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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
(MARK ONE)
(x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from________________to_________________
Commission File Number: 333-10161
Sygnet Wireless, Inc.
(Exact name of registrant as specified in its charter)
Ohio 34-1689165
------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6550-B Seville Drive, Canfield, Ohio 44406
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(330) 565-1000
- ----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
(x) Yes ( ) No
As of October 20, 1997, there were outstanding 4,010,653 shares of the
registrant's Class A common stock, $.01 par value, and 5,159,977 shares of the
registrant's Class B common stock, $.01 par value.
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INDEX
SYGNET WIRELESS, INC.
FORM 10-Q
PERIOD ENDED SEPTEMBER 30, 1997
PART I - FINANCIAL INFORMATION
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<TABLE>
<CAPTION>
<S> <C>
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of September 30, 1997 and December 31, 1996
Consolidated Statements of Operations for the Three Months
Ended September 30, 1997 and September 30, 1996 and the Nine
Months Ended September 30, 1997 and September 30, 1996.
Consolidated Statements of Cash Flows for the Nine Months Ended September 30,
1997 and September 30, 1996
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations
PART II - OTHER INFORMATION
- -----------------------------
Item 6. Exhibits and Reports on Form 8-K
</TABLE>
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<TABLE>
<CAPTION>
SYGNET WIRELESS, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30 DECEMBER 31
1997 1996
-------------------------------------
ASSETS (UNAUDITED) (NOTE)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,802,402 $ 2,257,748
Accounts receivable, less allowance for doubtful accounts of $826,444 at
September 30, 1997 and $1,168,800 December 31, 1996 11,126,204 8,857,028
Inventory 1,283,876 1,696,952
Prepaid expenses 352,435 531,171
-------------------------------------
Total current assets 14,564,917 13,342,899
Other assets:
Cellular licenses - net 247,467,543 252,271,468
Customer lists - net 20,667,086 24,535,885
Deferred financing costs - net 9,268,939 10,068,956
-------------------------------------
Total other assets 277,403,568 286,876,309
Property, plant and equipment--net 49,316,893 43,958,969
-------------------------------------
Total assets $ 341,285,378 $ 344,178,177
=====================================
LIABILITIES, REDEEMABLE PREFERRED STOCK AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 1,806,918 $ 2,227,187
Amount payable--Horizon acquisition - 599,442
Deferred revenue 1,927,521 1,679,873
Accrued expenses and other liabilities 3,187,865 2,282,472
Accrued interest payable 7,923,336 6,940,623
--------------------------------------
Total current liabilities 14,845,640 13,729,597
Long-term liabilities:
Deferred liability--utility property tax 462,317 462,317
Long-term debt 300,500,000 312,250,000
--------------------------------------
Total long-term liabilities 300,962,317 312,712,317
Redeemable Series A Senior Cumulative Nonvoting Preferred Stock, $.01 par,
aggregate redemption value of $20,690,411 as of December 31, 1996, 500,000
shares authorized, 200,000 shares issued and outstanding and
warrants as of December 31, 1996. - 19,718,028
Shareholders' equity (deficit):
Common shares, $.01 par, Class A, 1 vote per share, 60,000,000 shares
authorized, 4,010,653 shares issued and outstanding as of September 30,
1997, 2,653 shares issued and outstanding as of December 31, 1996. 40,107 27
Common shares, $.01 par, Class B, 10 votes per share; 10,000,000 shares
authorized, 5,159,977 shares issued and outstanding as of September 30,
1997, 6,167,977 shares issued and outstanding as of December 31, 1996. 51,599 61,679
Additional paid-in capital 47,292,498 5,812,211
Retained deficit (21,656,831) (7,605,730)
Note receivable from officer/shareholder (249,952) (249,952)
--------------------------------------
Total shareholders' equity (deficit) 25,477,421 (1,981,765)
--------------------------------------
Total liabilities and shareholders' equity (deficit) $ 341,285,378 $ 344,178,177
======================================
</TABLE>
Note: The balance sheet at December 31, 1996 has been derived from the audited
consolidated 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.
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<TABLE>
<CAPTION>
SYGNET WIRELESS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
-------------------------------------- -------------------------------------
<S> <C> <C> <C> <C>
Revenue:
Subscriber revenue $ 13,975,115 $ 7,056,509 $ 38,531,124 $ 20,024,721
Roamer revenue 8,112,424 1,775,046 19,868,262 4,534,632
Equipment sales 1,129,792 551,157 3,050,594 1,293,936
Other revenue 439,900 382,153 1,307,703 1,138,241
-------------------------------------- -------------------------------------
Total revenue 23,657,231 9,764,865 62,757,683 26,991,530
Costs and expenses:
Cost of services 2,810,101 1,134,099 7,175,048 3,464,630
Cost of equipment sales 2,396,778 1,172,042 6,806,047 3,175,211
General and administrative 4,286,956 2,052,325 11,666,527 5,861,858
Selling and marketing 2,676,800 1,158,194 7,465,863 3,317,989
Depreciation and amortization 7,385,487 1,321,815 21,142,930 3,804,331
-------------------------------------- -------------------------------------
Total costs and expenses 19,556,122 6,838,475 54,256,415 19,624,019
-------------------------------------- -------------------------------------
Income from operations 4,101,109 2,926,390 8,501,268 7,367,511
Other:
Interest expense, net 7,316,422 1,260,045 22,558,545 3,892,773
Other (17,209) 60,338 (6,174) 294,944
-------------------------------------- -------------------------------------
Net (loss) income before income taxes (3,198,104) 1,606,007 (14,051,103) 3,179,794
Income tax expense - 992,000 - 1,102,000
-------------------------------------- -------------------------------------
Net (loss) income $ (3,198,104) $ 614,007 $ (14,051,103) $ 2,077,794
====================================== =====================================
Earnings per share information (pro forma for (Pro forma) (Pro forma)
1996):
(Loss) income before income taxes $ (3,198,104) $ 1,606,007 $ (14,051,103) $ 3,179,794
Income taxes - (723,000) - (1,431,000)
Preferred stock dividend and accretion - (2,121,472) -
-------------------------------------- -------------------------------------
Net (loss) income applicable to common
shareholders $ (3,198,104) $ 883,007 $ (16,172,575) $ 1,748,794
====================================== =====================================
Net (loss) income per share applicable to
common shareholders $ (.35) $ 0.14 $ (2.21) $ 0.28
====================================== =====================================
Weighted average common shares outstanding 9,170,630 6,170,630 7,302,498 6,170,630
====================================== =====================================
</TABLE>
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<TABLE>
<CAPTION>
SYGNET WIRELESS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------------------------
1997 1996
--------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net (loss) income $ (14,051,101) $ 2,077,794
Adjustments to reconcile net (loss) income to net
cash provided by operating activities:
Depreciation 11,614,565 2,679,509
Amortization 9,528,365 1,124,822
Deferred income taxes - 782,900
(Gain) loss on disposal of equipment (14,361) 176,841
Changes in operating assets and liabilities:
Accounts receivable (2,269,177) 573,652
Inventory 413,076 192,607
Prepaid and deferred expenses 188,487 76,210
Accounts payable and accrued expenses 732,773 (90,001)
Accrued interest payable 982,713 (457,961)
--------------------------------------------
Net cash provided by operating activities 7,125,340 7,136,373
INVESTING ACTIVITIES
Cash to be used for acquisition of business - (35,200,000)
Acquisitions of Horizon and Erie (599,442) (1,920,190)
Purchases of property and equipment (16,979,123) (5,550,485)
Proceeds from sale of equipment 20,995 -
--------------------------------------------
Net cash used in investing activities (17,557,570) (42,670,675)
FINANCING ACTIVITIES
Dividends paid - (261,623)
Proceeds from long-term debt 23,500,000 114,000,000
Principal payments on long-term debt (35,250,000) (72,500,000)
Increase in financing costs (308,666) (4,469,615)
Redemption of preferred stock (21,839,451) -
Net proceeds from issuance of common stock 43,875,000 -
--------------------------------------------
Net cash provided by financing activities 9,976,883 36,768,762
(Decrease) increase in cash and cash equivalents (455,346) 1,234,460
Cash and cash equivalents at beginning of period 2,257,748 448,292
--------------------------------------------
Cash and cash equivalents at end of period $ 1,802,402 $ 1,682,752
============================================
</TABLE>
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SYGNET WIRELESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION AND PRO FORMA INFORMATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. The unaudited consolidated
financial statements include the combined financial statements of SYGNET
Communications, Inc. (SYGNET) and Wilcom Corporation (Wilcom) through August
31, 1996, the effective date of the merger described below, and the accounts
of Sygnet Wireless, Inc. and its subsidiary (the Company) thereafter. 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 nine month period ended September 30, 1997 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1997. For further information, refer to the consolidated
financial statements and notes thereto included in the Company's annual
report on Form 10-K for the fiscal year ended December 31, 1996 (File No.
333-10161) filed with the Securities and Exchange Commission.
As described below, SYGNET and Wilcom terminated their status as Subchapter S
Corporations in August 1996. A pro forma adjustment has been made to the
financial statements for the three and nine months ended September 30, 1996,
respectively, to reflect a provision for federal, state and local income
taxes as though the Subchapter S election was terminated on January 1, 1996
at an effective rate of 48%.
Pro forma net income per share is presented as though the 6,170,630 shares
issued at the date of the corporate restructuring described below were
outstanding for all periods presented for 1996.
2. RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement No. 128, Earnings per Share, which is required to be adopted on
December 31, 1997. At that time, the Company will be required to change the
method currently used to compute earnings per share and to restate all prior
periods. Under the new requirements for calculating primary earnings per
share, the dilutive effect of stock options will be excluded. The impact of
Statement No. 128 on the calculation of both primary and fully diluted
earnings per share for these quarters is not expected to be material.
In June 1997, the FASB issued Statement No. 130, Reporting Comprehensive
Income, which is required to be adopted on January 1, 1998. This Statement
establishes standards for the reporting and display of comprehensive income
and its components in a full set of general purpose financial statements.
Reclassification of financial statements for earlier periods presented is
required. The impact of Statement No. 130 on the Company's financial
statements is not expected to be material.
In June 1997, the FASB also issued Statement No. 131, Disclosures About
Segments of an Enterprise and Related Information, which is required to be
adopted on January 1, 1998. This Statement changes the way companies report
segment information in annual financial statements and also requires those
companies to report selected segment information in interim financial reports
to shareholders. The impact of Statement No. 131 on the Company's financial
statements is not expected to be material.
3. MERGER AND RECAPITALIZATION
On August 19, 1996, the shareholders of SYGNET and Wilcom effected a
corporate restructuring whereby Wilcom was merged into SYGNET and
shareholders of Wilcom received 8.72 shares of SYGNET common stock for each
share of Wilcom common stock held as of August 31, 1996, the effective date
of the merger. Effective August 31, 1996, 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. In conjunction with
this merger, the shareholders of SYGNET amended the articles of incorporation
to change SYGNET's name to Sygnet Wireless, Inc.
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3. MERGER AND RECAPITALIZATION (CONTINUED)
On August 28, 1996, the Company approved a plan to recapitalize the Company
whereby the SYGNET common stock Type A (205,698 shares) and Type B (1,028,428
shares) were converted into 6,170,630 shares of Sygnet Wireless, Inc. Class B
common stock in a 5 for 1 stock split. In addition, on October 3, 1996 the
Company's shareholders amended the articles of incorporation to create a new
class of preferred stock (described below) effective October 4, 1996.
4. ACQUISITIONS
On October 9, 1996, the Company acquired certain cellular licenses, property,
equipment, customer lists, current assets and current liabilities of 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. (hereinafter collectively referred to as the "Horizon Acquisition") for
cash of $252.9 million. The systems acquired in the Horizon Acquisition
provide cellular service to an estimated population of 1.4 million in
contiguous markets in western Pennsylvania and western New York. This
acquisition was financed through the issuance of senior notes, the issuance
of $20,000,000 in redeemable preferred stock and by a syndicated bank credit
facility.
The pro forma unaudited condensed combined results of operations for the
three and nine months ended September 30, 1996, respectively, as if the
Horizon Acquisition occurred on January 1, 1996, are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1996 SEPTEMBER 30, 1996
--------------------------- -------------------------
<S> <C> <C>
Revenue $ 19,243,000 $ 52,046,000
=========================== =========================
Net loss $ (1,511,000) $ (9,771,000)
=========================== =========================
Pro forma net loss per share applicable
to common shareholders $ (.50) $ (2.30)
=========================== =========================
</TABLE>
5. LONG-TERM DEBT
On September 19, 1996, the Company issued $110,000,000 11 1/2% unsecured
Senior Notes due October 1, 2006 (the Notes). The Notes pay interest
semiannually on April 1 and October 1 of each year. The Notes are redeemable
at the option of the Company at redemption prices (expressed as a percentage
of principal amount) ranging from 105.75% in 2001 to 100.00% in 2005 and
thereafter. Among other things, the Notes contain certain covenants which
limit additional indebtedness, payment of dividends, sale of assets or stock,
changes in control and transactions with related parties. The proceeds from
the Notes were used to repay amounts borrowed under a $75 million bank credit
agreement and to finance the Horizon Acquisition described in Note 4.
On October 9, 1996, Sygnet Communications, Inc.(Sygnet), a wholly-owned
subsidiary of the Company, entered into a new financing agreement (the Bank
Credit Facility) with a commercial bank group. The Bank Credit Facility is a
senior secured reducing revolver that provides Sygnet the ability to borrow
up to $300 million through June 30, 1999. Mandatory reductions in the
revolver occur quarterly thereafter through June 30, 2005, when the Bank
Credit Facility terminates. The Bank Credit Facility is secured by certain
assets and the stock of Sygnet. The Bank Credit Facility provides for various
borrowing rate options based on either a fixed spread over the London
Interbank Offered Rate or the prime rate with interest payments made
quarterly. As of September 30, 1997, $190.5 million was outstanding under the
Bank Credit Facility.
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6. REDEEMABLE PREFERRED STOCK
On October 9, 1996, the Company issued 200,000 shares of Series A Senior
Cumulative Nonvoting Preferred Stock (Preferred Stock). The Preferred Stock
has a redemption value of $100 per share and is recorded at fair value on the
date of issuance less issuance costs. Dividends are cumulative from the date
of issuance, accrue quarterly in arrears and are payable in shares of
Preferred Stock. The dividend rates increase annually from 15% in the year
ending September 30, 1997; to 17% in the year ending September 30, 1998; to
19% in the year ending September 30, 1999; and to 21% in the year ending
September 30, 2000 and thereafter.
On April 3, 1997, 100,000 shares of Preferred Stock were redeemed by the
Company at a cost of $10,000,000 which was funded by the Bank Credit
Facility. On June 20, 1997, the remaining 118,394.51 shares of Preferred
Stock were redeemed by the Company at a cost of $11,839,451. This redemption
was funded by the Common Stock Sale described in Note 7.
7. SHAREHOLDERS EQUITY
On June 20, 1997, the Company issued and sold 3,000,000 shares of Class A
Common Stock, $.01 par value, to Boston Ventures Limited Partnership V
(Boston Ventures) at a price of $15 per share (Common Stock Sale). The
proceeds of $43.9 million, net of issuance fees, were used to redeem the
remaining outstanding Preferred Stock as described in Note 6, and to reduce
amounts outstanding under the Bank Credit Facility. As a condition of the
Common Stock Sale, Boston Ventures will have two representatives on the
Company's eleven member board of directors.
In August 1997, Boston Ventures purchased 1,000,000 shares of Class B Common
Stock from shareholders pursuant to a tender offer which, upon purchase,
became Class A Common Stock.
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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 unaudited consolidated financial statements and the notes thereto
appearing elsewhere in this report. References to pro forma information give
effect to the Horizon Acquisition as if it occurred on January 1, 1996. As a
result of the Horizon Acquisition, the Company's operating results for the
periods discussed may not be indicative of future performance. In the text
below, financial statement numbers have been rounded; however, the percentage
changes are based on the actual financial statement numbers.
THE COMPANY'S HISTORICAL RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1996.
For the three months ended September 30, 1997, the Company posted total revenue
of $23.7 million, which was more than double the total revenue of $9.8 million
for the comparable period in 1996. Earnings before interest, taxes, depreciation
and amortization, and other non-cash expenses (EBITDA) also more than doubled to
$11.5 million (48.6% of total revenue) for the three months ended September 30,
1997 from $4.2 million (43.5%. of total revenue) during the comparable period in
1996. The growth in revenue and EBITDA was the result of the Horizon Acquisition
and continued growth of the subscriber base. Increased interest expense,
depreciation, and amortization charges related to the Horizon Acquisition more
than offset the increased revenue and EBITDA to produce a net loss of $3.2
million for the three months ended September 30, 1997, a decrease from net
income of $0.6 million for the comparable period in 1996.
Subscriber revenue grew by 98% to $14.0 million for the three months ended
September 30, 1997 compared to $7.1 million for the comparable period in 1996
mainly as a result of the Horizon Acquisition and continued subscriber growth in
the Company's markets. Subscriber revenue, on a pro forma basis including the
effects of the Horizon Acquisition, grew by 25.9% for the three months ended
September 30, 1997 over the comparable period in 1996 due to growth in the
subscriber base, despite a decline in average revenue per subscriber. The
Company's subscribers more than doubled to 130,146 at September 30, 1997 from
54,245 at September 30, 1996 due mainly to the Horizon Acquisition as well as
internal growth. Including the pro forma effect of the Horizon Acquisition, the
subscriber base increased by 36% on September 30, 1997 from the September 30,
1996 level due to internal growth. On a per subscriber pro forma basis,
including the effect of the Horizon Acquisition, average monthly revenue
declined by 8.2% to $58.54 during the three months ended September 30, 1997 from
$63.74 in the comparable 1996 quarter. This was due to competitive market
pressures, increased promotional activity, lower customer usage, and the
changing mix of subscribers reflecting increasing levels of safety and security
subscribers, who typically purchase less expensive rate plans that include
limited free minutes of use.
Roamer revenue more than tripled to $8.1 million during the three months ended
September 30, 1997 compared to $1.8 million in the comparable period in 1996.
This increase was mainly a result of the Horizon Acquisition as well as
increased roaming traffic throughout all of the Company's systems. Including the
pro-forma effects of the Horizon Acquisition, roamer revenue grew by 23.5% for
the three months ended September 30, 1997 over the comparable period in 1996 due
mainly to a greater volume of roaming traffic despite a reduction in roaming
revenue per minute. Including the results of the Horizon Acquisition, the
roaming revenue per minute for the three months ended September 30, 1997
decreased to $0.60 from $0.65 for the comparable period in 1996. This was mainly
a result of reduced roaming rates in the newly acquired markets.
Equipment sales almost doubled to $1.1 million for the three months ended
September 30, 1997 compared to $0.6 million for the comparable period in 1996.
This increase was due mainly to the Horizon Acquisition, and an increased number
of telephones and accessories distributed as new subscriber acquisitions
increased, as well as from additional sales of equipment to existing customers.
Other revenue increased to $0.44 million for the three months ended September
30, 1997 from $0.38 million for the comparable period in 1996 due mainly to the
Horizon Acquisition.
Cost of services more than doubled to $2.8 million for the three months ended
September 30, 1997 from $1.1 million for the comparable period in 1996 due
mainly to the Horizon Acquisition. On a pro forma basis including the Horizon
Acquisition, cost of services for the three months ended September 30, 1997
increased by 23.5% from the comparable period in 1996. This was due mainly to an
increase in operating costs as a result of internal growth.
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Cost of equipment sales more than doubled to $2.4 million for the three months
ended September 30, 1997 from $1.2 million in the comparable 1996 period. This
increase was due mainly to the Horizon Acquisition and to an increased number of
telephones and accessories distributed as new subscriber acquisitions increased.
Sales of equipment to existing subscribers were also responsible for a portion
of this increase. On a pro-forma basis including the effect of the Horizon
Acquisition, cost of equipment sales for the three months ended September 30,
1997 increased 20.6% over the comparable period for 1996.
General and administrative costs more than doubled to $4.3 million for the three
months ended September 30, 1997 from $2.0 million for the comparable period in
1996. This increase is due primarily to the Horizon Acquisition and an increase
in operating costs due to internal growth. On a pro forma basis including the
effect of the Horizon Acquisition, general and administrative expenses for the
three months ended September 30, 1997 increased 25.1% over the comparable period
for 1996 due mainly to an increase in operating costs due to internal growth.
Selling and marketing costs more than doubled to $2.7 million for the three
months ended September 30, 1997 from $1.2 million in the comparable period in
1996. This increase is due to the Horizon Acquisition and a higher level of new
subscribers added period to period. Selling and marketing cost per gross new
subscriber, including the equipment subsidy, decreased to $293 for the three
months ended September 30, 1997 from $338 for the comparable period in 1996 on a
pro forma basis including the effect of the Horizon Acquisition.
Depreciation and amortization increased to $7.4 million for the three months
ended September 30, 1997 from $1.3 million for the comparable period in 1996 due
to depreciation on higher levels of fixed assets resulting from the Horizon
Acquisition and purchases for system growth, and amortization of the licenses
from the Horizon Acquisition. The amortization of the acquired cellular licenses
and subscriber lists contributed $2.6 million to this increased amortization.
For the three months ended September 30, 1997, the Company spent $6.0 million in
capital expenditures, primarily for new cell sites, cell site conversions, and
system growth.
Interest expense increased to $7.3 million for the three months ended September
30, 1997 from $1.3 million for the comparable period in 1996. This increase was
primarily a result of increased borrowings associated with the Horizon
Acquisition.
THE COMPANY'S HISTORICAL RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1996.
For the nine months ended September 30, 1997, the Company posted total revenue
of $62.8 million, which was more than double the total revenue of $27.0 million
for the comparable period in 1996. EBITDA also more than doubled to $23.2
million (44.6% of total revenue) for the nine months ended September 30, 1997
from $11.2 million (41.4%. of total revenue) during the comparable period in
1996. The growth in revenue and EBITDA was the result of the Horizon Acquisition
and continued growth of the subscriber base. Increased interest expense,
depreciation, and amortization charges related to the Horizon Acquisition more
than offset the increased revenue and EBITDA to produce a net loss of $14.0
million for the nine months ended September 30, 1997, a decrease from net income
of $2.1 million for the comparable period in 1996.
Subscriber revenue grew by 92.4% to $38.5 million for the nine months ended
September 30, 1997 compared to $20.0 million for the comparable period in 1996
mainly as a result of the Horizon Acquisition and continued subscriber growth in
the Company's markets. Subscriber revenue, on a pro forma basis including the
effects of the Horizon Acquisition, grew by 22.6% for the nine months ended
September 30, 1997 over the comparable period in 1996 due to growth in the
subscriber base, despite a decline in average revenue per subscriber. The
Company's subscribers more than doubled to 130,146 at September 30, 1997 from
54,245 at September 30, 1996 due mainly to the Horizon Acquisition as well as
internal growth. Including the pro forma effect of the Horizon Acquisition, the
subscriber base increased by 36.1% on September 30, 1997 from the September 30,
1996 level due to internal growth. On a per subscriber pro forma basis,
including the effect of the Horizon Acquisition, average monthly revenue
declined by 10.5% to $55.03 during the nine months ended September 30, 1997 from
$61.50 in the comparable 1996 period. This was due to competitive market
pressures, increased promotional activity, lower customer usage, and the
changing mix of subscribers reflecting increasing levels of safety and security
subscribers, who typically purchase less expensive rate plans that include
limited free minutes of use.
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<PAGE> 11
Roamer revenue more than tripled to $19.9 million during the nine months ended
September 30, 1997 compared to $4.5 million in the comparable period in 1996.
This increase was mainly a result of the Horizon Acquisition as well as
increased roaming traffic throughout all of the Company's systems. Including the
pro-forma effects of the Horizon Acquisition, roamer revenue grew by 20.6% for
the nine months ended September 30, 1997 over the comparable period in 1996 due
mainly to a greater volume of roaming traffic. Including the results of the
Horizon Acquisition, the roaming revenue per minute for the nine months ended
September 30, 1997 decreased to $0.59 from $0.65 for the comparable period in
1996. This was mainly a result of reduced roaming rates in the newly acquired
markets.
Equipment sales more than doubled to $3.0 million for the nine months ended
September 30, 1997 compared to $1.3 million for the comparable period in 1996.
This increase was due mainly to the Horizon Acquisition, and an increased number
of telephones and accessories distributed as new subscriber acquisitions
increased, as well as from additional sales of equipment to existing customers.
Other revenue increased to $1.3 million for the nine months ended September 30,
1997 from $1.1 million for the comparable period in 1996 due mainly to the
Horizon Acquisition.
Cost of services more than doubled to $7.2 million for the nine months ended
September 30, 1997 from $3.5 million for the comparable period in 1996 due
mainly to the Horizon Acquisition. On a pro forma basis including the effect of
the Horizon Acquisition, cost of services for the nine months ended September
30, 1997 increased by 8.0% from the comparable period in 1996. This is mainly
due to an increase in operating costs due to internal growth partially offset by
lower rates for interconnection and long distance charges.
Cost of equipment sales more than doubled to $6.8 million for the nine months
ended September 30, 1997 from $3.2 million in the comparable 1996 period. This
increase was due mainly to the Horizon Acquisition and to an increased number of
telephones and accessories distributed as new subscriber acquisitions increased.
Sales of equipment to existing subscribers were also responsible for a portion
of this increase. On a pro forma basis including the effect of the Horizon
Acquisition, cost of equipment sales for the nine months ended September 30,
1997 increased 25.3% over the comparable period for 1996.
General and administrative costs nearly doubled to $11.7 million for the nine
months ended September, 1997 from $5.9 million for the comparable period in
1996. This increase is due primarily to the Horizon Acquisition and an increase
in operating costs due to company growth. On a pro forma basis, including the
effect of the Horizon Acquisition, general and administrative expenses for the
nine months ended September 30, 1997 increased 25.3% over the comparable period
for 1996 due mainly to an increase in operating costs due to internal growth.
Selling and marketing costs more than doubled to $7.5 million for the nine
months ended September 30, 1997 from $3.3 million for the comparable 1996
period. This increase is due to the Horizon Acquisition and a higher level of
new subscribers added period to period. Selling and marketing cost per gross new
subscriber, including the equipment subsidy, decreased to $306 for the nine
months ended September 30, 1997 from $347 for the comparable period in 1996 on a
pro forma basis for the Horizon Acquisition.
Depreciation and amortization increased to $21.1 million for the nine months
ended September 30, 1997 from $3.8 million for the comparable period in 1996 due
to depreciation on higher levels of fixed assets resulting from the Horizon
Acquisition and purchases for system growth, and amortization of the licenses
from the Horizon Acquisition. The amortization of the acquired cellular licenses
and subscriber lists contributed $7.7 million to this increased amortization.
For the nine months ended September 30, 1997, the Company spent $17.0 million in
capital expenditures, primarily for new cell sites, cell site conversions, and
system growth. As of September 30, 1997, the Company had completed 35 new cell
sites during 1997 bringing the total cell sites in service to 152.
Interest expense increased to $22.6 million for the nine months ended September
30, 1997 from $3.9 million for the comparable period in 1996. This increase was
primarily a result of increased borrowings associated with the Horizon
Acquisition.
11
<PAGE> 12
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. During 1996, the Company issued Senior Notes and
Preferred Stock to fund the Horizon Acquisition. During 1997, the Company issued
additional Common Stock and redeemed the outstanding Preferred Stock. See Note 6
and 7, Notes to Consolidated Financial Statements (Unaudited). In addition, 1.0
million outstanding shares of Class B Common Stock were purchased by Boston
Ventures Limited Partnership V from shareholders pursuant to a tender offer and,
upon transfer, became shares of Class A Common Stock.
Net cash provided by operating activities was $7.1 million for the nine months
ended September 30, 1997 compared to $7.1 million for the comparable period in
1996. This remained unchanged primarily due to the increase in interest expense,
which offset the increase in revenue and EBITDA due to growth in subscribers.
Net cash used in investing activities was $17.6 million for the nine months
ended September 30, 1997 compared to $42.7 million for the comparable period in
1996. This decrease is primarily due to the 1996 Horizon Acquisition offset some
what by the increased 1997 levels of purchases of property and equipment
primarily for system buildout.
Net cash provided by financing activities was $10.0 million for the nine months
ended September 30, 1997 compared to $36.8 million for the comparable period in
1996. The 1997 amount includes $43.9 million in net proceeds from the Common
Stock Sale which were used primarily to retire the Preferred Stock, reduce bank
debt, and fund capital expenditures. The 1996 amount includes primarily $110
million in gross proceeds from the issuance of Senior Notes which were used
primarily to reduce bank debt and the purchase of the Horizon Systems.
The Company's plans include a rapid buildout of the newly acquired systems in
order to improve coverage and increase usage. During the remainder of 1997, the
Company expects to complete 5 to 10 new cell sites in addition to the 35
completed to date. The Company continues to convert cell sites from Ericsson to
Northern Telecom equipment to more efficiently serve communities of interest in
and around the existing Northern Telecom systems in Youngstown and Erie and to
expand the digital service footprint, in addition to upgrading switches and
other network equipment. Aggregate capital expenditure levels are expected to be
approximately $25 to $30 million for the year ending 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. At September
30, 1997, the Company had approximately $109.5 million in additional funds
available to borrow under the Bank Credit Facility.
As a part of the Horizon Acquisition, the Company acquired interim operating
authority for the Rural Service Area (PA-2). On June 3, 1997, the Federal
Communications Commission granted the application of Pinellas Communications for
a license to operate a permanent cellular telephone system in PA-2. The Company
does not believe that the loss of PA-2 would have a material adverse effect upon
the Company's result of operations, financial position or cash flows.
The Company is a holding company with no direct operations and no significant
assets other than the stock of Sygnet Communications, Inc., its wholly owned
subsidiary. Accordingly, the Company's ability to make principal, interest and
other payments to holders of the Senior Notes when due, and to meet its other
obligations, is dependent upon the receipt of sufficient funds from its
subsidiary. The Bank Credit Facility contains certain restrictions upon the
ability of the subsidiary to distribute funds to the Company. The indenture
under which the Senior Notes were issued imposes certain limits on the ability
of the Company to, among others things, incur additional indebtedness. In
addition, the agreement under which the Company issued Common Stock in June 1997
imposes certain limits on the ability of the Company to, among other things,
incur additional indebtedness, issue additional capital stock or engage in
certain types of transactions.
12
<PAGE> 13
FORWARD LOOKING STATEMENTS
The description of the Company's capital expenditure plans set forth above are
forward looking statements made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. These plans involve a number
of risks and uncertainties. The important factors that could cause actual
capital expenditures or the Company's performance to differ materially from the
plans include, without limitation, the Company's continued ability to satisfy
the financial performance and other covenants of the Bank Credit Facility; the
impact of competition from other providers of cellular telephone and personal
communications services and other technologies that may be developed; and the
occurrence of other technological changes affecting the Company's business. For
further information regarding these and other risk factors, see "Business" in
the Company's annual report, on Form 10K for the fiscal year ended December 31,
1996 (File No. 333-10161) filed with the Securities and Exchange Commission. The
Company disclaims any duty to release publicly any updates or revisions to these
forward looking statements.
13
<PAGE> 14
<TABLE>
<CAPTION>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
<S> <C> <C>
(a) Exhibits
3.1 Amended and restated Articles of Incorporation of Sygnet Wireless, Inc. (1)[3.1]
3.2 Code of Regulations of Sygnet Wireless, Inc. (1)[3.2]
4.1 Indenture dated as of September 26, 1996 between Sygnet Wireless, Inc. and Fleet National
Bank, as Trustee. (1)[4]
10.23 Investment Agreement dated as of June 20, 1997 between Sygnet Wireless, Inc. and Boston
Ventures Limited Partnership V. (2)[10.23]
10.24 Registration Rights Agreement dated as of June 20, 1997
among Sygnet Wireless, Inc., Boston Ventures Limited
Partnership V, J.D. Williamson, II and Warren P.
Williamson, III. (2)[10.24]
10.25 Stockholders Agreement dated as of June 20, 1997 among
Sygnet Wireless, Inc., Boston Ventures Limited
Partnership V, J.D. Williamson, II and Warren P.
Williamson, III. (2)[10.25]
27.1 Financial Data Schedule.
(b) Reports on Form 8-K. There were no reports on Form 8-K filed during the quarter ended September 30,
1997
(1) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 1996, as the exhibit number indicated in brackets and incorporated by reference herein.
(2) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 1997, as the exhibit number indicated in brackets and incorporated by reference herein.
</TABLE>
<PAGE> 15
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
SYGNET WIRELESS, INC.
By: /s/ CRAIG T. SHEETZ
-------------------------
Craig T. Sheetz
Vice President and Chief
Financial Officer
(as duly authorized officer
and principal financial
officer of the registrant)
Dated: November 4, 1997
15
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