsidiaries will grant liens on substantially all of
their assets as security for the obligations under the Bank Credit Facility.
Because the Notes are not secured by any assets, in the event of a dissolution,
bankruptcy, liquidation or reorganization of the Subsidiary, holders of the
Notes may receive less ratably than the secured creditors under the Bank Credit
Facility. As of June 30, 1996, after giving effect to the Horizon Acquisition
and the Related Transactions, the Subsidiary would have had $211.8 million of
total outstanding liabilities (including $204.4 million of secured borrowings
under the Bank Credit Facility), all of which is structurally senior in right of
payment to the Notes. See "Capitalization" and "Unaudited Pro Forma Condensed
Consolidated Financial Statements." The Company is dependent on the cash flow of
the Subsidiary to meet its obligations, including the payment of interest and
principal obligations on the Notes when due. Accordingly, the Company's ability
to make principal, interest and other payments to holders of the Notes when due
is dependent on the receipt of sufficient funds from the Subsidiary. Receipt of
such funds will be
12
<PAGE> 14
restricted by the terms of existing and future indebtedness of the Subsidiary,
including the Bank Credit Facility. See "Description of Bank Credit Facility."
BUSINESS RISKS ASSOCIATED WITH THE HORIZON ACQUISITION
The Company will be subject to risks that the Horizon Systems will not
perform as expected and that the returns from such systems will not support the
indebtedness incurred to acquire, or the capital expenditures needed to develop,
such systems. See "Business -- The Horizon Acquisition."
The Company has filed applications seeking FCC approval to assign each of
the licenses to be acquired by the Company as part of the Horizon Acquisition.
The Company may consummate such acquisition after the FCC grants the
applications, but prior to the time the FCC grants are no longer subject to
reconsideration or review. If the Company consummates such acquisition prior to
the time the grants become final orders, there can be no assurance that any or
all such grants will not be reconsidered, reviewed or revoked. In the event any
such grant is revoked, the Company could be required to refile its applications,
rescind the acquisition or otherwise dispose of the licenses acquired pursuant
to the Horizon Acquisition.
COMPETITION
In each of its markets, the Company competes with one other cellular
licensee, most of which are larger and have greater financial resources than the
Company. See "Business -- Cellular Markets and Systems -- Competitors and
Adjoining Systems." The Company also competes, although to a lesser extent, with
paging companies and landline telephone service providers. Many of the Company's
current and potential competitors have financial, personnel and other resources
substantially greater than those of the Company, as well as other competitive
advantages over the Company. See "Business -- Competition" for more detailed
information on the competitive environment faced by the Company. Current
policies of the FCC authorize only two cellular licensees to operate in each
license area and the Company expects there will continue to be competition from
the other licensee authorized to serve each cellular market in which the Company
operates. Competition for subscribers between cellular licensees in a given
license area is based principally upon the services and enhancements offered,
the technical quality of the cellular system, customer service, system coverage
and capacity and price.
As a result of recent regulatory and legislative initiatives, the Company's
cellular operations may face increased competition from entities using or
proposing to use other comparable communications technologies. The Company is
unable to predict whether such competing technologies will be successful and as
a result will provide significant competition for the Company. While some of
these technologies and services using them are currently operational, most are
still in the process of development and commercialization. For example, the
Company's cellular operations are expected to face additional competition from
new market entrants once systems designed to provide PCS have been constructed
and become operational and may face competition from other technologies
developed in the future including, but not limited to, satellite systems. The
Company believes the likelihood of near-term competition from such services is
reduced because the areas in which it operates are less densely populated. There
can be no assurance, however, that one or more of the technologies currently
utilized by the Company in its business will not become inferior or obsolete at
some time in the future. See "Business -- Competition."
RAPID TECHNOLOGICAL CHANGES
The telecommunications industry is subject to rapid and significant changes
in technology, including advancements protected by intellectual property laws.
While the Company believes that for the foreseeable future these changes will
not materially hinder the Company's ability to acquire necessary technologies,
the effect of technological changes on the businesses of the Company cannot be
predicted. Thus, there can be no assurance that technological developments will
not have a material adverse effect on the Company.
DEPENDENCE ON KEY PERSONNEL
The Company's businesses are managed by a small number of management and
operating personnel, the loss of certain of whom could have a material adverse
effect on the Company. The Company believes that its ability to manage its
planned growth successfully will depend in large part on its continued ability
to attract
13
<PAGE> 15
and retain highly skilled and qualified personnel. Each of the Company's key
executives will enter into written employment agreements with the Company. See
"Management."
RELIANCE ON USE OF THIRD-PARTY SERVICE MARK
The Company intends to continue to use the registered service mark CELLULAR
ONE(R) to promote the services it offers in all of its license areas, including
the Horizon Systems. The Company's use of this service mark is governed by
five-year contracts between the Company and Cellular One Group, the owner of the
service mark. Such contracts expire on various dates and each is renewable at
the option of the Company for three additional five-year terms, subject to the
attainment of certain customer satisfaction ratings. See "Business -- Service
Marks." Under these agreements, the Company must meet a consistent set of
operating and service quality standards for its systems. If these agreements are
not renewed upon expiration or if the Company fails to meet the applicable
operating or service quality standards, the Company's ability both to attract
new subscribers and retain existing subscribers could be impaired. The Company
does not anticipate any difficulty in obtaining renewal of its agreements with
Cellular One Group or in continuing to meet such standards. Recently, McCaw/AT&T
Wireless, which had been the single largest user of the CELLULAR ONE(R) name,
has significantly reduced its use of the brand name as a primary service mark.
If for this or some other reason beyond the Company's control, the name CELLULAR
ONE(R) were to suffer diminished marketing appeal, the Company's ability both to
attract new subscribers and retain existing subscribers could be materially
impaired.
ABSENCE OF A PUBLIC MARKET FOR THE NOTES; POSSIBLE VOLATILITY OF NOTE PRICE
The Notes are new securities for which there is currently no market.
Although the Company has been advised by the Underwriters that, following
completion of the Offering, they currently intend to make a market in the Notes,
they are not obligated to do so and any such market-making activities may be
discontinued at any time without notice. Accordingly, there can be no assurance
as to the development or liquidity of any market for the Notes. If a market for
the Notes were to develop, the Notes could trade at prices that may be higher or
lower than their initial offering price depending upon many factors, including
prevailing interest rates, the Company's operating results and the markets for
similar securities. Historically, the market for non-investment grade debt has
been subject to disruptions that have caused substantial volatility in the
prices of securities similar to the Notes. There can be no assurance that if a
market for the Notes were to develop, such a market would not be subject to
similar disruptions.
FRAUDULENT CONVEYANCE STATUTES
Various laws enacted for the protection of creditors may apply to the
Company's incurrence of indebtedness and other obligations in connection with
the Horizon Acquisition, including the issuance of the Notes. If a court were to
find in a lawsuit by an unpaid creditor or representative of creditors of the
Company that the Company did not receive fair consideration or reasonably
equivalent value for incurring such indebtedness or obligation and, at the time
of such incurrence, the Company: (i) was insolvent; (ii) was rendered insolvent
by reason of such incurrence; (iii) was engaged in a business or transaction for
which the assets remaining in the Company constituted unreasonably small
capital; or (iv) intended to incur or believed it would incur obligations beyond
its ability to pay such obligations as they mature, such court, subject to
applicable statutes of limitation, could determine to invalidate, in whole or in
part, such indebtedness and obligations as fraudulent conveyances or subordinate
such indebtedness and obligations to existing or future creditors of the
Company.
The measure of insolvency for purposes of the foregoing will vary depending
on the law of the jurisdiction which is being applied. Generally, however, the
Company would be considered insolvent at a particular time if the sum of its
debts was then greater than all of its property at a fair valuation or if the
present fair saleable value of its assets was then less than the amount that
would be required to pay its probable liabilities on its existing debts as they
became absolute and matured. On the basis of its historical financial
information, its recent operating history as discussed in "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
other factors, the Company's management believes that, after giving effect to
indebtedness incurred in connection with the Horizon Acquisition and other
related financings, the Company
14
<PAGE> 16
will not be rendered insolvent, will have sufficient capital for the business in
which it will be engaged and will be able to pay its debts as they mature;
however, management has not obtained any independent opinion regarding such
issues. In addition, there can be no assurance as to what standard a court would
apply in making such determinations.
POTENTIAL FOR ADVERSE REGULATORY CHANGE AND THE NEED FOR REGULATORY APPROVALS
The licensing, construction, operation, acquisition and sale of cellular
systems, as well as the number of cellular and other wireless licensees
permitted in each market, are regulated by the FCC. Changes in the regulation of
cellular activities and other wireless carriers or the loss of any license could
have a material adverse effect on the Company's operations. In addition, all
cellular licenses in the United States are subject to renewal upon expiration of
their initial 10-year term. The Company's Youngstown, OH MSA cellular license
expired in 1995 and was renewed by the FCC in due course. The Company's Sharon,
PA MSA, Erie, PA MSA and OH-11 RSA initial licenses expire in 1996, 1998 and
2001, respectively. The licenses for PA-6 and PA-7 both expire on October 1,
2000 and the licenses for PA-1 and NY-3 expire one year later. In each case the
Company will apply for renewal of its license, and while the Company believes
that each of these licenses will be renewed based upon FCC rules establishing a
presumption in favor of licensees that have complied with their regulatory
obligations during the initial license period, there can be no assurance that
all of the Company's licenses will be renewed. See "Business -- Regulatory
Overview."
FLUCTUATIONS IN MARKET VALUE OF LICENSES
A substantial portion of the Company's assets are intangible and primarily
consist of the Subsidiary's interests in cellular licenses. The future value of
the Company's interest in its cellular licenses will depend significantly upon
the success of the Company's business. While there is a current market for the
licenses, such market may not exist in the future or the values obtainable may
be significantly lower than at present. The transfer of interests in such
licenses is also subject to prior FCC approval. As a consequence, there can be
no assurance that the proceeds from the liquidation or sale of the Company's
assets would be sufficient to pay the Company's obligations and a significant
reduction in the value of the licenses could require a charge to the Company's
results of operations.
EQUIPMENT FAILURE AND NATURAL DISASTER
Although the Company carries "business interruption" insurance, a major
equipment failure or a natural disaster affecting the Company's central
switching office, its microwave links or certain of its cell sites could have a
material adverse effect on the Company's operations.
RADIO FREQUENCY EMISSION CONCERNS
Media reports have suggested that certain radio frequency ("RF") emissions
from portable cellular telephones may be linked to cancer. Concerns over RF
emissions may have the effect of discouraging the use of cellular telephones,
which could have a material adverse effect on the Company's business. On August
1, 1996, the FCC released a report and order that updates the guidelines and
methods it uses for evaluating RF emissions from radio equipment, including
cellular telephones. While the FCC's new rules impose more restrictive standards
on RF emissions from low power devices such as portable cellular telephones, the
Company believes that all cellular telephones currently provided by the Company
to its customers comply with the proposed new standards.
15
<PAGE> 17
USE OF PROCEEDS
The net proceeds to be received by the Company from the issuance and sale
of the Notes are estimated to be approximately $105.0 million (after estimated
fees and expenses of approximately $5.0 million). The Company intends to use
such net proceeds, borrowings under the Bank Credit Facility and the net
proceeds from the Preferred Stock Investment, to finance the Horizon
Acquisition. If the proceeds are not applied to the purchase of assets in the
Horizon Acquisition within 120 days of the closing of the sale of the Notes, the
Company will make an offer to purchase the Notes at a price of 101% of the
principal amount thereof, plus accrued interest to the purchase date. Pending
the consummation of the Horizon Acquisition, all proceeds of the Offering shall
be held by the Company in a separate bank account, except that up to $71.5
million of the net proceeds from the sale of the Notes may be contributed to the
Subsidiary to repay indebtedness under the Subsidiary's existing bank credit
facility, but only to the extent that the banks thereunder consent to allow the
amounts repaid to be reborrowed and paid as a dividend to the Company for the
sole purpose of funding a repurchase of the Notes in the event that the Horizon
Acquisition does not occur within 120 days following the closing of the sale of
the Notes. See "Description of Notes -- Limitation on Use of Proceeds; Proceeds
Purchase Offer." See "Business -- The Horizon Acquisition" and "Description of
Capital Stock -- Preferred Stock."
SOURCES AND USES OF FUNDS
(IN THOUSANDS)
<TABLE>
<S> <C>
SOURCES:
Bank Credit Facility................................................. $204,393
Senior Notes due 2006................................................ 110,000
Preferred Stock Investment........................................... 20,000
--------
Total sources................................................... $334,393
========
USES:
Acquisition of Horizon Systems....................................... $250,000
Purchase of Horizon net current assets............................... 2,468(1)
Repayment of long-term bank debt..................................... 71,500(2)
Estimated fees and expenses.......................................... 10,425(3)
--------
Total uses...................................................... $334,393
========
</TABLE>
- -----------------------------
(1) Represents estimated net current assets of the Horizon Companies (exclusive
of cash), based upon historical June 30, 1996 amounts.
(2) Includes additional amounts borrowed subsequent to June 30, 1996 totaling
$1,000.
(3) Represents estimates of $4,975 for underwriting and other expenses related
to the Offering, $4,450 for fees related to the Bank Credit Facility and
$1,000 for fees related to the Preferred Stock Investment.
16
<PAGE> 18
CAPITALIZATION
The following table sets forth the unaudited capitalization of the Company
as of June 30, 1996 on (i) an actual basis and (ii) on a pro forma as adjusted
basis after giving effect to the Horizon Acquisition and the Related
Transactions (which includes the Offering). This table should be read in
conjunction with the combined financial statements of the Company, including the
notes thereto, and the "Unaudited Pro Forma Condensed Consolidated Financial
Data" and notes thereto, included elsewhere herein.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1996
----------------------
(IN THOUSANDS)
PRO FORMA
ACTUAL AS ADJUSTED
<S> <C> <C>
Long-term debt.................................................. $70,500 $ --
Bank Credit Facility............................................ -- 204,393
Senior Notes due 2006........................................... -- 110,000
------- -----------
Total long-term debt.................................. 70,500 314,393
Preferred Stock(1).............................................. -- 19,000
Shareholders' equity:(2)
Common stock(3)............................................ 1,331 62
Additional paid-in capital................................. 3,920 5,291
Treasury stock............................................. (1,719) --
Retained earnings (deficit)................................ 1,953 (1,647)
------- -----------
Total shareholders' equity............................ 5,485 3,706
------- -----------
Total capitalization.................................. $75,985 $ 337,099
======= =========
</TABLE>
- -----------------------------
(1) Net of issuance fees of $1,000.
(2) Excludes options to purchase 504,000 shares of Class A Common Stock granted
under the Company's 1996 Stock Option Plan ("SOP"), none of which are
presently exercisable and contingent warrants related to the Preferred Stock
Investment.
(3) Consists of Class A Common Stock, $0.01 par value per share: 60,000,000
shares authorized; none of which are issued or outstanding; Class B Common
Stock, $0.01 par value per share: 10,000,000 shares authorized; 6,170,630
shares issued and outstanding.
17
<PAGE> 19
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA
The following unaudited pro forma condensed consolidated statement of
operations of the Company for the year ended December 31, 1995 and the six
months ended June 30, 1996 include the historical operations of the Company and
give effect to the following as if they occurred as of January 1, 1995, (i) the
Erie Acquisition, (ii) the Horizon Acquisition, (iii) the Offering, (iv) the
repayment of existing debt, (v) the borrowings under the Bank Credit Facility,
(vi) the Preferred Stock Investment and (vii) the corporate restructuring of the
Company.
The following unaudited pro forma condensed consolidated balance sheet as
of June 30, 1996 includes the historical accounts of the Company and gives
effect to the following as if they occurred as of June 30, 1996, (i) the Horizon
Acquisition, (ii) the Offering, (iii) the repayment of existing debt, (iv) the
borrowings under the Bank Credit Facility, (v) the Preferred Stock Investment,
(vi) the corporate restructuring of the Company and (vii) the termination of
Subchapter S status of the predecessor corporations for federal and state income
tax purposes. The unaudited pro forma condensed consolidated financial
information gives effect to the Erie and Horizon Acquisitions under the purchase
method of accounting and to the assumptions in the accompanying notes to the
unaudited pro forma condensed consolidated financial data.
The unaudited pro forma condensed consolidated balance sheet at June 30,
1996 and statements of operations for the year ended December 31, 1995 and six
months ended June 30, 1996 have been prepared by the Company based in part on
information provided by (i) AT&T Wireless (former majority owner of the Erie, PA
MSA) for periods prior to the consummation of the Erie Acquisition in September
1995 with respect to the historical results of operations of Erie (as a whole)
and (ii) the Horizon Companies for periods prior to the consummation of the
Horizon Acquisition with respect to the historical results of the operations and
balance sheet of the Horizon Companies. The related pro forma adjustments have
been prepared by the Company's management based on its assumptions and using the
best available information provided by AT&T Wireless and the Horizon Companies.
The unaudited pro forma condensed consolidated financial data has been
prepared by the Company's management. The unaudited pro forma data is not
designed to represent and does not represent what the Company's financial
position or results of operations actually would have been had the
aforementioned transactions been completed as of the date or the beginning of
the periods indicated, or to project the Company's results of operations at any
future date or for any future period. The unaudited pro forma condensed
consolidated financial information should be read in conjunction with the 1995
combined financial statements and notes of the Company and the Horizon Systems
and the financial statements of Erie Cellular Telephone Company for the period
from January 1, 1995 to September 29, 1995, contained elsewhere in this
Prospectus.
18
<PAGE> 20
SYGNET WIRELESS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
ERIE ADJUSTMENTS
ACQUISITION FOR ERIE PRO FORMA
HISTORICAL HISTORICAL(a) ACQUISITION COMBINED
<S> <C> <C> <C> <C>
Revenue:
Cellular services................... $ 21,367 $ 4,638 $26,005
Equipment sales..................... 1,529 916 2,445
Other............................... 1,681 -- 1,681
------- ------ ------ -------
Total revenue................... 24,577 5,554 30,131
Costs and expenses:
Cost of cellular services........... 3,366 1,367 4,733
Cost of equipment sold.............. 4,164 887 5,051
General and administrative.......... 5,141 1,273 $ (772)(b) 5,642
Selling and marketing............... 3,505 1,634 (161)(c) 4,978
Depreciation and amortization....... 3,487 362 1,054(d) 4,903
------- ------ ------ -------
Total costs and expenses........ 19,663 5,523 121 25,307
Income from operations.................. 4,914 31 (121) 4,824
Other:
Interest expense, net............... 2,613 2,613
Other............................... 351 351
------- ------ ------ -------
Total other..................... 2,964 2,964
------- ------ ------ -------
Net income (loss)(1).................... $ 1,950 $ 31 $ (121) $ 1,860
======= ====== ====== =======
Preferred stock dividend requirements
and accretion.........................
Net loss applicable to common
shareholders..........................
Pro forma net loss per share applicable
to common shareholders................
Number of shares used to compute pro
forma per share data..................
<CAPTION>
PRO FORMA
ADJUSTMENTS
FOR THE HORIZON ACQUISITION PRO FORMA
OFFERING ------------------------------ ADJUSTMENTS
AND BANK HORIZON AMC FOR
CREDIT COMPANIES CELLULAR HORIZON PRO FORMA
FACILITY HISTORICAL(g) ASSOCIATES(g) ACQUISITION AS ADJUSTED
<S> <C> <C> <C> <C> <C>
Revenue:
Cellular services................... $22,871 1,352 130(h) $ 50,358
Equipment sales..................... 1,602 62 4,109
Other............................... -- 33 396(h) 2,110
-------- ------- ------- ------- ---------
Total revenue................... 24,473 1,447 526 56,577
Costs and expenses:
Cost of cellular services........... 3,572 197 526(h) 9,028
Cost of equipment sold.............. 2,544 93 7,688
General and administrative.......... 3,577 445 (150)(h) 9,514
Selling and marketing............... 4,016 88 9,082
Depreciation and amortization....... $ 872(e) 6,650 166 1,865(i) 14,456
-------- ------- ------- ------- ---------
Total costs and expenses........ 872 20,359 989 2,241 49,768
Income from operations.................. (872) 4,114 458 (1,715) 6,809
Other:
Interest expense, net............... 26,334(f) 3,830 166 (3,996)(j) 28,947
Other............................... 351
-------- ------- ------- ------- ---------
Total other..................... 26,334 3,830 166 (3,996) 29,298
-------- ------- ------- ------- ---------
Net income (loss)(1).................... $(27,206) $ 284 $ 292 $ 2,281 $ (22,489)
======== ======= ======= ======== =========
Preferred stock dividend requirements
and accretion......................... (4,642)(2)
---------
Net loss applicable to common
shareholders.......................... $ (27,131)
=========
Pro forma net loss per share applicable
to common shareholders................ $ (4.40)
=========
Number of shares used to compute pro
forma per share data.................. 6,170,630
=========
</TABLE>
- -----------------------------
(1) The pro forma statement of operations for the year ended December 31, 1995
does not include a tax benefit related to the pro forma losses. Such losses
would be carried forward and their realization would be dependent upon
future taxable income.
(2) The Preferred Stock dividend, which is payable solely through the issuance
of additional shares of Preferred Stock, represents the effective annual
dividend rate compounded quarterly on the $20,000 Preferred Stock
Investment. The accretion related to issuance fees is $100 per annum and
represents the amount required to accrete the Preferred Stock Investment to
its redemption value (including dividends) upon the tenth anniversary of the
issuance of the stock.
19
<PAGE> 21
SYGNET WIRELESS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS FOR PRO FORMA
THE OFFERING HORIZON ADJUSTMENTS FOR
AND BANK CREDIT COMPANIES HORIZON PRO FORMA
HISTORICAL FACILITY HISTORICAL(g) ACQUISITION AS ADJUSTED
<S> <C> <C> <C> <C> <C>
Revenue:
Cellular services.............. $ 15,728 $14,216 290(h) $ 30,234
Equipment sales................ 743 893 1,636
Other.......................... 756 177(h) 933
---------- ------------- --------------- -----------
Total revenue............. 17,227 15,109 467 32,803
Costs and expenses:
Cost of cellular services...... 2,331 2,121 467(h) 4,919
Cost of equipment sold......... 2,003 1,442 3,445
General and administrative..... 3,613 2,278 $ (75)(h) 5,816
Selling and marketing.......... 2,356 2,186 4,542
Depreciation and
amortization................. 2,483 $ 425(e) 3,918 679(i) 7,505
---------- --------------- ------------- --------------- -----------
Total costs and
expenses................ 12,786 425 11,945 1,071 26,227
Income from operations............. 4,441 (425) 3,164 (604) 6,576
Other:
Interest expense, net.......... 2,633 11,855(f) 1,796 (1,796)(j) 14,488
Other.......................... 348 348
---------- --------------- ------------- --------------- -----------
Total..................... 2,981 11,855 1,796 (1,796) 14,836
---------- --------------- ------------- --------------- -----------
Net income (loss)(1)............... $1,460 $ (12,280) $ 1,368 $ 1,192 $ (8,260)
========= ============== ============ ============== ==========
Preferred stock dividend
requirements and accretion....... (2,695)(2)
----------
Net loss applicable to common
shareholders..................... $ (10,955)
==========
Pro forma net loss per share
applicable to common
shareholders..................... $ (1.78)
==========
Number of shares used to compute
pro forma per share data......... 6,170,630
==========
</TABLE>
- -----------------------------
(1) The pro forma statement of operations for the six months ended June 30, 1996
does not include a tax benefit related to the pro forma losses. Such losses
would be carried forward and their realization would be dependent upon
future taxable income.
(2) The Preferred Stock dividend, which is payable solely through the issuance
of additional shares of Preferred Stock, represents the effective annual
dividend rate compounded quarterly on the $20,000 Preferred Stock
Investment. The accretion related to issuance fees is $100 per annum and
represents the amount required to accrete the Preferred Stock Investment to
its redemption value (including dividends) upon the tenth anniversary of
the issuance of the shares.
20
<PAGE> 22
SYGNET WIRELESS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS
FOR THE
OFFERING,
BANK CREDIT
FACILITY, AND PRO
HORIZON PREFERRED FORMA
COMPANIES STOCK AS
HISTORICAL HISTORICAL INVESTMENT ADJUSTED
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.............. $ 1,661 $ 1,019 $ (1,019)(n) $ 1,661
Accounts receivable.................... 4,755 5,574 10,329
Inventory.............................. 738 397 1,135
Prepaid expenses and deferred taxes.... 550(k) 185 735
---------- ---------- ------------- -------
Total current assets.............. 7,704 7,175 (1,019) 13,860
Property and equipment -- net............... 22,430 20,837 43,267
Cellular licenses -- net.................... 48,824 90,289 138,874 (m)(o) 277,987
Deferred financing costs.................... 1,537 7,888 (p) 9,425
---------- ---------- ------------- -------
Total assets...................... $ 80,495 $ 118,301 $ 145,743 $344,539
======= ======== ========== =========
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable....................... $ 913 $ 1,446 $ 2,359
Other current liabilities.............. 822 694 1,516
Accrued expenses....................... 2,172 1,548 3,720
---------- ---------- -------
Total current liabilities......... 3,907 3,688 7,595
Deferred tax liability...................... 557(l) 557
Long-term debt.............................. 70,500 31,981 $ 210,912 (q) 313,393
Other long-term liabilities................. 289 289
---------- ---------- ------------- -------
Total liabilities................. 75,253 35,669 210,912 321,834
Preferred stock............................. 19,000 (r) 19,000
Shareholders' equity........................ 5,242 82,632 (84,169)(s) 3,705
---------- ---------- ------------- -------
Total liabilities & shareholders'
equity.......................... $ 80,495 $ 118,301 $ 145,743 $344,539
======= ======== ========== =========
</TABLE>
21
<PAGE> 23
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS)
For purposes of determining the pro forma effect of the transactions described
in the previous pages on the Company's Unaudited Pro Forma Condensed
Consolidated Statements of Operations for the year ended December 31, 1995 and
the six months ended June 30, 1996, the following adjustments have been made:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1995 JUNE 30, 1996
<S> <C> <C> <C>
(a) Represents the results of operations of Erie Cellular
Telephone Company ("Erie") for the period from January
1, 1995 through September 29, 1995. Erie was acquired by
the Company from AT&T Wireless on September 29, 1995.
(b) General and administrative expenses have been adjusted
to eliminate certain allocated technical and
administrative shared services costs charged by AT&T
Wireless to Erie during the period from January 1, 1995
through September 29, 1995. The Company has not incurred
similar incremental costs subsequent to its acquisition
of Erie and has not allocated any such general and
administrative expenses. ............................... $ (772)
=============
(c) Selling and marketing expenses have been adjusted to
eliminate certain allocated marketing shared services
costs charged by AT&T Wireless to Erie during the period
from January 1, 1995 through September 29, 1995. The
Company has not incurred similar incremental costs
subsequent to its acquisition of Erie and has not
allocated any such selling and marketing expenses. ..... $ (161)
=============
(d) Represents incremental amortization and depreciation for
the period from January 1, 1995 through September 29,
1995 due to (i) the application of purchase accounting
resulting from increases in the basis of intangible
assets and (ii) the upgrade of certain property and
equipment in the Erie Acquisition. Intangible assets
include cellular licenses that are amortized over 40
years. Property and equipment includes cell site
equipment that is depreciated over 5 to 12 years.
Elimination of historical amortization expense
related to cellular licenses....................... $ (171)
Amortization of cellular licenses.................. 755
Depreciation of new cell site equipment............ 470
-------------
$ 1,054
=============
(e) Represents the amortization of estimated deferred
financing costs resulting from the (i) sale of the
Notes, (ii) borrowings under the Bank Credit Facility
and (iii) elimination of historical amortization
relating to the repayment of existing debt. Deferred
financing costs are amortized over the life of the
related debt.
Amortization of deferred financing costs related to
the sale of the Notes.............................. $ 498 $ 249
Amortization of deferred financing costs related to
borrowings under the Bank Credit Facility.......... 557 279
Elimination of amortization of deferred financing
costs related to existing debt..................... (183) (103)
----------------- ----------------
$ 872 $ 425
============= =============
</TABLE>
22
<PAGE> 24
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1995 JUNE 30, 1996
<S> <C> <C> <C>
(f) Represents the net effect on interest expense resulting
from (i) the sale of the Notes assuming an interest rate
of 11.5% per annum, (ii) borrowings of $204.4 million
under the Bank Credit Facility with a variable interest
rate (assumed to be 8% per annum) and (iii) elimination
of historical interest expense relating to the repayment
of existing debt.
Interest expense related to the sale of the
Notes.............................................. $12,650 $ 6,325
Interest expense related to borrowings under the
Bank Credit Facility............................... 16,344 8,172
Elimination of historical interest expense on
existing debt...................................... (2,660) (2,642)
------------- -------------
$26,334 $ 11,855
============= =============
If the interest rate on the variable rate Bank Credit
Facility were to change by 1/8 of one percent, interest
expense would change by approximately $255 for the year
ended December 31, 1995 and $128 for the six months
ended June 30, 1996.
(g) Represents the results of operations of the Horizon
Companies for the year ended December 31, 1995 and six
months ended June 30, 1996 and the results of operations
of AMC Cellular Associates (Indiana, PA-7 RSA) for the
period from January 1, 1995 through June 15, 1995. The
Horizon Companies acquired the operating license and
certain operating assets and liabilities of PA-7 on June
15, 1995.
(h) Represents reclassifications of certain revenues, costs
and expenses of the Horizon Companies to conform to the
Company's historical presentation.
Revenue Cellular services:
Reclassified to cost net roaming incollect
expenses recorded by the Horizon Companies as a
reduction from revenue........................... $ 526 $ 467
Other revenue.................................... (396) (177)
------------ -------------
$ 130 $ 290
============ =============
Other revenue...................................... $ 396 $ 177
============ =============
Cost of cellular services:
To include as a cost net roaming incollect
expenses......................................... $ 526 $ 467
============ =============
General and administrative expenses have been adjusted
to eliminate certain corporate costs charged to the
Horizon Companies that will not be incurred subsequent
to the Horizon Acquisition.............................. $ (150) $ (75)
============ =============
(i) Represents the incremental amortization due to the
application of purchase accounting resulting from an
increase in the basis of intangible assets in the
Horizon Acquisition. Intangible assets include cellular
licenses and customer lists that are amortized over 40
and 5 years, respectively.
Elimination of historical amortization expense
related to cellular licenses and customer lists.... $(3,860) $ (2,184)
Amortization of cellular licenses and customer
lists.............................................. 5,725 2,863
------------ -------------
$ 1,865 $ 679
============ =============
(j) Represents the elimination of historical interest
expense as a result of debt not assumed as part of the
Horizon Acquisition. ................................... $(3,996) $ (1,796)
============ =============
</TABLE>
23
<PAGE> 25
For the purposes of determining the pro forma effect of the transactions
described in the previous pages on the Company's Unaudited Pro Forma Condensed
Consolidated Balance Sheet as of June 30, 1996, the following adjustments have
been made:
<TABLE>
<CAPTION>
AS OF
JUNE 30, 1996
<S> <C> <C> <C>
(k) Prepaid expenses and deferred taxes include a pro forma
adjustment for a deferred tax asset to be recorded as a
result of the termination of Subchapter S status for
federal and state income tax purposes assuming it
occurred as of June 30, 1996. Before this adjustment,
prepaid expenses and deferred taxes totaled $236.
Deferred tax assets are primarily attributable to
certain accrued expenses. .............................. $ 314
=============
(l) Represents the deferred tax liability to be recorded as
a result of the pro forma adjustment for a termination
of Subchapter S status for federal and state income tax
purposes assuming it occurred as of June 30, 1996. The
deferred tax liability is primarily attributable to
accelerated methods of depreciation for income tax
purposes. .............................................. $ 557
=============
(m) Reflects adjustments to assets acquired and liabilities
assumed of the Horizon Companies based on their
estimated fair values under the purchase method of
accounting. The allocation of the aggregate purchase
cost below is preliminary and assumes the historic net
book value of tangible assets approximates their fair
value. The actual allocation will be based on
management's final evaluation of such assets and
liabilities. Some portion of the excess of purchase cost
over the historical cost of the net assets acquired may
ultimately be allocated to specific tangible and
intangible assets and liabilities. The final allocation
of purchase cost and the resulting effect on net income
may differ significantly from the pro forma amounts
included herein.
(n) Represents the net adjustment to cash and cash
equivalents as a result of the following:
Proceeds from sale of the Notes.................... $ 110,000
Proceeds from borrowings under the Bank Credit
Facility........................................... 204,393
Purchase of net current assets of the Horizon
Companies (exclusive of cash), based upon
historical June 30, 1996 amounts................... (2,468)
Acquisition of the Horizon Companies............... (250,000)
Proceeds of the Preferred Stock Investment net of
issuance fees of $1,000............................ 19,000
Payment of deferred financing costs related to the
sale of the Notes, borrowings under the Bank Credit
Facility........................................... (9,425)
Repayment of existing debt including additional
amounts borrowed subsequent to June 30, 1996
totaling $1,000.................................... (71,500)
Cash as of June 30, 1996 not acquired in connection
with the Horizon Acquisition....................... (1,019)
-------------
$ (1,019)
=============
(o) Represents the net increase in cellular licenses and
customer lists due to the application of purchase price
accounting for assets to be acquired in the Horizon
Acquisition.
Elimination of historical cellular licenses and
customer
lists.............................................. $ (90,289)
Fair value of cellular licenses and customer lists
to be acquired as a result of the Horizon
Acquisition........................................ 229,163
-------------
$ 138,874
=============
</TABLE>
24
<PAGE> 26
<TABLE>
<CAPTION>
AS OF
JUNE 30, 1996
<S> <C> <C> <C>
(p) Represents the net adjustment to deferred financing
costs as a result of:
Deferred financing costs related to the sale of the
Notes.............................................. $ 4,975
Deferred financing costs related to borrowings
under the Bank Credit Facility..................... 4,450
Estimated write-off of deferred financing costs as
of June 30, 1996 as a result of the early
extinguishment of existing
debt............................................... (1,537)
-------------
$ 7,888
=============
(q) Represents the net effect on long-term debt resulting
from:
Sale of the Notes.................................. $ 110,000
Borrowings under the Bank Credit Facility.......... 204,393
Repayment of existing debt including additional
amounts borrowed subsequent to June 30, 1996
totaling $1,000.................................... (71,500)
Elimination of Horizon Companies debt not assumed
as part of the Horizon Acquisition................. (31,981)
-------------
$ 210,912
=============
(r) Proceeds of the Preferred Stock Investment net of
issuance fees of $1,000................................. $ 19,000
=============
(s) Represents the net adjustment to shareholders' equity as
a result of:
Elimination of net equity in connection with
pending Horizon Acquisition........................ $ (82,632)
Represents the effect on shareholders' equity of
the write-off of deferred financing costs
associated with the early extinguishment of
existing debt...................................... (1,537)
-------------
$ (84,169)
=============
</TABLE>
25
<PAGE> 27
SELECTED FINANCIAL DATA
THE COMPANY
The following selected financial data are derived from the historical
financial statements of the Company. The combined financial statements for the
three years ended December 31, 1995 have been audited by Ernst & Young LLP,
independent auditors. Prior to December 31, 1992, the Company's Selected
Financial Data does not include the selected financial data of Wilcom
Corporation, which consists of paging operations. Prior to such date, the
operations of Wilcom Corporation were not significant and would not impact
comparability of the financial data. The financial statements for the two years
ended December 31, 1992 have been audited by other independent auditors. The
financial data for the six month periods ended June 30, 1996 and 1995 are
derived from unaudited financial statements. The unaudited financial statements
include all adjustments, consisting of normal recurring accruals, which the
Company considers necessary for a fair presentation of the financial position
and the results of operations for these periods. Operating results for the six
months ended June 30, 1996 are not necessarily indicative of the results that
may be expected for the entire year ending December 31, 1996. The data should be
read in conjunction with the combined financial statements, related notes and
other financial information included herein.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
--------------------------------------------------- ------------------
1991 1992 1993 1994 1995 1995 1996
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenue.............. $ 2,098 $11,487 $14,474 $18,048 $24,577 $10,719 $17,227
Cost of services........... 204 1,270 2,515 3,452 3,366 1,505 2,331
Cost of equipment sales.... 262 1,207 930 1,624 4,164 1,676 2,003
General and administrative
expense................. 825 3,612 4,412 4,467 5,141 2,411 3,613
Selling and marketing
expense................. 436 2,089 2,166 2,555 3,505 1,415 2,356
Depreciation and
amortization............ 289 1,441 1,951 2,639 3,487 1,387 2,483
Operating income........... 82 1,868 2,500 3,311 4,914 2,325 4,441
Interest expense, net...... 192 888 652 964 2,613 829 2,633
Other expense, net......... (6) (114) (325) (625) (351) (111) (348)
Net income (loss).......... (116) 866 1,523 1,722 1,950 1,385 1,460
Ratio of earnings to fixed
charges(1).............. 1.84 3.11 2.60 1.67 2.52 1.56
BALANCE SHEET DATA:
Working capital
(deficit)............... $ 4,285 $ 1,756 $ 4 $ (331) $ 1,880 $ 778 $ 3,484
Net fixed assets........... 8,355 9,276 11,127 14,084 21,049 16,448 22,430
Total assets............... 20,488 20,431 20,553 27,418 79,618 29,783 80,181
Long-term debt............. 13,774 12,064 10,928 18,264 69,500 22,414 70,500
Total liabilities.......... 15,618 15,024 15,224 22,649 75,332 25,609 74,695
Shareholders' equity....... 4,869 5,407 5,329 4,769 4,286 4,174 5,485
</TABLE>
- -----------------------------
(1) The ratio of earnings to fixed charges is determined by dividing the sum of
earnings before extraordinary items and accounting changes, interest
expense, amortization of deferred financing costs, taxes and a portion of
rent expense representative of interest, by the sum of interest expense,
amortization of deferred financing costs and a portion of rent expense
representative of interest. The ratio of earnings to fixed charges is not
meaningful for periods that result in a deficit. For the year ended December
31, 1991, the deficiency of earnings to fixed charges was $116.
26
<PAGE> 28
HORIZON COMPANIES
The following selected financial data are derived from the combined
Statements of Operations, included elsewhere herein, of the Horizon Systems
which consist of selected systems of Horizon Cellular Telephone Company, L.P.
The Statements of Operations for each of the three years in the period ended
December 31, 1995 have been audited by Ernst & Young LLP, independent auditors.
The financial data for the six month periods ended June 30, 1996 and 1995 are
derived from unaudited financial statements. Operating results for the six
months ended June 30, 1996 are not necessarily indicative of the results that
may be expected for the entire year ending December 31, 1996. The data should be
read in conjunction with the combined financial statements, related notes, and
other financial information included herein.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
---------------------------- -----------------
1993 1994 1995 1995 1996
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenue.................................. $6,584 $14,908 $24,473 $9,758 $15,109
Cost of services............................... 1,567 2,807 3,572 1,569 2,121
Cost of equipment sales........................ 717 1,690 2,544 918 1,443
General and administrative..................... 848 2,097 3,577 1,476 2,278
Selling........................................ 1,344 2,550 4,016 1,635 2,186
Depreciation and amortization.................. 2,294 4,484 6,650 2,788 3,918
Operating income (loss)........................ (186) 1,280 4,114 1,372 3,163
</TABLE>
27
<PAGE> 29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Company's and Horizon Systems' audited combined financial statements and the
notes thereto appearing elsewhere in this Prospectus. As a result of the Erie
Acquisition and the Horizon Acquisition, the Company's operating results for the
periods discussed may not be indicative of future performance. The Horizon
Systems' operating results exclude all corporate charges and corporate overhead.
THE COMPANY'S HISTORICAL RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995
For the six months ended June 30, 1996, revenues totalled $17.2 million, a
60.7% increase over total revenue of $10.7 million for the comparable period in
1995. Net income for the six months ended June 30, 1996 was $1.5 million, a 7.1%
increase over net income of $1.4 million for the first half of 1995. Earnings
before interest, taxes, depreciation and amortization, minority interest and
other non-cash expenses ("EBITDA") grew to $6.9 million (40.1% of total revenue)
in the six months ended June 30, 1996 from $3.7 million (34.6% of total revenue)
in the comparable 1995 period. Subscriber revenue grew by 80.6% to $13.0 million
in the six months ended June 30, 1996 compared to $7.2 million in the first six
months of 1995 as a result of continued subscriber growth in the Company's
markets and from the inclusion of results from the Erie Acquisition for all of
1996. Consistent with industry trends, the Company's subscribers continue to
increase and at June 30, 1996 ending subscribers had grown 13.7% since December
31, 1995. However, on a per subscriber basis revenue is down slightly, due in
part to competitive market pressures and the mix of subscribers reflecting
safety and security subscribers, who typically have fewer minutes of use per
month. Roamer revenue grew by 47.4% to $2.8 million during the six months ended
June 30, 1996 compared to $1.9 million during the same period in 1995. This
increase was a result of greater volume of roaming traffic in the Existing
Systems versus the comparable 1995 period and the inclusion of the results for
Erie for 1996 after the Erie Acquisition. Roamer rates during the first half of
1996 have remained flat in comparison to the first half of 1995. Equipment sales
were flat period to period at approximately $0.7 million as retail prices of
equipment continued to decline but were offset by increased accessory sales.
Throughout the industry, to attract subscribers cellular telephone equipment is
frequently provided to subscribers at no cost as part of promotions to sell
access, airtime and cellular service. Consistent with this industry practice the
Company is selling fewer telephones, however, sales of accessories continue to
grow. Other revenue declined to $756,000 in the first six months of 1996 from
$839,000 in the comparable 1995 period as equipment rental revenue continued to
decrease as rental programs continued to be phased out.
Cost of services increased to $2.3 million during the six months ended June
30, 1996 from $1.5 million in the comparable 1995 period. Although cost of
services has increased 53.3%, subscriber revenue grew 80.6% during the same
period, which was the result of additional usage generated from a larger
subscriber base, primarily Erie, and operating efficiencies gained from the Erie
Acquisition. Cost of equipment sales increased by 17.6% to $2.0 million in the
first half of 1996 from $1.7 million in the comparable 1995 period. The primary
reasons for the rise in cost include an increased number of telephones
distributed as new subscriber acquisitions increased, the higher level of swaps
and upgrades of telephones by existing customers and the inclusion of the Erie
Acquisition. The increased cost of equipment sold resulting from the rise in
gross activations is somewhat offset by the declining cost to acquire new
telephones. General and administrative costs increased by 50.0% to $3.6 million
in the first half of 1996 from $2.4 million in the first half of 1995. This
increase is due primarily to the Erie Acquisition. Other operating costs also
generally increased as the Company grew. Selling and marketing costs grew by
over 71.4% to $2.4 million in the first six months of 1996 from $1.4 million in
the comparable 1995 period. This increase is due to a higher level of new
subscribers added period to period and the Erie Acquisition. Selling and
marketing cost (all in) per gross new subscriber decreased to $391 in the first
half of 1996 from $422 in the comparable 1995 period. Depreciation and
amortization increased to $2.5 million in the first six months of 1996 from $1.4
million in the comparable 1995 period due to the higher levels of fixed assets
purchased for system growth and the Erie Acquisition. The Company continues to
expand its systems by adding cell sites and in the first half of 1996 four new
cell sites
28
<PAGE> 30
were constructed at a cost of $0.9 million. The amortization of the Erie
cellular license also contributed $0.8 million to this increased cost.
Interest expense more than tripled to $2.6 million for the first six months
of 1996 from $0.8 million in the comparable 1995 period. This increase was
primarily a result of increased borrowings associated with the Erie Acquisition.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
For the year ended December 31, 1995, the Company's total revenue increased
to $24.6 million, which was 36.7% higher than 1994 total revenue of $18.0
million. Net income for the year ended December 31, 1995 was $2.0 million, which
was 17.6% higher than the prior year's net income of $1.7 million. EBITDA grew
to $8.4 million or 34.1% of total revenue in 1995 from $6.0 million or 33.3% of
total revenue in 1994. Subscriber revenue grew by 52.2% to $17.2 million in the
year ended December 31, 1995 from $11.3 million in the prior year as a result of
continued growth in the number of subscribers in the Existing Systems and from
the Erie Acquisition. Roamer revenue was flat year to year at $4.1 million.
During 1995, the Company reduced roaming rates in certain key areas to be more
competitive which increased its roaming traffic volume. However, the decrease in
rates was offset by the increased roaming traffic volume that occurred.
Equipment sales grew by 25.0% to $1.5 million in 1995 from $1.2 million in 1994
as the Company's retail stores continued to emphasize accessory sales and
because of increased subscriber acquisition levels somewhat offset by continued
cellular telephone promotion programs. Other revenue grew by 21.4% to $1.7
million in 1995 from $1.4 million in 1994, as the paging subscriber base
continued to increase.
Cost of services decreased by 2.9% to $3.4 million during the year ended
December 31, 1995 from $3.5 million in the prior year. This was a result of the
Company's ability to negotiate reduced roaming rates charged by its key roaming
partners. This rate reduction more than offset the additional costs associated
with increased traffic from internal growth and the Erie Acquisition. Cost of
equipment sales more than doubled to $4.2 million in 1995 from $1.6 million in
1994. The primary reasons for the rise in cost include an increased number of
phones distributed on a promotional basis to new activations, a higher level of
swaps and upgrades of phones by existing customers, the continued phase-out of
phone rental programs and the Erie Acquisition. General and administrative costs
increased 13.3% to $5.1 million in 1995 from $4.5 million in 1994. This increase
was primarily due to the Erie Acquisition, partially offset by a decrease in
personal property tax rates for public utilities.
Selling and marketing costs grew by 34.6% to $3.5 million in the year ended
December 31, 1995 from $2.6 million in the comparable 1994 period. This increase
is due to the growth of new subscribers added to the system in 1995 compared to
1994, the Erie Acquisition and increased advertising levels. Selling and
marketing cost (all in) per gross new subscriber decreased to $396 in 1995 from
$418 in 1994. Depreciation and amortization increased to $3.5 million in 1995
from $2.6 million in 1994 due to the increased fixed assets purchased for system
growth and the Erie Acquisition. In 1995, the Company spent approximately $9.1
million in capital expenditures, primarily for additional cell sites which will
enable it to further penetrate its Existing Markets and $3.0 million to convert
the acquired Erie equipment to conform with the Company's technology. The Erie
cellular license was acquired at a cost of $42.5 million resulting in $0.3
million of additional amortization expense in 1995.
Interest expense, net more than doubled to $2.6 million for the year ended
December 31, 1995 from $1.0 million in the year ended December 31, 1994. During
1995 the Company borrowed approximately $52.0 million primarily associated with
the Erie Acquisition, which resulted in additional interest expense.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
For the year ended December 31, 1994, the Company's revenue totalled $18.0
million, a 24.1% increase over 1993 total revenue of $14.5 million. Net income
for the year ended December 31, 1994 was $1.7 million, which was 13.3% higher
than the prior year net income of $1.5 million. EBITDA grew to $6.0 million or
33.3% of total revenue in 1994 from $4.5 million or 31.0% of total revenue in
1993. Subscriber revenue grew by 27.0% to $11.3 million in 1994 from $8.9
million in the prior year due primarily to the growth in the number of
subscribers. Roamer revenue increased by 32.3% to $4.1 million during 1994 from
$3.1 million in 1993 due to
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<PAGE> 31
higher levels of roaming traffic volume, partially offset by slight reductions
in roaming rates. Throughout the industry, there was competitive pressure on
roaming rates. Equipment sales grew slightly to $1.2 million in 1994 from $1.1
million in 1993 as the Company opened two retail stores, which stimulated
accessory sales and increased subscriber acquisition levels.
Cost of services increased by 40.0% to $3.5 million during the year ended
December 31, 1994 from $2.5 million in 1993. This was a result of increased
usage levels associated with the continually growing subscriber base. Cost of
equipment sales increased by 77.8% to $1.6 million in 1994 from $0.9 million in
fiscal 1993. This was largely due to the increase in subscriber activation
levels, equipment purchases and increased accessory sales. Selling and marketing
costs grew by 18.2% to $2.6 million in the year ended December 31, 1994 from
$2.2 million in the prior year. This increase was due to a higher level of new
subscribers added in 1995 compared to 1994, despite reductions in dealer and
agent per unit costs. Selling and marketing cost (all in) per gross new
subscriber increased slightly to $418 in 1994 from $416 in 1993.
Depreciation and amortization increased to $2.6 million in 1994 from $2.0
million in 1993 due to the depreciation on higher levels of fixed assets
purchased for system growth. Interest expense, net increased by 42.9% to $1.0
million for the year ended December 31, 1994 from $0.7 million in 1993 primarily
associated with the purchase of a partnership interest as well as borrowings for
additional system expansion.
Other expense increased to $0.6 million in 1994 from $0.2 million in 1993
due to the write-off of obsolete subscriber equipment.
HORIZON SYSTEMS HISTORICAL RESULTS OF OPERATIONS
The following discussion and analysis is based upon information obtained
from the Horizon Companies and reflects management's current understanding of
the Horizon Systems, which the Company has not yet acquired.
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995
Total revenues and sales increased 54.1% to $15.1 million for the six
months ended June 30, 1996 from $9.8 million for the comparable period in 1995.
Of this increase, $3.0 million was due to an increase in subscriber revenues,
$2.1 million was due to an increase in roaming revenues and $0.3 million was due
to an increase in equipment sales. The growth in subscriber revenues was due
primarily to the growth in the number of subscribers associated with continued
internal expansion as well as the acquisition of PA-2 and PA-7. The growth in
roaming revenues was due primarily to increased coverage of the licensed service
area through the construction of additional cell sites. The growth in equipment
sales was due primarily to the increase in the number of subscriber additions,
somewhat offset by continued decreases in cellular telephone equipment prices.
Consistent with industry practices, the Horizon Companies frequently sold
cellular equipment at significant discounts, resulting in a negative gross
margin. Such practices are designed to attract and retain subscribers to allow
the Horizon Companies to focus on its primary business of selling airtime,
access and other cellular services.
Cost of services increased 31.3%, to $2.1 million (13.9% of total revenues
and sales) for the six months ended June 30, 1996 from $1.6 million (16.3% of
total revenues and sales) for the comparable period in 1995. The growth in the
Horizon Companies' subscriber base and the expansion of its cellular coverage
areas led to greater cost of services, primarily in the areas of system network,
billing and administration. The decrease in cost of services as a percentage of
total revenues excluding equipment sales resulted from continued operational
efficiencies as well as the fact that certain costs are fixed in nature and are
spread over an increasing revenue base. Cost of equipment sales increased 55.6%,
to $1.4 million for the six months ended June 30, 1996 from $0.9 million for the
comparable period in 1995. The increase was due primarily to the increase in the
number of subscriber additions and their associated equipment purchases.
General and administrative expenses increased 53.3%, to $2.3 million (15.2%
of total revenues and sales) for the six months ended June 30, 1996 from $1.5
million (15.3% of total revenues and sales) for the comparable period in 1995.
The increase was due primarily to the overall growth of the Horizon Companies as
well as the acquisition of PA-2 and PA-7. The decrease in general and
administrative expenses as a percentage of total revenues and sales resulted
from efficiencies in the Horizon Companies' operations. Selling expenses
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<PAGE> 32
increased 37.5%, to $2.2 million (14.6% of total revenues and sales) for the
three months ended June 30, 1996 from $1.6 million (16.3% of total revenues and
sales) for the comparable period in 1995. The increase was due primarily to the
increase in the number of subscribers added.
EBITDA increased 69.0% to $7.1 million (47.0% of total revenues and sales)
for the six months ended June 30, 1996 from $4.2 million (42.9% of total
revenues and sales) for the comparable period in 1995, primarily as a result of
increased subscriber and roaming revenue and efficiencies in cost of services
and general and administrative expenses, as previously discussed.
Depreciation and amortization increased approximately 39.3%, to $3.9
million for the six months ended June 30, 1996 from $2.8 million for the
comparable period in 1995. The increase was primarily the result of amortization
of license costs associated with the acquisition in 1995 of PA-2 and PA-7, as
well as an increase in depreciation related to additional cellular equipment
placed into service throughout 1995 and the first quarter of 1996.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Total revenues and sales increased 64.4% to $24.5 million for the year
ended December 31, 1995 from $14.9 million in 1994. Of this increase, $5.2
million was due to an increase in subscriber revenues, $3.9 million was due to
an increase in roaming revenues and $0.5 million was due to an increase in
equipment sales. The growth in subscriber revenues was due primarily to the
growth in number of subscribers associated with continued internal expansion as
well as the acquisition of PA-2 and PA-7. The growth in roaming revenues was due
primarily to increased coverage of the licensed service area through the
addition of cell sites as well as the acquisition of PA-2 and PA-7. The growth
in equipment sales was due primarily to the increase in the number of
subscribers as noted above, somewhat offset by continued decreases in cellular
telephone equipment prices.
Cost of services increased 28.6%, to $3.6 million (14.7% of total revenues
and sales) for the year ended December 31, 1995 from $2.8 million (18.8% of
total revenues and sales) in 1994. The growth in the Horizon Companies'
subscriber base and the expansion of its cellular coverage areas has led to
greater cost of services, primarily in the areas of system network, billing and
administration. Cost of equipment sales increased 47.1%, to $2.5 million for the
year ended December 31, 1995 from $1.7 million in 1994. The increase was due
primarily to the increase in the number of subscribers and their associated
equipment purchases, as noted above.
General and administrative expenses increased 71.4% to $3.6 million (14.7%
of total revenues and sales) for the year ended December 31, 1995 from $2.1
million (14.1% of total revenues and sales) in 1994. The increase was due
primarily to the increase in the number of subscribers as well as the
acquisition of PA-2 and PA-7. Selling expenses increased 53.8%, to $4.0 million
(16.3% of total revenues and sales) for the year ended December 31, 1995 from
$2.6 million (17.4% of total revenues and sales) in 1994. The increase was due
primarily to the growth in the number of subscribers added.
EBITDA increased 86.2% to $10.8 million (44.1% of total revenues and sales)
for the year ended December 31, 1995 from $5.8 million (38.9% of total revenues
and sales) in 1994, primarily as a result of increased subscriber and roaming
revenue as noted above.
Depreciation and amortization increased 46.7%, to $6.6 million for the year
ended December 31, 1995 from $4.5 million in 1994. The increase was primarily
the result of amortization of license costs associated with the acquisition of
PA-2 and PA-7 during 1995, a full year's amortization of license cost associated
with NY-3, which was acquired during 1994, as well as an increase in
depreciation related to additional cellular equipment placed into service
throughout 1995 and 1994.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
Total revenues and sales increased 125.8% to $14.9 million for the year
ended December 31, 1994 from $6.6 million in 1993. Of this increase, $4.1
million was due to an increase in subscriber revenues, $3.6 million was due to
an increase in roaming revenues and $0.6 million was due to an increase in
equipment sales. Subscriber revenues increased 151.9% to $6.8 million for the
year ended December 31, 1994 from $2.7 million in 1993. The growth in subscriber
revenues was due primarily to the growth in the number of subscribers
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<PAGE> 33
associated with continued internal expansion as well as the acquisition of new
systems. Roaming revenues increased 109.1% to $6.9 million for the year ended
December 31, 1994 from $3.3 million in 1993. The growth in roaming revenues was
due primarily to an increase in the number of systems as well as increased cell
site coverage of the licensed service area. Equipment sales increased 83.3% to
$1.1 million for the year ended December 31, 1994 from $0.6 million in 1993. The
growth in equipment sales was due primarily to the increase in the number of
subscribers as noted above, somewhat offset by continued decreases in cellular
telephone equipment prices. The Horizon Companies' frequently sold cellular
equipment at significant discounts, resulting in a negative gross margin. Such
practices were designed to attract and retain subscribers and to allow the
Horizon Companies to focus on its primary business of selling airtime, access
and other cellular services.
Cost of services increased 75.0%, to $2.8 million (18.8% of total revenues
and sales) for the year ended December 31, 1994 from $1.6 million (24.2% of
total revenues and sales) in 1993. The growth in the Horizon Companies'
subscriber base and the expansion of its cellular coverage areas led to greater
cost of services, primarily in the areas of system network, billing and
administration. Cost of equipment sales increased, to $1.7 million for the year
ended December 31, 1994 from $0.7 million in 1993. The increase was due
primarily to the increase in the number of subscribers and their associated
equipment purchases, as noted above.
General and administrative expenses more than doubled to $2.1 million
(14.1% of total revenues and sales) for the year ended December 31, 1994 from
$0.8 million (12.1% of total revenues and sales) in 1993. The increase was due
primarily to the increase in the number of systems in operation throughout 1994.
Selling expenses doubled to $2.6 million (17.4% of total revenues and
sales) for the year ended December 31, 1994 from $1.3 million (19.7% of total
revenues and sales) in 1993. The increase was due primarily to the increase in
the number of systems in operation as well as the growth in number of
subscribers added.
EBITDA more than doubled to $5.8 million (38.9% of total revenues and
sales) for the year ended December 31, 1994 from $2.1 million (31.8% of total
revenues and sales) in 1993, primarily as a result of increased subscriber and
roaming revenue as noted above. Cost efficiencies, particularly in general and
administrative expenses, also contributed to the increase.
Depreciation and amortization increased to $4.5 million for the year ended
December 31, 1994 from $2.3 million in 1993. The increase was primarily the
result of amortization of license costs.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically relied on internally generated funds to fund
debt service and a substantial portion of its capital expenditures. Bank credit
facilities have been used for additional support of capital expenditure programs
and to fund acquisitions. The Company plans to use the $110.0 million of
proceeds of the Offering, the $20.0 million of proceeds of the Preferred Stock
Investment and approximately $204.4 million of borrowings under the Bank Credit
Facility to fund the $250.0 million Horizon Acquisition, to pay the fees
associated with the above transactions and to refinance $71.5 million of
existing bank debt.
The Company projects a rapid buildout of the Horizon Systems in order to
improve coverage and increase usage. During the first 15 month period through
December 31, 1997, the Company expects to add 35 to 40 new cell sites to the
Horizon Systems, which is approximately a 50% increase over the existing 70 cell
sites. The Company also plans to continue to add cell sites in its Existing
Systems and to convert cell sites from Ericsson to Northern Telecom equipment to
more efficiently serve communities of interest that expand the existing Northern
Telecom systems in Youngstown and Erie. In addition, the Company will continue
to upgrade switches and other network equipment. Aggregate capital expenditure
levels are expected to range from approximately $25 to $30 million from the date
of the Offering through December 31, 1997.
The Company plans to use internally generated funds plus funds available
under the Bank Credit Facility to finance this capital expenditure program.
After completion of the Offering and the Horizon Acquisition, the Company
expects to have approximately $95.6 million in remaining revolver availability
under the Bank Credit Facility, subject to meeting certain financial tests. See
"Description of Bank Credit Facility." The Company expects that these resources
will be sufficient to meets its needs.
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EFFECT OF NEW ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of, which will require the Company to review
for the impairment of long-lived assets and certain identifiable intangibles to
be held and used by the Company when events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. The Company adopted
the provisions of SFAS No. 121 effective January 1, 1996. The impact of adopting
SFAS No. 121 did not have a material effect on the Company's combined financial
position or results of operations.
In October 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based
Compensation, which establishes a fair value based method of accounting for
stock-based employee compensation plans, including stock option plans. However,
the new standard allows compensation to continue to be measured as prescribed by
Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued
to Employees, but requires expanded disclosures. At this time, management
expects to account for stock options in accordance with APB Opinion No. 25. The
disclosure requirements of SFAS No. 123, which are required if an entity elects
to continue to use the accounting method in APB Opinion No. 25, will be adopted
as required for the financial statements of the Company for the year ending
December 31, 1996.
INFLATION
The Company does not believe that inflation has had a significant impact on
the Company's consolidated operations.
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BUSINESS
GENERAL
Upon consummation of the Horizon Acquisition, the Company will own and
operate cellular telephone systems serving one large cluster with approximately
2.4 million Pops in northeastern Ohio, western Pennsylvania and western New
York. The Horizon Acquisition will add the five Horizon System RSAs to the
Existing Systems (three MSAs and one RSA), providing the Company with over
89,000 subscribers. The Company's cellular systems are located in Youngstown,
Ohio and Erie, Pennsylvania and in primarily suburban and rural areas between
the Cleveland, Akron-Canton, Pittsburgh, Buffalo and Rochester metropolitan
areas. The Company believes that its mix of suburban and rural locations
provides it with advantages over cellular operators in predominately urban
areas, including greater roaming revenue opportunities, lower distribution costs
and higher costs of entry for new competitors. The Company has converted all of
its Existing Systems to TDMA digital technology and will selectively convert the
more densely populated portions of the Horizon Systems to digital technology in
early 1997.
The Company was incorporated under the laws of the State of Ohio in August
1991. Youngstown Cellular Telephone Company, which is one of the Company's
predecessor partnerships, has operated the Youngstown system since 1985 with
substantially the same management that operates the Company today. The principal
executive offices of the Company are located at 6550-B Seville Drive, Canfield,
Ohio 44406 and its telephone number is (330) 565-1000.
CORPORATE RESTRUCTURING
To facilitate implementation of its business strategy, the Company is in
the process of being restructured, which restructuring will be completed prior
to consummation of the Offering (the "Restructuring"). Prior to the
Restructuring, SYGNET Communications, Inc., has been operating as a Close
Corporation with S corporation tax status. Its cellular business has been
operated through three partnerships: Youngstown Cellular Telephone Company, Erie
Cellular Telephone Company and Wilcom Cellular, each of which has two other
corporate partners -- Wilcom Corporation and Sharon-Youngstown Cellular, Inc. As
a result of the Restructuring, Wilcom has been merged into SYGNET
Communications, Inc. which has been renamed Sygnet Wireless, Inc. and now is a
holding company with Sharon-Youngstown, renamed Sygnet Communications, Inc., now
its wholly-owned subsidiary and the operating company. The existence of the
Youngstown Cellular Telephone Company, Erie Cellular Telephone Company and
Wilcom Cellular will automatically terminate once all partnership interests are
transferred to the Subsidiary, which will occur prior to the Offering.
Completion of the restructuring is contingent upon FCC approval of the transfer
of the FCC microwave licenses held by the partnerships.
THE HORIZON ACQUISITION
On July 11, 1996, the Company signed an agreement with the Horizon
Companies to purchase for $250.0 million in cash (subject to net working capital
adjustment) the Horizon Systems, which consist of the PA-1, PA-2, PA-6, PA-7 and
NY-3 RSAs. Under the agreement, the Company is to become the cellular licensee
serving contiguous markets representing approximately 1.3 million Pops and
covering over 16,125 square miles in western Pennsylvania and New York. The PA-2
RSA, which represents 89,400 Pops, currently operates under IOA pending the
FCC's final determination of the qualifications of the initial lottery winner to
hold the permanent license for the PA-2 RSA. While the Company will not be
issued a permanent license for the PA-2 RSA (unless the Company were to reach an
agreement to purchase the license from the eventual recipient of the license),
it is entitled to all revenue and income generated by the cellular system until
the FCC resolves the dispute. The Company is unable to predict when or how the
FCC will resolve this matter or the likelihood that a purchase agreement will be
reached with the eventual license winner.
The four contiguous Pennsylvania RSAs to be acquired from the Horizon
Companies include 880,100 Pops and cover over 10,243 square miles in western
Pennsylvania. The New York system represents 485,200 Pops and covers over 5,882
square miles in the western portion of the state. When combined with the
Existing Systems, the Company will serve one large cluster representing
approximately 2.4 million Pops and covering 19,164 square miles. Pittsburgh and
Erie, Pennsylvania; Buffalo, Elmira and Rochester, New York; and
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<PAGE> 36
Cleveland, Akron, Canton and Youngstown, Ohio are the major urban centers
encompassed by or bordering on the Company's service area.
BUSINESS STRATEGY
The Company's goal is to become the leading full service provider of mobile
telecommunications services in its cluster by offering technically advanced
cellular service, superior coverage and a high level of customer service at
competitive prices. Specifically, the Company's business objectives are to
increase penetration and improve profitability in both the Horizon Systems and
its Existing Systems by taking advantage of its ability to operate in a much
larger regional footprint. In addition, the Company may in the future acquire
additional systems that provide the Company with the ability to further its
strategic objectives.
- Developing the Horizon Systems. The Company believes that the Horizon
Systems are underdeveloped and underpenetrated compared to its Existing
Systems and represent a substantial growth opportunity for the Company. By
taking advantage of marketing, operating and engineering synergies arising
from the Horizon Acquisition, the Company believes that it will be able to
decrease overall per subscriber operating costs and rapidly increase
penetration in the Horizon Systems to levels comparable to those achieved
in its Existing Systems. Immediately upon consummation of the Horizon
Acquisition, the Company will apply its business strategy to the Horizon
Systems, which strategy has generated significant subscriber and revenue
growth in its Existing Systems, including the Erie Acquisition in
September 1995.
- Aggressive Marketing and Promotion of Cellular Services. The Company
plans to implement aggressive marketing programs that it has been using in
its Existing Systems to increase subscriber activations in the Horizon
Systems. These include competitive rate plans which include low priced
regional roaming rates tailored for individual markets and attractive
equipment prices. In addition, the Company will use a mix of advertising
media such as television, radio and outdoor advertising to reach potential
new subscribers.
- Local Retail Outlets and Superior Customer Service. The Company strives
to provide a high level of customer service and the Company's use of local
retail stores is a key element of this local subscriber service strategy.
The Company's stores are staffed with sales and customer service
representatives who provide a more direct, specifically targeted level of
customer service than is ordinarily offered by larger competitors relying
on centralized customer service operations. By having a permanent local
retail presence, the sales staff can cultivate local market knowledge that
allows them to focus their efforts on the specific demands of the market
or markets in which they operate. This improves their ability to establish
relationships with customers, to understand the customer's needs and to
reduce churn. The sales team's ability to promote the Company's services
both inside and outside of its cluster is enhanced by its license to
market under the CELLULAR ONE(R) brand name and its continuing
participation in the NACN, a national cellular network comprised
principally of non-wireline carriers whose goal is to make cellular
service "seamless" throughout North America by facilitating automatic
roaming to and from member systems.
- Advanced Systems Design. The Company's system design and the TDMA
digital technology it employs provide the foundation for technically
superior cellular service. The Company has deployed a large number of cell
sites in each service area. Consequently, subscribers in the Existing
Systems enjoy a high level of local and regional coverage, resulting in
high quality hand-held coverage throughout most of its population centers,
minimal call blocking, seamless call delivery through NACN and the
availability of digital voice and data services. All of the Company's
existing cells have already been upgraded to offer TDMA digital services
and the Company intends to selectively improve the technology being used
in the Horizon Systems to match this high quality level. The Company
believes it is well positioned to address new technologies that might
become available in its markets.
- Decentralized Marketing Management. The Company has assembled
management, sales and operating staff with extensive experience and
relationships within each market. The decentralized market management
structure adopted by the Company allows it to tailor its service to meet
the needs of each
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market. This local approach to marketing is coordinated with senior
management of the Company and allows each market to benefit from shared
corporate resources.
- Acquisition Strategy. The Company's primary external growth strategy has
been to develop its cellular system by pursuing acquisitions that expand
its regional footprint, can be operated efficiently, enhance its
reciprocal relationships with other cellular telephone carriers and
provide an opportunity to gain significant competitive advantages. As it
has done successfully in the past, the Company intends to pursue
acquisition opportunities which permit the Company to achieve these
strategic objectives either with respect to its current cluster or
elsewhere.
- Future Competition. The Company is preparing for what is expected to be
an increasingly competitive telecommunications environment by aggressively
working to attract new subscribers. The Company believes it is prepared
for this competition because it is not dependent on high roaming or local
rates. In addition, the Company believes that it can effectively face this
competition from its position as an incumbent in the cellular field with a
high quality network that is not capacity constrained. The Company also
has an extensive footprint, strong distribution channels, superior
customer service capabilities and an experienced management team. Because
the Company operates in medium to small markets, the new PCS licensees may
be unable or unwilling to offer commercially viable wireless service in
much of the Company's area in the near term. The Company believes the
extensive capital expenditures required to deploy the infrastructure for
PCS is more readily justifiable from an economic standpoint in larger,
more densely populated urban areas. This constraint of PCS may position
the Company to offer roaming services to PCS customers, as well as to
provide bulk lines of service for resale to certain PCS companies. For
example, the Company's existing Youngstown and Erie systems are equipped
to provide TDMA digital roaming to AT&T Wireless PCS subscribers when AT&T
Wireless introduces dual band TDMA phones in the adjacent Cleveland and
Buffalo-Rochester MTAs.
CELLULAR MARKETS AND SYSTEMS
After giving effect to the Horizon Acquisition, the Company will operate in
eight license areas in northeastern Ohio and western New York and Pennsylvania.
This does not include the PA-2 IOA. The following table summarizes the Existing
Systems and the Horizon Systems. See "-- The Horizon Acquisition."
<TABLE>
<CAPTION>
DATE OF
TOTAL POPS OWNERSHIP NET POPS ACQUISITION
<S> <C> <C> <C> <C>
EXISTING SYSTEMS(1)
Youngstown, OH MSA........................... 491,900 100% 491,900 1985
Sharon, PA MSA............................... 122,100 100% 122,100 1987
Erie, PA MSA................................. 280,600 100% 280,600 1995
Columbiana, OH, OH-11 RSA.................... 111,700 100% 111,700 1991
HORIZON SYSTEMS(1)(2)
Chautauqua, NY, NY-3 RSA..................... 485,200 100% 485,200 1996
Crawford, PA, PA-1 RSA....................... 197,200 100% 197,200 1996
Lawrence, PA, PA-6 RSA....................... 376,400 100% 376,400 1996
Indiana, PA, PA-7 RSA........................ 217,100 100% 217,100 1996
McKean, PA, PA-2 RSA(3)...................... 89,400 100% 89,400 1996
--------- ---------
Total................................ 2,371,600 2,371,600
</TABLE>
- -----------------------------
(1) All of the Existing Systems and Horizon Systems licenses are non-wireline
licenses.
(2) To be acquired as described under "-- The Horizon Acquisition."
(3) The Horizon Acquisition includes the Pops in the PA-2 RSA where the Company
has IOA pending the FCC's final determination of the qualifications of the
initial lottery winner to hold the permanent license for the PA-2 RSA. The
Company will not be issued the permanent license to provide cellular
service in this RSA (unless the Company were to reach an agreement to
purchase the license from the eventual
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<PAGE> 38
recipient of the license) and the Company's IOA from the FCC will expire
upon selection of the new licensee and the commencement of operations by
that licensee. Until the expiration of the IOA, however, the Company is
entitled to all revenue and income generated by the PA-2 RSA. The Company
believes that the expiration of such authority will not have a material
adverse effect on its results of operations.
The Company's operations are conducted in a single large cluster
representing approximately 2.4 million contiguous Pops in Ohio, Pennsylvania and
New York. It spans three MSAs and six RSAs and over 19,164 square miles. The
area includes 25 counties and 479 total interstate highway miles. Eight
airports, Cleveland, Pittsburgh, Youngstown, Akron, Erie, Corning, Rochester and
Buffalo, provide access to the systems.
YOUNGSTOWN-WARREN OHIO, COLUMBIANA, OHIO AND SHARON, PENNSYLVANIA
The Youngstown, Ohio area is an important economic area for eastern Ohio
and western Pennsylvania. Located at a midway point approximately 50 miles from
both Pittsburgh and Cleveland along the Ohio Turnpike and Interstate 76, the
Youngstown market is a key roaming corridor between these two cities. Interstate
80, a major transportation access route from the Midwest to New York City, is
also a source of roaming traffic.
The median household income for the Youngstown MSA is $29,982, with 22.8%
of the population with household income in excess of $50,000. Selected major
employers in the area include Delphi Packard Electric Systems, General
Motors-Lordstown Assembly, St. Elizabeth Health Center, WCI Steel, Youngstown
State University and Youngstown Air Reserve Base. The area is also served by
Youngstown State University and Pennsylvania State University Sharon Campus. The
population of the Youngstown-Warren Metro Area has increased throughout the
1990's.
Notable cultural and recreation attractions include the Youngstown
Symphony, Butler Institute of American Art and the Youngstown-Warren LPGA
Classic. The area's proximity to Cleveland and Pittsburgh also allows residents
to enjoy the attractions of these cities, including professional sports and
additional cultural activities.
ERIE, PENNSYLVANIA
Located on Lake Erie, Erie County is noted for manufacturing,
transportation and recreation. The Port of Erie handles imports and exports
through the St. Lawrence Seaway and is supported by excellent rail service. Erie
County exports more per capita than any other Pennsylvania county. Included in
Erie County is Interstate 90, which connects Buffalo and Cleveland. Interstate
79 connects Erie and Interstate 90 directly to Pittsburgh. Both of the routes
are important roaming corridors. There are 66 total interstate highway miles in
a market comprised of 802 square miles.
The Erie County median household income is $32,363 with 24.8% of the
population having household incomes in excess of $50,000. Major Erie County
employers include General Electric, Hamot Health Foundation, St. Vincent Health
Center, Plastek Industries and Erie Insurance Group. Pennsylvania State
University at Erie, Mercyhurst College, Edinboro University of Pennsylvania and
Gannon University are located in the license area.
Travel and tourism is Erie's second largest industry with millions of
vacationers attracted annually to Presque Isle State Park and other recreational
and historical sites. Residents and visitors enjoy the Erie Philharmonic,
professional baseball and hockey and a number of zoos and museums.
PENNSYLVANIA 1
PA-1 is located between the Company's existing Erie and Sharon MSAs. The
primary population center is Meadville which is located along the 42 miles of
Interstate 79 that runs through the market. Interstate 80 also crosses the RSA,
extending east from Sharon. The market's median household income in $28,593 with
18.8% of households having income over $50,000.
Major employers include Quaker State, Penzoil and Joy Technologies.
Allegheny College is located in the region and Conneaut Lake and the Allegheny
National Forest serve as key recreation areas.
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PENNSYLVANIA 6 AND 7
The license areas of the PA-6 and PA-7 RSAs are located in the western part
of Pennsylvania just north of Pittsburgh to approximately the middle of the
state. The market is characterized by substantial levels of roaming, as it
includes significant traffic flow between its market areas and surrounding major
cities such as Pittsburgh, Pennsylvania, Youngstown, Ohio and Erie,
Pennsylvania. In particular, Butler County (located in PA-6) has a strong
community of interest with nearby Pittsburgh. Butler County contains 43% of the
RSA's total population, of which 50,000 people commute out of the county to
Pittsburgh. The population in all counties comprising both RSAs has grown during
the 1990-1995 timeframe. Butler County population experienced the greatest
growth at 7.2%. Median household income for PA-6 is $30,172 and for PA-7 is
$25,930, with 21.9% and 15.8% of households in each RSA above $50,000.
Pennsylvania State University DuBois, Clarion University of Pennsylvania and
Indiana University of Pennsylvania are examples of the educational institutions
in the area.
The major highways serving these RSAs are Interstate 79 and Interstate 80
that link the major population centers in north-central Pennsylvania. In
addition, Route 60, a recently completed toll road, serves as an expressway to
Pittsburgh International Airport. Indiana County, located in PA-7, also contains
several well-traveled state highways (Routes 119, 22 and 422) that are major
regional commuting routes for the Pittsburgh region. The are 145 combined
interstate highway miles within these RSAs.
NEW YORK 3
The NY-3 RSA is located in the western part of New York State and includes
six counties in an area that covers 5,882 square miles that represents 22.5% of
the area of New York State. It is the largest geographic RSA in the United
States. The system borders Buffalo and Rochester to the north, Erie,
Pennsylvania to the west and Binghamton/Elmira to the east. This large area
includes bedroom communities for Buffalo and Rochester, primarily in Genesee
County (61,300 Pops), strong core communities along Lake Erie and in Jamestown
in Chautauqua County (142,100 Pops) and the growing economic region of Corning
and Bath in Steuben County (100,700 Pops). Population growth statistics for the
period of 1990-1995 show that each county comprising the RSA grew, with Wyoming
County experiencing the highest growth rate of 4.0%.
Major employers include Corning, Inc., Dresser Rand and Morrison Knudsen.
The area is also home to many recreational destinations, including various lakes
such as the Finger Lakes region, portions of New York's wine country and certain
of New York's ski areas. The State University of New York at Fredonia and St.
Bonaventure are two of the colleges and universities located in the license
area. Health care services are available through WCA Hospital and Brooks
Memorial Hospital.
NY-3 is also a strong roaming market, containing 1.7 million interstate
vehicle miles and 3.6 million total highway vehicle miles. The primary
interstates are Interstate 90 (the New York Thruway) which connects Buffalo,
Rochester and Erie and yields traffic counts averaging over 21,000 cars per day
and Interstate 390 which connects Rochester, Corning and Binghamton/Elmira and
yields traffic counts averaging 9,600 cars per day (including over 15,000 cars
per day across Steuben County). Route 17, known as the Southern Tier Expressway,
is a four lane U.S. highway that traverses the entire RSA from Corning to the
Pennsylvania state line. There are 94 interstate highway miles within the area.
COMPETITORS AND ADJOINING SYSTEMS
The Company competes with various companies in each of its markets.
Management believes that the integrated network of its contiguous cellular
systems operating as CELLULAR ONE(R) affords it significant advantages over many
of its competitors. Overall, the Company competes against four distinct cellular
system operators.
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The following chart lists the Company's cellular competitors in each of its
communities of interest.
<TABLE>
<CAPTION>
MARKETS COMPETITORS
<S> <C>
Youngstown, OH MSA....................... 360() Communications
Erie, PA MSA............................. GTE Mobilnet
Columbiana, OH (OH-11 RSA)............... 360() Communications
Sharon, PA MSA........................... 360() Communications
Crawford, PA (PA-1 RSA).................. 360() Communications
Lawrence, PA (PA-6 RSA).................. Bell Atlantic/NYNEX and 360() Communications
Indiana, PA (PA-7 RSA)................... Bell Atlantic/NYNEX
Chautauqua, NY (NY-3 RSA)................ Frontier
McKean, PA (PA-2 RSA).................... Bell Atlantic/NYNEX
</TABLE>
MARKETING
The systems acquired from the Horizon Companies promote their respective
cellular products and services under the name CELLULAR ONE(R), as does the
Company for its operations in the Erie vicinity. See "-- Service Marks."
CELLULAR ONE(R), the first national brand name in the cellular industry is
currently utilized in over 400 service areas throughout the United States.
CELLULAR ONE(R) ranks as the nation's most recognized cellular service provider.
The national advertising campaign conducted by the Cellular One Group enhances
the Company's advertising exposure. The Company also obtains substantial
marketing benefits from the name recognition associated with this widely used
service mark, both with existing subscribers traveling outside the Company's
service areas and with potential new subscribers moving into the Company's
service areas. In addition, travelers who subscribe to CELLULAR ONE(R) service
in other markets may be more likely to use the Company's service when they
travel in the Company's service areas. This is primarily due to the technical
operation of the cellular telephone. Cellular telephones of non-wireline
subscribers are programmed to select the non-wireline carrier (such as the
Company) when roaming, unless the subscriber either dials a special code or has
a cellular telephone equipped with an "A/B" (non-wireline/ wireline) switch and
selects the wireline carrier.
As part of its growth strategy, the Company expects to expand its use of
the CELLULAR ONE(R) name to include Youngstown, Ohio, where it currently
operates under the name "Wilcom Cellular." Several competing systems bordering
the Youngstown market historically operated under the CELLULAR ONE(R) name, thus
creating the opportunity for customer confusion. With the Horizon Acquisition,
almost all of the bordering systems using the CELLULAR ONE(R) name will be owned
by the Company, thus the need for differentiation will be eliminated. By
adopting the CELLULAR ONE(R) name, the Company will be able to leverage the
brand recognition for the mark in the sale of all its own services.
Management has also implemented its marketing strategy by training and
compensating its sales force in a manner designed to stress the importance of
customer service and high penetration levels. The Company's sales staff has a
two-tier structure. A retail sales force handles walk-in traffic and a targeted
sales staff solicits certain corporate and government subscribers. The Company's
management believes that its internal sales force is better able to select and
screen new subscribers and select pricing plans that realistically match
subscriber means and needs than are independent agents. As a result, the
Company's use of an internal sales force keeps marketing costs low both directly
because commissions are lower and indirectly because subscriber retention is
higher than when using independent agents.
The Company's sales force works principally out of its own retail stores in
which the Company offers a full line of cellular products and services. As of
June 30, 1996, the Company maintained four retail stores in the Youngstown area
and three in the Erie area. Horizon has 10 retail stores supporting the Horizon
Systems.
ROAMING
Roaming is an important service component for many subscribers. The Company
believes that attractively priced regional roaming is important to the
development of customers for all regional non-wireline cellular carriers.
Accordingly, where possible, the Company attempts to arrange reciprocal roaming
rates that allow customers to roam at competitive prices. The Company believes
this increases usage on all non-wireline
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systems, including the Company's. Roaming revenue is a substantial source of
incremental revenue for the Company due, in part, to the fact that a number of
the Company's cellular systems are located along major travel and commuting
corridors and because certain of the Horizon Systems are in the early stages of
their growth cycle. While there is an industry trend to reduce roaming rates,
the Company is addressing this trend through its roaming agreements which are
usually reciprocal in nature and are at or near home rates. Roaming yield for
the 12 months ended December 31, 1995 was $0.57 and for the six months ended
June 30, 1996 was $0.54 per minute, including long distance toll charges.
Roaming yield is defined as roamer service revenue, which includes airtime,
tolls and surcharges divided by the roaming minutes of use.
The Company is also a member of NACN. NACN is the largest wireless
telephone network system in the world, linking non-wireline cellular operators
throughout the United States and Canada. NACN connects key areas across North
America so that customers can use their cellular phones to place and receive
calls in these areas as easily as they do in their home areas. Through NACN,
customers receive calls automatically without the use of complicated roaming
codes as they "roam" in more than 5,000 cities and towns in the United States
and Canada. By dialing a subscriber's cellular telephone number, the caller can
reach the subscriber without knowing his or her location or having to dial
additional roaming access numbers. In addition, special services such as call
forwarding and call waiting automatically follow subscribers as they travel.
Through its membership in NACN, the Company provides extended regional and
national service to subscribers, thereby allowing them to easily make and
receive calls while in other cellular service areas. This service distinguishes
the Company's service and call delivery features from those of some of its
competitors.
PRODUCTS AND SERVICES
In addition to providing high-quality cellular telephone service in each of
its markets, the Company also offers various custom-calling features such as
voicemail, call forwarding, call waiting, three-way conference calling and no
answer and busy transfer. The Company also sells cellular equipment at no cost
or at discount prices as a way to encourage use of its mobile services.
Several rate plans are presented to prospective customers so that they may
choose the plan that will best fit their expected calling needs. Unlike some of
its competitors, the Company designs rate plans on a market-by-market basis. The
Company's local market managers are given the ability to market from a wide
variety of existing rate plans and are encouraged to propose to the Company new
rate plans that respond to market and competitive conditions. These rate plans
include a high user plan, a medium user plan, a basic plan and an economy plan.
Most rate plans combine a fixed monthly access fee, per minute usage charges and
additional charges for custom-calling features in a package which offers value
to the customer while enhancing airtime use and revenues for the Company. In
general, rate plans that include a higher monthly access fee typically include a
lower usage rate per minute. An ongoing review of equipment and service pricing
is conducted to ensure the Company's competitiveness. As appropriate, revisions
to the pricing of service plans and equipment are made to meet the demands of
the local marketplace.
CUSTOMER SERVICE
Customer service is an essential element of the Company's marketing and
operating philosophy. The Company is committed to attracting significant numbers
of new subscribers and retaining existing subscribers by providing consistently
high quality customer service and coverage. In each of its cellular service
areas, the Company maintains a local staff, including a market manager, to serve
as customer service representatives. Local offices and installation and repair
facilities enable the Company to service customers better and schedule
installations and make repairs on a timely basis.
SYSTEM DEVELOPMENT AND EXPANSION
The Company has 47 cell sites in operation in the Company's Existing
Systems and expects to add 35 to 40 new cell sites to the Horizon Systems. The
Company develops or builds out its cellular service areas by adding channels to
existing cell sites and by building new cell sites. Such development is done for
the purpose of increasing capacity and improving coverage in direct response to
projected subscriber demand and in response to actions taken by the Company's
competitors. Projected subscriber demand is calculated for each cellular service
area on a cell-by-cell basis. These projections involve a traffic analysis of
usage by existing
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subscribers, coverage quality analysis and an estimate of the number of
additional subscribers in each such area. In calculating projected subscriber
demand, the Company builds into its design assumptions an extremely low call
"blockage" rate (percentage of calls that are not connected on first attempt at
peak usage time during the day). After calculating projected subscriber demand,
the Company determines the most cost-efficient manner of meeting such projected
demand. The Company has historically met such demand through a combination of
augmenting channel capacity in existing cell sites and building new cell sites.
Cell site expansion is expected to enable the Company to continue to add
subscribers, enhance use of the systems by existing subscribers, increase roamer
traffic due to the larger geographic area covered by the cellular network and
further enhance the overall efficiency of the network. The Company believes that
the high level of coverage provided by its Existing Systems and the increased
cellular coverage it intends to attain will have a positive impact on market
penetration and subscriber usage.
In addition to its cellular operations, the Company also operates two small
paging systems in the Youngstown Area with 9,559 subscribers. Paging revenue for
the first six months of 1996 was approximately $0.5 million. The Company does
not view ownership of its paging systems as a significant element of its
business and does not have any plans to expand such ownership to include
additional paging systems.
DIGITAL TECHNOLOGY
The Company has selected TDMA digital for its Existing Systems. All cell
sites in the Existing Systems were converted to digital in early 1996. Each cell
site handles analog service as well. The Company's systems are also equipped to
provide cellular digital packet data ("CDPD"). Additionally, TDMA ensures the
services provided by the Company will be compatible with the cellular systems
operated by AT&T Wireless in Pittsburgh, Pennsylvania and Southwestern Bell
Mobile in Buffalo and Rochester, New York, as well as the PCS systems being
developed by AT&T Wireless in Cleveland, Ohio and Buffalo and Rochester, New
York.
The Company expects to install digital cells in the more densely populated
areas of the Horizon Systems beginning in early 1997. Horizon's existing
analog-only equipment will be redeployed when replaced with digital to improve
coverage in the more rural portions of these systems. Digital can be added to
these areas when demand for digital services or capacity warrants the added
capital costs.
SERVICE MARKS
CELLULAR ONE(R) is a federally registered service mark, owned by Cellular
One Group, a Delaware general partnership of Cellular One Marketing, Inc., a
subsidiary of Southwestern Bell Mobile Systems, Inc., together with Cellular One
Development, Inc., a subsidiary of AT&T Wireless Services, Inc. and Vanguard
Cellular Systems, Inc. The Company currently uses the CELLULAR ONE(R) service
mark to identify and promote its cellular telephone service for the Erie system
pursuant to a licensing agreement with Cellular One Group (the "Licensor").
Licensing and advertising fees are determined based upon the population of the
licensed areas. The licensing agreements require the Company to provide high
quality cellular telephone service to its customers and to maintain a certain
minimum overall customer satisfaction rating in surveys commissioned by the
Licensor. The licensing agreements which the Company has entered into are for
original five-year terms expiring on various dates. These agreements may be
renewed at the Company's option for three additional five-year terms. The
Company's use of the CELLULAR ONE(R) service mark will be expanded to include
the NY-3, PA-1, PA-2, PA-6 and PA-7 RSAs under licensing agreements assumed by
the Company as part of the Horizon Acquisition.
COMPANY PATENT
The Company is the owner of U.S. Patent No. 5,235,633 (the "Dennison
Patent") relating to a cellular telephone system that uses the position of a
mobile unit to make call management decisions. The Company is evaluating whether
the technology involved should be pursued and, if so, whether it should be
developed using internal resources, by a third party under a license arrangement
or in a joint effort with one or more third parties. The Company's policy is to
apply for and obtain U.S. patents with respect to technology it has developed
when management determines that it may be competitively advantageous and cost
effective to do so. The Company is currently prosecuting continuations and
continuations-in-part of the application which matured into the Dennison Patent.
Because the technology is still at an early stage of its development, the
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<PAGE> 43
Company is unable to determine the ultimate value of the Dennison Patent or the
continuations filed with regard thereto, and there is no assurance that it will
ever prove to be of any significant economic or strategic value.
EMPLOYEES AND AGENTS
As of June 30, 1996, the Company had approximately 175 employees. In
addition, as of such date the Company had agreements with numerous independent
sales agents, including car dealerships, electronics stores, paging services
companies and independent contractors. None of the Company's employees are
represented by a labor organization and the Company's management considers its
employee relations to be good.
PROPERTIES
The Company maintains its corporate headquarters in Canfield, Ohio. The
Company leases this space, which is approximately 6,000 square feet. As of June
30, 1996, the Company's cellular operations lease eight and own one sales and
administrative offices. The Company anticipates that it will review these leases
from time to time and may, in the future, lease or acquire new facilities as
needed. The Company does not anticipate that it will encounter any material
difficulties in meeting its future needs for any leased space.
LEGAL PROCEEDINGS
The Company is not currently involved in any pending legal proceedings that
individually or in the aggregate are material to the Company.
OVERVIEW OF THE CELLULAR TELEPHONE INDUSTRY
The following table sets forth information published by CTIA with respect
to the number of subscribers served by cellular telephone systems in the United
States and the combined penetration rate of such wireline and non-wireline
systems as of the dates indicated:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------------------------------------
1991 1992 1993 1994 1995
<S> <C> <C> <C> <C> <C>
Subscribers (in thousands)..................... 7,500 11,000 16,000 24,000 35,000
Ending penetration(1).......................... 2.8% 4.2% 6.2% 9.2% 13.5%
</TABLE>
- -----------------------------
(1) Determined by dividing the aggregate number of subscribers by estimated
population. Rates reflect combined penetration of both wireline and
non-wireline cellular operators. CTIA estimates that the total number of
subscribers will surpass 40 million in 1996, thus yielding a penetration
rate of at least 15.4%.
Cellular telephone service is a form of telecommunications capable of
providing high quality, high capacity voice and data communications to and from
vehicle-mounted and hand-held radio telephones. Cellular telephone systems
generally offer customers the features offered by the most technologically
advanced landline telephone services. Two significant features of cellular
telephone systems are frequency reuse, which enables the simultaneous use of the
same frequency in two adequately separated cells and call handoff. A cellular
telephone system's frequency reuse and call handoff features result in highly
efficient use of available frequencies and enable cellular telephone systems to
process more simultaneous calls and service more users over a greater area than
conventional mobile telephone systems.
Cellular telephone technology is based upon the division of a given market
area into a number of smaller geographic areas or "cells." Each cell has a "base
station" or "cell site" that is equipped with a relatively low power
transmitter, a receiver and other equipment that communicates by radio signal
with cellular telephones located within range of the cell. Cells generally have
a maximum operating range of up to 25 miles, while the standard cell size is
four to ten miles in radius. Cells are typically designed on a grid, although
terrain factors, including natural and man-made obstructions, signal coverage
patterns and capacity constraints may result in irregularly shaped cells and
overlaps or gaps in coverage.
Each cell site is connected by microwave link or telephone line to a mobile
telephone switching office ("MTSO"), which, in turn, is connected to the local
landline telephone network. Because cellular communications systems are fully
interconnected with the landline telephone network and long distance systems,
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customers can receive and originate both local and long-distance calls from
their cellular telephones on a worldwide basis. When a customer in a particular
cell dials a number, the cellular telephone sends the call by radio signal to
the cell's transmitter-receiver, which in turn transmits it to the MTSO. The
MTSO then completes the call by connecting it with the landline telephone
network or another cellular telephone unit. Incoming calls are received by the
MTSO from the landline telephone office, which instructs the appropriate cell to
complete the communications link by radio signal between the cell's
transmitter-receiver and the cellular telephone.
The MTSO and the base stations periodically monitor the signal strength of
calls in progress. The signal strength of the transmission between a subscriber
and the base station in any cell declines as the unit moves away from the base
station. When the signal strength of a call declines to a predetermined level,
the MTSO automatically determines if the signal strength is greater in an
adjacent cell and, if so, hands off the call in a fraction of a second to the
base station of the other cell. This handoff is virtually unnoticeable to the
user. If the subscriber leaves the service area of the cellular system, the call
is disconnected unless an appropriate technical interface and roaming
arrangement has been established with an adjacent system.
Cellular telephone systems operate under interconnection agreements with
various local exchange carriers ("LECs") and interexchange (long distance)
carriers. The interconnection agreements establish the manner in which the
cellular telephone system integrates with other telecommunications systems. The
cellular operator and the local landline telephone company must cooperate in the
interconnection between the cellular and landline telephone systems to permit
cellular customers to call landline customers and vice versa. The technical and
financial details of such interconnection arrangements are subject to
negotiation, vary from system to system and to the present time, generally have
not been subject to FCC regulation or oversight. However, the implementation of
the Telecommunications Act of 1996 (the "1996 Act") by the FCC is expected to
result in arrangements between cellular carriers and local exchange carriers for
interconnection services at rates more closely related to cost. On August 1,
1996, the FCC adopted rules implementing the interconnection policies imposed by
the 1996 Act. Various aspects of the order are being appealed in federal court.
While it is too soon to predict the actual effect of the FCC's order, the
Company believes that the new rules are likely to reduce the interconnection
expenses incurred by the Company.
FCC rules require that all cellular telephones be functionally compatible
with cellular telephone systems in all markets within the United States and with
all frequencies allocated for cellular use, allowing a cellular telephone to be
used wherever a customer is located, subject to appropriate arrangements for
service charges. Changes to cellular telephone numbers or other technical
adjustments to cellular telephones by the manufacturer or local cellular
telephone service businesses may be required, however, to enable the customer to
change from one cellular service provider to another within a service area.
However, the FCC recently announced that it will require LECs to implement
"number portability" in the top 100 MSAs by December 31, 1998. Number
portability allows customers to retain their telephone numbers, including
cellular telephone numbers, when they switch to another service provider. See
"-- Regulatory Overview." Cellular system operators may provide service to
roamers temporarily located in, or travelling through, their service area. The
cellular system providing service to the roamer generally receives 100% of the
revenues from such service and such roaming charges are billed to the roamer's
local service provider.
The rapid growth of the cellular customer base has begun to strain the
call-processing capacity of many existing analog systems, especially in densely
populated urban areas. Each cellular network is designed to meet a certain level
of customer density and traffic demand. Once these traffic levels are exceeded,
the operator must take steps to increase the network capacity. Capacity can be
increased initially by using techniques such as sectorization and cell
splitting. Network operators and infrastructure manufacturers are developing a
number of additional solutions which are expected to increase network capacity
and coverage.
Within certain limitations, increasing demand may be met by simply adding
available frequency capacity to cells as required, or by using directional
antennae to divide a cell into discrete multiple sectors or coverage areas (also
known as sectorization), thereby reducing the required distance between cells
using the same frequency. Furthermore, an area within a cellular telephone
system may be served by more than one cell through procedures that utilize
available channels in adjacent cells. When all possible channels are in use,
further growth can be accomplished through a process called "cell splitting."
Cell splitting entails dividing a
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single cell into a number of smaller cells served by lower-power transmitters,
thereby increasing the reuse factor and the number of calls that can be handled
in a given area.
Network capacity can also be enhanced through the development of newer
network technologies like N-AMPS analog technology (which triples call carrying
capacity over conventional analog technology) and TDMA or code division multiple
access ("CDMA") digital technology (which increases call carrying capacity by an
estimated factor of 10). In each case, these advanced technologies allow
cellular carriers to add customers without degrading service quality. Digital
technology offers advantages including improved voice quality, larger system
capacity and perhaps lower incremental costs for additional customers. The
conversion from analog to digital radio technology is expected to be an
industry-wide process that will take a number of years. The Company has
installed TDMA digital technology throughout its Existing Systems and intends to
deploy it selectively in the Horizon Systems. The Company believes that its
Existing Systems have sufficient capacity to handle the Company's customer
growth rate in the near term.
COMPETITION
CELLULAR CARRIERS
Cellular carriers such as the Company compete primarily against one other
facilities-based cellular carrier in each MSA and RSA market. See "-- Cellular
Markets and Systems -- Competitors and Adjoining Systems." Competition for
customers between cellular licensees is based principally upon the services and
enhancements offered, the quality of the cellular system, customer service,
system coverage, capacity and price. Such competition may increase to the extent
that licenses are transferred from smaller, stand-alone operators to larger,
better capitalized and more experienced cellular operators who may be able to
offer consumers certain network advantages.
Cellular carriers also face to a lesser extent competition from Personal
Communications Service ("PCS"), Enhanced Specialized Mobile Radio ("ESMR") and
mobile satellite service ("MSS") systems, as well as from resellers of these
services and cellular service. In the future, cellular operators may also
compete more directly with traditional landline telephone service providers.
Continuing technological advances in telecommunications make it impossible to
predict the extent of future competition. However, due to the depth and breadth
of these competitive services offered by operators using these other
technologies, such competition could be significant and expected to become more
intense.
The FCC requires that all cellular system operators must provide service to
resellers on a nondiscriminatory basis. A reseller provides cellular service to
customers but does not hold an FCC license or own cellular facilities. Instead,
the reseller buys blocks of cellular telephone numbers from a licensed carrier
and resells service through its own distribution network to the public.
Therefore, a reseller may be both a customer of a cellular licensee's services,
a competitor of that licensee, or both. Recently, several well-known
telecommunications companies have begun reselling cellular service as a
complement to their long distance, local telephone, paging, cable television or
Internet offerings.
NEW TECHNOLOGIES
The most likely future source of direct competition to cellular providers
in the near term from a new technology is broadband PCS. Broadband PCS services
consist of wireless two-way telecommunications services for voice, data and
other transmissions employing digital micro-cellular technology. PCS operates in
the 1850 to 1990 Mhz band. PCS technology utilizes a network of small,
low-powered transceivers placed throughout a neighborhood, business complex,
community or metropolitan area to provide customers with mobile and portable
voice and data communications. PCS customers have dedicated personal telephone
numbers and communicate using small digital radio handsets that could be carried
in a pocket or purse. Many PCS licensees who will compete with the Company have
access to substantial capital resources. In addition, many of these companies,
or their predecessors and affiliates, already operate large cellular telephone
systems and thus bring significant wireless experience to this new marketplace.
ESMR is a wireless communications service supplied by converting analog SMR
services into an integrated, digital transmission system. The ESMR system
incorporates characteristics of cellular technology, including multiple low
power transmitters and interconnection with the landline telephone network. ESMR
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<PAGE> 46
service may compete with cellular service by providing higher quality digital
communication technology, lower rates, enhanced privacy and additional features
such as electronic mail and built-in paging. ESMR handsets are likely to be more
expensive than cellular telephones and there may be other differences between
cellular and ESMR.
A consortium of telecommunications providers known as American Mobile
Satellite Corporation has been licensed by the FCC to provide mobile satellite
service. In addition, Motorola filed for a license from the FCC for a low-orbit
satellite system, called "Iridium," that would provide mobile communications to
subscribers throughout the world. Other proposals for MSS are pending before the
FCC. The FCC is developing rules for these services and international and
foreign regulatory authorities must also approve aspects of some mobile
satellite systems and services. Mobile satellite systems could augment or
replace communications within land-based cellular systems.
The commercial development and deployment of these new technologies remain
in an early phase. The Company expects this activity to be focused initially in
relatively large markets in view of the substantial costs involved in building
and launching systems using these technologies. The Company is preparing for
this new competitive environment by aggressively working to attract new
subscribers, expanding its footprint and reducing its dependency on high roaming
and local rates. The Company believes that by leveraging the above actions, it
can effectively face this competition from its position as an incumbent in the
cellular field with a high quality network and extensive footprint that is not
capacity constrained, strong distribution channels, superior customer service
capabilities and an experienced management team. Since the Company operates in
medium to small markets, the new PCS licensees may be unable to offer viable
wireless service in many of the Company's properties in the near term because
the extensive capital expenditure required to deploy the infrastructure for PCS
are more readily justifiable from an economic standpoint in larger, more densely
populated urban areas. This may position the Company to offer roaming services
to PCS customers, as well as to provide bulk lines of service for resale to
certain PCS companies. The Company's existing Youngstown and Erie systems are
equipped to provide TDMA digital roaming to AT&T Wireless PCS subscribers when
AT&T Wireless introduces dual band TDMA phones in the adjacent Cleveland and
Buffalo-Rochester MTAs.
REGULATORY OVERVIEW
The cellular telephone industry is subject to extensive governmental
regulation on the federal level and to varying degrees on the state level. Many
aspects of such regulation have recently been impacted by the enactment of the
1996 Act and are currently the subject of administrative rulemakings that are
significant to the Company. Neither the outcome of these rulemakings nor their
impact upon the cellular telephone industry or the Company can be predicted at
this time. The following is a summary of the federal laws and regulations that
currently materially affect the cellular communications industry and a
description of certain state laws. This "Regulatory Overview" section does not
purport to be a summary of all present and proposed federal, state and local
regulations and legislation relating to the cellular communications industry.
FEDERAL REGULATION
The licensing, construction, modification, operation, ownership and
acquisition of cellular telephone systems are subject to regulations and
policies of the FCC under the Communications Act of 1934, as amended (the
"Communications Act"). The FCC has promulgated rules and regulations governing,
among other things, applications to construct and operate cellular
communications systems, applications to transfer control of or assign cellular
licenses and technical and operational standards for the operation of cellular
systems (such as maximum power and antenna height).
The FCC licenses cellular systems in accordance with 734 geographically
defined market areas comprised of 306 MSAs and 428 RSAs. In each market, the
frequencies allocated for cellular telephone use are divided into two equal 25
MHz blocks and designated as wireline and non-wireline. Block A licenses
initially were reserved for non-wireline entities, such as the Company, while
wireline licenses initially were reserved for entities affiliated with a
wireline telephone company. Apart from the different frequency blocks, there is
no technical difference between wireline and non-wireline cellular systems and
the operational requirements imposed on each by the FCC are the same. Under
current FCC rules, with FCC approval, wireline and non-wireline licenses may be
transferred without restriction as to wireline affiliation, but generally, no
entity may
45
<PAGE> 47
own a substantial interest in both systems in any one MSA or RSA. The FCC may
prohibit or impose conditions on transfers of licenses.
Under FCC rules, the authorized service area of a cellular provider in each
of its markets is referred to as the "Cellular Geographic Service Area" or
"CGSA". The CGSA may conform exactly with the boundaries of the FCC designated
MSA or RSA, or it may be smaller, subject to certain minimum service
requirements. A cellular licensee has the exclusive right to expand its CGSA
boundaries within the licensee's MSA or RSA for a period of five years after
grant of the licensee's initial construction permit. At the end of this
five-year build-out period, however, any entity may apply to serve portions of
the MSA or RSA outside the licensee's CGSA. The five year build-out period has
expired for some licensees and the FCC has granted several "unserved area"
applications filed by parties. The Company's five year build-out period has
expired in all markets. With respect to the Youngstown and Erie systems, 100% of
the geographical area was covered by the Company prior to the expiration of the
five year build-out period. The Horizon Systems have one area that was not
covered prior to the expiration of the five year build-out period. It consists
of a portion of Forest County, Pennsylvania that has a total population of less
than 5,000. The Company does not believe the potential for a fill-in application
for this property to be significant.
Cellular service providers also must satisfy a variety of FCC requirements
relating to technical and reporting matters. One such requirement is the
coordination of proposed frequency usage with adjacent cellular users,
permittees and licensees in order to avoid interference between adjacent
systems. In addition, the height and power of base station transmitting
facilities and the type of signals they emit must fall within specified
parameters. The Company is obligated to pay certain annual regulatory fees to
the FCC in connection with its cellular operations.
The Company also regularly applies for FCC authority to use additional
frequencies, to modify the technical parameters of existing licenses, to expand
its service territory and to provide new services. The Communications Act
requires prior FCC approval for transfers to or from the Company of a
controlling interest in any license or construction permit, or any rights
thereunder. Although there can be no assurance that any future requests for
approval of applications filed will be approved or acted upon in a timely manner
by the FCC, the Company has no reason to believe such requests or applications
would not be approved or granted in due course.
The FCC also regulates a number of other aspects of the cellular business.
For example, the FCC regulates cellular resale practices and recently extended
the resale requirement to broadband PCS and ESMR licensees. Under the new FCC
policy, all resale obligations for cellular, broadband PCS and ESMR operators
will terminate five years after the date that the last group of initial PCS
licenses are granted. The FCC will issue a public notice announcing commencement
of the five year sunset period. Another FCC requirement that cellular operators
provide "manual" roaming where technically possible also was recently extended
to broadband PCS and ESMR licensees. Further, the FCC recently proposed that
cellular, broadband PCS and ESMR licensees be required to offer "automatic"
roaming agreements on a nondiscriminatory basis. The FCC has also proposed that
these roaming obligations sunset five years after the last group of initial
licenses for currently allocated broadband PCS spectrum is awarded.
In addition, the FCC regulates the ancillary service offerings that
cellular licensees can provide and recently revised its rules to permit
cellular, PCS, paging and SMR licensees to offer fixed services on a primary
basis along with mobile services. This rule change may facilitate the provision
of wireless local loop service, which involves the use of wireless links to
provide telephone service by cellular licensees, as well as broadband PCS and
ESMR licensees. In this regard, the FCC also recently adopted telephone number
portability rules for LECs, as well as cellular, broadband PCS and ESMR
licensees, that could facilitate the development of local exchange competition,
including wireless local loop service. The new number portability rules
generally require cellular, broadband PCS and ESMR licensees to have the
capability to deliver calls from their systems to ported numbers by December 31,
1998 and to offer number portability and roaming to ported numbers by June 30,
1999. These requirements may result in added capital expenditures for the
Company to make necessary system changes.
Initial cellular licenses are generally granted for terms of up to 10
years, beginning on the date of the grant of the initial operating authority and
are renewable upon application to the FCC. Licenses may be
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<PAGE> 48
revoked and license renewal applications denied for cause after appropriate
notice and hearing. Near the conclusion of the license term, licensees must file
applications for renewal of licenses to obtain authority to operate for up to an
additional 10-year term. The FCC will award a renewal expectancy to a cellular
licensee that meets certain standards of past performance. If the existing
licensee receives a renewal expectancy, it is very likely that the existing
licensee's cellular license will be renewed without becoming subject to
competing applications. To receive a renewal expectancy, a licensee must show
that it (i) has provided "substantial" service during its past license term and
(ii) has substantially complied with applicable FCC rules and policies and the
Communications Act. "Substantial" service is defined as service which is sound,
favorable and substantially above a level of mediocre service that might only
minimally warrant renewal. If the existing licensee does not receive a renewal
expectancy, competing applications for the license will be accepted by the FCC
and the license may be awarded to another entity.
In 1995, the Company filed for renewal of its Youngstown license which was
originally granted by the FCC in 1985. In its application for renewal, the
Company demonstrated not only its compliance with FCC regulations, but also its
service in the public interest. That license was renewed without challenge. The
Company is confident that it has met and will continue to meet all requirements
necessary to secure renewal of its cellular licenses, including those licenses
being acquired from the Horizon Companies. The first Horizon licenses subject to
renewal will be those for PA-6 and PA-7, which expire on October 1, 2000. The
licenses for PA-1 and NY-3 expire one year later.
CHARACTER AND CITIZENSHIP REQUIREMENTS
Applications for FCC authority may be denied and in extreme cases licenses
may be revoked if the FCC finds that an entity lacks the requisite "character"
qualifications to be a licensee. In making the determination, the FCC considers
whether an applicant or licensee has been the subject of adverse findings in a
judicial or administrative proceeding involving felonies, the possession or sale
of unlawful drugs, fraud, antitrust violations or unfair competition, employment
discrimination, misrepresentations to the FCC or other government agencies, or
serious violations of the Communications Act or FCC regulations. The FCC also
requires licensees to comply with statutory restrictions regarding the direct or
indirect ownership or control of FCC licenses by non-U.S. persons or entities.
TELECOMMUNICATIONS ACT OF 1996
The 1996 Act, which makes significant changes to the Communications Act and
the antitrust consent decree applicable to the Regional Bell Operating Companies
("RBOCs"), affects the cellular industry. This legislation, among other things,
affects competition for local telecommunications services, interconnection
arrangements for carriers, universal service funding and the provision of
interexchange services by the RBOCs' wireless systems.
The 1996 Act requires state public utilities commissions and/or the FCC to
implement policies that mandate reciprocal compensation between local exchange
carriers, a category that may, for these purposes, include cellular carriers,
for interconnection services at rates more closely related to cost. On August 1,
1996, the FCC adopted rules implementing the interconnection policies imposed by
the 1996 Act. Various aspects of the order are being appealed in federal court.
While it is too soon to predict the actual effect of the FCC's order, the
Company believes that the new rules are likely to reduce the interconnection
expenses incurred by the Company.
The 1996 Act requires the FCC to adopt rules that require interstate
communications carriers, including cellular carriers, to "make an equitable and
non-discriminatory contribution" to a universal service fund that reimburses
communications carriers that provide basic communications services to users who
receive services at subsidized rates. The 1996 Act also eases the restrictions
on the provision of interexchange telephone services by wireless carriers
affiliated with RBOCs. RBOC-related wireless carriers have interpreted the
legislation to permit immediate provision of long distance call delivery for
their cellular customers.
The 1996 Act specifically exempts all cellular carriers from the obligation
to provide equal access to interstate long distance carriers. However, the 1996
Act gives the FCC the authority to impose rules to require unblocked access
through carrier identification codes or 800/888 numbers, so that cellular
subscribers are not
47
<PAGE> 49
denied access to the long distance carrier of their choosing, if the FCC
determines that the public interest so requires. The Company currently provides
"dial around" equal access to all of its customers.
The overall impact of the 1996 Act on the business of the Company is
unclear and will likely remain so for the foreseeable future. The Company may
benefit from reduced costs in acquiring required communications services and
facilities, such as LEC interconnection, resulting from the pro-competitive
policies of the 1996 Act. Similarly, the new limitations on local zoning
requirements may facilitate the construction of new cell sites and related
facilities. See "-- State, Local and Other Regulation." However, other
provisions of the new statute relating to interconnection, telephone number
portability, equal access and resale could subject the Company to additional
costs and increased competition.
STATE, LOCAL AND OTHER REGULATION
The Communications Act preempts state or local regulation of the entry of,
or the rates charged by, any commercial mobile service or any private mobile
service provider, which includes cellular telephone service providers. The FCC
has denied the petition of eight states to continue their rate regulation
authority, including authority over cellular operators. As a practical matter,
the Company is free to establish rates and offer new products and service with a
minimum of regulatory requirements. Two of the Company's three states of
operation, Ohio and New York, still maintain nominal oversight jurisdiction,
primarily focusing upon prior approval of acquisitions and transfers and
resolution of customer complaints.
The Public Utilities Commission of Ohio (the "PUCO") has decreased
significantly its regulatory oversight of cellular companies. In accordance with
the Communications Act, cellular prices no longer require state regulatory
approval, nor will the filing of prices for cellular services be required
(detariffing), leaving the Company free to respond to market forces. The PUCO
has waived various other regulatory approval requirements and most of the
remaining regulatory filing requirements typically can be accomplished either on
a same day notice basis, or automatically after thirty days, although some
procedures still require specific regulatory approval and are not subject to any
time limits for action.
The New York Public Service Commission requires advance approvals of
acquisition and transfers of cellular companies. The Company has filed for all
necessary approvals in connection with the acquisition of the Horizon Systems
and expects to have these approvals prior to closing.
The location and construction of cellular transmitter towers and antennas
are subject to Federal Aviation Administration ("FAA") regulations and are
subject to Federal, state and local environmental regulation, as well as state
or local zoning, land use and other regulation. Before a system can be put into
commercial operation, the grantee of a construction permit must obtain all
necessary zoning and building permit approvals for the cell sites and MTSO
locations and must secure state certification and tariff approvals, if required.
The time needed to obtain zoning approvals and requisite state permits varies
from market to market and state to state. Likewise, variations exist in local
zoning processes. There can be no assurance that any state or local regulatory
requirements currently applicable to the Company's systems will not be changed
in the future or that regulatory requirements will not be adopted in those
states and localities which currently have none.
Zoning and planning regulation may become more restrictive in the future as
many broadband PCS carriers are now seeking sites for network construction. The
1996 Act may provide some relief from state and local laws that arbitrarily
restrict the expansion of personal wireless services, which include cellular,
PCS and ESMR systems. For example, under the 1996 Act, localities are now
precluded from denying zoning approval for cell sites based upon electromagnetic
emission concerns, if the cellular operator's system complies with FCC emissions
standards. The FCC is required to adopt rules concerning emission standards by
early August 1996. In addition, localities are prohibited from adopting zoning
requirements that simply prohibit or have the effect of prohibiting personal
wireless services, or that discriminate between "functionally equivalent"
services. Notwithstanding these new requirements, the effectiveness of the new
law has not yet been tested and it is still unclear whether the costs of
expanding cellular systems by adding cell sites will increase and whether
significant delays will be experienced due to local zoning regulation.
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<PAGE> 50
FUTURE REGULATION
From time to time, legislation that potentially could affect the Company,
either beneficially or adversely, is proposed by federal or state legislators.
There can be no assurance that legislation will not be enacted by the federal or
state governments, or that regulations will not be adopted or actions taken by
the FCC or state regulatory authorities that might adversely affect the business
of the Company. Changes such as the allocation by the FCC of radio spectrum for
services that compete with the Company's business could adversely affect the
Company's operating results.
RADIO FREQUENCY EMISSION CONCERNS
Media reports have suggested that certain RF emissions from cellular
telephones may be linked to cancer. Litigation concerning this issue is pending
against several other cellular operators generally alleging that the death by
cancer of a cellular system subscriber was related to such emissions. The
Company is not aware of any credible evidence linking the usage of cellular
telephones with cancer. On August 1, 1996, the FCC released a report and order
that updates the guidelines and methods it uses for evaluation on RF emissions
of radio equipment, including cellular telephones. While the FCC's new rules
impose more restrictive standards for determining acceptable levels of RF
emissions from low power devices such as portable cellular telephones, the
Company believes that all cellular telephones currently provided by the Company
to its customers already comply with the new standards.
OTHER WIRELESS OPERATIONS
In addition to its cellular operations, the Company also operates two small
paging systems in the Youngstown area. The Company also resells paging in areas
where it does not provide such services directly. These paging operations
currently account for less 3% of the Company's revenues. However, like its
cellular operations, the Company also provides paging services pursuant to
licenses issued by the FCC. Commercial paging systems are also deemed to be CMRS
providers. Consequently, many of the regulations applicable to the cellular
systems are also applicable to the Company's paging operations, including the
requirement to renew system licenses on a periodic basis.
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<PAGE> 51
MANAGEMENT
<TABLE>
<CAPTION>
NAME AGE OFFICE
<S> <C> <C>
Warren P. Williamson, III........... 66 Director and Chairman
Albert H. Pharis, Jr................ 46 Director, President and Chief Executive Officer
Craig T. Sheetz..................... 36 Vice President, Chief Financial Officer and
Treasurer
William Zlotnick.................... 41 Vice President and Chief Operating Officer
Gregory T. Pauley................... 34 Vice President and Chief Technical Officer
Joseph D. Williamson, II............ 51 Director
Lowry A. Stewart.................... 41 Director
Raymond S. Tittle, Jr............... 66 Director
Philip N. Winkelstern............... 66 Director
</TABLE>
WARREN P. WILLIAMSON, III is the founder of the Company and has served as
Chairman and Director since the Company's inception. Prior to founding the
Company, Mr. Williamson held the positions of President and Chief Executive
Officer for WKBN Broadcasting Corporation. He presently serves as Vice Chairman
of WKBN Broadcasting Corporation. In addition to his positions with the Company,
Mr. Williamson serves as Director and as Chairman of the Executive Committee of
the Mahoning National Bank. Mr. Williamson is also Director and Chairman of the
Board of the Youngstown State University Foundation. Finally, he serves as
Director of the Association of Maximum Service Television, Inc., a trade
association representing more than 300 U.S. television stations. Mr. Williamson
is the brother of Joseph D. Williamson, II and uncle of Lowry A. Stewart.
ALBERT H. PHARIS, JR. has served as President, Chief Executive Officer and
Director of the Company since the Company's inception in 1985. During that
period, Mr. Pharis has been involved in all aspects of the Company's
development. He has been active as a board member of CTIA since 1985 and as a
member of the CTIA Executive Committee since 1989. He has also been Chairman of
CTIA's Small Operators Caucus.
CRAIG T. SHEETZ has served since 1990 as Vice President, Chief Financial
Officer and Treasurer of the Company. Prior to 1990, Mr. Sheetz served as
Assistant Vice President at PNC Bank and Mellon Bank where he specialized in the
media and telecommunications industries and in middle market lending.
WILLIAM ZLOTNICK is expected to be named Vice President and Chief Operating
Officer of the Company immediately following consummation of the Horizon
Acquisition. Mr. Zlotnick currently serves as Regional General Manager for
Horizon Cellular Telephone Company in Western Pennsylvania, a position he has
held since 1991. From 1986 to 1991, Mr. Zlotnick was Regional General Manager
for McCaw Cellular Communications in Pittsburgh, Pennsylvania.
GREGORY T. PAULEY is Vice President and Chief Technical Officer. Mr. Pauley
joined the Company in 1987. He served as Technical Operations Manager for the
Company from May 1990 until his promotion to Vice President in January 1995.
JOSEPH D. WILLIAMSON, II has been a Director of the Company and its
predecessor company since its inception. In 1994, after serving as Executive
Vice President of WKBN Broadcasting Corporation, Mr. Williamson became President
of WKBN Broadcasting Corporation and has continued in that position. Mr.
Williamson is the brother of Warren P. Williamson, III and the uncle of Lowry A.
Stewart.
LOWRY A. STEWART has been a Director of the Company and its predecessor
company since its inception. Since 1993, Mr. Stewart has served as Treasurer and
Director of WKBN Broadcasting Corporation, where he also has been employed as
the Production Manager since 1991. Mr. Stewart is the nephew of Warren P.
Williamson, III and Joseph D. Williamson, II.
RAYMOND S. TITTLE, JR. has been a Director of the Company since 1991. Mr.
Tittle served as President of Northwest Indiana Markets until it was sold in
1993. Mr. Tittle is currently President of Joe Tittle, Inc. and Joe Tittle &
Sons, Inc. which administer real estate and investment assets formerly owned by
Northwest Indiana Markets.
PHILIP N. WINKELSTERN has been nominated to become a Director upon
consummation of the Offering and the Horizon Acquisition. Mr. Winkelstern served
as Senior Vice President and Chief Financial Officer of
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<PAGE> 52
Commercial Intertech Corporation, a publicly held manufacturer ("CIC") prior to
his retirement in August 1995. Mr. Winkelstern also served as a Director of CIC
from July 1975 to August 1995 and is currently a Director of McDonald Steel
Corporation and Mahoning National Bank.
The Company expects to add two additional independent directors prior to or
shortly after consummation of the Offering.
COMMITTEES OF THE BOARD
The Board of Directors has established a Compensation Committee comprised
of Joseph D. Williamson, II, Lowry A. Stewart and, upon his appointment to the
Board of Directors, Philip N. Winkelstern. The Company will establish Audit and
Nomination Committees shortly after consummation of the Offering.
DIRECTOR COMPENSATION
Directors are currently not paid fees or other compensation for services
rendered as Directors of the Company. However, the Board is actively considering
plans to compensate its outside Directors and expects to institute a plan prior
to the consummation of the Offering.
EXECUTIVE COMPENSATION
The following table presents summary information concerning compensation
received by the Chief Executive Officer and each of the other executive officers
for the year ended December 31, 1995.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
OTHER ANNUAL
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION
<S> <C> <C> <C>
Warren P. Williamson, III................................ $223,587(1)
Chairman
Albert H. Pharis, Jr..................................... 171,990 $50,000 $2,400
President and Chief Executive Officer
Craig T. Sheetz.......................................... 85,885 25,000 4,800
Vice President, Chief Financial Officer and Treasurer
Greg T. Pauley........................................... 78,000 25,000 4,800
Vice President and Chief Technical Officer
</TABLE>
- -----------------------------
(1) Does not include salary and bonus paid by the Company for services rendered
to WKBN Broadcasting Corporation, which amount was reimbursed to the
Company by WKBN Broadcasting Corporation.
1996 STOCK OPTION PLAN
The Company has adopted a 1996 Stock Option Plan. Under the SOP, options to
purchase up to an aggregate of 1,000,000 shares of Class A Common Stock are
available for grants to employees of the Company. The SOP provides for issuance
of incentive stock options, intended to qualify under Section 422 of the
Internal Revenue Code of 1986, as amended, and also nonqualified stock options.
The SOP will terminate by its terms in 2006 or earlier if so determined by the
Board of Directors.
The following tables present certain information concerning stock options
granted in 1996 to the executive officers of the Company.
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<PAGE> 53
OPTIONS GRANTED
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
% TOTAL OF VALUE AT ASSUMED
OPTIONS ANNUAL RATES OF STOCK
GRANTED TO PER PRICE APPRECIATION FOR
EMPLOYEES SHARE OPTION TERM(4)
OPTIONS IN FISCAL EXERCISE EXPIRATION -----------------------
NAME GRANTED(1)(2) YEAR(3) PRICE DATE 5% 10%
<S> <C> <C> <C> <C> <C> <C>
Albert H. Pharis, Jr............. 225,000 44.64% $ 10.00 2006 $3,665,013 $5,835,921
Warren P. Williamson, III........ 100,000 19.84 10.00 2006 1,628,895 2,593,742
Craig T. Sheetz.................. 53,600 10.63 10.00 2006 873,088 1,390,246
Gregory T. Pauley................ 46,800 9.29 10.00 2006 762,323 1,213,871
All Others....................... 78,600 15.60 10.00 2006
------------- ------- ---------- ----------
Total Options............... 504,000 100.00%
</TABLE>
- -----------------------------
(1) Options granted by Sygnet Communications, Inc. in fiscal 1995 have been
terminated in conjunction with the Restructuring. All options granted prior
to the Restructuring are not reflected in this table. No options were
exercised in fiscal 1995.
(2) Ten-year options have been granted in conjunction with the Restructuring
pursuant to the Company's SOP. All the options become exercisable on
January 1, 1997 and remain exercisable in full so long as the holder
thereof remains an employee of the Company. The options further vest at the
rate of twenty percent (20%) on each anniversary thereafter, and unvested
options terminate if the holder's employment with the Company terminates.
(3) The Company has granted options representing Class A Common Stock to
employees in fiscal 1996.
(4) The amounts shown under these columns are the result of calculations at 5%
and 10% rates as required by the SEC are not intended to forecast future
appreciation of the stock price of the Class A Common Stock.
EMPLOYMENT AGREEMENTS
The Company will enter into employment agreements with Messrs. Pharis and
Williamson for an initial term of three years and with Messrs. Sheetz and Pauley
for an initial term of two years. All agreements will have automatic one-year
renewals after the initial terms expire. The executives will have initial annual
base salaries of $240,000, $240,000, $135,000 and $120,000, respectively. Each
agreement provides that if the executive officer is terminated without good
cause, as defined therein, or resigns with good cause, as defined therein, the
executive officer will be entitled to receive when due his or her base salary
and benefits for the remaining term of the agreement.
Each agreement will also provide that during the term of the agreement and
for one year thereafter, the executive officer will not, in any state in which
the Company does business or intends to do business, compete with the Company in
any way in the wireless communication business as employee, officer, director,
agent, representative, stockholder, partner, member, owner, or have any direct
or indirect financial interest in any enterprise engaged in the wireless
communications business. Provided, however, that ownership of less than 5% of
the outstanding stock of any corporation listed on a national securities
exchange and engaged in the wireless communications business is not deemed a
violation of the non-competition provision.
BONUS PLAN
The Board of Directors of the Company has instituted a cash bonus program
for executive officers for 1997 that will pay between 25% to 50% of base
salaries if certain targets are met. The percentages set may be higher if the
targets are exceeded. The criteria to be used and the specific targets to be met
by each officer will be set by the Board.
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<PAGE> 54
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Class B Common Stock as of August 30, 1996 by (i)
each director of the Company, (ii) each named executive officer of the Company,
(iii) all officers and directors as a group and (iv) each person known to the
Company to beneficially own 5% or more of any class of the Company's securities.
<TABLE>
<CAPTION>
NUMBER OF SHARES % SHARES
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) BENEFICIALLY OWNED
<S> <C> <C>
DIRECTORS AND NAMED EXECUTIVE OFFICERS
J.D. Williamson, II....................................... 1,867,150 30.26
Warren P. Williamson, III(2).............................. 1,487,215 24.10
Lowry A. Stewart(3)....................................... 337,720 5.47
Raymond Tittle, Jr........................................ 329,835 5.35
Albert H. Pharis.......................................... 40,275 0.65
All directors and officers as a group (7 persons)(4)...... 4,062,195 65.83
Others.................................................... -- --
OTHER 5% OWNERS
Mahoning National Bank of Youngstown(5)................... 652,135 10.57
P.O. Box 479
Trust Department
Youngstown, OH 44501
Martha J. Stewart(6)...................................... 408,400 6.62
15 Mill Trace Road
Youngstown, Ohio 44511
</TABLE>
- -----------------------------
(1) As used in this table, "beneficial ownership" means the sole or shared power
to vote or direct the voting or to dispose or direct the disposition of any
security. The Company's total issued and outstanding stock immediately
prior to the Offering is 6,170,630 shares of which all are Class B Common
Stock. Class B Common Stock is automatically converted to Class A Common
Stock upon transfer. Class A Common Stock is entitled to one vote per share
and Class B Common Stock is entitled to 10 votes per share. See
"Description of Capital Stock -- Common Stock."
(2) Includes 10,410 shares of Class B Common Stock with respect to which Warren
P. Williamson, III shares voting and investment power with his spouse,
Carol Williamson.
(3) Includes 5,845 shares of Class B Common Stock held by Lowry A. Stewart as
custodian for his daughter Kathryn A. Stewart.
(4) May include stock jointly or separately owned with or by a spouse.
(5) Represents Class B Common Stock beneficially owned by Mahoning National Bank
of Youngstown as trustee under certain Williamson family trusts.
(6) Includes 13,430 shares of Class B Common Stock held by Martha J. Stewart as
successor trustee for her niece Kathryn A. Stewart; 13,430 shares of Class
B Common Stock held by Martha J. Stewart as successor trustee for her niece
Cristina Marie Sparks-Stewart; and 12,850 shares of Class B Common Stock
held by Martha J. Stewart as successor trustee for her nephew David E.
Stewart. Ms. Stewart disclaims beneficial ownership of these shares.
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<PAGE> 55
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On January 5, 1995, the Company repurchased 48,197 shares of common stock
for $1.7 million in cash from W.P. Williamson, Jr. in a redemption transaction.
W.P. Williamson, Jr. was the father of Warren P. Williamson, III and Joseph D.
Williamson, II.
On December 29, 1994, the Company loaned $249,952 to Albert H. Pharis, Jr.,
the President, Chief Executive Officer and a Director of the Company to permit
Mr. Pharis to purchase stock of the Company from another shareholder. The
interest rate on the loan is 8.23% per year and the loan is to be repaid over
seven years.
The Company provided cellular telephone service during 1995 for $69,845 to
WKBN Broadcasting Corporation, a company owned by the Williamson family. Warren
P. Williamson, III, a Director and Chairman of the Company, provided consulting
services to WKBN Broadcasting Corporation and was paid $66,896 in 1995 for such
services. In 1995, Wilcom Cellular and Youngstown Cellular Telephone Company
purchased advertising services and facilities from WKBN Broadcasting Corporation
for $218,404. Warren P. Williamson, III is the Vice Chairman of WKBN
Broadcasting Corporation. Joseph D. Williamson, II, a Director of the Company,
is the President of WKBN Broadcasting Corporation. Lowry A. Stewart, a Director
of the Company, is the Treasurer and a Director of WKBN Broadcasting
Corporation.
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<PAGE> 56
DESCRIPTION OF BANK CREDIT FACILITY
The Bank Credit Facility, which will be entered into concurrently with the
Horizon Acquisition, is a senior secured reducing revolver that provides the
Subsidiary the ability to borrow up to $300.0 million from time to time.
Interest under the Bank Credit Facility accrues at a variable rate using (at the
Subsidiary's election) either a prime rate or a rate based upon the London
Interbank Offered Rate ("LIBOR"), plus in each instance a margin. The margin
ranges from 0.25% to 1.75% for the prime rate and from 1.25% to 2.75% for the
LIBOR depending upon the ratio of consolidated total indebtedness of the Company
(including the Notes) to annualized operating cash flow of the Subsidiary (with
the ratios used ranging from 4-to-1 to 10-to-1, respectively).
Until June 30, 1999, the Subsidiary is only required to make quarterly
payments of interest; on and after that date, the Subsidiary must also make
quarterly payments of principal ranging from 2% up to 7% of the amount of the
initial outstanding balance under the Bank Credit Facility. In addition, on an
annual basis beginning March 31, 2000, the Subsidiary must also make payments of
principal equal to 50% of excess cash flow for the immediately preceding fiscal
year. Each such quarterly and annual payment of principal permanently reduces
the amount of credit available for borrowing under the Bank Credit Facility, and
the final maturity date of the facility is eight and one-half years from the
closing.
The Bank Credit Facility is secured by all of the assets of the Subsidiary,
as well as by a pledge of the stock of the Subsidiary.
Among the various covenants that must be satisfied by the Subsidiary are
the following five financial covenant ratios that must be satisfied as of the
end of each fiscal quarter:
(a) a ratio of senior indebtedness to annualized operating cash flow
that will range from a maximum of 8.5-to-1.0 through March 31, 1997
down to a maximum of 4.0-to-1.0 after December 31, 2000; and
(b) a ratio of consolidated total indebtedness for the Company
(including the Notes) to annualized operating cash flow for the
Subsidiary that will range from a maximum of 12.0-to-1.0 through
March 31, 1997 down to a maximum of 6.0-to-1.0 after June 30, 2000;
and
(c) a ratio of annualized operating cash flow (including credit
availability under the Bank Credit Facility) to fixed charges
(defined to include any amounts paid to the Company to pay interest
on the Notes) of at least 1.0-to-1.0; and
(d) a ratio of annualized operating cash flow to interest expense
through December 31, 1998 of at least 1.1-to-1.0 (and no such
covenant thereafter); and
(e) beginning as of the end of the fiscal quarter commencing on April 1,
1997, a ratio of annualized operating cash flow to pro forma debt
service of at least 1.0-to-1.0.
The Bank Credit Facility also contains certain restrictive covenants,
including, without limitation, restrictions on the ability of the Subsidiary (a)
to declare and pay dividends or distributions to the Company (for servicing the
Notes and otherwise), (b) to incur additional indebtedness, (c) to make loans
and advances, (d) to engage in transactions with the Company, (e) to transfer
and sell assets and (f) to acquire and purchase assets. The definitive credit
agreement also prohibits a Change of Control of the Company and/or the
Subsidiary, which for this purpose is defined as a change that results in the
current shareholders failing to own (directly or indirectly) shares of stock
that entitle them to at least 51% of the votes entitled to be cast in an
election of the board of directors. An Event of Default under and as defined in
the Indenture will also constitute one of the events of default under the Bank
Credit Facility.
The Bank Credit Facility permits the Subsidiary to declare and pay
dividends or distributions to the Company if such dividends are used to service
the semi-annual interest payments due on the Notes, and at the time of such
dividend or distribution no event of default or material default exists under
the Bank Credit Facility or would be caused by making such dividend. If there is
an event of default under the Bank Credit Facility other than a payment default,
the Lenders may suspend dividends and distributions for a period not to exceed
180 days in each year. If there is a payment default, the Lenders may suspend
dividends and distributions by the Subsidiary for as long as such default
exists. The stock pledge agreement by the Company
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<PAGE> 57
in favor of the Lenders will permit the Company to continue making the
semi-annual interest payment, notwithstanding the occurrence of any default
under the Bank Credit Facility, if funds other than funds received from the
Subsidiary are used. The stock pledge agreement will permit the Company to make
principal payments, prepayments and redemptions on the Notes only if funds other
than funds from the Subsidiary are used and no event of default or material
default then exists under the Bank Credit Facility or would be caused thereby.
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<PAGE> 58
DESCRIPTION OF NOTES
GENERAL
The Notes will be issued under the Indenture by and between the Company and
Fleet National Bank, as trustee (the "Trustee"), which has been filed as an
exhibit to the Registration Statement of which this Prospectus is a part. The
terms of the Notes include those stated in the Indenture and those made part of
the Indenture by reference to the Trust Indenture Act of 1939 (the "Trust
Indenture Act"). The Notes are subject to all such terms, and holders of Notes
are referred to the Indenture and the Trust Indenture Act for a statement
thereof. The following summaries of certain provisions of the Indenture are
summaries only, do not purport to be complete and are qualified in their
entirety by reference to all of the provisions of those documents. Capitalized
terms used herein and not otherwise defined shall have the meanings assigned to
them in the Indenture. When used in this section, the term "Company" means
Sygnet Wireless, Inc. and not Sygnet Communications, Inc. or any other
subsidiary. See "-- Certain Definitions." Wherever particular provisions of the
Indenture are referred to in this summary, such provisions are incorporated by
reference as a part of the statements made and such statements are qualified in
their entirety by such reference.
RANKING
The Notes will be general unsecured obligations of the Company ranking pari
passu with all future Indebtedness of the Company, if any, that is not
subordinated to the Notes and senior to all future Indebtedness of the Company,
if any, that is subordinated to the Notes. The Notes will not be guaranteed by
the Subsidiary or any future Subsidiaries.
STRUCTURAL SUBORDINATION
The Company's operations are conducted entirely through the Subsidiary. The
Company has no assets other than the stock of the Subsidiary and has no direct
operations of any kind. As a holding company, the Company has no independent
operations and, therefore, is dependent on dividends and distributions from the
Subsidiary to meet its own obligations, including the obligations under the
Notes. Because the Subsidiary will not guarantee the payment of principal of or
interest on the Notes, holders of Notes will have no claim with respect to the
assets of the Subsidiary. As a result, the claims of holders of Notes will be
structurally subordinated to the claims of creditors of the Subsidiary,
including the lenders under the Bank Credit Facility. In addition, the Company
will pledge the stock of the Subsidiary to secure the borrowings under the Bank
Credit Facility and the Subsidiary and any other Subsidiaries will grant liens
on substantially all of their assets as security for the obligations under the
Bank Credit Facility. Because the Notes are not secured by any assets, in the
event of a dissolution, bankruptcy, liquidation or reorganization of the
Subsidiary, and holders of the Notes may receive less ratably than the secured
creditors under the Bank Credit Facility. As of June 30, 1996, after giving
effect to the Horizon Acquisition and the Related Transactions, the Subsidiary
would have had approximately $211.8 million in total outstanding liabilities
(including $204.4 million of Indebtedness under the Bank Credit Facility and
$7.4 million of trade payables and other obligations) that would be structurally
senior to the Notes. The Company is dependent upon the cash flows of the
Subsidiary to meet its obligations, including the payment of interest and
principal on the Notes. The Company's ability to receive distributions and
dividends from the Subsidiary will be limited by the provisions of the Bank
Credit Facility. See "Description of Bank Credit Facility."
PRINCIPAL, MATURITY AND INTEREST
The Notes will be unsecured, general obligations of the Company, limited in
aggregate principal amount to $110,000,000. The Notes will be issued only in
fully registered form, without coupons, in denominations of $1,000 and integral
multiples thereof.
The Notes will mature on October 1, 2006. Interest on the Notes will accrue
at the rate of 11 1/2% per annum and will be payable semi-annually in arrears on
April 1 and October 1, commencing on April 1, 1997, to Holders of record on the
immediately preceding March 15 and September 15. Interest on the Notes will
accrue from the most recent date to which interest has been paid or, if no
interest has been paid, from the date of original issuance.
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<PAGE> 59
The Indenture does not contain provisions which would afford Holders of the
Notes protection in the event of a decline in the Company's credit quality
resulting from highly leveraged or other similar transaction involving the
Company.
Principal of, premium, if any, and interest on the Notes will be payable,
and, subject to the following provisions, the Notes may be presented for
registration of transfer or exchange, at the office or agency of the Company
maintained for such purpose, which office or agency shall be maintained in the
Borough of Manhattan of the City of New York. At the option of the Company,
payment of interest may be made by check mailed to the Holders of the Notes at
the addresses set forth in the register of the Holders. No service charge will
be made for any registration of transfer or exchange of Notes, but the Company
may require payment of a sum sufficient to cover any tax or other governmental
charge payable in connection therewith. Until otherwise designated by the
Company, the Company's office or agency will be the corporate trust office of
the Trustee presently located at 777 Main Street, Hartford, Connecticut 06115.
OPTIONAL REDEMPTION
The Notes will not be redeemable at the Company's option prior to October
1, 2001. Thereafter, the Notes will be subject to redemption at the option of
the Company, in whole or in part, upon not less than 30 nor more than 60 days'
notice, at the redemption prices (expressed as percentages of principal amount)
set forth below plus accrued and unpaid interest thereon to the applicable
redemption date, if redeemed during the twelve-month period beginning on October
1 in the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
<S> <C>
2001..................................................................... 105.750%
2002..................................................................... 104.313%
2003..................................................................... 102.875%
2004..................................................................... 101.438%
2005 and thereafter...................................................... 100.000%
</TABLE>
Notwithstanding the foregoing, during the first 36 months after the date of
the original issuance of Notes, the Company may redeem up to an aggregate of
$38.5 million in principal amount of Notes at a redemption price of 111.5% of
the principal amount thereof, in each case plus accrued and unpaid interest
thereon to the redemption date, with the net proceeds of an offering of
Qualified Capital Stock of the Company; provided that at least $71.5 million in
aggregate principal amount of Notes remain outstanding immediately after the
occurrence of such redemption; and provided, further, that such redemption shall
occur within 30 days of the date of the closing of such offering.
If less than all of the Notes are to be redeemed at any time, selection of
Notes for redemption will be made by the Trustee in compliance with the
requirements of the principal national securities exchange, if any, on which the
Notes are listed, or, if the Notes are not so listed, on a pro rata basis, by
lot or by such method as the Trustee shall deem fair and appropriate; provided
that no Notes of $1,000 or less shall be redeemed in part. Notices of redemption
shall be mailed by first class mail at least 30 but not more than 60 days before
the redemption date to each Holder of Notes to be redeemed at its registered
address. If any Note is to be redeemed in part only, the notice of redemption
that relates to such Note shall state the portion of the principal amount
thereof to be redeemed. A new Note in principal amount equal to the unredeemed
portion thereof will be issued in the name of the Holder thereof upon
cancellation of the original Note. On and after the redemption date, interest
ceases to accrue on Notes or portions thereof called for redemption.
MANDATORY REDEMPTION
The Company is not required to make mandatory redemption or sinking fund
payments with respect to the Notes.
LIMITATION ON USE OF PROCEEDS; PROCEEDS PURCHASE OFFER
All proceeds (net of underwriting discounts and commissions and other
transaction expenses as set forth in the Prospectus under the caption "Use of
Proceeds") received by the Company from the sale of the Notes shall be applied
to the purchase of assets in the Horizon Acquisition or, as set forth below, to
repay
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<PAGE> 60
indebtedness under the Subsidiary's existing bank credit facility pending such
acquisition; provided, however, that no such proceeds may be applied to the
purchase of assets in Horizon Acquisition until (i) the Company has received at
least $19.0 million in proceeds from the Preferred Stock Investment and (ii) the
Trustee has received the certificates and opinions set forth in Exhibit B to the
Indenture. Pending the consummation of the Horizon Acquisition, all such
proceeds shall be held by the Company in a separate bank account, except that up
to $71.5 million of the net proceeds from the sale of the Notes may be
contributed to the Subsidiary to repay indebtedness under the Subsidiary's
existing bank credit facility, but only to the extent that the banks thereunder
consent to allow the amounts repaid to be reborrowed and paid as a dividend or
other distribution to the Company for the sole purpose of funding a repurchase
of the Notes in the event that the Horizon Acquisition does not occur within 120
days following the closing of the sale of the Notes.
In the event that all of the net proceeds of the sale of the Notes have not
been so applied, directly or indirectly, to the purchase of assets in the
Horizon Acquisition within 120 days of the closing of the sale of the Notes, the
Company will make an offer (a "Proceeds Purchase Offer") to all holders of Notes
to purchase on a pro rata basis, at a price of 101% of the principal amount
thereof plus accrued interest to the purchase date, all Notes that may be
purchased at such price with such unapplied net proceeds.
If applicable, within five Business Days following the end of the 120-day
period referred to above, the Company will mail a notice to each Holder setting
forth the Proceeds Purchase Offer and offering to repurchase Notes pursuant to
the procedures required by the Indenture and described in such notice. The
Company will comply with the requirements of Rule 14e-1 under the Exchange Act
and any other securities laws and regulations thereunder to the extent such laws
and regulations are applicable in connection with the repurchase of the Notes in
the Proceeds Purchase Offer.
A Proceeds Purchase Offer will remain open for a period of 20 Business Days
following its commencement and no longer, except to the extent that a longer
period is required by applicable law (the "Proceeds Purchase Offer Period"). No
later than five Business Days after the termination of the Proceeds Purchase
Offer Period (the "Proceeds Purchase Date"), the Company will purchase the
principal amount of Notes required to be purchased pursuant to this covenant
(the "Proceeds Purchase Offer Amount") or, if less than the Proceeds Purchase
Offer Amount has been tendered, all Notes tendered in response to the Proceeds
Purchase Offer. Payment for any Notes so purchased will be made in the same
manner as interest payments are made.
If the Proceeds Purchase Date is on or after an interest record date and on
or before the related interest payment date, any accrued and unpaid interest
will be paid to the Person in whose name a Note is registered at the close of
business on such record date, and no additional interest will be payable to
Holders who tender Notes pursuant to the Proceeds Purchase Offer.
On or before the Proceeds Purchase Date, the Company will, to the extent
lawful, accept for payment, on a pro rata basis to the extent necessary, the
Proceeds Purchase Offer Amount of Notes or portions thereof tendered pursuant to
the Proceeds Purchase Offer, or if less than the Proceeds Purchase Offer Amount
has been tendered, all Notes tendered, and will deliver to the Trustee an
Officers' Certificate stating that such Notes or portions thereof were accepted
for payment by the Company in accordance with the terms of this covenant. The
Company, the Depository or the Paying Agent, as the case may be, will promptly
(but in any case not later than five Business Days after the Proceeds Purchase
Date) mail or deliver to each tendering Holder an amount equal to the purchase
price of the Notes tendered by such Holder and accepted by the Company for
purchase, and the Company will promptly issue a new Note, and the Trustee, upon
written request from the Company will authenticate and mail or deliver such new
Note to such Holder, in a principal amount equal to any unpurchased portion of
the Note surrendered. Any Note not so accepted will be promptly mailed or
delivered by the Company to the Holder thereof. The Company will publicly
announce the results of the Proceeds Purchase Offer on the Proceeds Purchase
Date.
CERTAIN COVENANTS
CHANGE OF CONTROL
The Indenture will provide that upon the occurrence of a Change of Control,
each Holder of Notes will have the right to require the Company to repurchase
all or any part (equal to $1,000 or an integral multiple
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<PAGE> 61
thereof) of such Holder's Notes pursuant to the offer described below (the
"Change of Control Offer") at an offer price in cash equal to 101% of the
aggregate principal amount thereof plus accrued and unpaid interest thereon to
the date of purchase (the "Change of Control Payment").
Within 10 days following any Change of Control, the Company will mail a
notice to each Holder describing the transaction or transactions that constitute
the Change of Control and offering to repurchase Notes pursuant to the
procedures required by the Indenture and described in such notice. The Company
will comply with the requirements of Rule 14e-1 under the Exchange Act and any
other securities laws and regulations thereunder to the extent such laws and
regulations are applicable in connection with the repurchase of the Notes as a
result of a Change of Control.
The Change of Control Offer will remain open for a period of 20 Business
Days following its commencement and no longer, except to the extent that a
longer period is required by applicable law (the "Change of Control Offer
Period"). No later than five Business Days after the termination of the Change
of Control Offer Period (the "Change of Control Purchase Date"), the Company
will purchase all Notes tendered in response to the Change of Control Offer.
Payment for any Notes so purchased will be made in the same manner as interest
payments are made.
If the Change of Control Purchase Date is on or after an interest record
date and on or before the related interest payment date, any accrued and unpaid
interest will be paid to the Person in whose name a Note is registered at the
close of business on such record date, and no additional interest will be
payable to Holders who tender Notes pursuant to the Change of Control Offer.
On the Change of Control Payment Date, the Company will, to the extent
lawful, (a) accept for payment all Notes or portions thereof properly tendered
pursuant to the Change of Control Offer, (b) deposit with the Paying Agent an
amount equal to the Change of Control Payment in respect of all Notes or
portions thereof so tendered and (c) deliver or cause to be delivered to the
Trustee the Notes so accepted together with an Officers' Certificate stating the
aggregate principal amount of Notes or portions thereof being purchased by the
Company. The Paying Agent will promptly mail to each Holder of Notes so tendered
the Change of Control Payment for such Notes, and the Trustee will promptly
authenticate and mail (or cause to be transferred by book entry) to each Holder
a new Note equal in principal amount to any unpurchased portion of the Notes
surrendered, if any; provided that each such new Note will be in a principal
amount of $1,000 or an integral multiple thereof. The Company will publicly
announce the results of the Change of Control Offer on or as soon as practicable
after the Change of Control Payment Date.
Except as described above with respect to a Change of Control, the
Indenture does not contain provisions that permit the Holders of Notes to
require that the Company repurchase or redeem the Notes in the event of a
takeover, recapitalization or other restructuring.
The Bank Credit Facility provides that certain change of control events
with respect to the Company and the Subsidiary would constitute a default
thereunder. Any future credit agreements or other agreements relating to which
the Company or the Subsidiary becomes a party may contain similar restrictions
and provisions. In the event a Change of Control occurs at a time when the
Company is prohibited from purchasing Notes or the Subsidiary is prohibited from
making a distribution or paying a dividend to the Company to permit such
purchase, the Company could seek the consent of its lenders or the Subsidiary
could obtain the consent of its lenders to such purchase of Notes or to such
distribution or dividend, respectively, or either company could attempt to
refinance the borrowings that contain such prohibition. If the Company or the
Subsidiary do not obtain such consents or repay such borrowings, the Company
will not be able to purchase the Notes. In such case, the Company's failure to
purchase tendered Notes would constitute an Event of Default under the
Indenture.
LIMITATION ON INCURRENCE OF ADDITIONAL INDEBTEDNESS
The Indenture will provide that after the Issue Date the Company will not,
and will not permit any of its Restricted Subsidiaries to, directly or
indirectly, issue, create, incur, assume, guarantee or otherwise directly or
indirectly become liable for (including as a result of an acquisition), or
otherwise become responsible for, contingently or otherwise (individually or
collectively, to "Incur" or, as appropriate, an "Incurrence"), any Indebtedness.
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<PAGE> 62
Notwithstanding the foregoing, if there exists no Default or Event of
Default immediately prior and subsequent thereto, the Company may incur
Indebtedness if, after giving effect thereto, the Company's Annualized Operating
Cash Flow Ratio on a pro forma basis calculated on the assumption that such
Indebtedness had been incurred on the first day of the applicable Reference
Period, would have been less than the ratios set forth below for the calendar
year periods indicated:
<TABLE>
<CAPTION>
FOR THE PERIOD RATIO
<S> <C>
1996-1998..................................................................... 8.0x
1999 and after................................................................ 7.0x
</TABLE>
In addition, if there exists no Event of Default immediately prior and
subsequent thereto, the foregoing limitations will not apply to the Incurrence
of (i) prior to the date of the consummation of the Horizon Acquisition,
Indebtedness incurred under the Bank Credit Facility (including, without
limitation, Indebtedness under Interest Swap and Hedging Obligations required by
the Bank Credit Facility) in an aggregate amount not to exceed $75,000,000 in
aggregate principal amount; provided, however, that if such Indebtedness is
repaid with the net proceeds of the sale of the Notes pursuant to the covenant
entitled "-- Limitation on Use of Proceeds; Proceeds Purchase Offer," no
Indebtedness in excess of $3,500,000 may be incurred thereunder except for
Indebtedness whose proceeds are paid as a dividend or loan payment to the
Company for the sole purpose of funding a repurchase of the Notes under the
covenant entitled "-- Limitation on Use of Proceeds; Proceeds Purchase Offer,"
(ii) on and after the date of the consummation of the Horizon Acquisition,
Indebtedness incurred under the Bank Credit Facility (including, without
limitation, Indebtedness under Interest Swap and Hedging Obligations required by
the Bank Credit Facility) in an aggregate amount not to exceed $300,000,000 in
aggregate principal amount at any time, (iii) Indebtedness by the Company or any
of its Restricted Subsidiaries constituting Existing Indebtedness, reduced by
permanent repayments of and reductions thereof (and in commitments with respect
thereto) in satisfaction of the Net Cash Proceeds application requirement set
forth in the covenant described in "-- Limitation on Asset Sales and Sales of
Subsidiary Stock" and by repayments and permanent reductions in amounts
outstanding pursuant to scheduled amortizations and mandatory prepayments in
accordance with the terms thereof, (iv) Indebtedness by the Company evidenced by
the Notes, (v) Permitted Acquisition Indebtedness, (vi) Indebtedness between the
Company and any Restricted Subsidiary of the Company or between Restricted
Subsidiaries of the Company, provided that, in the case of Indebtedness incurred
by the Company, such obligations shall be unsecured and subordinated in all
respects to the Holders' rights pursuant to the Notes, (vii) Capitalized Lease
Obligations and Purchase Money Indebtedness in an aggregate amount or aggregate
principal amount, as the case may be, outstanding at any time not to exceed in
the aggregate $15.0 million, and (viii) Refinancing Indebtedness Incurred to
extend, renew, replace or refund Indebtedness permitted under clauses (iii) (as
so reduced in amount) and (iv) of this paragraph.
Indebtedness of any Person that is not a Restricted Subsidiary of the
Company (or that is a Non-Recourse Restricted Subsidiary designated to be a
Restricted Subsidiary, but no longer a Non-Recourse Restricted Subsidiary),
which Indebtedness is outstanding at the time such Person becomes such a
Restricted Subsidiary of the Company or is merged with or into or consolidated
with the Company or a Restricted Subsidiary of the Company shall be deemed to
have been Incurred, as the case may be, at the time such Person becomes such a
Restricted Subsidiary of the Company, or is merged with or into or consolidated
with the Company or a Restricted Subsidiary of the Company.
LIMITATION ON RESTRICTED PAYMENTS
The Indenture will provide that after the Issue Date the Company will not,
and will not permit any of its Restricted Subsidiaries to, directly or
indirectly, make any Restricted Payment, if, immediately prior or after giving
effect thereto on a pro forma basis, (a) a Default or an Event of Default would
occur or be continuing, (b) the Company's Annualized Operating Cash Flow Ratio
for the Reference Period would have exceeded 6 to 1, or (c) the aggregate amount
of all Restricted Payments made by the Company and its Restricted Subsidiaries,
including such proposed Restricted Payment (if not made in cash, then the fair
market value of any property used therefor) from and after the Issue Date and on
or prior to the date of such Restricted Payment, shall exceed the sum of (i) the
amount determined by subtracting (x) 2.0 times the aggregate Consolidated
Interest Expense of the Company for the period (taken as one accounting period)
from the Issue
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Date to the last day of the last full fiscal quarter prior to the date of the
proposed Restricted Payment (the "Computation Period") from (y) Operating Cash
Flow of the Company for the Computation Period, plus (ii) the aggregate Net
Proceeds received by the Company from the sale (other than to a Subsidiary of
the Company) of its Qualified Capital Stock after the Issue Date and on or prior
to the date of such Restricted Payment.
Notwithstanding the foregoing, the provisions set forth in clause (b) or
(c) of the immediately preceding paragraph will not prohibit (i) the use of an
aggregate of $10.0 million to be used solely for Investments in Unrestricted
Subsidiaries or Non-Recourse Restricted Subsidiaries, (ii) the payment of any
dividend within 60 days after the date of its declaration if such dividend could
have been made on the date of its declaration in compliance with the foregoing
provisions, (iii) the redemption, defeasance, repurchase or other acquisition or
retirement of any Indebtedness or Capital Stock of the Company or its Restricted
Subsidiaries either in exchange for or out of the Net Proceeds of the
substantially concurrent sale (other than to a Subsidiary of the Company) of
Qualified Capital Stock of the Company or (iv) the redemption, repurchase or
other acquisition or retirement of the Preferred Stock for an aggregate price
not to exceed $25.0 million if, after giving effect thereto on a pro forma
basis, the Company's Annualized Operating Cash Flow Ratio for the Reference
Period would have been less than 7.5 to 1.
LIMITATION ON RESTRICTED SUBSIDIARY DIVIDENDS
The Indenture will provide that the Company will not, and will not permit
any of its Restricted Subsidiaries to, directly or indirectly, create, assume or
suffer to exist any consensual encumbrance or restriction on the ability of any
Restricted Subsidiary of the Company to pay dividends or make other
distributions on the Capital Stock of any Restricted Subsidiary of the Company
or pay or satisfy any obligation to the Company or any of its Restricted
Subsidiaries or otherwise transfer assets or make or pay loans or advances to
the Company or any of its Restricted Subsidiaries, except encumbrances and
restrictions existing under (i) the Indenture and the Notes or Refinancing
Indebtedness incurred to refinance the Notes; provided, that such encumbrances
and restrictions are no more restrictive than those contained in the Indenture
as in effect on the Issue Date, (ii) the Bank Credit Facility as in effect on
and immediately after the date of the Horizon Acquisition, and any amendments,
modifications, restatements, renewals, increases, supplements, refundings,
replacements or refinancings thereof; provided that such amendments,
modifications, restatements, renewals, increases, supplements, refundings,
replacements or refinancings are no more restrictive with respect to such
dividend and other payment restrictions than those contained in the Bank Credit
Facility as in effect on the Issue Date, (iii) any agreement of a Person
acquired by the Company or a Restricted Subsidiary of the Company, which
restrictions existed at the time of acquisition, were not put in place in
anticipation of such acquisition and are not applicable to any person or
property, other than the Person or any property of the Person so acquired.
Notwithstanding the foregoing, customary provisions restricting subletting or
assignment of any lease entered into the ordinary course of business, consistent
with past practices shall not in and of themselves be considered a restriction
on the ability of the applicable Restricted Subsidiary to transfer such
agreement or assets, as the case may be.
LIMITATION ON TRANSACTIONS WITH RELATED PERSONS
The Indenture will provide that, after the Issue Date, the Company will
not, and will not permit any of its Restricted Subsidiaries or Unrestricted
Subsidiaries to, enter into any contract, agreement, arrangement or transaction
with any Related Person (each a "Related Person Transaction"), or any series of
Related Person Transactions, except for transactions made in good faith, the
terms of which are (i) fair and reasonable to the Company or such Subsidiary, as
the case may be, and (ii) are at least as favorable as the terms which could be
obtained by the Company or such Subsidiary, as the case may be, in a comparable
transaction made on an arm's length basis with Persons who are not Related
Persons.
Without limiting the foregoing, (a) any Related Person Transaction or
series of Related Person Transactions with an aggregate value in excess of $1.0
million must first be approved by a majority of the Board of Directors of the
Company who are disinterested in the subject matter of the transaction pursuant
to a Board Resolution, and (b) with respect to any Related Person Transaction or
series of Related Person Transactions with an aggregate value in excess of $5.0
million, the Company must first obtain a favorable
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written opinion from an independent financial advisor of national reputation as
to the fairness from a financial point of view of such transaction to the
Company or such Subsidiary, as the case may be.
Notwithstanding the foregoing, any contract, agreement, arrangement or
transaction solely between or among the Company and any of its Wholly Owned
Restricted Subsidiaries or between or among Wholly Owned Restricted Subsidiaries
of the Company is not a Related Person Transaction.
LIMITATION ON ASSET SALES AND SALES OF SUBSIDIARY STOCK
The Indenture will provide that after the Issue Date the Company will not,
and will not permit any of its Restricted Subsidiaries to, in one transaction or
a series of related transactions, convey, sell, transfer, assign or otherwise
dispose of, directly or indirectly, any of its property, business or assets,
including any sale or other transfer or issuance of any Capital Stock of any
Restricted Subsidiary of the Company, whether owned on the Issue Date or
thereafter acquired (an "Asset Sale") unless (a) such Asset Sale is for fair
market value as determined by the Board of Directors of the Company acting
reasonably and in good faith, (b) at least 80% of the value of the consideration
for such Asset Sale consists of (i) cash, (ii) the assumption by the transferee
of pari passu Indebtedness or (iii) notes, obligations or other marketable
securities (collectively "Marketable Securities") that are immediately converted
into cash and (c) the Net Cash Proceeds therefrom are applied on or prior to 360
days after the date of such Asset Sale (i) to the permanent repayment of
Indebtedness under the Bank Credit Facility (which payment reduces the
commitment thereunder) or (ii) to the repurchase of the Notes pursuant to an
offer to purchase (an "Asset Sale Offer") described below or (iii) to an
investment in a Related Business.
Notwithstanding the foregoing provisions of the prior paragraph:
(i) any Restricted Subsidiary of the Company may convey, sell, lease,
transfer or otherwise dispose of any or all of its assets (upon voluntary
liquidation or otherwise) to the Company or a Restricted Subsidiary of the
Company;
(ii) the Company and its Restricted Subsidiaries may, in the ordinary
course of business, (A) convey, sell, lease, transfer, assign or otherwise
dispose of assets in the ordinary course of business and (B) exchange
assets for assets in Related Businesses;
(iii) the Company and its Restricted Subsidiaries may convey, sell,
lease, transfer, assign or otherwise dispose of assets pursuant to and in
accordance with the covenant described in "-- Limitation on Mergers, Sales
or Consolidations";
(iv) the Company and its Restricted Subsidiaries may (a) sell damaged,
worn out or other obsolete property in the ordinary course of business or
other property no longer necessary for the proper conduct of the business
of the Company or any of its Restricted Subsidiaries, or (b) abandon such
property if it cannot, through reasonable efforts, be sold; and
(v) the Company may transfer the assets that it acquires in the
Horizon Acquisition to the Subsidiary after the Issue Date.
The Indenture will provide that an Asset Sale Offer may be deferred until
the accumulated Net Cash Proceeds not applied to the uses set forth in
subsections (c)(i) or (c)(iii) in the first paragraph exceeds $5.0 million. An
Asset Sale Offer will remain open for a period of 20 Business Days following its
commencement and no longer, except to the extent that a longer period is
required by applicable law (the "Asset Sale Offer Period"). No later than five
Business Days after the termination of the Asset Sale Offer Period (the "Asset
Sale Purchase Date"), the Company will purchase the principal amount of Notes
required to be purchased pursuant to this covenant (the "Asset Sale Offer
Amount") or, if less than the Asset Sale Offer Amount has been tendered, all
Notes tendered in response to the Asset Sale Offer. Payment for any Notes so
purchased will be made in the same manner as interest payments are made.
If the Asset Sale Purchase Date is on or after an interest record date and
on or before the related interest payment date, any accrued and unpaid interest
will be paid to the Person in whose name a Note is registered at the close of
business on such record date, and no additional interest will be payable to
Holders who tender Notes pursuant to the Asset Sale Offer.
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On or before the Asset Sale Purchase Date, the Company will, to the extent
lawful, accept for payment, on a pro rata basis to the extent necessary, the
Asset Sale Offer Amount of Notes or portions thereof tendered pursuant to the
Asset Sale Offer, or if less than the Asset Sale Offer Amount has been tendered,
all Notes tendered, and will deliver to the Trustee an Officers' Certificate
stating that such Notes or portions thereof were accepted for payment by the
Company in accordance with the terms of this covenant. The Company, the
Depository or the Paying Agent, as the case may be, will promptly (but in any
case not later than five days after the Asset Sale Purchase Date) mail or
deliver to each tendering Holder an amount equal to the purchase price of the
Notes tendered by such Holder and accepted by the Company for purchase, and the
Company will promptly issue a new Note, and the Trustee, upon written request
from the Company will authenticate and mail or deliver such new Note to such
Holder, in a principal amount equal to any unpurchased portion of the Note
surrendered. Any Note not so accepted will be promptly mailed or delivered by
the Company to the Holder thereof. The Company will publicly announce the
results of the Asset Sale Offer on the Asset Sale Purchase Date.
LIMITATIONS ON LIENS
The Indenture will provide that the Company will not and will not permit
any Restricted Subsidiary, directly or indirectly, to incur or suffer to exist
any Lien (other than Permitted Liens) upon any of its property or assets,
whether now owned or hereafter acquired.
LIMITATION ON MERGER, SALE OR CONSOLIDATION
The Indenture will provide that the Company will not consolidate with or
merge with or into another Person, or sell, lease, convey, transfer or otherwise
dispose of all or substantially all of its assets (computed on a consolidated
basis), whether in a single transaction or a series of related transactions, to
another Person or group of affiliated Persons, unless: (i) immediately after
giving effect to such transaction on a pro forma basis, the consolidated
resulting surviving or transferee entity would immediately thereafter be
permitted to incur at least $1.00 of additional Indebtedness pursuant to the
Annualized Operating Cash Flow Ratio provision set forth in the second paragraph
of the covenant described in "-- Limitation on Incurrence of Additional
Indebtedness;" (ii) immediately thereafter, no Event of Default (and no event
which, after notice or lapse of time or both, would become an Event of Default)
shall have occurred and be continuing; (iii) either (a) the Company is the
surviving entity or (b) the resulting, surviving or transferee entity (if other
than the Company) is a corporation organized under the laws of the United
States, any state thereof or the District of Columbia and expressly assumes by
supplemental indenture all of the obligations of the Company in connection with
the Notes and the Indenture, including the punctual payment of the principal of,
and premium, if any, and interest on the Notes and the performance and
observance of every covenant of the Indenture on the part of the Company to be
performed; and (iv) the Company shall have delivered to the Trustee an Officers'
Certificate confirming compliance with the requirements of this covenant.
Upon any consolidation or merger or any transfer of all or substantially
all of the assets of the Company in accordance with the foregoing, the successor
corporation formed by such consolidation or into which the Company is merged or
to which such transfer is made, shall succeed to, and be substituted for, and
may exercise every right and power of, the Company under the Indenture with the
same effect as if such successor corporation had been named therein as the
Company.
REPORTS
The Indenture will provide that whether or not the Company is subject to
the reporting requirements of Section 13 or 15(d) of the Exchange Act of 1934,
as amended (the "Exchange Act"), the Company shall deliver to the Trustee and to
each Holder, within 15 days after it is or would have been required to file such
with the SEC, annual and quarterly financial statements substantially equivalent
to financial statements that would have been included in reports filed with the
SEC, if the Company were subject to the requirements of Section 13 or 15(d) of
the Exchange Act, including, with respect to annual information only, a report
thereon by the Company's certified independent public accountants as such would
be required in such reports to the SEC, and in each case, together with a
management's discussion and analysis of financial condition and results of
operations which would be so required.
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EVENTS OF DEFAULT AND REMEDIES
The Indenture will provide that each of the following constitutes an Event
of Default: (i) default for 30 days in the payment when due and payable of
interest on the Notes; (ii) default in payment when due and payable of the
principal of or premium, if any, on the Notes; (iii) failure by the Company to
comply with the provisions described under the captions "-- Change of Control,"
"-- Limitation on Asset Sales and Sales of Subsidiary Stock," "-- Limitation on
Restricted Payments," "-- Limitation on Incurrence of Additional Indebtedness,"
"-- Limitation on Liens," "Limitations on Merger, Sale or Consolidation" or
"Limitation on Use of Proceeds; Proceeds Purchase Offer"; (iv) failure by the
Company for 30 days after notice to comply with any of its other agreements in
the Indenture or the Notes; (v) default under any mortgage, indenture or
instrument under which there may be issued or by which there may be secured or
evidenced any Indebtedness for money borrowed by the Company or any of its
Subsidiaries (or the payment of which is guaranteed by the Company or any of its
Subsidiaries) whether such Indebtedness or guarantee now exists, or is created
after the date of the Indenture, which default (a) is caused by a failure to pay
principal of or premium, if any, or interest on such Indebtedness prior to the
expiration of the grace period provided in such Indebtedness on the date of such
default (a "Payment Default"); provided such Event of Default shall not occur
until 90 days after such Payment Default, or (b) results in the acceleration of
such Indebtedness prior to its express maturity and, in each case, the principal
amount of any such Indebtedness, together with the principal amount of any other
such Indebtedness under which there has been a Payment Default or the maturity
of which has been so accelerated, aggregates $5.0 million or more; (vi) failure
by the Company or any of its Subsidiaries to pay final judgments aggregating in
excess of $5.0 million, which judgments are not paid, discharged or stayed for a
period of 60 days; and (vii) certain events of bankruptcy or insolvency with
respect to the Company or any of its Subsidiaries.
If any Event of Default occurs and is continuing, the Trustee or the
Holders of at least 25% in principal amount of the then outstanding Notes may
declare the unpaid principal of, premium, if any and all accrued interest on all
the Notes to be due and payable immediately. Notwithstanding the foregoing, in
the case of an Event of Default arising from certain events of bankruptcy or
insolvency, with respect to the Company, any Subsidiary, the unpaid principal
of, premium, if any and all accrued interest on all outstanding Notes will
become due and payable without further action or notice. The holders of a
majority in principal amount of Notes may rescind any acceleration and its
consequences if the rescission would not conflict with any judgment or decree
and if all existing Events of Default (except nonpayment of principal and
interest that has become due solely because of the acceleration) have been cured
or waived. Holders of the Notes may not enforce the Indenture or the Notes
except as provided in the Indenture. Subject to certain limitations, Holders of
a majority in principal amount of the then outstanding Notes may direct the
Trustee in its exercise of any trust or power. The Trustee may withhold from
Holders of the Notes notice of any continuing Default or Event of Default
(except a Default or Event of Default relating to the payment of principal or
interest) if it determines that withholding notice is in the interests of the
Holders of the Notes.
In the case of any Event of Default occurring by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of the Company with
the intention of avoiding payment of the premium that the Company would have had
to pay if the Company then had elected to redeem the Notes pursuant to the
optional redemption provisions of the Indenture, an equivalent premium shall
also become and be immediately due and payable to the extent permitted by law
upon the acceleration of the Notes. If an Event of Default occurs prior to
October 1, 2001 by reason of any willful action (or inaction) taken (or not
taken) by or on behalf of the Company with the intention of avoiding the
prohibition on redemption of the Notes prior to October 1, 2001, then the
premium specified in the Indenture for optional redemptions shall also become
immediately due and payable to the extent permitted by law upon the acceleration
of the Notes.
The Holders of a majority in aggregate principal amount of the Notes then
outstanding by notice to the Trustee may on behalf of the Holders of all of the
Notes waive any existing Default or Event of Default and its consequences under
the Indenture except a continuing Default or Event of Default in the payment of
interest on, or the principal of, the Notes.
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The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company is required upon
becoming aware of any Default or Event of Default, to deliver to the Trustee a
statement specifying such Default or Event of Default.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have all of its
obligations discharged with respect to the outstanding Notes ("Legal
Defeasance") except for (i) the rights of Holders of outstanding Notes to
receive payments in respect of the principal of, premium, if any, and interest
on such Notes when such payments are due from the trust referred to below, (ii)
the Company's obligations with respect to the Notes concerning issuing temporary
Notes, registration of Notes, mutilated, destroyed, lost or stolen Notes and the
maintenance of an office or agency for payment and money for security payments
held in trust, (iii) the rights, powers, trusts, duties and immunities of the
Trustee, and the Company's obligations in connection therewith and (iv) the
Legal Defeasance provisions of the Indenture. In addition, the Company may, at
its option and at any time, elect to have the obligations of the Company
released with respect to certain covenants that are described in the Indenture
("Covenant Defeasance") and thereafter any omission to comply with such
obligations shall not constitute a Default or Event of Default with respect to
the Notes. In the event Covenant Defeasance occurs, certain events (not
including non-payment, bankruptcy, receivership, rehabilitation and insolvency
events) described under "Events of Default" will no longer constitute an Event
of Default with respect to the Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance: (i)
the Company must irrevocably deposit with the Trustee, in trust, for the benefit
of the Holders of the Notes, cash in U.S. dollars, non-callable Government
Securities, or a combination thereof, in such amounts as will be sufficient, in
the opinion of a nationally recognized firm of independent public accountants,
to pay the principal of, premium, if any, and interest on the outstanding Notes
on the stated date for payment thereof or on the applicable redemption date, as
the case may be, and the Company must specify whether the Notes are being
defeased to maturity or to a particular redemption date; (ii) in the case of
Legal Defeasance, the Company shall have delivered to the Trustee an opinion of
counsel in the United States reasonably acceptable to the Trustee confirming
that (A) the Company has received from, or there has been published by, the
Internal Revenue Service a ruling or (B) since the date of the Indenture, there
has been a change in the applicable federal income tax law, in either case to
the effect that, and based thereon such opinion of counsel shall confirm that,
the Holders of the outstanding Notes will not recognize income, gain or loss for
federal income tax purposes as a result of such Legal Defeasance and will be
subject to federal income tax on the same amounts, in the same manner and at the
same times as would have been the case if such Legal Defeasance had not
occurred; (iii) in the case of Covenant Defeasance, the Company shall have
delivered to the Trustee an opinion of counsel in the United States reasonably
acceptable to the Trustee confirming that the Holders of the outstanding Notes
will not recognize income, gain or loss for federal income tax purposes as a
result of such Covenant Defeasance and will be subject to federal income tax on
the same amounts, in the same manner and at the same times as would have been
the case if such Covenant Defeasance had not occurred; (iv) no Default or Event
of Default shall have occurred and be continuing on the date of such deposit
(other than a Default or Event of Default resulting from the borrowing of funds
to be applied to such deposit) or insofar as Events of Default from bankruptcy
or insolvency events are concerned, at any time in the period ending on the 91st
day after the date of deposit; (v) such Legal Defeasance or Covenant Defeasance
will not result in a breach or violation of, or constitute a default under any
material agreement or instrument (other than the Indenture) to which the Company
or any of its Subsidiaries is a party or by which the Company or any of its
Subsidiaries is bound; (vi) the Company must have delivered to the Trustee an
opinion of counsel to the effect that after the 91st day following the deposit,
the trust funds will not be subject to the effect of any applicable bankruptcy,
insolvency, reorganization or similar laws affecting creditors' rights
generally; (vii) the Company must deliver to the Trustee an Officers'
Certificate stating that the deposit was not made by the Company with the intent
of preferring the Holders of Notes over the other creditors of the Company with
the intent of defeating, hindering, delaying or defrauding creditors of the
Company or others; and (viii) the Company must deliver to the Trustee an
Officers' Certificate and an opinion of counsel, each stating that all
conditions precedent provided for relating to the Legal Defeasance or the
Covenant Defeasance have been complied with.
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AMENDMENTS AND SUPPLEMENTS
Except as provided in the next two succeeding paragraphs, the Indenture or
the Notes may be amended or supplemented with the consent of the Holders of at
least a majority in principal amount of the Notes then outstanding (including,
without limitation, consents obtained in connection with a purchase of, or
tender offer or exchange offer for, Notes), and any existing Default or Event of
Default (other than a default in the payment of principal of, premium, if any,
or interest on the Notes, except a payment default resulting from an
acceleration that has been rescinded) or compliance with any provision of the
Indenture or the Notes may be waived with the consent of the Holders of a
majority in principal amount of the then outstanding Notes (including consents
obtained in connection with a tender offer or exchange offer for Notes).
Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any Notes held by a non-consenting Holder): (i) reduce the
principal amount of Notes whose Holders must consent to an amendment, supplement
or waiver; (ii) reduce the principal of or change the fixed maturity of any Note
or alter the provisions with respect to the optional redemption of the Notes
(other than the provisions described under "-- Change of Control,"
"-- Limitation on Asset Sales or Sales of Subsidiary Stock" or "-- Limitations
on Use of Proceeds; Proceeds Purchase Offer"); (iii) reduce the rate of or
change the time for payment of interest on any Note; (iv) waive a Default or
Event of Default in the payment of principal of or premium, if any, or interest
on the Notes (except a rescission of acceleration of the Notes by the Holders of
at least a majority in aggregate principal amount of the Notes and a waiver of
the payment default that resulted from such acceleration); (v) make any Note
payable in money other than that stated in the Notes; (vi) make any change in
the provisions of the Indenture relating to waivers of past Defaults or the
rights of Holders of Notes to receive payments of principal of or premium, if
any, or interest on the Notes; (vii) waive a redemption payment with respect to
any Note (other than a payment required by one of the covenants described above
under the captions "-- Change of Control" or "-- Limitation on Asset Sales or
Sales of Subsidiary Stock" or "-- Limitations on Use of Proceeds; Proceeds
Purchase Offer"; or (viii) make any change in the foregoing amendment and waiver
provisions.
Notwithstanding the foregoing, without the consent of any Holder of Notes,
the Company and the Trustee may amend or supplement the Indenture or the Notes
to cure any ambiguity, defect or inconsistency, to provide for uncertificated
Notes in addition to or in place of certificated Notes, to provide for the
assumption of the Company's obligations to Holders of Notes in the case of a
merger or consolidation, to make any change that would provide any additional
rights or benefits to the Holders of Notes or that does not adversely affect the
legal rights under the Indenture of any such Holder, or to comply with
requirements of the Commission in order to effect or maintain the qualification
of the Indenture under the Trust Indenture Act.
NO PERSONAL LIABILITY OF PARTNERS, STOCKHOLDERS, OFFICERS, DIRECTORS
The Indenture will provide that no direct or indirect stockholder,
employee, officer or director, as such, past, present or future of the Company
or any successor entity shall have any personal liability in respect of the
obligations of the Company under the Indenture or the Notes by reason of his or
its status as such stockholder, employee, officer or director. Each Holder by
accepting a Note waives and releases all such liability.
CERTAIN DEFINITIONS
Set forth below is a summary of certain defined terms to be contained in
the Indenture. Reference is made to the Indenture for the full definition of all
such terms, as well as any other terms and herein for which no definition is
provided.
"Affiliate" means, with respect to any specified Person, (i) any other
Person directly or indirectly controlling or controlled by, or under direct or
indirect common control with, such specified Person or (ii) any officer,
director, or controlling stockholder of such other Person. For purposes of this
definition, the term "control" means (a) the power to direct the management and
policies of a Person, directly or through one or more intermediaries, whether
through the ownership of voting securities, by contract, or otherwise, or (b)
without limiting the foregoing, the beneficial ownership of 10% or more of the
voting power of the voting common equity of such Person (on a fully diluted
basis) or of warrants or other rights to acquire such equity (whether or not
presently exercisable).
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"Annualized Operating Cash Flow" on any date, means with respect to any
Person the Operating Cash Flow for the Reference Period multiplied by four.
"Annualized Operating Cash Flow Ratio" on any date (the "Transaction Date")
means, with respect to any Person and it Subsidiaries, the ratio of (i)
consolidated Indebtedness of such Person and its Subsidiaries on the Transaction
Date (after giving pro forma effect to the Incurrence of such Indebtedness)
divided by (ii) the aggregate amount of Annualized Operating Cash Flow of such
Person (determined on a pro forma basis after giving effect to all dispositions
of businesses made by such Person and its Subsidiaries from the beginning of the
Reference Period through the Transaction Date as if such disposition has
occurred at the beginning of such Reference Period); provided, that for purposes
of such computation, in calculating Annualized Operating Cash Flow and
consolidated Indebtedness: (a) the transaction giving rise to the need to
calculate the Annualized Operating Cash Flow Ratio will be assumed to have
occurred (on a pro forma basis) on the first day of the Reference Period; (b)
the incurrence of any Indebtedness during the Reference Period or subsequent
thereto and on or prior to the Transaction Date (and the application of the
proceeds therefrom to the extent used to retire Indebtedness) will be assumed to
have occurred (on a pro forma basis) on the first day of such Reference Period;
(c) Consolidated Interest Expense attributable to any Indebtedness (whether
existing or being incurred) bearing a floating interest rate shall be computed
as if the rate in effect on the Transaction Date had been the applicable rate
for the entire period; and (d) all members of the consolidated group of such
Person on the Transaction Date that were acquired during the Reference Period
shall be deemed to be members of the consolidated group of such Person for the
entire Reference Period. When the foregoing definition is used in connection
with the Company and its Restricted Subsidiaries, references to a Person and its
Subsidiaries in the foregoing definition shall be deemed to refer to the Company
and its Restricted Subsidiaries.
"Bank Credit Facility" means, (a) until the consummation of the Horizon
Acquisition, the Credit Agreement, dated as of September 29, 1995, entered into
by and among Sygnet Communications, Inc. and certain of its affiliates, the
lenders which are parties thereto and PNC Bank, National Association, as the
agent for such lenders, as it may have been amended from time to time, and (b)
as of and after the consummation of the Horizon Acquisition, and so long as
there is Indebtedness under, or the borrower has the ability to borrow
thereunder, the Credit Agreement (in substantially the form filed as an exhibit
to Amendment No. 3 to the registration statement of which the Prospectus is a
part and consistent with the terms set forth in the commitment letter, dated as
of August 21, 1996), among Sygnet Communications, Inc., as the borrower, the
financial institutions which are parties thereto as lenders, PNC Bank, National
Association and Toronto Dominion (Texas), Inc. as managing agents and
syndication agents, Toronto Dominion (Texas), Inc. as the administrative agent,
and PNC Bank, National Association, as the documentation agent and the
collateral agent, or any other credit facility or loan agreement designated by
the Company to be the "Bank Credit Facility," as such Credit Agreement or other
credit facility or loan agreement may be amended, modified, restated, renewed,
increased, supplemented, refunded, replaced or refinanced from time to time.
There can be only one such credit facility or loan agreement designated to be
the "Bank Credit Facility" at any one time.
"Business Day" means any day other than a Legal Holiday.
"Capitalized Lease Obligations" means obligations under a lease that are
required to be capitalized for financial reporting purposes in accordance with
GAAP, and the amount of Indebtedness represented by such obligations shall be
the capitalized amount of such obligations, as determined in accordance with
GAAP.
"Capital Stock" means, with respect to any Person, any capital stock of
such Person and shares, interests, participations or other ownership interests
(however designated) of any Person and any rights (other than debt securities
convertible into capital stock), warrants and options to purchase any of the
foregoing, including (without limitation) each class of common stock and
preferred stock of such Person if such Person is a corporation and each general
and limited partnership interest of such Person if such Person is a partnership.
"Cash Equivalents" means (i) Securities issued or directly and fully
guaranteed or insured by the United States of America or any agency or
instrumentality thereof (provided that the full faith and credit of the United
States of America is pledged in support thereof) in each case maturing within
one year after the date of acquisition, (ii) time deposits and certificates of
deposit and commercial paper issued by the parent corporation of any domestic
commercial bank of recognized standing having capital and surplus in excess of
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$500 million and commercial paper issued by others rated at least A-2 or the
equivalent thereof by Standard & Poor's Corporation or at least P-2 or the
equivalent thereof by Moody's Investors Service, Inc. and in each case maturing
within one year after the date of acquisition and (iii) investments in money
market funds substantially all of whose assets comprise securities of the types
described in clauses (i) and (ii) above.
"Change of Control" means (i) any sale, transfer or other conveyance,
whether direct or indirect, of a majority of the fair market value of the assets
of the Company, on a consolidated basis, in one transaction or a series of
related transactions, if, immediately after giving effect to such transaction,
any "person" or "group" (as such terms are used for purposes of Sections 13(d)
and 14(d) of the Exchange Act, whether or not applicable), other than an
Excluded Person or Excluded Group, is or becomes the "beneficial owner" (as such
term is used in Rule 13d-3 promulgated pursuant to the Exchange Act), directly
or indirectly, of more than 50% of the total voting power in the aggregate
normally entitled to vote in the election of directors, managers, or trustees,
as applicable, of the transferee, (ii) any "person" or "group" (as such terms
are used for purposes of Section 13(d) and 14(d) of the Exchange Act, whether or
not applicable), other than an Excluded Person or Excluded Group, is or becomes
the "beneficial owner" (as such term is used in Rule 13d-3 promulgated pursuant
to the Exchange Act), directly or indirectly, of more than 50% of the total
voting power in the aggregate of all classes of Capital Stock of the Company
then outstanding normally entitled to vote in elections of directors, or (iii)
during any period of 12 consecutive months after the Issue Date, individuals who
at the beginning of any such 12-month period constituted the Board of Directors
of the Company (together with any new directors whose election by such Board or
whose nomination for election by the shareholders of the Company was approved by
a vote of a majority of the directors then still in office who were either
directors at the beginning of such period or whose election or nomination for
election was previously so approved) cease for any reason to constitute a
majority of the Board of Directors of the Company then in office.
"Consolidated Interest Expense" of any Person means, for any period, the
aggregate amount (without duplication and determined in each case in accordance
with GAAP) of (a) interest expensed or capitalized, paid, accrued, or scheduled
to be paid or accrued (including, in accordance with the following sentence,
interest attributable to Capitalized Lease Obligations) of such Person and its
consolidated Subsidiaries during such period, including (i) original issue
discount and non-cash interest payments or accruals on any Indebtedness, (ii)
the interest portion of all deferred payment obligations, and (iii) all
commissions, discounts and other fees and charges owed with respect to bankers'
acceptances and letters of credit financings and currency and Interest Swap and
Hedging Obligations, in each case to the extent attributable to such period, and
(b) the amount of dividends accrued or payable by such Person or any of its
consolidated Subsidiaries in respect of Preferred Stock (other than by
Restricted Subsidiaries of such Person to such Person or such Person's Wholly
Owned Subsidiaries). For purposes of this definition, (x) interest on a
Capitalized Lease Obligation shall be deemed to accrue at an interest rate
reasonably determined by the Company to be the rate of interest implicit in such
Capitalized Lease Obligation in accordance with GAAP and (y) interest expense
attributable to any Indebtedness represented by the guaranty by such Person or a
Subsidiary of such Person of an obligation of another Person shall be deemed to
be the interest expense attributable to the Indebtedness guaranteed. When the
foregoing definition is used in connection with the Company and its Restricted
Subsidiaries, references to a Person and its Subsidiaries in the foregoing
definition shall be deemed to refer to the Company and its Restricted
Subsidiaries.
"Consolidated Net Income" of any Person for any period means the net income
(or loss) of such Person and its consolidated Subsidiaries for such period,
determined (on a consolidated basis) in accordance with GAAP, adjusted to
exclude (only to the extent included in computing such net income (or loss), and
without duplication (i) all extraordinary gains and losses and gains and losses
that are nonrecurring (including as a result of Asset Sales outside the ordinary
course of business), (ii) the net income, if positive, of any Person, that is
not a Subsidiary in which such Person or any of its Subsidiaries has an
interest, except to the extent of the amount of dividends or distributions
actually paid to such Person or a Subsidiary of such Person that both (x) are
actually paid in cash to such Person or a Subsidiary of such Person during such
period and (y) when taken together will all other dividends and distributions
paid during such period in cash to such Person or a Subsidiary of such Person,
are not in excess of such Person's pro rata share of such other Person's
aggregate net income earned during such period, (iii), except as provided in the
definition of "Annualized Operating Cash Flow Ratio," the net income (or loss)
of any Subsidiary acquired in a pooling of interests transaction for
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any period prior to the date of such acquisition and (iv) the net income, if
positive, of any Subsidiary of such Person to the extent that the declaration or
payment of dividends or similar distributions is not at the time permitted by
operation of the terms of its charter or any agreement or instrument applicable
to such Subsidiary. When the foregoing definition is used in connection with the
Company and its Restricted Subsidiaries, references to a Person and its
Subsidiaries in the foregoing definition shall be deemed to refer to the Company
and its Restricted Subsidiaries.
"Default" means any event or condition that is, or after notice or passage
of time or both would be, an "Event of Default."
"Disqualified Capital Stock" means, with respect to any Person, Capital
Stock of such Person that, by its terms or by the terms of any security into
which it is convertible, exercisable or exchangeable, is, or upon the happening
of any event or the passage of time would be, required to be redeemed or
repurchased (including at the option of the holder thereof) by such Person or
any of its Subsidiaries, in whole or in part, on or prior to the Stated Maturity
of the Notes; provided that Capital Stock will not be deemed to be Disqualified
Capital Stock if it may only be redeemed or repurchased solely in consideration
of Qualified Capital Stock of the Company.
"Excluded Group" means a "group" (as such term is used in Sections 13(d)
and 14(d) of the Exchange Act) that includes one or more Excluded Persons;
provided that the voting power of the Capital Stock of the Company "beneficially
owned" (as such term is used in Rule 13d-3 promulgated under the Exchange Act)
by such Excluded Persons (without attribution to such Excluded Persons of the
ownership by other members of the "group") represents a majority of the voting
power of the Capital Stock "beneficially owned" (as such term is used in Rule
13d-3 promulgated under the Exchange Act) by such group.
"Excluded Person" means the members of the Williamson family who owned
Capital Stock of the Company on the Issue Date and any wholly owned Affiliate of
any of the foregoing that is wholly owned by one of the foregoing.
"Existing Indebtedness" means Indebtedness of the Company and its
Subsidiaries in existence and outstanding on the Issue Date.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board ("FASB") or in such other statements by
such other entity as approved by a significant segment of the accounting
profession which are in effect in the United States; provided, however, that for
purposes of determining compliance with covenants in the Indenture, "GAAP" means
such generally accepted accounting principles as in effect as of the Issue Date.
"Holder" means a Person in whose name a Note is registered. The Holder of a
Note will be treated as the owner of such Note for all purposes.
"Horizon Acquisition" means the acquisition of assets made pursuant to the
Asset Acquisition Agreement, dated July 11, 1996, among the Company, Horizon
Cellular Telephone Company of Chautauqua, L.P., Horizon Cellular Telephone
Company of Crawford, L.P., and Horizon Cellular Telephone Company of Indiana,
L.P.
"Indebtedness" of any Person means, without duplication: (a) all
liabilities and obligations, contingent or otherwise, of such Person, (i) in
respect of borrowed money (whether or not the recourse of the lender is to the
whole of the assets of such Person or only to a portion thereof), (ii) evidenced
by bonds, notes, debentures or similar instruments, (iii) representing the
balance deferred and unpaid of the purchase price of any property or services,
except (other than accounts payable or other obligations to trade creditors
which have remained unpaid for greater than 90 days past their original due date
or to financial institutions, which obligations are not being contested in good
faith and for which appropriate reserves have been established) those incurred
in the ordinary course of its business that would constitute ordinarily a trade
payable to trade creditors, (iv) evidenced by bankers' acceptances or similar
instruments issued or accepted by banks, (v) for the payment of money relating
to a Capitalized Lease Obligation, or (vi) evidenced by a letter of credit or a
reimbursement obligation of such Person with respect to any letter of credit;
(b) all obligations of such Person under Interest Swap and Hedging Obligations;
(c) all liabilities of others of the kind described in the
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preceding clauses (a) or (b) that such Person has guaranteed or that is
otherwise its legal liability or which are secured by any assets or property of
such Person and all obligations to purchase, redeem or acquire any Capital
Stock; (d) all Disqualified Capital Stock of such Person and all Preferred Stock
of such Person's Subsidiaries; and (e) any and all deferrals, renewals,
extensions, refinancing and refundings (whether direct or indirect) of, or
amendments, modifications or supplements to, any liability of the kind described
in any of the preceding clauses (a), (b), (c), or (d) or this clause (e),
whether or not between or among the same parties; provided that the outstanding
principal amount at any date of any Indebtedness issued with original issue
discount is the face amount of such Indebtedness less the remaining unamortized
portion of the original issue discount of such Indebtedness at such date.
"Interest Swap and Hedging Obligations" means any obligations of any Person
pursuant to any interest rate swaps, caps, collars and similar arrangements
providing protection against fluctuations in interest rates. For purposes of the
Indenture, the amount of such obligations shall be the amount determined in
respect thereof as of the end of the then most recently ended fiscal quarter of
such Person, based on the assumption that such obligation had terminated at the
end of such fiscal quarter, and in making such determination, if any agreement
relating to such obligation provides for the netting of amounts payable by and
to such Person thereunder or if any such agreement provides for the simultaneous
payment of amounts by and to such Person or in any event until the counterparty
thereunder defaults in its corresponding payment, then in each such case, the
amount of such obligations shall be the net amount so determined, plus any
premium due upon default by such Person.
"Investment" by any Person in any other Person means (without duplication):
(a) the acquisition (whether by purchase, merger, consolidation or otherwise) by
such Person (whether for cash, property, services, securities or otherwise) of
capital stock, bonds, notes, debentures, partnership or other ownership
interests or other securities of such other Person or any agreement to make any
such acquisition; (b) the making by such Person of any deposit with, or advance,
loan or other extension of credit to, such other Person (including the purchase
of property from another Person subject to an understanding or agreement,
contingent or otherwise, to resell such property to such other Person) or any
commitment to make any such advance, loan or extension; (c) the entering into by
such Person of any guarantee of, or other contingent obligation with respect to,
Indebtedness or other liability of such other Person; (d) the making of any
capital contribution by such Person to such other Person; and (e) the
designation by the Board of Directors of the Company of any Person to be an
Unrestricted Subsidiary. For purposes of the covenant described in
"-- Limitation on Restricted Payments," (i) "Investment" shall include and be
valued at the fair market value of the net assets of any Restricted Subsidiary
at the time that such Restricted Subsidiary is designated an Unrestricted
Subsidiary and shall exclude the fair market value of the net assets of any
Unrestricted Subsidiary at the time that such Unrestricted Subsidiary is
designated a Restricted Subsidiary and (ii) the amount of any Investment shall
be the fair market value of such Investment plus the fair market value of all
additional Investments by the Company or any of its Restricted Subsidiaries at
the time any such Investment is made; provided that, for purposes of this
sentence, the fair market value of net assets in excess of $5,000,000 shall be
as determined by an independent appraiser of national reputation.
"Issue Date" means the time and date of the first issuance of the Notes
under the Indenture.
"Legal Holiday" means a Saturday, a Sunday or a day on which banking
institutions in the City of New York or at a place of payment are authorized by
law, regulation or executive order to remain closed. If a payment date is a
Legal Holiday at a place of payment, payment may be made at that place on the
next succeeding day that is not a Legal Holiday, and no interest shall accrue
for the intervening period.
"Lien" means any mortgage, lien, pledge, charge, security interest, or
other encumbrance of any kind, whether or not filed, recorded or otherwise
perfected under applicable law (including any conditional sale or other title
retention agreement and any lease deemed to constitute a security interest and
any option or other agreement to give any security interest).
"Maturity Date" means, when used with respect to any Note, the date
specified on such Note as the fixed date on which the final installment of
principal of such Note is due and payable (in the absence of any acceleration
thereof pursuant to the provisions of the Indenture regarding acceleration of
Indebtedness or any Change of Control Offer or Asset Sale Offer).
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"Net Cash Proceeds" means the aggregate amount of cash and Cash Equivalents
received by the Company and its Restricted Subsidiaries in respect of an Asset
Sale (including upon the conversion to cash and Cash Equivalents of (a) any note
or installment receivable at any time, or (b) any other property as and when any
cash and Cash Equivalents are received in respect of any property received in an
Asset Sale but only to the extent such cash and Cash Equivalents are received
within one year after such Asset Sale), less the sum of (i) all reasonable
out-of-pocket fees, commissions and other expenses incurred in connection with
such Asset Sale, including the amount (estimated in good faith by the Board of
Directors of the Company) of income, franchise, sales and other applicable taxes
required to be paid by the Company or any Restricted Subsidiary of the Company
in connection with such Asset Sale and (ii) the aggregate amount of cash so
received which is used to retire any existing Indebtedness of its Restricted
Subsidiaries, as the case may be, which is required to be repaid in connection
with such Asset Sale or is secured by a Lien on the property or assets of the
Company or any of its Restricted Subsidiaries, as the case may be.
"Net Pops" of any Person with respect to any System means the Pops of the
MSA or RSA served by such System multiplied by the direct and/or indirect
percentage interest of such Person in the entity licensed or designated to
receive an authorization by the Federal Communications Commission to construct
or operate a system in that MSA or RSA.
"Net Proceeds" means the aggregate net proceeds (including the fair market
value of non-cash proceeds constituting equipment or other assets of a type
generally used in a Related Business in an amount reasonably determined by the
Board of Directors of the Company for amounts under $5,000,000 and by a
financial advisor or appraiser of national reputation for equal or greater
amounts) received by a Person from the sale of Qualified Capital Stock (other
than to a Subsidiary of such Person) after payment of out-of-pocket expenses,
commissions and discounts incurred in connection therewith.
"Obligations" means any principal, premium, interest (including interest
accruing subsequent to a bankruptcy or other similar proceeding whether or not
such interest is an allowed claim enforceable against the Company in a
bankruptcy case under Federal bankruptcy law), penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable pursuant
to the terms of the documentation governing any Indebtedness.
"Operating Cash Flow" for any Person for any period means (a) the
Consolidated Net Income of such Person for such period, plus (b) the sum,
without duplication (and only to the extent such amounts are deducted from net
revenues in determining such Consolidated Net Income), of (i) the provisions for
income taxes for such period for such Person and its consolidated Subsidiaries,
(ii) depreciation, amortization and other non-cash charges of such Person and
its consolidated Subsidiaries and (iii) Consolidated Interest Expense of such
Person for such period, determined, in each case, on a consolidated basis for
such Person and its consolidated Subsidiaries in accordance with GAAP, less (c)
the sum, without duplication (and only to the extent such amounts are included
in such Consolidated Net Income) of (i) all extraordinary gains of such Person
and its consolidated Subsidiaries during such period and (ii) the amount of all
cash payments made during such period by such Person and its Subsidiaries to the
extent such payments relate to non-cash charges that were added back in
determining Operating Cash Flow for such period or for any prior period. When
the foregoing definition is used in connection with the Company and its
Restricted Subsidiaries, references to a Person and its Subsidiaries in the
foregoing definition shall be deemed to refer to the Company and its Restricted
Subsidiaries.
"Permitted Acquisition Indebtedness" means, with respect to any Person,
Indebtedness Incurred in connection with the acquisition of property, businesses
or assets which, or Capital Stock of a Person all or substantially all of whose
assets, are of a type generally used in a Related Business; provided that, in
the case of the Company or its Restricted Subsidiaries, as applicable, (x)(i)
the Company's Annualized Operating Cash Flow Ratio, after giving effect to such
acquisition and such Incurrence on a pro forma basis, is no greater than such
ratio prior to giving pro forma effect to such acquisition and such Incurrence,
(ii) the Company's consolidated Indebtedness under the Bank Credit Facility,
divided by the Net Pops of the Company and its Restricted Subsidiaries, in each
case giving pro forma effect to the acquisition and such Incurrence, does not
exceed $60, (iii) the Company's consolidated Indebtedness divided by the Net
Pops of the Company and its Restricted Subsidiaries does not increase as a
result of the acquisition and such Incurrence and (iv) after
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giving effect to such acquisition and such Incurrence the acquired property,
businesses or assets or such Capital Stock is owned directly by the Company or a
Wholly Owned Restricted Subsidiary of the Company or (y)(i) under the terms of
such Indebtedness and pursuant to applicable law, no recourse could be had for
the payment of principal, interest or premium with respect to such Indebtedness
or for any claim based thereon against the Company or any Person that
constituted a Restricted Subsidiary immediately prior to the consummation of
such acquisition or any of their property or assets, (ii) the obligor of such
Indebtedness shall have, immediately after giving effect to such acquisition and
such Incurrence on a pro forma basis, a ratio of Annualized Operating Cash Flow
as of the date of the acquisition to the product of Consolidated Interest
Expense for the Reference Period multiplied by four (but excluding from
Consolidated Interest Expense all amounts that are not required to be paid in
cash on a current basis) of at least 1 to 1 and (iii) immediately subsequent to
the Incurrence of such Indebtedness, the obligor thereof shall be a Restricted
Subsidiary and shall have been designated by the Company (as evidenced by an
Officers' Certificate delivered promptly to the Trustee) to be a "Non-Recourse
Restricted Subsidiary."
"Permitted Investment" means: (i) Investments in Cash Equivalents; (ii)
Investments in the Company or a Restricted Subsidiary (other than a Non-Recourse
Restricted Subsidiary); (iii) Investments in a Person substantially all of whose
assets are of a type generally used in a Related Business (an "Acquired Person")
if, as a result of such Investments, (A) the Acquired Person immediately
thereupon becomes a Restricted Subsidiary (other than a Non-Recourse Restricted
Subsidiary) or (B) the Acquired Person immediately thereupon either (1) is
merged or consolidated with or into the Company or any of its Restricted
Subsidiaries (other than a Non-Recourse Restricted Subsidiary) or (2) transfers
or conveys all or substantially all of its assets to, or is liquidated into, the
Company or any of its Restricted Subsidiaries (other than a Non-Recourse
Restricted Subsidiary); (iv) Investments in accounts and notes receivable
acquired in the ordinary course of business; (v) any securities received in
connection with an Asset Sale (other than those of a Non-Recourse Restricted
Subsidiary) and any investment with the Net Cash Proceeds from any Asset Sale in
Capital Stock of a Person, all or substantially all of whose assets are of a
type used in a Related Business, that complies with the "Limitation on Asset
Sales and Sales of Subsidiary Stock" covenant; (vi) any Investment pursuant to
the terms of the agreements described in or referred to under the caption
"Certain Relationships and Related Transactions," as such agreements were in
effect on the Issue Date; (vii) advances and prepayments for asset purchases in
the ordinary course of business in a Related Business of the Company or a
Restricted Subsidiary; and (viii) customary loans or advances made in the
ordinary course of business to officers, directors or employees of the Company
or any of its Restricted Subsidiaries for travel, entertainment, and moving and
other relocation expenses.
"Permitted Liens" means: (a) Liens existing on the Issue Date; (b) Liens
imposed by governmental authorities for taxes, assessments or other charges not
yet subject to penalty or which are being contested in good faith and by
appropriate proceedings, if adequate reserves with respect thereto are
maintained on the books of the Company in accordance with GAAP; (c) statutory
liens of carriers, warehousemen, mechanics, materialmen, landlords, repairmen or
other like Liens arising by operation of law in the ordinary course of business
provided that (i) the underlying obligations are not overdue for a period of
more than 30 days, and (ii) such Liens are being contested in good faith and by
appropriate proceedings and adequate reserves with respect thereto are
maintained on the books of the Company in accordance with GAAP; (d) Liens
securing the performance of bids, trade contracts (other than borrowed money),
leases, statutory obligations, surety and appeal bonds, performance bonds and
other obligations of a like nature incurred in the ordinary course of business;
(e) easements, rights-of-way, zoning, similar restrictions and other similar
encumbrances or title defects which, singly or in the aggregate, do not in any
case materially detract from the value of the property, subject thereto (as such
property used by the Company or any of its Restricted Subsidiaries) or interfere
with the ordinary conduct of the business of the Company or any of its
Restricted Subsidiaries; (f) Liens arising by operation of law in connection
with judgments, only to the extent, for an amount and for a period not resulting
in an Event of Default with respect thereto; (g) pledges or deposits made in the
ordinary course of business in connection with worker's compensation,
unemployment insurance and other types of social security legislation; (h) Liens
in favor of the Trustee arising under the Indenture; (i) Liens securing
Permitted Acquisition Indebtedness, which either (A) were not incurred or issued
in anticipation of such acquisition or (B) secure Permitted Acquisition
Indebtedness meeting the requirements set forth in clause (y) of the definition
thereof;
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(j) Liens securing Indebtedness under the Bank Credit Facility (including,
without limitation, Indebtedness under Interest Swap and Hedging Obligations
required by the Bank Credit Facility) that was incurred in accordance with
Section 4.08; (k) Liens securing Indebtedness of a Person existing at the time
such Person becomes a Restricted Subsidiary or is merged with or into the
Company or a Restricted Subsidiary, provided that such Liens were in existence
prior to the date of such acquisition, merger or consolidation, were not
incurred in anticipation thereof, and do not extend to any other assets; (l)
Liens arising from Purchase Money Indebtedness permitted under the Indenture;
(m) Liens securing Refinancing Indebtedness Incurred to refinance any
Indebtedness that was previously so secured in a manner no more adverse to the
Holders of the Notes than the terms of the Liens securing such refinanced
Indebtedness; (n) Liens in favor of the Company or a Wholly Owned Restricted
Subsidiary and (o) Liens arising out of judgments or awards against the Company
or a Subsidiary of the Company with respect to which enforcement has been stayed
and the Company at the time shall currently be prosecuting an appeal or
proceeding for review in good faith by appropriate proceedings diligently
conducted and with respect to which the Company has created adequate reserves or
has adequate insurance protection; provided, however, that at no time may the
aggregate amount of such judgment liens exceed $3.0 million.
"Person" means any corporation, individual, joint stock company, joint
venture, partnership, unincorporated association, governmental regulatory
entity, country, state or political subdivision thereof, trust, municipality or
other entity.
"Pops" means the estimate of the population of a Metropolitan Statistical
Area ("MSA") or Rural Service Area ("RSA") as derived from the most recent Rand
McNally Commercial Atlas and Marketing Guide or if such statistics are no longer
printed in the Rand McNally Commercial Atlas and Marketing Guide or the Rand
McNally Commercial Atlas and Marketing Guide is no longer published, such other
nationally recognized source of such information.
"Purchase Money Indebtedness" means Indebtedness of the Company or its
Restricted Subsidiaries Incurred in connection with the purchase of property or
assets for the business of the Company or its Restricted Subsidiaries, provided,
that the recourse of the lenders with respect to such Indebtedness is limited
solely to the property or assets so purchased without further recourse to either
the Company or any of its Restricted Subsidiaries.
"Qualified Capital Stock" means any Capital Stock of a Person that is not
Disqualified Capital Stock.
"Reference Period" with regard to any Person means the last full fiscal
quarter of such Person for which financial information (which the Company shall
use its best efforts to compile in a timely manner) in respect thereof is
available ended on or immediately preceding any date upon which any
determination is to be made pursuant to the terms of the Notes or the Indenture.
"Refinancing Indebtedness" means Indebtedness or Disqualified Capital Stock
(a) issued in exchange for, or the proceeds from the issuance and sale of which
are used substantially concurrently to repay, redeem, defease, refund,
refinance, discharge or otherwise retire for value, in whole or in part, or (b)
constituting an amendment, modification or supplement to, or a deferral or
renewal of ((a) and (b) above are, collectively, a "Refinancing"), any
Indebtedness or Disqualified Capital Stock in a principal amount or, in the case
of Disqualified Capital Stock, liquidation preference (or if such Indebtedness
or Disqualified Capital Stock does not require cash payments prior to maturity
or is otherwise issued at a discount, the original issue price of such
Indebtedness or Disqualified Capital Stock), not to exceed the sum of (x) the
lesser of (i) the principal amount or, in the case of Disqualified Capital
Stock, liquidation preference, of the Indebtedness or Disqualified Capital Stock
so Refinanced and (ii) if such Indebtedness being Refinanced was issued with an
original issue discount, the accreted value thereof (as determined in accordance
with GAAP) at the time of such Refinancing, (y) the amount of any premium
required to be paid in connection with such refinancing pursuant to the terms of
such Indebtedness and (z) all other customary fees and expenses of the Company
or such Restricted Subsidiary reasonably incurred in connection with such
refinancing; provided, that (A) Refinancing Indebtedness issued by any
Restricted Subsidiary of the Company shall only be used to Refinance outstanding
Indebtedness or Disqualified Capital Stock of such Restricted Subsidiary, (B)
Refinancing Indebtedness shall (x) not have a Weighted Average Life shorter than
the Indebtedness or Disqualified Capital Stock to be so refinanced at the time
of such Refinancing and (y) in all respects, be no
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less subordinated or junior, if applicable, to the rights of Holders of the
Notes than was the Indebtedness or Disqualified Capital Stock to be refinanced
and (C) such Refinancing Indebtedness shall have no installments or principal
(or redemption payment) scheduled to come due earlier than the scheduled
maturity of any installment of principal (or redemption payment) of the
Indebtedness or Disqualified Capital Stock to be so refinanced which was
scheduled to come due prior to the Stated Maturity of the Notes.
"Related Business" means any business directly related to the ownership,
development, operation, and acquisition of wireless cellular communications
systems.
"Related Person" means, with respect to any Person, (i) any Affiliate of
such Person or any spouse, immediate family member, or other relative who has
the same principal residence of any Affiliate of such Person and (ii) any trust
in which any Person described in clause (i) above, has a beneficial interest.
"Restricted Payment" means, with respect to any Person, (i) any dividend or
other distribution on shares of Capital Stock of such Person or any Subsidiary
of such Person, (ii) any payment on account of the purchase, redemption or other
acquisition or retirement for value, or any payment in respect of any amendment
(in anticipation of or in connection with any such retirement, acquisition or
defeasance) in whole or in part, of any shares of Capital Stock of such Person
or any Subsidiary of such Person held by Persons other than such Person or any
of its Restricted Subsidiaries, (iii) any defeasance, redemption, repurchase or
other acquisition or retirement for value, or any payment in respect of any
amendment (in anticipation of or in connection with any such retirement,
acquisition or defeasance) in whole or in part, of any Indebtedness of the
Company by such Person or a Subsidiary of such Person that is subordinate in
right of payment to, or ranks pari passu (other than the Notes) with, the Notes
and (iv) any Investment (other than a Permitted Investment); provided, however,
that the term "Restricted Payment" does not include (i) any dividend,
distribution or other payment on shares of Capital Stock of the Company or any
Restricted Subsidiary solely in shares of Qualified Capital Stock, (ii) any
dividend, distribution or other payment to the Company, or any dividend to any
of its Restricted Subsidiaries, by any of its Subsidiaries, or (iii) any
defeasance, redemption, repurchase or other acquisition or retirement for value,
in whole or in part, of Indebtedness of such person payable solely in shares of
Qualified Capital Stock of such Person.
"Restricted Subsidiary" means (i) Sygnet Communications, Inc. and (ii) any
Subsidiary of the Company which at the time of determination is not an
Unrestricted Subsidiary. The Board of Directors of the Company may designate any
Unrestricted Subsidiary to be a Restricted Subsidiary only if, immediately
before and after giving effect to such designation, there would exist no Default
or Event of Default and the Company could incur at least $1.00 of Indebtedness
pursuant to the Annualized Operating Cash Flow Ratio test under the covenant
described in "-- Limitation of Incurrence of Additional Indebtedness," on a pro
forma basis taking into account such designation.
"Stated Maturity" means the date fixed for the payment of any principal or
premium pursuant to the Indenture and the Notes, including the Maturity Date,
upon redemption, acceleration, Asset Sale Offer, Change of Control Offer or
otherwise.
"Subsidiary" with respect to any Person, means (i) a corporation at least
fifty percent of whose Capital Stock with voting power, under ordinary
circumstances, to elect directors is at the time, directly or indirectly, owned
by such Person, by such Person and one or more Subsidiaries of such Person or by
one or more Subsidiaries of such Person, or (ii) a partnership in which such
Person or a Subsidiary of such Person is, at the time, a general partner of such
partnership, or (iii) any Person in which such Person, one or more Subsidiaries
of such Person, or such Person and one or more Subsidiaries of such Person,
directly or indirectly, at the date of determination thereof has (x) at least a
fifty percent ownership interest or (y) the power to elect or direct the
election of the directors or other governing body of such Person.
"Unrestricted Subsidiary" shall mean any Subsidiary of the Company that, at
the time of determination, shall be an Unrestricted Subsidiary (as designated by
the Board of Directors of the Company, as provided below). The Board of
Directors of the Company may designate any Subsidiary of the Company other than
Sygnet Communications, Inc. (including any newly acquired or newly formed
Subsidiary at or prior to the time it is so formed or acquired) to be an
Unrestricted Subsidiary if (a) no Default or Event of Default is existing or
will occur as a consequence thereof, (b) such Subsidiary does not own any
Capital Stock of, or own or hold any Lien on any property or asset of, the
Company or any Restricted Subsidiary that is not a
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Subsidiary of the Subsidiary to be so designated, and (c) such Subsidiary and
each of its Subsidiaries has not at the time of designation, and does not
thereafter, create, incur, issue, assume, guarantee, or otherwise become
directly or indirectly liable with respect to any Indebtedness pursuant to which
the lender has recourse to any property or assets of the Company or any of its
Restricted Subsidiaries (except that such Subsidiary and its Subsidiaries may
guarantee the Notes); provided that either (A) the Subsidiary to be so
designated has total assets of $1,000 or less or (B) if such Subsidiary has
assets greater than $1,000, that such designation would be permitted under the
covenant described in "-- Limitation on Restricted Payments." Each such
designation shall be evidenced by filing with the Trustee a certified copy of
the resolution giving effect to such designation and Officers' Certificate
certifying that such designation complied with the foregoing conditions.
"Voting Stock" means Capital Stock of the Company having generally the
right to vote in the election of a majority of the directors of the Company or
having generally the right to vote with respect to the organizational matters of
the Company.
"Weighted Average Life" means, as of the date of determination, with
respect to any debt instrument, the quotient obtained by dividing (i) the sum of
the products of the numbers of years from the date of determination to the dates
of each successive scheduled principal payment of such debt instrument
multiplied by the amount of each such respective principal payment by (ii) the
sum of all such principal payments.
"Wholly Owned" means, with respect to a Subsidiary of the Company, (i) a
Subsidiary that is a corporation, of which not less than 99% of the Capital
Stock (except for directors' qualifying shares or certain minority interests
owned by other Persons solely due to local law requirements that there be more
than one stockholder, but which interest is not in excess of what is required
for such purpose) is owned directly by such Person or through one or more other
Wholly Owned Subsidiaries of such Person, or (ii) any entity other than a
corporation in which such Person, directly or indirectly, owns not less than 99%
of the Capital Stock of such entity.
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DESCRIPTION OF CAPITAL STOCK
The following description of the Company's capital stock does not purport
to be complete and is subject in all respects to applicable Ohio law and to the
provisions of the Company's Amended Articles of Incorporation (the "Articles of
Incorporation") a copy of which has been filed as an exhibit to the Registration
Statement on Form S-1 of which this Prospectus is a part. When used in this
section, the term "Company" means Sygnet Wireless, Inc. and not Sygnet
Communications, Inc. or any other subsidiary.
The authorized capital stock of the Company consists of 60,000,000 shares
of Class A Common Stock, $0.01 par value per share, 10,000,000 shares of Class B
Common Stock, $0.01 par value per share, 10,000,000 shares of voting preferred
stock, $0.01 par value per share and 5,000,000 shares of nonvoting preferred
stock, $0.01 par value per share (including the Preferred Stock).
PREFERRED STOCK
Concurrent with and conditioned upon the consummation of the Horizon
Acquisition, the Company will issue 200,000 shares of nonvoting Preferred Stock
for an aggregate purchase price of $20.0 million to Toronto Dominion
Investments, Inc. (or one or more of its affiliates), an affiliate of one of the
Agents and Lenders under the Bank Credit Facility. So long as any shares of the
Preferred Stock are outstanding, the Company may not authorize or issue (or
obligate itself to issue) any other equity securities senior to or on a parity
with the Preferred Stock.
RIGHTS TO DESIGNATE DIRECTORS
At any time after the first anniversary of the issuance of the Preferred
Stock, holders of the Preferred Stock will have the right to receive notice of
and to designate a representative to attend all meetings of the Board of
Directors of the Company. At any time after the third anniversary of such
issuance, the holders of Preferred Stock will have the right to designate
Directors constituting 15% of the total number of Directors.
LIQUIDATION PREFERENCE AND DIVIDEND RIGHTS
Each share of Preferred Stock has a liquidation preference of $100 (or an
aggregate liquidation preference of $20.0 million as of the date of the
Preferred Stock Investment).
Subject to the Default Rate (as defined), dividends on the Preferred Stock
will accrue quarterly in arrears and will be payable in additional shares of
Preferred Stock at the following rates (expressed as percentages of the
liquidation preference of Preferred Stock outstanding) during the respective
12-month periods ending on the anniversaries of the issuance of the Preferred
Stock in the following years:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
<S> <C>
1......................................................................... 15%
2......................................................................... 17%
3......................................................................... 19%
4 and thereafter.......................................................... 21%
</TABLE>
WARRANTS
Warrants to purchase shares of the Company's Class A Common Stock
representing 1% of the Common Stock outstanding, on a fully diluted basis, will
be issued to Toronto Dominion Investments, Inc. at the end of the nine-month
period following the issuance of the Preferred Stock if the Preferred Stock is
still outstanding at such time (subject to pro rata reduction in the event of a
partial redemption of the Preferred Stock during the first six months it is
outstanding). At the end of each quarter thereafter for so long as any of the
Preferred Stock continues to remain outstanding, warrants to purchase shares of
the Class A Common Stock representing 3/8% of the Common Stock then outstanding,
on a fully diluted basis, will be issued to Toronto Dominion Investments, Inc.
The exercise price of the warrants will be $0.01 per share of Class A Common
Stock.
77
<PAGE> 79
MANDATORY AND OPTIONAL REDEMPTION; PUT OPTION
The Company will be required to redeem the Preferred Stock at its
liquidation amount, plus all accrued and unpaid dividends to the date of
redemption, upon the earlier of (i) the tenth anniversary of the Preferred Stock
Investment, (ii) a Change of Control (defined below), (iii) the issuance of any
equity by the Company at the holding company level other than to employees or
directors as compensation or management incentives (to the extent of the
proceeds thereof) or (iv) the exercise of the Put Option (defined below) by
holders of 51% or more of the then-outstanding shares of Preferred Stock (each a
"Mandatory Redemption Event").
At any time after the fourth anniversary of the issuance of the Preferred
Stock, holders of the Preferred Stock have the right to require the Company to
redeem the Preferred Stock (the "Put Option") in whole or in part within 90 days
from the receipt of written notice of the exercise of the Put Option. In the
event the Preferred Stock is not redeemed within such 90-day period, the holders
of the Preferred Stock, upon written notice to the Company, will have the right
to require the Company to effect a sale or liquidation of the Company to be
completed within a period of twelve months following such notice.
The Preferred Stock will be subject to redemption at the option of the
Company at any time in minimum increments of $1.0 million in whole or in part
upon three business days' notice.
EVENTS OF DEFAULT; CERTAIN COVENANTS
Each of the following constitutes an event of default under the terms of
the Preferred Stock: (i) a Change of Control; (ii) default in the payment of or
the acceleration of any Indebtedness of the Company in excess of $5,000,000,
which default shall remain uncured for a period of more than 90 days; (iii)
failure to redeem the Preferred Stock after the occurrence of a Mandatory
Redemption Event; and (iv) the breach of any covenant in the Preferred Stock.
See "-- Liquidation Preference and Dividend Rights."
If any event of default under the terms of the Preferred Stock occurs and
is continuing or if the Company's Annualized Operating Cash Flow Ratio (using
substantially the same definition as that used in the Indenture) exceeds 12.0x,
the remedy will be an increase in the dividend rate to 5% in excess of the
otherwise applicable rate (the "Default Rate").
The terms of the Preferred Stock also prohibit the issuance of Indebtedness
by the Company or any Subsidiary other than substantially the same as that
permitted in the Bank Credit Facility.
CERTAIN DEFINITIONS
"Change of Control" has substantially the same meaning as the definition of
such term used in the Bank Credit Facility. See "Description of Bank Credit
Facility."
"Indebtedness" has substantially the same meaning as the definition of such
term used in the Indenture. See "Description of Notes -- Certain Terms."
COMMON STOCK
The rights of holders of Class A and Class B Common Stock are identical
except for voting and conversion rights. Holders of shares of Common Stock are
entitled to receive such dividends as may be declared by the Company's Board of
Directors out of funds legally available for such purpose. The Board of
Directors may not declare any cash dividends on shares of Class B Common Stock
unless it also declares at the same time (and payable on the same date as the
payment date for such dividends on Class B Common Stock) a cash dividend on
shares of Class A Common Stock in an amount per share that is at least equal to
the amount of dividends then being declared per share on the Class B Common
Stock. Each share of Class A Common Stock and each share of Class B Common Stock
shall be equal in respect of rights to dividends and distributions, when and as
declared in the form of stock or other property of the Company. The Company does
not anticipate paying cash dividends in the foreseeable future.
With respect to all matters upon which stockholders are entitled to vote or
to which stockholders are entitled to give consent, the holders of the
outstanding shares of Class A Common Stock and the holders of any outstanding
shares of Class B Common Stock shall vote (together with the holders of any
outstanding shares of preferred stock entitled to vote with the Class A Common
Stock and the Class B Common Stock)
78
<PAGE> 80
without regard to class and every holder of Class A Common Stock shall be
entitled to one vote for each share of Class A Common Stock held in his name and
every holder of Class B Common Stock shall be entitled to 10 votes for each
share of Class B Common Stock held in his name.
In addition to any other votes as may be required by law, the approval of
the holders of a majority of the Class A Common Stock voting separately as a
class, will be required to approve (i) the authorization of any new class of
capital stock which is entitled to more than one vote per share, (ii) any
increase in the votes per share of Class B Common Stock or the number of shares
of Class A Common Stock into which the shares of Class B Common Stock are
convertible, or (iii) any proposed amendment to the Articles of Incorporation
that would adversely affect the dividends or other distributions with respect to
shares of Class A Common Stock or the voting rights or other rights of the Class
A Common Stock. Holders of Class A Common Stock will have no cumulative voting
rights and no preemptive, subscription, sinking fund or conversion rights.
Holders of Class B Common Stock will have no cumulative voting rights and no
preemptive, subscription or sinking fund rights.
Each share of Class B Common Stock is convertible at any time, at the
option of its holder, into one share of Class A Common Stock. The Class B Common
Stock will convert automatically into Class A Common Stock and thereby lose its
special voting rights, if such Class B Common Stock is sold or otherwise
transferred to any person or entity other than certain current Holders of the
Class B Common Stock or their descendants or any trusts for their benefit.
79
<PAGE> 81
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
underwriters named below (the "Underwriters") have agreed, severally, to
purchase from the Company and the Company has agreed to sell to the
Underwriters, all of the Notes offered hereby. The respective principal amounts
of the Notes that each Underwriter has agreed to purchase is set forth opposite
its name below:
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
UNDERWRITER OF NOTES
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation.................. $ 66,000,000
Lehman Brothers Inc. ................................................ 33,000,000
Toronto Dominion Securities (USA) Inc. .............................. 11,000,000
----------------
Total........................................................... $110,000,000
=============
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters thereunder are subject to certain conditions precedent. The
Underwriting Agreement also provides that the Company will indemnify the
Underwriters and their controlling persons against certain liabilities and
expenses, including liabilities under the Securities Act. The nature of the
Underwriters' obligations under the Underwriting Agreement is such that they are
required to purchase all of the Notes if the Underwriters purchase any of the
Notes.
The Underwriters propose to offer the Notes directly to the public at the
respective public offering prices set forth on the cover page of this Prospectus
and to certain dealers at such prices less a concession not in excess of 0.40%
of the principal amount of the Notes. The Underwriters may allow and such
dealers may reallow, a concession not in excess of 0.25% of the principal amount
of the Notes. After the initial public offering of the Notes, the offering
prices and other selling terms may be changed by the Underwriters. The
Underwriters do not intend to confirm sales to any accounts over which they
exercise discretionary authority.
The Notes will not be listed on a national securities exchange or admitted
to trading in the National Association of Securities Dealers Automated Quotation
system. The Underwriters have advised the Company that they currently intend to
make a market in the Notes, but are not obligated to do so and may discontinue
any such market making at any time without notice. Accordingly, there can be no
assurance that an active trading market will develop for, or as to the liquidity
of, the Notes.
Toronto Dominion Securities (USA) Inc. is an affiliate of Toronto Dominion
Capital and Toronto-Dominion Bank. The Toronto-Dominion Bank is a lender under
the proposed Bank Credit Facility. The lenders under the Bank Credit Facility
will receive customary fees and other compensation.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following summary, which is based on an opinion of Bryan Cave LLP,
describes certain United States federal income tax consequences of the ownership
of Notes as of the date hereof. Except where noted, it deals only with Notes
held as capital assets by United States Holders and does not deal with special
situations, such as those of dealers in securities or currencies, financial
institutions, life insurance companies, persons holding Notes as part of a
hedging or conversion transaction or a straddle or United States Holders whose
"functional currency" is not the U.S. dollar. Furthermore, the discussion below
is based on the provisions of the Internal Revenue Code of 1986, as amended, and
regulations, rulings and judicial decisions thereunder as of the date hereof and
such authorities may be repealed, revoked, or modified so as to result in
federal income tax consequences different from those discussed below. The
discussion below is also based on there not being original issue discount with
respect to the original issuance of the Notes. PERSONS CONSIDERING THE PURCHASE,
OWNERSHIP OR DISPOSITION OF NOTES SHOULD CONSULT THEIR OWN TAX ADVISORS
CONCERNING THE FEDERAL INCOME TAX CONSEQUENCES IN LIGHT OF THEIR PARTICULAR
SITUATIONS AS WELL ANY CONSEQUENCES ARISING UNDER THE LAWS OF ANY OTHER TAXING
JURISDICTION.
80
<PAGE> 82
PAYMENTS OF INTEREST
Interest on a Note will generally be taxable to a United States Holder as
ordinary income from domestic sources at the time it is paid or accrued in
accordance with the United States Holder's method of accounting for tax
purposes. As used herein, a "United States Holder" of a Note means a holder that
is a citizen or resident of the United States, a corporation, partnership or
other entity created or organized in or under the laws of the United States or
any political subdivision thereof, or an estate or trust the income of which is
subject to United States federal income taxation regardless of its source.
MARKET DISCOUNT
If a United States Holder purchases a Note for an amount that is less than
its principal amount (generally other than at its original issue), the amount of
the difference will be treated as "market discount" for federal income tax
purposes, unless such difference is less than a specified de minimis amount.
Under the market discount rules, a United States Holder will be required to
treat any principal payment on, or any gain on the sale, exchange, retirement or
other disposition of, a Note as ordinary income to the extent of the market
discount which has not previously been included in income and is treated as
having accrued on such Note at the time of such payment or disposition. In
addition, the United States Holder may be required to defer, until the maturity
of the Note or its earlier disposition in a taxable transaction incurred or
continued to purchase or carry such Note.
Any market discount will be considered to accrue ratably during the period
from the date of acquisition to the maturity date of the Note, unless the United
States Holder elects to accrue the market discount on a constant interest
method. A United States Holder of a Note may elect to include market discount in
income currently as it accrues (on either a ratable or constant interest method)
in which case the rule described above regarding deferral of interest deductions
will not apply. This election to include market discount in income currently,
once made, applies to all market discount obligations acquired on or after the
first taxable year to which the election applies and may not be revoked without
the consent of the Internal Revenue Service.
SALE, EXCHANGE AND RETIREMENT OF NOTES
A United States Holder's tax basis in a Note will, in general, be the
United States Holder's cost thereof, increased by market discount previously
included in income by the United States Holder and reduced by any amortized
premium and any cash payments on the Note other than qualified stated interest.
Upon the sale, exchange or retirement of a Note, a United States Holder will
recognize gain or loss equal to the difference between the amount realized upon
the sale, exchange or retirement (less any accrued qualified stated interest,
which will be taxable as such) and the adjusted tax basis of the Note. Except
with respect to market discount, such gain or loss will be capital gain or loss
and will be long-term capital gain or loss if at the time of the sale, exchange
or retirement the Note has been held for more than one year. Under current law,
net capital gains of individuals are, under certain circumstances, taxed at
lower rates than items of ordinary income. The deductibility of capital losses
is subject to limitations.
BACKUP WITHHOLDING AND INFORMATION REPORTING
In general, information reporting requirements will apply to certain
payments of principal, interest and premium paid on Notes and to the proceeds of
sale of a Note made to United States Holders other than certain exempt
recipients (such as corporations). A 31% backup withholding tax will apply to
such payments if the United States Holder fails to provide a taxpayer
identification number or certification of foreign or other exempt status or
fails to report in full dividend and interest income.
LEGAL MATTERS
The validity of the Notes will be passed upon for the Company by Bryan Cave
LLP, Washington, D.C. Certain legal matters related to the Offering will be
passed upon for the Underwriters by Latham & Watkins, Los Angeles, California.
81
<PAGE> 83
EXPERTS
The combined financial statements of SYGNET Communications, Inc. and Wilcom
Corporation as of December 31, 1994 and 1995, and for each of the three years in
the period ended December 31, 1995, appearing in this Prospectus and
Registration Statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon appearing elsewhere herein, and
are included in reliance upon such report given upon the authority of such firm
as experts in accounting and auditing.
The combined financial statements of Selected Systems of Horizon Cellular
Telephone Company, L.P., representing certain majority-owned subsidiaries of
Horizon Cellular Telephone Company, L.P., as of December 31, 1994 and 1995, and
for each of the three years in the period ended December 31, 1995, appearing in
this Prospectus and Registration Statement have been audited by Ernst & Young
LLP, independent auditors, as set forth in their report thereon appearing
elsewhere herein, and are included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
The statements of operations and changes in partners' capital and cash
flows of Erie Cellular Telephone Company for the period from January 1, 1995
through September 29, 1995, appearing in this Prospectus and Registration
Statement have been audited by Coopers & Lybrand L.L.P., independent
accountants, as set forth in their report thereon appearing elsewhere herein,
and are included in reliance upon such report given upon the authority of such
firm as experts in accounting and auditing.
The financial statements of Erie Cellular Telephone Company as of December
31, 1994 and 1993 and for the years then ended, appearing in this Prospectus and
Registration Statement have been audited by Arthur Andersen LLP, independent
public accountants, as set forth in their report thereon appearing elsewhere
herein, and are included in reliance upon such report given upon the authority
of such firm as experts in accounting and auditing.
The statements of operations, partners' capital (deficiency) and cash flows
of DICOMM Cellular Limited Partnership for the year ended December 31, 1993,
appearing in this Prospectus and Registration Statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein, and are included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.
82
<PAGE> 84
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
SYGNET COMMUNICATIONS, INC.
WILCOM CORPORATION
Report of Independent Auditors....................................................... F-2
Combined Balance Sheets as of December 31, 1994 and 1995 and June 30, 1996........... F-3
Combined Statements of Income for the years ended December 31, 1993, 1994 and 1995
and
for the six months ended June 30, 1995 and 1996.................................... F-4
Combined Statements of Shareholders' Equity for the years ended December 31, 1993,
1994 and 1995 and the six months ended June 30, 1996............................... F-5
Combined Statements of Cash Flows for the years ended December 31, 1993, 1994, and
1995 and for the six months ended June 30, 1995 and 1996........................... F-6
Notes to Financial Statements........................................................ F-7
SELECTED SYSTEMS OF HORIZON CELLULAR TELEPHONE COMPANY, L.P.
Report of Independent Auditors....................................................... F-15
Combined Balance Sheets as of December 31, 1994 and 1995............................. F-16
Combined Statements of Operations for the years ended December 31, 1993, 1994 and
1995............................................................................... F-17
Combined Statements of Partners' Equity for the years ended December 31, 1993, 1994
and 1995........................................................................... F-18
Combined Statements of Cash Flows for the years ended December 31, 1993, 1994 and
1995............................................................................... F-19
Notes to Combined Financial Statements............................................... F-20
Combined Balance Sheet as of June 30, 1996........................................... F-25
Combined Statements of Operations for the six months ended June 30, 1995 and 1996.... F-26
Combined Statements of Cash Flows for the six months ended June 30, 1995 and 1996.... F-27
Notes to the Combined Financial Statements for the Six Months Ended June 30, 1996.... F-28
ERIE CELLULAR TELEPHONE COMPANY
Report of Independent Accountants.................................................... F-30
Statement of Operations and Changes in Partners' Capital for the period January 1,
1995 to September 29, 1995......................................................... F-31
Statement of Cash Flows for the period January 1, 1995 to September 29, 1995......... F-32
Notes to Financial Statements........................................................ F-33
ERIE CELLULAR TELEPHONE COMPANY
Report of Independent Public Accountants............................................. F-36
Balance Sheets as of December 31, 1993 and 1994...................................... F-37
Statements of Operations and Changes in Partners' Capital for the years ended
December 31, 1993 and 1994......................................................... F-38
Statements of Cash Flows for the years ended December 31, 1993 and 1994.............. F-39
Notes to Financial Statements........................................................ F-40
DICOMM CELLULAR LIMITED PARTNERSHIP
Report of Independent Auditors....................................................... F-44
Statement of Operations for the year ended December 31, 1993......................... F-45
Statement of Partners' Capital (Deficiency) for the year ended December 31, 1993..... F-46
Statement of Cash Flows for the year ended December 31, 1993......................... F-47
Notes to Financial Statements........................................................ F-48
</TABLE>
F-1
<PAGE> 85
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
SYGNET Communications, Inc.
Wilcom Corporation
We have audited the accompanying combined balance sheets of SYGNET
Communications, Inc. and Wilcom Corporation as of December 31, 1994 and 1995,
and the related combined statements of income, shareholders' equity, and cash
flows for each of the three years in the period ended December 31, 1995. These
financial statements are the responsibility of the Companies' management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of SYGNET
Communications, Inc. and Wilcom Corporation at December 31, 1994 and 1995 and
the combined results of their operations and their cash flows for each of the
three years in the period ended December 31, 1995 in conformity with generally
accepted accounting principles.
Ernst & Young LLP
Cleveland, Ohio
August 8, 1996, except as to Note 12, as to
which the date is September 16, 1996
F-2
<PAGE> 86
SYGNET COMMUNICATIONS, INC.
AND WILCOM CORPORATION
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31 PRO FORMA
-------------------------- JUNE 30 JUNE 30
1994 1995 1996 1996
(UNAUDITED) (NOTE 12)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................... $ 436,790 $ 448,292 $ 1,661,363
Accounts receivable, less allowance for doubtful
accounts of $163,400 at December 31, 1994, $402,800 at
December 31, 1995, and $389,100 at June 30, 1996...... 2,076,231 5,654,208 4,755,063
Inventory............................................... 727,920 1,096,961 737,905
Prepaid expenses and deferred income taxes.............. 271,673 263,722 235,732 $ 549,732
----------- ----------- ----------- ----------
Total current assets................................ 3,512,614 7,463,183 7,390,063
Other assets:
Intangible assets -- net................................ 9,690,422 49,456,397 48,823,747
Deferred financing costs -- net......................... 130,737 1,649,997 1,536,842
----------- ----------- ----------- ----------
Total other assets.................................. 9,821,159 51,106,394 50,360,589
Property and equipment -- net............................... 14,084,371 21,048,896 22,429,951
----------- ----------- ----------- ----------
Total assets........................................ $27,418,144 $79,618,473 $80,180,603
=========== =========== =========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................ $ 1,618,507 $ 998,368 $ 912,948
Amount payable -- Erie Acquisition...................... -- 1,920,190 --
Deferred revenue........................................ 449,045 742,811 821,695
Utility property tax payable............................ 409,000 135,000 189,797
Accrued expenses and other liabilities.................. 921,132 1,786,965 1,981,834
Dividends payable....................................... 445,461 -- --
----------- ----------- ----------- ----------
Total current liabilities........................... 3,843,145 5,583,334 3,906,274
Long-term liabilities:
Deferred liability -- utility property tax.............. 542,450 248,876 289,212
Deferred income taxes................................... -- -- -- 557,000
Long-term debt.......................................... 18,263,812 69,500,000 70,500,000
----------- ----------- ----------- ----------
Total long-term liabilities......................... 18,806,262 69,748,876 70,789,212
Shareholders' equity:
Wilcom Corporation:
Common shares, no par, Type A, voting, stated value
$25; 1,000 shares authorized, 500 shares issued
and outstanding................................... 12,500 12,500 12,500 --
Common shares, no par, Type B, non-voting, stated
value $25; 5,000 shares authorized, 2,500 shares
issued and outstanding............................ 62,500 62,500 62,500 --
SYGNET Communications, Inc.:
Common shares, no par, Type A, voting, stated value
$1; 250,000 shares authorized, 209,362 shares
issued and outstanding............................ 209,362 209,362 209,362 --
Common shares, no par, Type B, non-voting, stated
value $1; 1,250,000 shares authorized, 1,046,801
shares issued and outstanding..................... 1,046,801 1,046,801 1,046,801 --
Sygnet Wireless, Inc.:
Common shares, $.01 par, Class B, voting; 10,000,000
shares authorized, 6,170,630 pro forma shares
issued and outstanding............................ 61,706
Additional paid-in capital.......................... 4,170,368 4,170,368 4,170,368 5,538,533
Retained earnings (deficit)......................... (482,842) 753,675 1,952,529 (108,170)
Note receivable from officer/shareholder............ (249,952) (249,952) (249,952) (249,952)
Treasury stock, at cost............................. -- (1,718,991) (1,718,991) --
----------- ----------- ----------- ----------
Total shareholders' equity.......................... 4,768,737 4,286,263 5,485,117 5,242,117
----------- ----------- ----------- ----------
Total liabilities and shareholders' equity.......... $27,418,144 $79,618,473 $80,180,603
=========== =========== =========== ==========
</TABLE>
See accompanying notes.
F-3
<PAGE> 87
SYGNET COMMUNICATIONS, INC.
AND WILCOM CORPORATION
COMBINED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
----------------------------------------- --------------------------
1993 1994 1995 1995 1996
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Subscriber revenue....... $ 8,877,744 $11,311,782 $17,191,291 $ 7,230,714 $12,968,212
Roamer revenue........... 3,107,035 4,144,532 4,175,809 1,904,409 2,759,586
Equipment sales.......... 1,098,271 1,172,126 1,529,284 744,081 742,779
Other revenue............ 1,391,205 1,419,501 1,680,544 839,632 756,088
----------- ----------- ----------- ----------- -----------
Total revenue................. 14,474,255 18,047,941 24,576,928 10,718,836 17,226,665
Costs and expenses:
Cost of services......... 2,514,411 3,452,103 3,365,954 1,504,883 2,330,531
Cost of equipment
sales.................. 930,430 1,623,996 4,163,890 1,675,674 2,003,169
General and
administrative......... 4,411,838 4,466,568 5,140,727 2,410,636 3,613,467
Selling and marketing.... 2,166,243 2,555,320 3,505,652 1,414,916 2,355,861
Depreciation and
amortization........... 1,951,209 2,638,577 3,486,554 1,387,061 2,482,516
----------- ----------- ----------- ----------- -----------
Total costs and expenses...... 11,974,131 14,736,564 19,662,777 8,393,170 12,785,544
----------- ----------- ----------- ----------- -----------
Income from operations........ 2,500,124 3,311,377 4,914,151 2,325,666 4,441,121
Other:
Interest expense, net.... 652,174 964,046 2,612,699 829,469 2,632,728
Other expense............ 188,070 552,762 286,016 86,749 228,916
----------- ----------- ----------- ----------- -----------
Income before income taxes.... 1,659,880 1,794,569 2,015,436 1,409,448 1,579,477
Income tax (benefit)
expense..................... -- (40,700) 65,400 24,115 119,000
----------- ----------- ----------- ----------- -----------
Income before minority partner
interest.................... 1,659,880 1,835,269 1,950,036 1,385,333 1,460,477
Minority interest............. 136,836 113,545 -- -- --
----------- ----------- ----------- ----------- -----------
Net income.................... $ 1,523,044 $ 1,721,724 $ 1,950,036 $ 1,385,333 $ 1,460,477
========== ========== ========== ========== ==========
Unaudited pro forma
information (Note 12):
Historical income before
income taxes........... $ 2,015,000 $ 1,579,000
Pro forma income taxes... 968,000 758,000
----------- -----------
Pro forma net income..... $ 1,047,000 $ 821,000
========== ==========
Pro forma net income per
share.................. $ .17 $ .13
========== ==========
Weighted average shares
outstanding............ 6,170,630 6,170,630
========== ==========
</TABLE>
See accompanying notes.
F-4
<PAGE> 88
SYGNET COMMUNICATIONS, INC.
AND WILCOM CORPORATION
COMBINED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
WILCOM CORPORATION COMMON STOCK SYGNET COMMUNICATIONS, INC. COMMON STOCK
----------------------------------- -------------------------------------------
TYPE A TYPE B TYPE A TYPE B ADDITIONAL
---------------- ---------------- ------------------ ---------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1993.......... 500 $12,500 2,500 $62,500 209,362 $209,362 1,046,801 $1,046,801 $4,170,368
Net income......................
Dividends declared..............
--- ------- ----- ------- ------- -------- --------- ---------- ----------
Balance at December 31, 1993........ 500 12,500 2,500 62,500 209,362 209,362 1,046,801 1,046,801 4,170,368
Net income......................
Dividends declared..............
Officer/shareholder stock
purchase......................
--- ------- ----- ------- ------- -------- --------- ---------- ----------
Balance at December 31, 1994........ 500 12,500 2,500 62,500 209,362 209,362 1,046,801 1,046,801 4,170,368
Net income......................
Dividends declared..............
Type A common stock
repurchased...................
Type B common stock
repurchased...................
--- ------- ----- ------- ------- -------- --------- ---------- ----------
Balance at December 31, 1995........ 500 12,500 2,500 62,500 209,362 209,362 1,046,801 1,046,801 4,170,368
Net income (unaudited)..........
Dividends declared
(unaudited)...................
--- ------- ----- ------- ------- -------- --------- ---------- ----------
Balance at June 30, 1996
(unaudited)....................... 500 $12,500 2,500 $62,500 209,362 $209,362 1,046,801 $1,046,801 $4,170,368
=== ======= ===== ======= ======= ======== ========= ========== ==========
<CAPTION>
RETAINED RECEIVABLE TREASURY STOCK
EARNINGS FROM OFFICER/ --------------------
(DEFICIT) SHAREHOLDER SHARES AMOUNT
<S> <C> <C> <C> <C>
Balance at January 1, 1993.......... $ (602,990)
Net income...................... 1,523,044
Dividends declared.............. (996,305)
----------- --------- ------ -----------
Balance at December 31, 1993........ (76,251)
Net income...................... 1,721,724
Dividends declared.............. (2,128,315)
Officer/shareholder stock
purchase...................... $(249,952)
----------- --------- ------ -----------
Balance at December 31, 1994........ (482,842) (249,952)
Net income...................... 1,950,036
Dividends declared.............. (713,519)
Type A common stock
repurchased................... 8,024 $ (312,936)
Type B common stock
repurchased................... 40,173 (1,406,055)
----------- --------- ------ -----------
Balance at December 31, 1995........ 753,675 (249,952) 48,197 (1,718,991)
Net income (unaudited).......... 1,460,477
Dividends declared
(unaudited)................... (261,623)
----------- --------- ------ -----------
Balance at June 30, 1996
(unaudited)....................... $1,952,529 $(249,952) 48,197 $(1,718,991)
=========== ========= ====== ===========
</TABLE>
See accompanying notes.
F-5
<PAGE> 89
SYGNET COMMUNICATIONS, INC.
AND WILCOM CORPORATION
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
YEAR ENDED DECEMBER 31 JUNE 30
------------------------------------------- --------------------------
1993 1994 1995 1995 1996
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating Activities
Net income............................ $ 1,523,044 $ 1,721,724 $ 1,950,036 $ 1,385,333 $ 1,460,477
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation...................... 1,762,831 2,365,848 2,765,816 1,234,402 1,732,635
Amortization...................... 188,378 272,729 720,738 152,659 749,881
Loss on disposal of equipment..... 37,870 461,333 161,222 23,270 153,151
Minority interest................. 136,836 113,545
Changes in operating assets and
liabilities:
Accounts receivable........... (404,067) (320,520) (2,838,833) (342,357) 899,145
Inventory..................... (31,002) (382,335) (184,951) 168,389 359,056
Prepaid and deferred
expenses.................... 34,744 (97,296) 7,951 (9,650) 27,990
Accounts payable and accrued
expenses.................... 604,188 1,161,191 (136,992) (744,463) 279,390
----------- ------------ ------------ ----------- -----------
Net cash provided by operating
activities...................... 3,852,822 5,296,219 2,444,987 1,867,583 5,661,725
Investing Activities
Acquisitions of Sharon and Erie (Note
3).................................. -- (4,500,000) (40,533,104) -- (1,920,190)
Issuance of note receivable........... -- (249,952) -- -- --
Purchases of property and equipment... (3,630,390) (5,793,053) (9,056,098) (3,621,030) (3,266,841)
Proceeds from sale of equipment....... 102,181 8,701 513,730 -- --
----------- ------------ ------------ ----------- -----------
Net cash used in investing
activities...................... (3,528,209) (10,534,304) (49,075,472) (3,621,030) (5,187,031)
Financing Activities
Dividends paid........................ (1,120,044) (1,856,089) (1,158,980) (980,600) (261,623)
Proceeds from long-term debt.......... -- 9,733,812 51,986,188 4,900,000 2,000,000
Principal payments on long-term
debt................................ (816,500) (3,534,000) (750,000) (750,000) (1,000,000)
Increase in financing costs........... (15,778) (127,546) (1,716,230) (45,522) --
Purchase of treasury stock............ -- -- (1,718,991) (1,718,991) --
----------- ------------ ------------ ----------- -----------
Net cash (used in) provided by
financing activities............ (1,952,322) 4,216,177 46,641,987 1,404,887 738,377
(Decrease) increase in cash and cash
equivalents............................. (1,627,709) (1,021,908) 11,502 (348,560) 1,213,071
Cash and cash equivalents at beginning of
period.................................. 3,086,407 1,458,698 436,790 436,790 448,292
----------- ------------ ------------ ----------- -----------
Cash and cash equivalents at end of
period.................................. $ 1,458,698 $ 436,790 $ 448,292 $ 88,230 $ 1,661,363
=========== ============ ============ =========== ===========
</TABLE>
See accompanying notes.
F-6
<PAGE> 90
SYGNET COMMUNICATIONS, INC.
AND WILCOM CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND THE
UNAUDITED PERIODS ENDED JUNE 30, 1995 AND 1996
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
The combined financial statements include the accounts of SYGNET
Communications, Inc. and its subsidiaries (SYGNET) combined with Wilcom
Corporation and its affiliates (Wilcom) (collectively, the Company). The Company
owns and operates cellular telephone systems in metropolitan statistical areas
(MSA) and rural service areas (RSA) located in northeastern Ohio and western
Pennsylvania representing a population of approximately one million, under three
partnerships, Wilcom Cellular, Youngstown Cellular Telephone Company ("YCTC")
and Erie Cellular Telephone Company (Erie). All significant intercompany
balances and transactions have been eliminated in the combined financial
statements.
2. SIGNIFICANT ACCOUNTING POLICIES
Cash Equivalents
The Company considers all liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
Inventory
Inventory consisting of merchandise purchased for resale is stated at the
lower of cost or market determined by the first-in, first-out (FIFO) method.
Property and Equipment
Property and equipment are recorded at cost and are depreciated over their
estimated useful lives calculated under the straight-line or double-declining
balance methods.
Intangible Assets
The FCC issues licenses that enable cellular carriers to provide cellular
service in specific geographic areas. The FCC grants licenses for a term of up
to 10 years, and generally grants renewals if the licensee has complied with its
obligations under the Communications Act of 1934, as amended. In 1993, the FCC
adopted specific standards to apply to cellular renewals, concluding it will
award a renewal to a cellular licensee that meets certain standards of past
performance. Historically, the FCC has granted license renewals routinely. The
Company believes that it has, and will continue to meet all requirements
necessary to secure renewal of its cellular licenses.
The Company has acquired cellular licenses through its acquisition of
interests in various cellular systems. The cost of licenses acquired was
$4,194,100 and $40,289,743 in 1994 and 1995, respectively. The Company uses a 40
year useful life to amortize its licenses under the straight-line method.
Purchased paging customer lists are being amortized over 5 years under the
straight-line method. The components of intangible assets at December 31 are
summarized below:
<TABLE>
<CAPTION>
1994 1995
<S> <C> <C>
Cellular licenses.......................................... $10,256,527 $50,546,270
Paging license and customer lists.......................... 119,792 119,792
----------- -----------
10,376,319 50,666,062
Accumulated amortization................................... (685,897) (1,209,665)
----------- -----------
$ 9,690,422 $49,456,397
=========== ===========
</TABLE>
Amortization expense was $174,355, $211,921 and $523,768 in 1993, 1994 and
1995, respectively.
F-7
<PAGE> 91
The ongoing value and remaining useful life of intangible assets are
subject to periodic evaluation and the Company currently expects the carrying
amounts to be fully recoverable. When events and circumstances indicate that
intangible assets might be impaired, an undiscounted cash flow methodology would
be used to determine whether an impairment loss would be recognized.
Revenue Recognition
The Company earns revenue primarily by providing cellular services to its
customers (Subscriber Revenue) and from the usage of its system by the customers
of other cellular carriers (Roamer Revenue). Access revenue for Subscriber
Revenue is billed one month in advance. Revenue is recognized as service is
rendered. Subscriber acquisition costs (primarily commissions and loss on
equipment sales) are expensed when incurred.
Deferred Financing Costs
Deferred financing costs are being amortized over the term of the notes.
Accumulated amortization was $12,987 and $58,834 at December 31, 1994 and 1995,
respectively. Amortization expense was $14,023, $60,808 and $196,970 in 1993,
1994 and 1995, respectively.
Advertising Costs
Advertising costs are recorded as expense when incurred. Advertising
expense was $569,692, $625,255 and $933,498 in 1993, 1994 and 1995,
respectively.
Stock Compensation
The Company accounts for its stock-based employee compensation arrangements
based on the intrinsic value of the equity instruments granted, as set forth in
APB Opinion No. 25 Accounting For Stock Issued to Employees.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements. Actual
results may differ from those estimates.
Significant Concentrations
In connection with providing cellular services to customers of other
cellular carriers, the Company has contractual agreements with those carriers
which provide for agreed upon billing rates between the parties. Approximately
75%, 74% and 62% of the Company's Roamer Revenue was earned from two cellular
carriers in 1993, 1994 and 1995, respectively. In addition, approximately 30% of
Roamer Revenue in the markets to be acquired (see Note 11) is earned from a
single cellular carrier.
Financial Instruments
Derivative financial instruments are used by the Company in the management
of interest rate exposure and are accounted for on an accrual basis. Income and
expense are recorded in the same category as that arising from the related
liability being hedged (i.e., adjustments to interest expense).
The Company uses variable interest rate credit facilities to finance
acquisitions and operations of the Company. The Company may reduce its exposure
to fluctuations in interest rates by creating offsetting positions through the
use of derivative financial instruments. The Company does not use derivative
financial instruments for trading or speculative purposes, nor is the Company a
party to leveraged derivatives. The notional amount of interest rate swaps is
the underlying principal amount used in determining the interest payments
exchanged over the life of the swap. The notional amount is not a measure of the
Company's exposure through its use of derivatives. Premiums paid for interest
rate cap agreements are being amortized as adjustments to interest expense over
the term of the agreements.
The Company may be exposed to credit loss in the event of nonperformance by
the counterparty to its interest rate swap agreements and interest rate cap
agreements. The Company anticipates the counterparty
F-8
<PAGE> 92
will be able to fully satisfy its obligations under the agreements as the
counterparty is the primary lender under the financing agreement which the
interest rate swap and cap agreements hedge.
Fair Value of Financial Instruments
At December 31, 1994 and 1995, the carrying value of cash equivalents,
accounts receivable, the interest rate swap and cap and long-term debt
approximated the fair value.
Recently Issued Accounting Pronouncements
In March of 1995, SFAS No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of, was issued. SFAS No. 121
requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. The Company adopted SFAS No. 121 effective January 1, 1996. The
impact resulting from the adoption of SFAS No. 121 did not have a material
effect on the Company's combined financial position or results of operations.
In October 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based
Compensation. Statement No. 123 defines a fair value based method of accounting
for stock-based employee compensation plans (including stock option plans).
Statement No. 123 allows an entity to continue to measure compensation costs for
its plans as prescribed by APB Opinion No. 25, Accounting for Stock Issued to
Employees. Management expects to account for stock options in accordance with
APB Opinion No. 25. The disclosure requirements of Statement No. 123, which are
required if an entity elects to continue to use the accounting method in APB
Opinion No. 25, will be adopted as required for financial statements beginning
in 1996 for the Stock Option Plan to be adopted in 1996 as described in Note 12.
Unaudited Interim Financial Information
The accompanying unaudited combined financial statements at June 30, 1996
and for the six months ended June 30, 1995 and 1996 have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with Article 10 of Regulation S-X. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered necessary
for a fair presentation have been included. Operating results for the six-month
period ended June 30, 1996 are not necessarily indicative of the results that
may be expected for the year ending December 31, 1996.
3. ACQUISITIONS
On August 11, 1994, SYGNET purchased 75% and Wilcom purchased 25% of the
outstanding shares of common stock of Sharron Youngstown Cellular, Inc. (Sharon)
for $4.5 million. Sharon owns a 7.26% interest in Wilcom Cellular and Youngstown
Cellular Telephone Company.
On September 30, 1995, SYGNET, as a general partner, purchased 95.46% of
Erie for cash of $40.53 million. On November 30, 1995, Sharon purchased 4.54% of
Erie for $1.92 million, which was paid on February 12, 1996.
The above transactions were accounted for as purchases and, accordingly,
the results of operations of the companies acquired have been included in the
combined financial statements since the dates of acquisition.
The pro forma unaudited condensed combined results of operations for the
year ended December 31, 1994 and December 31, 1995 as if the purchases occurred
on January 1, 1994 are as follows:
<TABLE>
<CAPTION>
1994 1995
<S> <C> <C>
Revenue.................................................... $23,148,000 $30,374,000
=========== ===========
Net income................................................. $ 311,000 $ 1,860,000
=========== ===========
</TABLE>
F-9
<PAGE> 93
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
USEFUL LIFE 1994 1995
<S> <C> <C> <C>
Land, building and improvements................ 10-19 years $ 2,392,162 $ 3,340,331
Cellular system and equipment.................. 5-19 years 11,043,087 19,556,464
Customer premise equipment..................... 3 years 2,548,036 1,695,605
Office furniture and equipment................. 3-10 years 1,954,899 2,498,057
Cell site construction in progress............. 950,700 379,813
----------- -----------
18,888,884 27,470,270
Accumulated depreciation....................... (4,804,513) (6,421,374)
----------- -----------
$14,084,371 $21,048,896
========== ==========
</TABLE>
At December 31, 1995, the Company had purchase commitments of approximately
$3.75 million for equipment.
5. CREDIT AGREEMENT
On September 29, 1995, the Company entered into a financing agreement with
a commercial bank group to borrow up to $75 million at any time through
September 30, 2003. The credit agreement provides for various borrowing rate
options based on either a fixed spread over the London Interbank Offered Rate
("LIBOR") or the prime rate.
Among other things, the credit agreement contains financial covenants
requiring the maintenance of debt service ratios, hedging of interest rate
exposure, limitations on distributions to shareholders and sales of assets. The
credit facility is secured by a pledge of the partnership interests in YCTC,
Wilcom Cellular and Erie. Interest rates at December 31, 1995 ranged from 7.48%
to 7.82%.
In connection with covenant requirements described above, the Company
entered into a three year interest rate swap and a two year interest rate cap
agreement on November 29, 1995 with a total underlying notional amount of $40
million. The swap agreement converted the interest rate on $20 million notional
amount of the credit facility from a variable rate based upon LIBOR (5.87% at
December 31, 1995) to a fixed rate of 5.79%. Amounts paid or received under this
agreement are recognized as adjustments to interest expense. The interest rate
cap agreement entitled the Company to receive from a counterparty on a quarterly
basis the amounts, if any, by which the Company's interest payments on its $20
million notional amount exceed 8.25%. The interest rate under the credit
facility did not exceed 8.25% during the period from November 29, 1995 to
December 31, 1995.
Minimum future payments based upon the borrowing levels at December 31,
1995 for the next five years are:
<TABLE>
<S> <C>
1996........................................................... $ --
1997........................................................... --
1998........................................................... 500,000
1999........................................................... 9,000,000
2000........................................................... 12,000,000
</TABLE>
Interest paid was $753,754, $810,303 and $2,202,345 in 1993, 1994 and 1995,
respectively.
6. LEASES
The Company has entered into various operating leases for land and office
facilities. Leases for tower sites provide for periodic extensions of lease
periods with future lease payments indexed to the consumer price index.
F-10
<PAGE> 94
Minimum future rental payments under operating leases having remaining
terms in excess of one year as of December 31, 1995 are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31
<S> <C>
1996......................................................... $ 572,239
1997......................................................... 526,308
1998......................................................... 470,262
1999......................................................... 329,636
2000......................................................... 253,222
Thereafter................................................... 1,024,410
----------
Total........................................................ $3,176,077
==========
</TABLE>
Rent expense was approximately $230,000, $296,000 and $460,800 in 1993,
1994 and 1995, respectively.
7. RETIREMENT PLAN
The Company sponsors a 401(k) retirement and profit sharing plan which
covers substantially all its employees. Eligible employees can contribute from
1% to 15% of their compensation. The Company, at its discretion, may match a
portion of the employee's contribution. The Company may also, at its discretion,
make additional profit sharing contributions to the plan. Total pension expense
was $64,000, $113,000 and $114,000 in 1993, 1994 and 1995, respectively.
8. SHAREHOLDERS' EQUITY
Each share of SYGNET and Wilcom Type A common stock is entitled to one
vote. SYGNET and Wilcom Type B common stock have no voting rights. Both types of
common stock are identical in all other respects.
On January 5, 1995, SYGNET repurchased 8,024 Type A shares for $39.00 per
share and 40,173 Type B shares for $35.00 per share from a shareholder for
approximately $1,719,000. These shares are accounted for at cost and held as
treasury stock.
Under the most restrictive of the covenants discussed in Note 5, the
Company could not declare any additional dividends at December 31, 1995.
9. INCOME TAXES
SYGNET's shareholders have elected under Subchapter S of the Internal
Revenue Code to include SYGNET's taxable income and losses in the shareholders'
federal and Ohio returns.
Sharon is subject to federal and state taxes, and accordingly has provided
for deferred income taxes for the temporary differences between financial and
tax reporting. The principal differences relate to partnership income and
alternative minimum tax (AMT) credit carryforwards. Amounts for deferred tax
assets and liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
------------------
DEFERRED TAX ASSETS: 1994 1995
------------------------------------------------------------------
<S> <C> <C>
AMT credit carryforward........................................... $48,200 $63,400
Investment in partnerships........................................ 33,900 --
Other............................................................. 7,600 8,200
------- -------
Total deferred tax assets......................................... 89,700 71,600
Deferred tax liability -- investment in partnerships.............. -- 26,600
------- -------
Net deferred tax assets........................................... $89,700 $45,000
======= =======
</TABLE>
Sharon had an AMT credit carryforward at December 31, 1995 of approximately
$63,000 which will be available to reduce future federal income tax over an
indefinite period. Deferred tax assets are included in
F-11
<PAGE> 95
prepaid expenses and deferred income taxes; deferred tax liabilities are
included in accrued expenses and other liabilities.
The components of the income tax provision (benefit), in the combined
statement of income for the years ended December 31, 1994 and 1995 are as
follows:
<TABLE>
<CAPTION>
1994 1995
<S> <C> <C>
Current income tax expense....................................... $ 49,000 $20,700
Deferred income tax (benefit).................................... (89,700) 44,700
-------- --------
Total provision for income tax (benefit)......................... $(40,700) $65,400
======== ========
</TABLE>
Income taxes paid were $49,000 and $60,514 in 1994 and 1995, respectively.
10. RELATED PARTY TRANSACTIONS
Certain shareholders of SYGNET and Wilcom Corporation own a majority of the
outstanding shares of WKBN. SYGNET purchases advertising, production, tower
rental and other services from WKBN. WKBN purchases cellular telephone, paging
and other services from SYGNET. The following is a summary of material
transactions and balances with WKBN:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
--------------------------------
1993 1994 1995
<S> <C> <C> <C>
Services and facilities provided by WKBN.............. $233,385 $214,518 $218,404
Services provided to WKBN............................. 73,268 67,717 136,741
Property purchased from WKBN.......................... 700,000 -- --
Amounts payable to WKBN............................... 25,379 26,076 18,797
</TABLE>
On December 29, 1994, the Company received a promissory note from an
officer/shareholder for $249,952 for the purchase of Type A and Type B common
shares from a shareholder. The interest rate is 8.23% and the note is to be
repaid over 7 years.
11. PENDING ACQUISITION OF SELECTED CELLULAR SYSTEMS
On July 11, 1996, the Company signed an agreement to purchase various
cellular licenses, property and equipment and the net current assets of selected
systems of Horizon Cellular Telephone Company, L.P. The aggregate proposed
purchase price is $250 million plus the net current assets of the selected
systems. The Company intends to finance the acquisition through the issuance of
$110 million of senior notes, issuance of redeemed preferred stock and
additional bank credit facilities. Subsequent to the purchase, the Company
intends to extinguish its existing credit facility and expects to incur a loss
of approximately $1.5 million on the refinancing of its credit facility.
12. SUBSEQUENT EVENTS AND PRO FORMA INFORMATION (UNAUDITED)
Merger Between Sygnet Communications, Inc. and Wilcom Corporation
In connection with the transactions described in Note 11, the Company is in
the process of effecting a corporate restructuring as follows. First, the SYGNET
and Wilcom shareholders have terminated the Close Corporation Agreement and
Subchapter S corporation tax status. Wilcom merged into SYGNET whereby
shareholders of Wilcom received 8.72 shares of SYGNET common stock for each
share of Wilcom common stock held as of August 31, 1996. Effective with the
merger, the 500 shares of Wilcom Type A converted into 4,360 shares of SYGNET
Type A and the 2,500 shares of Wilcom Type B converted into 21,800 shares of
SYGNET Type B. The SYGNET common stock Type A 205,698 shares and Type B
1,028,428 shares will be converted into 6,170,630 shares of Sygnet Wireless,
Inc. (Wireless) Class B common stock. This merger is a business combination
between entities under common control whereby the assets and liabilities so
transferred will be accounted for at historical cost in a manner similar to that
in pooling-of-interest accounting. The corporate restructuring is contingent
upon FCC approval of the transfer of the FCC microwave licenses.
F-12
<PAGE> 96
As a result of the corporate restructuring described above, Wireless will
have a capital structure as follows:
Class A Common Stock -- Wireless will authorize 60 million shares of
$.01 par value Class A common stock. These shares will have one vote per
share.
Class B Common Stock -- Wireless will authorize 10 million shares of
$.01 par value Class B common stock. 6,170,360 shares will be issued and
outstanding as a result of the corporate restructuring described above.
These shares will have ten votes per share.
Preferred Stock -- Wireless will authorize 10 million shares of voting
$.01 par value preferred stock and 5 million shares of non-voting $.01 par
value preferred stock. The Board of Directors will have the authority to
determine the rights conferred to shareholders when the Board causes either
type of preferred stock to be issued. The Company expects to issue 200,000
shares of nonvoting redeemable cumulative preferred stock (Preferred Stock)
as a result of the transactions described in Note 11.
The net proceeds from the Preferred Stock are expected to total $19.0
million. Dividends will accrue quarterly in arrears and will be payable in
shares of Preferred Stock. The dividend rates will increase annually from 15% in
1997 to 19% in 1999 and are 21% in year 2000 and thereafter. Warrants to
purchase shares of the Company's Class A Common Stock representing 1% of the
Common Stock outstanding, on a fully diluted basis, will be issued to holders of
the Preferred Stock at the end of the nine-month period following the closing of
the issuance of the shares if the Preferred Stock is outstanding at such time.
At the end of each quarter thereafter for so long as any of the Preferred Stock
continues to remain outstanding, warrants to purchase shares of Class A Common
Stock representing 3/8%, on a fully diluted basis, will be issued to the
holders of the Preferred Stock. The exercise price of the warrants will be $0.01
per share of Class A Common Stock.
The Company will be required to redeem the Preferred Stock at its
liquidation amount thereof, plus all accrued and unpaid dividends to the date of
redemption, upon the earlier of (i) the tenth anniversary of the Preferred Stock
Investment, (ii) a Change of Control as defined, (iii) the issuance of any
equity by the Company at the holding Company level (to the extent of the
proceeds thereof) or (iv) the exercise of the Put Option (defined below).
At any time after the fourth anniversary, holders of the Preferred Stock
will have the right to require the Company to redeem the Preferred Stock (the
"Put Option") in whole or in part within 90 days from the receipt of written
notice of the exercise of the Put Option. In the event the Preferred Stock is
not redeemed within such 90-day period, the holders of the Preferred Stock, upon
written notice to the Company, will have the right to require the Company to
effect a sale or liquidation of the Company to be completed within a period of
12 months following such notice.
The Preferred Stock will be subject to redemption at the option of the
Company at any time in whole or in part upon three business days' notice.
Stock Option Plan
The Company has adopted a Stock Option Plan ("SOP"). The SOP will provide
for the grant of incentive and nonqualified stock options. Under the SOP,
options to purchase up to an aggregate of one million shares of Sygnet Wireless,
Inc. Class A Common Stock are available for grants to employees of the Company.
In August, 1996, the Board of Directors granted a total of 504,000 ten
year, non qualified stock options at the estimated fair value as determined by
the Board of Directors.
Tax Status
As a Subchapter S Corporation, SYGNET recorded no provision for income
taxes. SYGNET's taxable income and losses are included in its shareholders'
federal and state returns. As a result of the termination of the Subchapter S
Corporation status, application of the provisions of SFAS No. 109, Accounting
for Income Taxes requires deferred income taxes to be provided for differences
in the basis for tax purposes and for financial accounting purposes of recorded
assets and liabilities, principally, depreciable property and certain accrued
liabilities. A tax provision and a net deferred income tax liability of
approximately $243,000 (deferred
F-13
<PAGE> 97
income tax liability of $557,000 net of deferred income tax assets of $314,000)
would have been recorded at June 30, 1996 had the termination of the Subchapter
S Corporation occurred at that date.
Pro Forma Net Income Per Share Information
As described above, SYGNET and Wilcom will terminate their status as
Subchapter S Corporations. A pro forma adjustment has been made to the
historical financial statements for the year ended December 31, 1995 and for the
six months ended June 30, 1996 to reflect a provision for federal and certain
state income taxes at an effective rate of 48%. The effective rate is in excess
of the statutory rate primarily due to non-deductible amortization.
Pro forma net income per share is based on the weighted average number of
shares of common stock of 6,170,630 outstanding assuming the corporate
restructuring described above had occurred. Historical earnings per share data
is not presented because such data is not meaningful.
F-14
<PAGE> 98
REPORT OF INDEPENDENT AUDITORS
The Board of Horizon G.P., Inc.
We have audited the accompanying combined balance sheets of Selected
Systems of Horizon Cellular Telephone Company, L.P., representing certain
majority-owned subsidiaries of Horizon Cellular Telephone Company, L.P., as of
December 31, 1994 and 1995, and the related combined statements of operations,
partners' equity, and cash flows for each of the three years in the period ended
December 31, 1995. These financial statements are the responsibility of Horizon
Cellular Telephone Company, L.P.'s management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of Selected Systems of
Horizon Cellular Telephone Company, L.P. at December 31, 1994 and 1995, and the
combined results of their operations and their cash flows for each of the three
years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles.
Ernst & Young LLP
Philadelphia, Pennsylvania
July 26, 1996
F-15
<PAGE> 99
SELECTED SYSTEMS OF
HORIZON CELLULAR TELEPHONE COMPANY, L.P.
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1994 1995
<S> <C> <C>
ASSETS
Current assets:
Cash....................................................... $ 611,829 $ 629,874
Accounts receivable, net of allowance for doubtful accounts
of $173,671 and $218,218................................. 2,977,901 5,123,833
Inventory.................................................. 240,066 373,623
Prepaid expenses........................................... 100,068 147,206
----------- ------------
Total current assets.................................. 3,929,864 6,274,586
Property and equipment:
Cellular system............................................ 16,258,547 23,305,472
Other...................................................... 1,122,286 2,035,273
----------- ------------
17,380,833 25,340,745
Accumulated depreciation........................................ (2,714,488) (5,504,261)
----------- ------------
14,666,345 19,836,484
Licenses, net of accumulated amortization of $3,185,738
and $5,266,096................................................ 67,614,553 86,976,933
Other assets, net of accumulated amortization of $3,099,830
and $4,879,099................................................ 3,985,252 5,498,139
----------- ------------
Total assets.......................................... $90,196,014 $118,586,142
=========== ============
LIABILITIES AND COMBINED PARTNERS' EQUITY
Current liabilities:
Accounts payable........................................... $ 867,180 $ 1,864,160
Accrued expenses........................................... 995,211 1,781,994
Deferred revenue........................................... 279,332 588,649
----------- ------------
Total current liabilities............................. 2,141,723 4,234,803
Advances from affiliates........................................ 34,914,840 33,087,671
Combined partners' equity:
Partners' contributions.................................... 61,376,007 89,215,915
Cumulative net loss........................................ (8,236,556) (7,952,247)
----------- ------------
Total combined partners' equity....................... 53,139,451 81,263,668
----------- ------------
Total liabilities and combined partners' equity....... $90,196,014 $118,586,142
=========== ============
</TABLE>
See accompanying notes.
F-16
<PAGE> 100
SELECTED SYSTEMS OF
HORIZON CELLULAR TELEPHONE COMPANY, L.P.
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1993 1994 1995
<S> <C> <C> <C>
Revenues and sales:
Subscriber revenues.............................. $ 2,701,900 $ 6,848,485 $12,069,274
Roaming revenues................................. 3,312,659 6,909,821 10,801,818
Equipment sales.................................. 569,919 1,149,996 1,602,339
----------- ----------- -----------
Total revenues and sales.............................. 6,584,478 14,908,302 24,473,431
Costs and expenses:
Cost of services................................. 1,567,551 2,807,611 3,572,445
Cost of equipment sales.......................... 717,081 1,689,616 2,544,039
General and administrative expenses.............. 848,459 2,096,844 3,576,817
Selling.......................................... 1,343,854 2,550,325 4,016,438
Depreciation and amortization.................... 2,293,908 4,483,784 6,649,659
----------- ----------- -----------
6,770,853 13,628,180 20,359,398
----------- ----------- -----------
(Loss) income from operations......................... (186,375) 1,280,122 4,114,033
Interest expense...................................... 2,731,076 3,662,815 3,829,724
----------- ----------- -----------
(Loss) income before extraordinary item............... (2,917,451) (2,382,693) 284,309
Extraordinary item -- gain on early extinguishment of
debt................................................ 873,638 -- --
----------- ----------- -----------
Net (loss) income..................................... $(2,043,813) $(2,382,693) $ 284,309
========== ========== ==========
</TABLE>
See accompanying notes.
F-17
<PAGE> 101
SELECTED SYSTEMS OF
HORIZON CELLULAR TELEPHONE COMPANY, L.P.
COMBINED STATEMENTS OF PARTNERS' EQUITY
<TABLE>
<CAPTION>
HORIZON
CELLULAR
TELEPHONE KCCGP,
COMPANY, L.P. L.P. TOTAL
------------- ------------- -------------
<S> <C> <C> <C>
Combined partners' equity at December 31, 1992......... $11,332,355 $ 29,543 $ 11,361,898
Partners' contributions........................... 1,243,160 1,244 1,244,404
Net loss.......................................... (2,032,392) (11,421) (2,043,813)
------------- ------------- -------------
Combined partners' equity at December 31, 1993......... 10,543,123 19,366 10,562,489
Partners' contributions........................... 44,510,058 449,597 44,959,655
Net loss.......................................... (2,361,001) (21,692) (2,382,693)
------------- ------------- -------------
Combined partners' equity at December 31, 1994......... 52,692,180 447,271 53,139,451
Partners' contributions........................... 27,000,000 839,908 27,839,908
Net income........................................ 281,465 2,844 284,309
------------- ------------- -------------
Combined partners' equity at December 31, 1995......... $79,973,645 $ 1,290,023 $ 81,263,668
=========== ========= ==========
</TABLE>
See accompanying notes.
F-18
<PAGE> 102
SELECTED SYSTEMS OF
HORIZON CELLULAR TELEPHONE COMPANY, L.P.
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1993 1994 1995
<S> <C> <C> <C>
Operating Activities
Net (loss) income............................. $ (2,043,813) $ (2,382,693) $ 284,309
Adjustments to reconcile net (loss) income to
net cash (used in) provided by operating
activities:
Depreciation and amortization............ 2,293,908 4,483,784 6,649,659
Provision for bad debts.................. 69,936 197,431 182,770
Accrued interest expense-affiliate....... 840,644 3,662,815 3,829,724
Gain on early extinguishment of debt..... (873,638) -- --
Changes in operating assets and
liabilities (net of effect of companies
acquired):
Accounts receivable................. (629,924) (1,296,819) (2,043,359)
Inventory........................... (6,238) (152,139) (83,995)
Prepaid expenses.................... (2,695) (56,996) (35,273)
Accounts payable and accrued
expenses.......................... 101,018 243,185 1,610,340
Deferred revenue.................... 67,849 122,379 262,900
------------ ------------ ------------
Net cash (used in) provided by operating
activities....................................... (182,953) 4,820,947 10,657,075
Investing Activities
Purchases of property and equipment, net of
$105,200 and $220,900 purchased on account
in 1994 and 1995, respectively.............. (2,089,923) (7,071,504) (5,244,548)
License and systems acquisitions.............. -- (41,951,228) (27,662,557)
Other......................................... (4,614) (109,101) 85,060
------------ ------------ ------------
Net cash used in investing activities.............. (2,094,537) (49,131,833) (32,822,045)
Financing Activities
Partners' contributions....................... 1,244,404 41,959,655 27,272,727
Advances from (to) affiliates, net of $567,181
noncash partner contributions in 1995....... 28,941,193 991,167 (5,089,712)
Repayment of subordinated notes payable and
other long-term debt........................ (26,723,726) -- --
------------ ------------ ------------
Net cash provided by financing activities.......... 3,461,871 42,950,822 22,183,015
------------ ------------ ------------
Net increase (decrease) in cash.................... 1,184,381 (1,360,064) 18,045
Cash at beginning of period........................ 787,512 1,971,893 611,829
------------ ------------ ------------
Cash at end of period.............................. $ 1,971,893 $ 611,829 $ 629,874
=========== =========== ===========
</TABLE>
See accompanying notes.
F-19
<PAGE> 103
SELECTED SYSTEMS OF
HORIZON CELLULAR TELEPHONE COMPANY, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1995
1. BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS
The accompanying combined financial statements reflect the combined
financial position, combined results of operations and combined cash flows of
Horizon Cellular Telephone Company of Lawrence, L.P. ("Lawrence"), Horizon
Cellular Telephone Company of Crawford, L.P. ("Crawford"), Horizon Cellular
Telephone Company of Chautauqua, L.P. ("Chautauqua"), and Horizon Cellular
Telephone Company of Indiana, L.P. ("Indiana") (collectively referred to as
"Selected Systems" or "the Company") as of December 31, 1994 and 1995 and for
each of the three years in the period ended December 31, 1995. The combined
financial statements include only the operating results since the Selected
Systems were acquired by Horizon Cellular Telephone Company L.P. Each of the
operating systems is a limited partnership in which KCCGP, L.P. ("KCCGP") is the
managing and sole general partner, and Horizon Cellular Telephone Company, L.P.
("HCTC") is the sole limited partner.
The Selected Systems own, design, develop, and operate cellular
communications systems. KCCGP performs certain administrative functions for the
Selected Systems and, accordingly, certain expenses of KCCGP (see Note 5) have
been allocated to the Selected Systems on a basis which, in the opinion of
management, is reasonable. However, such expenditures are not necessarily
indicative of, and it is not practicable for management to estimate, the nature
and level of expenses which might have been incurred had the systems been
operating as separate independent companies.
2. ACQUISITIONS
Crawford
In August 1991, HCTC acquired the Federal Communications Commission ("FCC")
PA-6 Construction Permit for $7 million in cash and a $16.6 million subordinated
note payable to the seller. In December 1992, HCTC contributed the Construction
Permit to Lawrence in exchange for a 99.9% interest in the Company and
Lawrence's assumption of the related debt. KCCGP contributed approximately
$13,000 to Lawrence for a 0.1% interest in the Company. Lawrence became
operational in September 1991.
In December 1992, HCTC acquired the FCC PA-1 Operating License and certain
operating assets and liabilities for $2.2 million in cash and $7.7 million of
notes payable. Also, in December 1992, HCTC contributed the Operating License to
Crawford in exchange for a 99.0% interest in the Company and Crawford's
assumption of the related debt. KCCGP contributed approximately $20,000 to
Crawford for a 1.0% interest in the Company. The PA-1 system became operational
in April 1992.
Effective January 1, 1995, the operations of Lawrence were merged into
Crawford. As part of the market consolidation, the general partner interests
were reorganized. KCCGP acquired an additional .9% (serving as general partner
with a 1% ownership), reducing HCTC's Limited Partnership interest to 99%.
Chautauqua
In March 1994, the Company acquired the FCC NY-3 Operating License and
certain operating assets and liabilities for $41.5 million in cash, and the
issuance of 30 HCTC limited partnership units with a stated value of $3 million.
Also in March 1994, HCTC contributed cash to fund the acquisition in exchange
for a 99.0% interest in the Company. KCCGP contributed approximately $450,000 to
Chautauqua for a 1.0% interest in the Company. The NY-3 system became
operational in October 1991.
Indiana
In June 1995, the Company acquired the FCC PA-7 Operating License
("Indiana") and certain operating assets and liabilities for $27 million in
cash. As part of the acquisition, the Company also acquired the right to operate
the FCC PA-2 system under an Interim Operating Authority, which permits the
Company
F-20
<PAGE> 104
to temporarily provide cellular service in an otherwise unserved area. Also in
June 1995, HCTC contributed cash to fund the acquisition in exchange for a 99.0%
interest in the Company. KCCGP contributed approximately $273,000 to Indiana for
a 1.0% interest in the Company. The PA-7 system became operational in July 1991.
Pursuant to the partnership agreements, the Selected Systems' net profits
and losses are allocated proportionately to the partners based upon their
respective ownership interests. The partnerships shall terminate on the
respective tenth anniversary dates of formation of the partnerships; however,
the partners may extend the term of the partnership at their discretion.
All of the Company's acquisitions were accounted for under the purchase
method of accounting; accordingly, assets acquired and liabilities assumed have
been recorded at HCTC's basis in such amounts which represents their estimated
fair values at the dates of acquisition by HCTC and their results of operations
are included in the accompanying combined statements of operations since the
date of acquisition. The excess of purchase price over the fair market value of
identifiable net tangible assets acquired has been allocated to customer lists
and licenses.
Pro Forma Results of Operations
The following unaudited pro forma information presents the revenues and
sales, and (loss) income before extraordinary item, as if the acquisitions of
Chautauqua and Indiana had occurred at the beginning of 1993 and 1994,
respectively. The pro forma information includes the revenues and sales, and
(loss) income before extraordinary item for the Selected Systems for the
indicated periods less increased amortization of license costs and other
intangible assets, and increased general and administrative expenses for
management fee allocations. Pro forma revenues and sales and (loss) income
before extraordinary item are not necessarily indicative of the revenues and
sales and (loss) income before extraordinary item that would have occurred had
the purchases been made at the beginning of the respective years or the results
which may occur in the future.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1993 1994 1995
(UNAUDITED)
<S> <C> <C> <C>
Revenues and sales............................ $ 9,375,000 $19,040,000 $26,171,000
(Loss) income before extraordinary item....... (5,002,000) (3,488,000) 24,000
</TABLE>
3. ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Inventories
Inventories are carried at the lower of cost (using the first-in, first-out
method) or market.
Property and Equipment
Property and equipment are stated at cost and are depreciated over their
estimated useful lives (three to twelve years) using the straight-line method.
Depreciation expense amounted to approximately $667,900 in 1993, $1,573,900
in 1994, and $2,790,100 in 1995.
Licenses
Licenses primarily represent the acquisition costs of the Operating
Licenses. Such costs are being amortized over a period of 40 years using the
straight-line method.
The Selected Systems periodically review the carrying value of their
licenses to determine whether such amounts are recoverable based on undiscounted
future cash flows and whether a reduction to fair value is necessary. There have
been no such reductions through December 31, 1995.
F-21
<PAGE> 105
Other Assets
Other assets primarily represent the acquisition cost of the customer lists
which is being amortized over a period of 5 years using the straight-line
method.
Advances from Affiliates
Advances from affiliates primarily represent cash advances from HCTC and
KCCGP which provided funds for investing and operating activities, and have no
specific repayment terms. Commencing in October 1993, upon the transaction
described below, interest expense is charged monthly at a rate of 11-3/8% of the
ending balances payable to HCTC.
In October 1993, HCTC advanced the Company a portion of the proceeds it
generated from the issuance of $235 million senior subordinated discount notes.
The Company utilized the funds advanced to repay all of its indebtedness,
resulting in an extraordinary gain of approximately $874,000, net of the
write-off of unamortized deferred financing fees of approximately $53,000.
Revenue and Expense Recognition
Cellular airtime revenue and access charges are recognized as service is
provided. Cellular airtime is billed in arrears and a majority of access charges
are billed in advance. Subscriber acquisition costs (mainly commissions and loss
on equipment sales) are expensed when incurred. Accounts receivable consist
mainly of amounts due from subscribers and other cellular companies whose
subscribers use the Selected Systems' cellular service.
Approximately 30% of the Company's 1995 roaming revenues were generated
from subscribers of a cellular company serving an adjacent market when such
subscribers place or receive calls on the Company's systems.
Advertising Expenses
Advertising expenses are charged to operations as incurred and amounted to
approximately $107,100 in 1993, $263,300 in 1994, and $336,400 in 1995.
Accrued Expenses
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1994 1995
<S> <C> <C>
Property, sales and excise taxes.............................. $331,700 $ 617,600
Interconnection and other billing costs....................... 200,700 220,600
Salaries and bonuses.......................................... 180,400 364,700
Other......................................................... 282,400 579,100
-------- ----------
$995,200 $1,782,000
======== ==========
</TABLE>
Income Taxes
The Selected Systems are limited partnerships organized under the laws of
Delaware. Accordingly, federal and state income taxes are not paid at the
partnership level but by the ultimate partners of the Selected Systems. The tax
basis of the Selected Systems' assets amounted to approximately $74.7 million
and $93.7 million at December 31, 1994 and 1995, respectively.
New Accounting Standards
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 121, Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed of, which requires
impairment losses to be recorded on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows estimated
to be generated by those assets are less than the assets' carrying amount. The
Selected Systems will adopt SFAS
F-22
<PAGE> 106
121 in the first quarter of 1996 and, based upon current circumstances,
management does not believe the effect of the adoption will be material.
SFAS No. 123, Accounting for Stock-Based Compensation, is effective for
fiscal years beginning after December 15, 1995. SFAS 123 provides companies with
a choice to follow the provisions of SFAS 123 in determining stock-based
compensation expense or to continue with the provisions of APB 25, Accounting
for Stock Issued to Employees. The Selected Systems expect to continue to follow
APB 25 with respect to the LPAR Plan (see Note 6) and will provide disclosures
as required by SFAS 123 in the December 31, 1996 notes to the financial
statements.
4. COMMITMENTS AND CONTINGENCIES
The Selected Systems lease office space, office equipment and cellular
sites and facilities under operating leases with initial terms ranging from 1 to
20 years. Most cellular sites contain renewal options ranging up to 25 years.
Future minimum payments under noncancelable operating leases with initial
terms of one year or more consisted of the following at December 31, 1995,
assuming cellular site leases are renewed through the year 2000:
<TABLE>
<CAPTION>
CELLULAR
SITES OTHER
-------- ----------
<S> <C> <C>
1996.................................................. $516,000 $ 326,000
1997.................................................. 526,000 287,000
1998.................................................. 533,000 279,000
1999.................................................. 537,000 279,000
2000.................................................. 529,000 266,000
Thereafter............................................ 508,000
----------
Total minimum lease payments.......................... $1,945,000
==========
</TABLE>
The minimum lease payments for cellular sites in the year 2000 are expected
to approximate the minimum payments thereafter, subject to contractual increases
and payments for additional sites.
Rental expense amounted to approximately $224,900 in 1993, $395,800 in
1994, and $669,600 in 1995.
The Selected Systems have guaranteed and pledged substantially all of its
assets as collateral for certain debt of HCTC.
5. RELATED PARTY TRANSACTIONS
KCCGP provides various administrative services to the Selected Systems,
including accounting, engineering, and marketing and advertising services, in
addition to funding working capital requirements and capital expenditures as
necessary. These expenses are charged, first on the basis of direct usage when
identifiable, with the remainder allocated equally among its operating systems.
Allocated expenses amounted to $80,000 in 1993, $120,000 in 1994, and $150,000
in 1995, respectively.
6. BENEFIT PLANS
HCTC has granted certain officers of the Selected Systems limited
partnership appreciation rights in HCTC pursuant to a Limited Partnership Unit
Appreciation Rights Plan ("LPAR Plan") that was adopted September 1, 1994, to be
effective January 1, 1993. Upon the occurrence of certain events as specified
therein ("Termination Events"), participants are entitled to share in the
amounts, if any, of distributions to HCTC's partners after all capital
contributions made by HCTC's partners have been repaid, together with a fixed
return on such contributions. Such rights vest over a period of five years,
however vesting is automatically accelerated upon the occurrence of a
Termination Event. Compensation expense will be recognized when distributions
become probable under the LPAR Plan.
Effective July 1, 1994, KCCGP established an employee savings plan (the
"Plan") that qualifies as a deferred salary arrangement under Section 401(k) of
the Internal Revenue Code. Under the Plan, which
F-23
<PAGE> 107
covers employees of the Selected Systems who have met certain eligibility
requirements, participating employees may defer up to 15% of their pretax
earnings, up to the Internal Revenue Service annual contribution limit ($9,240
for calendar year 1995). The Company matches up to 50% of the employee's
contributions, up to a maximum of 3% of the employee's earnings. Employees who
participate in the LPAR Plan are excluded from matching contributions. Matching
Plan contributions, which vest equally over five years, amounted to
approximately $16,000 in 1994, and $31,500 in 1995, respectively.
7. SUBSEQUENT EVENTS
On July 11, 1996, the Company entered into a definitive agreement to sell
the FCC Operating Licenses of Selected Systems, together with certain operating
assets and liabilities, to SYGNET Communications Inc. for approximately $250
million. The combined financial statements do not reflect either the estimated
gain, or any expenses incurred or expected to be incurred related to the sale of
the systems. The sale is expected to close during the third quarter of 1996, and
is subject to certain regulatory and other approvals.
F-24
<PAGE> 108
SELECTED SYSTEMS OF
HORIZON CELLULAR TELEPHONE COMPANY, L.P.
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1995 1996
----------------------------
(NOTE) (UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash........................................................ $ 629,874 $ 1,019,087
Accounts receivable, net of allowance for doubtful accounts
of $218,218 and $235,607.................................. 5,123,883 5,573,573
Inventory................................................... 373,623 396,990
Prepaid expenses............................................ 147,206 185,554
------------ ------------
Total current assets................................... 6,274,586 7,175,204
Property and equipment:
Cellular system............................................. 23,305,472 25,318,244
Other....................................................... 2,035,273 2,757,307
------------ ------------
25,340,745 28,075,551
Accumulated depreciation......................................... (5,504,261) (7,238,549)
------------ ------------
19,836,484 20,837,002
Licenses, net of accumulated amortization of $5,266,096 and
$6,422,861..................................................... 86,976,933 85,822,040
Other assets, net of accumulated amortization of $4,879,009 and
$5,906,099..................................................... 5,498,139 4,466,927
------------ ------------
Total assets........................................... $118,586,142 $118,301,173
=========== ===========
LIABILITIES AND COMBINED PARTNERS' EQUITY
Current liabilities:
Accounts payable............................................ $ 1,864,160 $ 1,445,574
Accrued expenses............................................ 1,781,994 1,548,522
Deferred revenue............................................ 588,649 694,322
------------ ------------
Total current liabilities.............................. 4,234,803 3,688,418
Advances from affiliates......................................... 33,087,671 31,980,938
Combined partners' equity:
Partners' contributions..................................... 89,215,915 89,215,915
Cumulative net loss......................................... (7,952,247) (6,584,098)
------------ ------------
Total combined partners' equity........................ 81,263,668 82,631,817
------------ ------------
Total liabilities and combined partners' equity........ $118,586,142 $118,301,173
=========== ===========
</TABLE>
Note: The combined balance sheet at December 31, 1995 has been derived from the
audited combined financial statements at that date, but does not include
all of the information and footnotes required by generally accepted
accounting principles for complete financial statements.
See accompanying notes.
F-25
<PAGE> 109
SELECTED SYSTEMS OF
HORIZON CELLULAR TELEPHONE COMPANY, L.P.
COMBINED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
1995 1996
<S> <C> <C>
Revenues and sales:
Subscriber revenues............................................ $4,902,903 $ 7,858,344
Roaming revenues............................................... 4,233,107 6,357,961
Equipment sales................................................ 621,915 892,999
---------- -----------
Total revenues and sales.................................. 9,757,925 15,109,304
Costs and expenses:
Cost of services............................................... 1,569,118 2,121,106
Cost of equipment sales........................................ 918,238 1,442,640
General and administrative expenses............................ 1,475,669 2,278,009
Selling........................................................ 1,635,311 2,185,689
Depreciation and amortization.................................. 2,787,585 3,918,141
---------- -----------
8,385,921 11,945,585
---------- -----------
Income from operations.............................................. 1,372,004 3,163,719
Interest expense-affiliate.......................................... 1,925,084 1,795,570
---------- -----------
Net (loss) income......................................... $ (553,080) $ 1,368,149
========== ===========
</TABLE>
See accompanying notes.
F-26
<PAGE> 110
SELECTED SYSTEMS OF
HORIZON CELLULAR TELEPHONE COMPANY, L.P.
COMBINED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
---------------------------
1995 1996
<S> <C> <C>
Operating Activities
Net (loss) income............................................ $ (553,080) $ 1,368,149
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation and amortization........................... 2,787,585 3,918,141
Provision for bad debts................................. 68,534 140,069
Accrued interest expense-affiliate...................... 1,925,084 1,795,570
Changes in operating assets and liabilities (net of
effect of companies acquired):
Accounts receivable................................ (445,560) (589,759)
Inventory.......................................... (13,292) (23,367)
Prepaid expenses................................... (68,891) (38,348)
Accounts payable and accrued expenses.............. 365,927 (494,294)
Deferred revenue................................... 147,971 105,673
------------ -----------
Net cash provided by operating activities......................... 4,214,278 6,181,834
Investing Activities
Purchases of property and equipment, net of $166,200 and
$63,100 purchased on account in 1995 and 1996,
respectively................................................ (2,489,647) (2,894,440)
License and systems acquisitions............................. (27,662,557) --
Other........................................................ (22,675) 4,122
------------ -----------
Net cash used in investing activities............................. (30,174,879) (2,890,318)
Financing Activities
Partners' contributions...................................... 27,272,727 --
Advances to affiliates, net of $567,181 noncash partner
contributions in 1995....................................... (1,085,344) (2,902,303)
------------ -----------
Net cash provided by (used in) financing activities............... 26,187,383 (2,902,303)
------------ -----------
Net increase in cash.............................................. 226,782 389,213
Cash at beginning of period....................................... 611,829 629,874
------------ -----------
Cash at end of period............................................. $ 838,611 $ 1,019,087
============ ===========
</TABLE>
See accompanying notes.
F-27
<PAGE> 111
SELECTED SYSTEMS OF
HORIZON CELLULAR TELEPHONE COMPANY, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1996
1. BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS
The accompanying unaudited combined financial statements reflect the
combined financial position, combined results of operations and combined cash
flows of Horizon Cellular Telephone Company of Lawrence, L.P. ("Lawrence"),
Horizon Cellular Telephone Company of Crawford, L.P. ("Crawford"), Horizon
Cellular Telephone Company of Chautauqua, L.P. ("Chautauqua"), and Horizon
Cellular Telephone Company of Indiana, L.P. ("Indiana") (collectively referred
to as "Selected Systems" or "the Company") for the periods presented. Each of
the operating systems is a limited partnership in which KCCGP, L.P. ("KCCGP") is
the managing and sole general partner, and Horizon Cellular Telephone Company,
L.P. ("HCTC") is the sole limited partner.
The Selected Systems own, design, develop, and operate cellular
communications systems. KCCGP performs certain administrative functions for the
Selected Systems and, accordingly, certain expenses of KCCGP (see Note 6) have
been allocated to the Selected Systems on a basis which, in the opinion of
management, is reasonable. However, such expenditures are not necessarily
indicative of, and it is not practicable for management to estimate, the nature
and level of expenses which might have been incurred had the systems been
operating as separate independent companies.
The accompanying unaudited combined financial statements of the Selected
Systems 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 only of normal recurring accruals) considered necessary
for a fair presentation have been included. Operating results for the six-month
period ended June 30, 1996, are not necessarily indicative of the results that
may be expected for the year ending December 31, 1996.
2. ACQUISITIONS
In June 1995, the Company acquired the FCC PA-7 Operating License
("Indiana") and certain operating assets and liabilities for $27 million in
cash. As part of the acquisition, the Company also acquired the right to operate
the FCC PA-2 system under an Interim Operating Authority, which permits the
Company to temporarily provide cellular service in an otherwise unserved area.
Also in June 1995, HCTC contributed cash to fund the acquisition in exchange for
a 99.0% interest in the Company. KCCGP contributed approximately $273,000 to
Indiana for a 1.0% interest in the Company. The PA-7 system became operational
in July 1991.
The acquisition was accounted for under the purchase method of accounting;
accordingly, assets acquired and liabilities assumed have been recorded at
HCTC's basis in such amounts which represent their estimated fair values at the
date of acquisition by HCTC and the results of operations are included in the
accompanying combined statements of operations since the date of acquisition.
The excess of purchase price over the fair market value of identifiable net
tangible assets acquired has been allocated to customer list and license.
Pro Forma Results of Operations
The following unaudited pro forma information presents the revenues and
sales, and net loss, as if the acquisition had occurred at the beginning of
1995. The pro forma information includes the revenues and sales, and net loss
for the Selected Systems for the indicated period less increased amortization of
license costs and other intangible assets, and increased general and
administrative expenses for management fee allocations. Pro forma revenues and
sales and net loss are not necessarily indicative of the revenues and sales and
net loss that
F-28
<PAGE> 112
would have occurred had the acquisition been made at the beginning of the period
presented or the results which may occur in the future.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30, 1995
-------------
<S> <C>
Revenues and sales............................................. $ 11,456,000
Net loss....................................................... (839,000)
</TABLE>
3. USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
4. NEW ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 121, Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed of, which requires
impairment losses to be recorded on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows estimated
to be generated by those assets are less than the assets' carrying amount. The
Company adopted SFAS 121 in the first quarter of 1996 and the effect of the
adoption was not material.
SFAS No. 123, Accounting for Stock-Based Compensation, is effective for
fiscal years beginning after December 15, 1995. SFAS 123 provides companies with
a choice to follow the provisions of SFAS 123 in determining stock-based
compensation expense or to continue with the provisions of APB 25, Accounting
for Stock Issued to Employees. The Company expects to continue to follow APB 25
with respect to the LPAR Plan and will provide disclosures as required by SFAS
123 in the December 31, 1996 notes to the financial statements.
5. ADVANCES FROM AFFILIATES
Advances from affiliates primarily represent cash advances from HCTC and
KCCGP which provided funds for investing and operating activities, and have no
specific repayment terms. Interest expense is charged monthly at a rate of
11 3/8% of the ending balance payable to HCTC.
6. RELATED PARTY TRANSACTIONS
KCCGP provides various administrative services to the Company, including
accounting, engineering, and marketing and advertising services, in addition to
funding working capital requirements and capital expenditures as necessary.
These expenses are charged, first on the basis of direct usage when
identifiable, with the remainder allocated equally among its operating systems.
Allocated expenses amounted to $50,000 and $75,000 for the six months ended June
30, 1995 and 1996, respectively.
7. RECENT DEVELOPMENTS
On July 11, 1996, the Company entered into a definitive agreement to sell
the FCC operating Licenses, together with certain operating assets and
liabilities, to SYGNET Communications Inc. for approximately $250 million. The
combined financial statements do not reflect either the estimated gain, or any
expenses incurred or expected to be incurred related to the sale of the systems.
The sale is expected to close during the third quarter of 1996, and is subject
to certain regulatory and other approvals.
F-29
<PAGE> 113
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of
Erie Cellular Telephone Company:
We have audited the statements of operations and changes in partners'
capital and cash flows of Erie Cellular Telephone Company (a Delaware general
partnership) for the period from January 1, 1995 to September 29, 1995. These
financial statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit of the statements of operations and changes in
partners' capital and cash flows provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows of Erie
Cellular Telephone Company for the period from January 1, 1995 to September 29,
1995, in conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Seattle, Washington,
August 12, 1996
F-30
<PAGE> 114
ERIE CELLULAR TELEPHONE COMPANY
(A DELAWARE GENERAL PARTNERSHIP)
STATEMENT OF OPERATIONS AND CHANGES IN PARTNERS' CAPITAL
FOR THE PERIOD JANUARY 1, 1995 TO SEPTEMBER 29, 1995
<TABLE>
<S> <C>
Revenues:
Service.................................................................... $4,638,200
Equipment sales and installations.......................................... 915,600
----------
5,553,800
----------
Expenses:
Cost of service............................................................ 1,367,200
Cost of equipment sales and installations.................................. 887,000
General and administrative................................................. 1,272,600
Marketing.................................................................. 1,634,100
Depreciation and amortization.............................................. 362,000
----------
5,522,900
----------
Net Income...................................................................... 30,900
Partners' Capital, beginning of period.......................................... 9,106,000
Increase in cellular licensing costs from acquisitions made by majority
partner....................................................................... 182,300
----------
Partners' Capital, end of period................................................ $9,319,200
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-31
<PAGE> 115
ERIE CELLULAR TELEPHONE COMPANY
A DELAWARE GENERAL PARTNERSHIP
STATEMENT OF CASH FLOWS
FOR THE PERIOD JANUARY 1, 1995 TO SEPTEMBER 29, 1995
<TABLE>
<S> <C>
Cash flows from operating activities:
Net Income.................................................................. $ 30,900
---------
Adjustments to reconcile net income to net cash provided by operating
activities --
Depreciation and amortization.......................................... 362,000
Changes in current assets and liabilities:
Trade accounts receivable......................................... (80,000)
Cellular telephone inventory...................................... (106,100)
Other current assets.............................................. 13,800
Accounts payable.................................................. 12,300
Accrued expenses.................................................. 53,700
Customer deposits................................................. 20,800
---------
276,500
---------
Net cash provided by operating activities........................................ 307,400
---------
Cash flows from investing activities:
Purchase of property, equipment and other assets............................ (512,500)
---------
Net cash used in investing activities............................................ (512,500)
---------
Cash flows from financing activities:
Net advances from affiliates................................................ 202,300
---------
Net cash provided by financing activities........................................ 202,300
---------
Change in cash................................................................... (2,800)
Cash, beginning of period........................................................ 41,000
---------
Cash, end of period.............................................................. $ 38,200
=========
Supplemental disclosure of noncash investing activities:
Increase in cellular licensing costs from acquisitions made by majority
partner.................................................................... $ 182,300
=========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-32
<PAGE> 116
ERIE CELLULAR TELEPHONE COMPANY
A DELAWARE GENERAL PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND PARTNERS' INTEREST:
Organization
Erie Cellular Telephone Company (the Partnership), was organized in July
1987 by various applicants for the A Block cellular license in the metropolitan
statistical area (MSA) of Erie, Pennsylvania (the Market). The Partnership was
formed pursuant to an agreement between competing applicants in the lottery held
by the Federal Communications Commission to determine the recipient of the A
Block cellular license in the Market. Erie Cellular Systems, Inc. (Erie
Cellular), formerly McCaw Communications of Erie, Inc., a wholly owned
subsidiary of AT&T Wireless Services, Inc. (AWS) (formerly McCaw Cellular
Communications, Inc.), acquired controlling interest in the Partnership in June
1988. Effective September 29, 1995, Erie Cellular sold its interest in the
Partnership to SYGNET Communications, Inc. (SYGNET).
Allocation of Profits and Losses
Net income or loss is allocated to the partners in proportion to their
respective percentage interest during the period. The partners' percentage
interests at September 29, 1995, prior to the sale of Erie Cellular's interest
in the Partnership to SYGNET, were as follows:
<TABLE>
<S> <C>
Erie Cellular......................................................... 95.5%
Minority partners..................................................... 4.5
</TABLE>
In 1995, Erie Cellular purchased an additional 0.6% interest from a
minority partner for $182,300 in cash. The acquisition cost incurred by Erie
Cellular was capitalized as cellular licensing costs by the Partnership.
Subject to a majority vote of the partners, contributions to capital are
made to fund the Partnership's capital expenditures and operating losses. Should
a partner not make all or a portion of a required contribution, that partner's
interest is subject to dilution as determined by the partnership agreement.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Revenue Recognition
Cellular air time and cellular access charges are recorded as revenue as
earned. Sales of equipment and related services are recorded as revenue when the
goods and services are delivered.
The Partnership's cell sites are operated as part of a larger local calling
area managed by subsidiaries of AWS. Cellular air time revenue is recorded by
the Partnership based on the usage of its cell sites in relation to total usage
of all cell sites within the local calling area.
Depreciation and Amortization
Depreciation of property and equipment is computed using the straight-line
method over the estimated useful lives of the assets, which are generally twelve
years for cellular equipment and three to five years for other property and
equipment. Leasehold improvements are amortized using the straight-line method
over the term of the lease.
The costs of normal maintenance and repairs are charged to expense as
incurred and expenditures for major improvements are capitalized at cost. Gains
or losses on the disposition of assets are reflected in the determination of net
income or loss at the time of disposition.
Cellular licensing costs primarily represent amounts incurred by Erie
Cellular to acquire interests in the A Block cellular license in the Market.
Amortization of these costs is provided for using the straight-line method over
a period of 40 years.
F-33
<PAGE> 117
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
3. TRANSACTIONS WITH RELATED PARTIES:
Due to Affiliates
Certain expenditures are made out of a cash concentration account
maintained on behalf of the Partnership by a subsidiary of AWS to meet certain
capital expenditure and working capital requirements. Cash collections and the
above mentioned expenditures related to partnership operations are recorded in
this concentration account. Such activities are reflected as net advances from
affiliates in the accompanying statement of cash flows.
Technical, Administrative and Marketing Services
AWS has entered into an agreement with the Partnership by which the
Partnership shares technical, administrative and marketing services. Shared
service support is provided at three different levels: Corporate, Region and
District. The costs incurred by AWS and its subsidiaries, as agent, in
connection with these shared services, are recorded as follows: Technical
operating shared services are recorded based on the Partnership's cell sites in
relation to the total cell sites in markets served by AWS and its subsidiaries.
Administrative shared services are recorded based on the Partnership's
subscribers in relation to the total subscribers in markets served by AWS and
its subsidiaries. Marketing shared services are recorded based on the
Partnership's gross subscriber additions during the period in relation to the
total gross subscribers added in the markets served by AWS and its subsidiaries
during the period. The total number of cell sites, subscribers or gross
subscriber additions used in the calculation varies depending on the level at
which the shared service is provided. Prior to 1995, administrative and
marketing shared services were recorded based on the prior year's population in
the Partnership's market in relation to the total prior year's population in all
the markets served by AWS and its subsidiaries. Expenses for technical,
administrative and marketing shared services were approximately $724,400 for the
period January 1, 1995 to September 29, 1995.
Management Fees
The Partnership is charged a management fee by a subsidiary of AWS based
upon a specified percentage between 3% and 5% of gross monthly revenues not to
exceed $30,000 per month for its service in managing the system. Prior to 1995,
the management fee charged to the Partnership was 6% of gross revenues.
Management fee expense was approximately $209,000 for the period January 1, 1995
to September 29, 1995.
Switch Sharing
The Partnership shares the facilities and maintenance of an AWS
subsidiary's mobile switching center. The AWS subsidiary charges the Partnership
between $.015 and $.04 per minute of usage for the sharing of the switch. Prior
to 1995, the Partnership was charged $.04 per minute of usage for the sharing of
the switch. Expenses for switch sharing were approximately $287,000 for the
period January 1, 1995 to September 29, 1995.
Other Direct Expenses
Certain other direct expenses charged by AWS' subsidiaries to the
Partnership totalled approximately $8,700 for the period January 1, 1995 to
September 29, 1995. Such expenses included, among others, after-hours customer
care calls, security monitoring and roaming services.
Transactions with AT&T Corp.
The Partnership purchases certain cellular telephone inventory and long
distance services from AT&T Corp. (AT&T), parent of AWS. For the period January
1, 1995 to September 29, 1995, the Partnership expensed cellular telephone
inventory purchased from AT&T of approximately $33,000, and purchased long
distance services from AT&T reflected as cost of service of approximately
$110,800.
F-34
<PAGE> 118
4. INCOME TAXES:
Income taxes have not been recorded in the accompanying financial
statements because they are obligations of the partners. The tax returns, the
qualification of the Partnership as such for tax purposes and the amount of
distributable Partnership income or loss are subject to examination by taxing
authorities. If such examinations result in changes with respect to the
Partnership qualification or in changes with respect to the income or loss, the
tax liability of the partners would be changed accordingly.
The Partnership provides depreciation for financial reporting purposes
using the straight-line method whereas for income tax purposes accelerated
methods are used. In addition, the allowance method for bad debts is used for
financial reporting purposes, while the direct write-off method is used for
income tax purposes.
5. COMMITMENTS:
The Partnership is committed under operating leases and agreements,
principally for facilities, office space and cell sites, with remaining terms
ranging from one to five years. Certain cell site leases include options for
additional periods. Certain leases provide for payment by the lessee of taxes,
maintenance and insurance.
Future minimum payments, required under operating leases and agreements,
that have an initial or remaining noncancelable lease term in excess of one year
at September 29, 1995 are summarized below:
<TABLE>
<CAPTION>
PERIOD ENDING SEPTEMBER 29,
<S> <C>
1996.................................................... $124,800
1997.................................................... 121,200
1998.................................................... 119,600
1999.................................................... 104,200
2000.................................................... 44,600
--------
$514,400
========
</TABLE>
Total rent expense for the period January 1, 1995 to September 29, 1995 was
approximately $103,900.
F-35
<PAGE> 119
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of
Erie Cellular Telephone Company:
We have audited the accompanying balance sheets of Erie Cellular Telephone
Company (a Delaware general partnership) as of December 31, 1993 and 1994, and
the related statements of operations and changes in partners' capital and cash
flows for the years then ended. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Erie Cellular Telephone
Company as of December 31, 1993 and 1994, and the results of its operations and
its cash flows for the years then ended in conformity with generally accepted
accounting principles.
Arthur Andersen LLP
Seattle, Washington,
January 27, 1995 (except with
respect to the matter discussed
in Note 9, as to which the date
is August 2, 1996)
F-36
<PAGE> 120
ERIE CELLULAR TELEPHONE COMPANY
BALANCE SHEETS -- DECEMBER 31, 1993 AND 1994
<TABLE>
<CAPTION>
1993 1994
(RESTATED)
<S> <C> <C>
ASSETS
Current assets:
Cash........................................................... $ 3,200 $ 41,000
Trade accounts receivable, net of allowance for doubtful
accounts (1993, $34,800; 1994, $50,000)....................... 458,000 730,500
Cellular telephone inventory................................... 49,400 93,100
Other.......................................................... 13,300 14,600
---------- -----------
Total current assets...................................... 523,900 879,200
Property and equipment, net of accumulated depreciation and
amortization (1993, $548,800; 1994, $752,600)..................... 1,491,500 1,900,900
Cellular licensing costs, net of accumulated amortization (1993,
$1,311,600; 1994, $1,534,300)..................................... 7,604,400 7,552,400
Other, net.......................................................... 5,800 --
---------- -----------
$9,625,600 $10,332,500
========= ==========
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable............................................... $ 33,500 $ 10,100
Accrued expenses............................................... 211,100 279,300
Due to affiliates.............................................. 7,600 936,500
Unearned revenues and customer deposits........................ 88,200 600
---------- -----------
Total current liabilities................................. 340,400 1,226,500
Commitments
Partners' capital................................................... 9,285,200 9,106,000
---------- -----------
$9,625,600 $10,332,500
========= ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-37
<PAGE> 121
ERIE CELLULAR TELEPHONE COMPANY
STATEMENTS OF OPERATIONS AND CHANGES IN PARTNERS' CAPITAL
YEARS ENDED DECEMBER 31, 1993 AND 1994
<TABLE>
<CAPTION>
1993 1994
(RESTATED)
<S> <C> <C>
Revenues:
Service......................................................... $2,901,800 $4,303,400
Equipment sales and installations............................... 453,300 730,600
---------- ----------
3,355,100 5,034,000
---------- ----------
Expenses:
Cost of service................................................. 563,800 800,300
Cost of equipment sales and installations....................... 515,100 774,900
General and administrative...................................... 1,103,400 1,726,700
Marketing....................................................... 1,309,200 1,649,600
Depreciation and amortization................................... 350,200 432,400
---------- ----------
3,841,700 5,383,900
---------- ----------
Net loss............................................................. (486,600) (349,900)
Partners' capital, beginning of year................................. 8,507,400 9,285,200
Increase in cellular licensing costs from acquisitions made by
parent............................................................. 1,264,400 170,700
---------- ----------
Partners' capital, end of year....................................... $9,285,200 $9,106,000
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-38
<PAGE> 122
ERIE CELLULAR TELEPHONE COMPANY
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1993 AND 1994
<TABLE>
<CAPTION>
1993 1994
(RESTATED)
<S> <C> <C>
Cash flows from operating activities:
Net loss........................................................ $ (486,600) $(349,900)
---------- ---------
Adjustments to reconcile net loss to net cash used in operating
activities --
Depreciation and amortization.............................. 350,200 432,400
Changes in current assets and liabilities:
Trade accounts receivable, net........................ (201,600) (272,500)
Cellular telephone inventory.......................... (49,400) (43,700)
Other current assets.................................. 41,700 (1,300)
Accounts payable...................................... 21,700 (23,400)
Accrued expenses...................................... 119,100 68,200
Unearned revenues and customer deposits............... 42,300 (87,600)
---------- ---------
Total adjustments.......................................... 324,000 72,100
---------- ---------
Net cash used in operating activities................................ (162,600) (277,800)
---------- ---------
Cash flows from investing activities:
Purchase of property and equipment.............................. (472,000) (613,300)
---------- ---------
Net cash used in investing activities................................ (472,000) (613,300)
---------- ---------
Cash flows from financing activities:
Net advances from affiliates.................................... 619,200 928,900
---------- ---------
Net cash provided by financing activities............................ 619,200 928,900
---------- ---------
Change in cash....................................................... (15,400) 37,800
---------- ---------
Cash, beginning of year.............................................. 18,600 3,200
---------- ---------
Cash, end of year.................................................... $ 3,200 $ 41,000
========== =========
Supplemental disclosure of noncash investing and financing
activities:
Increase in cellular licensing costs from acquisitions made by
parent......................................................... $1,264,400 $ 170,700
========== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-39
<PAGE> 123
ERIE CELLULAR TELEPHONE COMPANY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994
1. ORGANIZATION AND PARTNERS' INTEREST:
Organization
Erie Cellular Telephone Company (the Partnership), a Delaware general
partnership, was originally organized in July 1987 by various applicants for the
A Block cellular license in the metropolitan statistical area (MSA) of Erie,
Pennsylvania (the Market). The Partnership was formed pursuant to an agreement
between competing applicants in the lottery held by the Federal Communications
Commission (FCC) to determine the recipient of the A Block cellular license in
the Market. McCaw Communications of Erie, Inc. (McCaw), a wholly owned
subsidiary of McCaw Cellular Communications, Inc. (MCCI), acquired controlling
interest in the Partnership in June 1988. On September 19, 1994, AT&T Corp.
(AT&T) merged with MCCI. During 1995, MCCI changed its name to AT&T Wireless
Services, Inc.
Allocation of Profits and Losses
Net loss is allocated to the partners in proportion to their respective
percentage interest during the period. The partners' percentage interests at
December 31, 1993 and 1994, were as follows:
<TABLE>
<CAPTION>
1993 1994
<S> <C> <C>
McCaw................................................................. 93.8% 94.9%
Minority partners..................................................... 6.2 5.1
</TABLE>
Subject to a majority vote of the partners, contributions to capital are
made to fund the Partnership's capital expenditures and operating losses. Should
a partner not make all or a portion of a required contribution, that partner's
interest is subject to dilution as determined by the partnership agreement.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Revenue Recognition
Cellular air time and cellular access charges are recorded as revenue as
earned. Sales of equipment and related services are recorded as revenue when the
goods and services are delivered. Prior to 1994, cellular access charges were
billed in advance.
Cellular Telephone Inventory
Cellular telephone inventory is stated at the lower of cost or market. Cost
is determined by using the specific identification method.
Property and Equipment
Property and equipment is stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets, which
are generally 12 years for cellular equipment and three to five years for other
property and equipment. Leasehold improvements are amortized using the
straight-line method over the term of the lease.
Cellular Licensing Costs
Cellular licensing costs primarily represent amounts incurred to secure the
A Block cellular license in the Market. Amortization of these costs is provided
for using the straight-line method over a period of 40 years.
F-40
<PAGE> 124
3. PROPERTY AND EQUIPMENT:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1993 1994
<S> <C> <C>
Cellular equipment........................................... $1,855,800 $2,452,900
Leasehold improvements....................................... 93,500 105,200
Other........................................................ 91,000 95,400
---------- ----------
2,040,300 2,653,500
========= =========
Less -- Accumulated depreciation and amortization............ 548,800 752,600
---------- ----------
$1,491,500 $1,900,900
========= =========
</TABLE>
4. ACCRUED EXPENSES:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1993 1994
<S> <C> <C>
Wages, vacations and bonuses.................................... $ 70,400 $ 86,500
Sales, excise and other taxes................................... 25,300 47,100
Commissions..................................................... 47,900 85,300
Other........................................................... 67,500 60,400
-------- --------
$211,100 $279,300
======== ========
</TABLE>
5. TRANSACTIONS WITH RELATED PARTIES:
Due to Affiliates
Certain expenditures are made out of a cash concentration account,
maintained on behalf of the Partnership by an affiliate, to meet certain capital
expenditure and working capital requirements. Cash collections and the above
mentioned expenditures related to partnership operations are recorded in this
concentration account. The resulting cash balance for the Partnership related to
the above activities is reflected as due to affiliates in the accompanying
financial statements.
Technical, Administrative and Marketing Services
Costs incurred by MCCI and its subsidiaries, as agents, in association with
certain shared services, are recorded as follows: Technical operating shared
expenses are recorded based on the Partnership's cell sites in relation to the
total cell sites serviced by MCCI and its subsidiaries. Administrative and
marketing shared expenses are recorded based on the prior year's population in
the Partnership's MSA in relation to the total prior year's population in all
the MSAs serviced by MCCI or its subsidiaries.
In addition, a management fee of 6% of gross revenues is charged to the
Partnership from a subsidiary of MCCI for its service in managing the system.
Switch Sharing
The Partnership shares the facilities and maintenance of an affiliate's
mobile switching center. The affiliate charges the Partnership $.04 per billable
minute of usage for the sharing of the switch.
Expenses for technical, administrative and marketing services and switch
sharing were $1,281,400 and $1,903,900 for the years ended December 31, 1993 and
1994, respectively.
Certain other direct expenses allocated to the Partnership equaled $24,100
and $26,400 for the years ended December 31, 1993 and 1994, respectively. Such
expenses included, among others, after-hours customer care calls, security
monitoring, network services and roaming services.
A proposal has been made to the Partners by McCaw to modify management
fees, switch sharing and shared administrative and marketing expenses charged to
the Partnership effective January 1, 1995. The proposed changes are as follows:
The management fee charges will be the lesser of $30,000 per month or a
specified sliding scale percentage of gross revenue, switch sharing charges will
be on a sliding scale ranging
F-41
<PAGE> 125
from $.04 to $.015 per minute based on the market's monthly minutes of use, and
shared administrative and marketing expenses will be changing from
population-based to subscriber-based allocations.
Transactions with AT&T
The Partnership purchases certain cellular telephone inventory and long
distance services from AT&T. These goods and services were purchased under
contractual arrangements with AT&T which existed prior to the AT&T/MCCI merger
date. For the year ended December 31, 1994, approximately $113,000 of cellular
telephone inventory sold and reflected as cost of equipment sales and
approximately $122,000 of cellular long distance services reflected as cost of
service in the accompanying financial statements were purchased from AT&T.
6. INCOME TAXES:
Income taxes have not been recorded in the accompanying financial
statements because they are obligations of the partners. The tax returns, the
qualification of the Partnership as such for tax purposes and the amount of
distributable Partnership income or loss are subject to examination by taxing
authorities. If such examinations result in changes with respect to the
Partnership qualification or in changes with respect to the income or loss, the
tax liability of the partners would likely be changed accordingly.
The Partnership provides depreciation for financial reporting purposes
using the straight-line method whereas for income tax purposes accelerated
methods are used. In addition, the allowance method for bad debts is used for
financial reporting purposes, while the direct write-off method is used for
income tax purposes.
7. COMMITMENTS:
The Partnership is committed under operating leases and agreements,
principally for facilities, office space and cell sites, with remaining terms
ranging from one to five years. Certain cell site leases include options for
additional periods. Certain leases provide for payment by the lessee of taxes,
maintenance and insurance.
Future minimum payments, required under operating leases and agreements,
that have an initial or remaining noncancelable lease term in excess of one year
at December 31, 1994, are summarized below:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
-------------------------------------------------------------------
<S> <C>
1995..................................................... $40,500
1996..................................................... 19,200
1997..................................................... 19,200
1998..................................................... 17,400
1999..................................................... 3,200
-------
$99,500
=======
</TABLE>
Total rent expense for the years ended December 31, 1993 and 1994, was
approximately $103,800 and $113,300, respectively.
8. MERGER OF MCCI AND AT&T:
In connection with the merger of MCCI and AT&T, both parties entered into a
Consent Decree with the Department of Justice. Under the Consent Decree, MCCI
and its affiliates are required to offer their customers equal access to long
distance carriers. The planned completion of this conversion for the Partnership
is August 1995. The Partnership has served and will continue to serve as the
provider for its customers' InterLATA and international calling services until
the conversion date. Subsequent to the conversion, all revenues and expenses
associated with providing InterLATA and international calling service will be
recorded by the long distance carrier providing the service. InterLATA and
international calling services reduced the net loss of the Partnership by
approximately $239,000 for the year ended December 31, 1994.
F-42
<PAGE> 126
9. SUBSEQUENT EVENT:
Effective September 29, 1995, McCaw sold all of its interests in the
Partnership to SYGNET Communications, Inc. (SYGNET). In connection with a
proposed offering of securities by SYGNET, adjustments have been made to the
previously issued financial statements of the Partnership to reflect the cost of
the cellular license originally purchased by McCaw. McCaw's basis in the
cellular license acquired and the related accumulated amortization have been
pushed down to the Partnership's financial statements for the years presented,
resulting in an increase to the provision for depreciation and amortization of
$180,700 and $222,700 for the years ended December 31, 1993 and 1994,
respectively, compared to the amounts previously reported.
F-43
<PAGE> 127
REPORT OF INDEPENDENT AUDITORS
General and Limited Partners
DICOMM Cellular Limited Partnership
We have audited the accompanying statements of operations, partners'
capital (deficiency), and cash flows of DICOMM Cellular Limited Partnership for
the year ended December 31, 1993. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows of DICOMM
Cellular Limited Partnership for the year ended December 31, 1993 in conformity
with generally accepted accounting principles.
Ernst & Young LLP
March 25, 1994
Boston, Massachusetts
F-44
<PAGE> 128
DICOMM CELLULAR LIMITED PARTNERSHIP
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1993
<TABLE>
<S> <C>
Revenues
Subscriber revenue......................................................... $1,161,720
Roamer revenue............................................................. 1,628,654
----------
Total revenues........................................................ 2,790,374
Costs and Expenses
Costs of services.......................................................... 1,042,689
General and administrative................................................. 787,564
Selling and marketing...................................................... 566,505
Depreciation and amortization.............................................. 475,196
----------
2,871,954
Loss from operations............................................................ (81,580)
Interest expense................................................................ 530,239
----------
Net loss........................................................................ $ (611,819)
==========
</TABLE>
See accompanying notes.
F-45
<PAGE> 129
DICOMM CELLULAR LIMITED PARTNERSHIP
STATEMENT OF PARTNERS' CAPITAL (DEFICIENCY)
<TABLE>
<CAPTION>
TOTAL
PARTNERS'
GENERAL LIMITED CAPITAL
PARTNER PARTNERS (DEFICIENCY)
<S> <C> <C> <C>
Balance at December 31, 1992............................. $(20,215) $(2,001,314) $ (2,021,529)
Partners' capital contributions.......................... 1,616 160,000 161,616
Net loss................................................. (6,118) (605,701) (611,819)
-------- ----------- ------------
Balance at December 31, 1993............................. $(24,717) $(2,447,015) $ (2,471,732)
======== ========== ==========
</TABLE>
See accompanying notes.
F-46
<PAGE> 130
DICOMM CELLULAR LIMITED PARTNERSHIP
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1993
<TABLE>
<S> <C>
Operating Activities
Net loss.................................................................... $(611,819)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation........................................................... 460,090
Amortization........................................................... 15,106
Deferred rent.......................................................... (2,994)
Changes in operating assets and liabilities:
Accounts receivable............................................... (282,871)
Inventories....................................................... (19,495)
Prepaid expenses.................................................. (7,833)
Other assets...................................................... 1,898
Accounts payable.................................................. 77,178
Accrued expenses.................................................. 85,628
---------
Net cash used in operating activities............................................ (285,112)
Investing Activities
Purchases of property and equipment......................................... (483,509)
---------
Net cash used in investing activities............................................ (483,509)
Financing Activities
Proceeds from capital contributions......................................... 161,616
Proceeds from loans from supplier........................................... 23,389
Bank overdraft.............................................................. 51,616
Proceeds from notes payable to related parties.............................. 532,000
---------
Net cash provided by financing activities........................................ 768,621
---------
Net decrease in cash and cash equivalents........................................ --
Cash and cash equivalents at December 31, 1992................................... --
---------
Cash and cash equivalents at December 31, 1993................................... $ --
=========
</TABLE>
See accompanying notes.
F-47
<PAGE> 131
DICOMM CELLULAR LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1993
1. BASIS OF PRESENTATION
DICOMM Cellular Limited Partnership (the Company) was formed as a Delaware
limited partnership on February 7, 1991. The Company provides cellular portable
telephone service in the Genessee, Wyoming, Chautauqua, Cattaraugus, Alleghany
and Steuben Counties in New York State.
The General Partner is DICOMM Cellular Inc. The General Partner has a 1%
interest in the Company and has sole operating responsibility and control.
Limited Partners have no operating control or responsibility and
collectively hold a 99% share of the Company.
On March 8, 1994, the partners sold all of their general and limited
partnership interests in the Company, with the exception of certain liabilities,
primarily litigation relating to the period prior to March 8, 1994. See Note 6
for further discussion.
2. SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
The Company considers highly liquid investments with maturities of three
months or less at date of purchase to be cash equivalents.
Property and Equipment
Property and equipment is stated at cost, including expenses related to
engineering services. Depreciation is calculated on a straight-line basis over
the estimated useful lives of the assets, ranging from 5 to 40 years.
License Costs
License costs relate to organization and development costs, legal and
professional fees, salaries and related expenses associated with technical
development of the cellular system and obtaining related regulatory approvals.
The costs are being amortized on a straight-line basis over 40 years.
Other Assets
Other assets relate to organization costs, deferred financing costs and
capitalized lease costs which are being amortized on a straight-line basis over
terms of 5 to 10 years.
Income Taxes
The Company is a partnership and, as such, no provision is made for income
taxes as income or loss is included in the tax returns of the partners. Each
partner accounts for its related share of applicable tax credits.
3. NOTES PAYABLE TO SUPPLIER
The Company entered into a loan agreement on July 1, 1991 with its major
equipment supplier. The agreement related to the issuance of two promissory
notes, an equipment note and a working capital note aggregating $6,000,000.
Interest accrues on principal balances at the rate of the Morgan Guaranty Trust
Company of New York base rate plus 3%, adjusted periodically. Advances under the
notes are secured by substantially all of the Company's assets. The notes are
payable in 48 equal monthly principal payments of $125,000 beginning July 1,
1994.
The notes include restrictive financial covenants relating to working
capital, tangible net worth and other items. The Company was in violation of
certain of these covenants at December 31, 1993. However, the notes were paid in
full on March 8, 1994 in conjunction with the sale of the general and limited
partnership interests discussed in Note 6. Accordingly, the notes are classified
as current at December 31, 1993. Interest paid in 1993 was $497,251.
F-48
<PAGE> 132
4. LEASES
The Company has noncancellable operating lease commitments for office
space, land, tower space and vehicles. Terms of the leases range from one to ten
years and include various renewal options. Rent expense incurred during the year
ended December 31, 1993 amounted to $150,792. Minimum future rental commitments
are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31:
<S> <C>
1994........................................................... $133,676
1995........................................................... 126,491
1996........................................................... 145,686
1997........................................................... 29,203
1998........................................................... 10,200
Thereafter..................................................... 37,994
--------
$483,250
========
</TABLE>
5. RELATED-PARTY TRANSACTIONS
The Company pays a monthly management fee to an affiliated company owned by
the limited partners for administrative and office services provided. The
Company incurred management fees of $119,874.
The notes payable to related parties on December 31, 1993 consist of
$542,000 unsecured demand promissory note from the general partner, of which
$462,000 is outstanding and $70,000 of unsecured demand notes payable to the
limited partners. The notes are noninterest bearing.
6. SUBSEQUENT EVENTS
On March 8, 1994, the General and Limited Partners sold their partnership
interests in the Company to Horizon Cellular Telephone Company, L.P. and Horizon
Cellular Telephone Company of Chautauqua L.P. (the Purchaser) for $43,750,000. A
portion of the purchase price was advanced to satisfy the Company's notes
payable to suppliers. Under the terms of the purchase and sale agreement,
certain liabilities of the Company remain with the general partner, including
notes payable and any litigation that may arise relating to the period prior to
March 8, 1994.
F-49
<PAGE> 133
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NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL TO, OR THE SOLICITATION OF ANY
OFFER TO BUY FROM ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR
SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE
DATE HEREOF.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
CERTAIN TERMS............................... 2
ADDITIONAL INFORMATION...................... 2
PROSPECTUS SUMMARY.......................... 3
RISK FACTORS................................ 12
USE OF PROCEEDS............................. 16
CAPITALIZATION.............................. 17
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL DATA............................ 18
SELECTED FINANCIAL DATA..................... 26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS................................ 28
BUSINESS.................................... 34
MANAGEMENT.................................. 50
PRINCIPAL STOCKHOLDERS...................... 53
CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS.............................. 54
DESCRIPTION OF BANK CREDIT FACILITY......... 55
DESCRIPTION OF NOTES........................ 57
DESCRIPTION OF CAPITAL STOCK................ 77
UNDERWRITING................................ 80
CERTAIN UNITED STATES FEDERAL INCOME TAX
CONSEQUENCES.............................. 80
LEGAL MATTERS............................... 81
EXPERTS..................................... 82
INDEX TO FINANCIAL STATEMENTS............... F-1
</TABLE>
UNTIL DECEMBER 19, 1996 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE NOTES, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO
THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
------------------------------------------------------
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$110,000,000
[SYGNET LOGO]
11 1/2% SENIOR NOTES
DUE 2006
--------------------
PROSPECTUS
--------------------
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
LEHMAN BROTHERS
TORONTO DOMINION SECURITIES
------------------------------------------------------
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