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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 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.
(AN OHIO CORPORATION)
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
OHIO 34-1689165
(State of Incorporation) (I.R.S. Employer Identification No.)
6550-B SEVILLE DRIVE, CANFIELD, OH 44406
(Address of principal executive offices) (Zip Code)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (330) 565-1000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K: [X]
As of February 11, 1998, 9,170,630 shares of Sygnet Wireless, Inc. Class A
and Class B Common Stock, par value $.01 per share (Common Stock), were
outstanding. The Common Stock is privately held and no shares have been sold in
the past 60 days to the knowledge of the Registrant.
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SYGNET WIRELESS, INC.
1997 REPORT ON FORM 10K
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM
NUMBER PAGE
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<C> <S> <C>
PART I
1 Business.................................................... 1
2 Properties.................................................. 17
3 Legal Proceedings........................................... 17
4 Submission of Matters to a Vote of Security Holders......... 17
PART II
5 Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 17
6 Selected Financial Data..................................... 18
7 Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 18
8 Financial Statements and Supplementary Data................. 24
9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 40
PART III
10 Directors and Executive Officers of Registrant.............. 40
11 Executive Compensation...................................... 42
12 Security Ownership of Certain Beneficial Owners and
Management................................................ 45
13 Certain Relationships and Related Transactions.............. 46
PART IV
14 Exhibits, Financial Statement Schedules, and Reports on Form
8-K....................................................... 47
</TABLE>
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PART I
ITEM 1. BUSINESS
GENERAL
Sygnet Wireless, Inc. (the Company) owns and operates cellular telephone
systems serving one large cluster with approximately 2.4 million Pops in
northeastern Ohio, western Pennsylvania and western New York. As used in this
document, Pops means the estimate of population of a license area. The number of
Pops is not the same as the number of subscribers or even potential 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. As of December 31, 1997, the Company had
approximately 143,000 subscribers.
The Company was incorporated under the laws of the State of Ohio in August
1991. 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 was
restructured in 1996 (the Restructuring). Prior to the Restructuring, SYGNET
Communications, Inc. operated as a Close Corporation with S corporation tax
status. Its cellular business was operated through three partnerships:
Youngstown Cellular Telephone Company, Erie Cellular Telephone Company and
Wilcom Cellular, each of which had two other corporate partners -- Wilcom
Corporation and Sharon-Youngstown Cellular, Inc. As a result of the
Restructuring, Wilcom Corporation was merged into SYGNET Communications, Inc.
which was renamed Sygnet Wireless, Inc. and is a holding company with
Sharon-Youngstown, renamed Sygnet Communications, Inc., its wholly-owned
subsidiary and the operating company. The existence of Youngstown Cellular
Telephone Company, Erie Cellular Telephone Company and Wilcom Cellular was
terminated.
THE HORIZON ACQUISITION
On October 9, 1996, the Company purchased for $252.9 million in cash
including net working capital, the PA-1, PA-2, PA-6, PA-7 and NY-3 Rural Service
Areas (RSAs) from Horizon Cellular Telephone Company (the Horizon Systems).
These systems serve 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, was acquired under Interim Operating
Authority (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. 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 will have a
material adverse effect upon the Company's result of operations, financial
position or cash flows.
The four contiguous Pennsylvania RSAs acquired from the Horizon Cellular
Telephone Company 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.
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 its systems by taking
advantage of its ability to operate in a large regional footprint. In
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addition, the Company may in the future acquire additional systems that provide
the Company with the ability to further its strategic objectives.
- 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 direct, targeted level of customer
service. 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 Time
Division Multiple Access (TDMA) digital technology it employs provide the
foundation for technically superior cellular service. The Company has
deployed and continues to deploy a large number of cell sites in each
service area. Consequently, subscribers enjoy a high quality of local and
regional coverage, minimal call blocking, seamless call delivery through
NACN and the availability of digital voice and data services. 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.
- 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 Personal Communications Service (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 are 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.
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CELLULAR MARKETS AND SYSTEMS
The Company operates in nine non-wireline license areas in northeastern
Ohio and western New York and Pennsylvania, including the PA-2 IOA. The
following table summarizes the Company's systems.
<TABLE>
<CAPTION>
DATE OF
TOTAL POPS OWNERSHIP NET POPS ACQUISITION
---------- --------- --------- -----------
<S> <C> <C> <C> <C>
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
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........................... 89,400 100% 89,400 1996
--------- ---------
Total................................ 2,371,600 2,371,600
</TABLE>
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.
The following chart lists the Company's cellular competitors in each of its
communities of interest.
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<CAPTION>
MARKETS COMPETITORS
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<S> <C>
Youngstown, OH MSA........................... 360 degrees Communications
Erie, PA MSA................................. GTE Mobilnet
Columbiana, OH (OH-11 RSA)................... 360 degrees Communications
Sharon, PA MSA............................... 360 degrees Communications
Crawford, PA (PA-1 RSA)...................... 360 degrees Communications
Lawrence, PA (PA-6 RSA)...................... Bell Atlantic and 360 degrees Communications
Indiana, PA (PA-7 RSA)....................... Bell Atlantic
Chautauqua, NY (NY-3RSA)..................... Frontier
McKean, PA (PA-2 RSA)........................ Bell Atlantic
</TABLE>
MARKETING
Most of the Company's systems promote their respective cellular products
and services under the name CELLULAR ONE(R). 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. The Company's Youngstown,
Columbiana and Sharon markets operate under the name Wilcom Cellular which has
strong local identity and name recognition.
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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 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
December 31, 1997, the Company maintained 53 retail stores and kiosks.
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 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 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.
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 new rate plans that
respond to market and competitive conditions. These rate plans range in type
from high user plans to economy plans. 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.
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CUSTOMER SERVICE AND RETENTION
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 had 163 cell sites in operation at December 31, 1997 and
expects to add approximately 15 to 20 new cell sites in 1998. 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 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. During 1997, the Company
constructed 46 new cell sites. The Company believes that the high level of
coverage provided by its Youngstown, Sharon, Erie and Columbiana systems and the
increased cellular coverage in the recently acquired Horizon Systems will have a
positive impact on market penetration and subscriber usage.
DIGITAL TECHNOLOGY
The Company has selected TDMA digital for its systems. All cell sites in
the Youngstown, Sharon, Erie and Columbiana systems were converted to digital in
early 1996 and most cell sites in western Pennsylvania which were part of the
Horizon Systems were converted to digital during 1997. Each cell site handles
analog service as well. Additionally, TDMA ensures the services provided by the
Company will be compatible with the neighboring cellular systems operated by
AT&T Wireless in Pittsburgh, Pennsylvania and SBC Communications 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.
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 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.
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EMPLOYEES AND AGENTS
As of December 31, 1997, the Company had 415 employees. In addition, as of
such date the Company had agreements with numerous independent sales agents,
including car dealerships, electronics stores, paging service 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.
OVERVIEW OF THE CELLULAR TELEPHONE INDUSTRY
The following table sets forth information published by the Cellular
Telephone Industry Association (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,
----------------------------------------------
1992 1993 1994 1995 1996
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Subscribers (in thousands).................... 11,000 16,000 24,000 34,000 44,000
Ending penetration(1)......................... 4.2% 6.2% 9.2% 12.8% 16.4%
</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 for 1997 the total number of
subscribers will surpass 53 million, thus yielding a penetration rate of
almost 20.0%.
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 more than one 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,
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
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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, implementation of the
Telecommunications Act of 1996 (the 1996 Act) by the FCC is expected ultimately
to result in arrangements between cellular carriers and local exchange carriers
for interconnection services at rates more closely related to cost. Certain of
the rules adopted by the FCC in August, 1996 to implement the pro-competition
interconnection provisions of the 1996 Act were struck down by the U.S. Court of
Appeals for the Eighth Circuit in a decision issued on July 17, 1997. The U.S.
Supreme Court has agreed to review the Eighth Circuit's decision. The Company is
unable to predict the outcome of the Supreme Court's review or the effect of the
FCC's final rules relating to interconnection services between cellular carriers
and LECs. The Company believes that any such 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. The
FCC 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 traveling 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
antennas 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 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 up to 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
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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 Youngstown, Erie, Columbiana and Sharon systems and
has begun to deploy it selectively in the Horizon Systems. The Company believes
that its 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.
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. 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.
PCS CARRIERS
The newest source of direct competition to cellular providers in the near
term is broadband PCS. Broadband PCS services consist of wireless two-way
telecommunications services for voice, data and other transmissions employing
digital microcellular 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. PCS systems
are currently operational in most urban areas in the United States. 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.
NEW TECHNOLOGIES
Cellular carriers also face to a lesser extent competition from 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 be expected to become more intense.
ESMR is a wireless communications service supplied by converting analog
Specialized Mobile Radio (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 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.
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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 has been authorized by the FCC to operate 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 transitioning toward lower 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, has strong distribution channels, superior customer
service capabilities and an experienced management team.
FINANCING
On October 9, 1996, Sygnet Communications, Inc. (the Subsidiary), a wholly
owned subsidiary of the Company, entered into a new financing agreement (the
Bank Credit Facility), a senior secured reducing revolver that provides the
Subsidiary with the ability to borrow up to $300 million from time to time.
Interest under the Bank Credit Facility accrues at a variable rate using 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 described
below) to annualized operating cash flow of the Subsidiary.
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% depending on the
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 June 30, 2005.
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. The Bank Credit Facility
sets forth various covenants that must be satisfied by the Subsidiary, including
financial covenant ratios that must be satisfied as the end of each fiscal
quarter, and 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 (defined
below) 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. A Change of Control (as
defined) of the Company would constitute an event 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 (defined below), 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 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
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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.
On September 19, 1996, the Company sold to the public $110,000,000
aggregate principal amount of 11 1/2% Senior Notes due October 1, 2006 (the
Notes). Interest on the Notes is payable April 1 and October 1 of each year. The
Notes are redeemable at the option of the Company at any time on or after
October 1, 2001 upon payment of premium plus accrued interest. The net proceeds
from the sale of the Notes were used to repay $71.5 million of existing debt and
the balance was used to partially fund the acquisition of the Horizon Systems.
The indenture under which the Notes were issued imposes certain limitations
on the ability of the Company to, among other things, incur indebtedness, make
restricted payments, effect certain asset sales, enter into certain transactions
with related persons, merge or consolidate with another person or transfer
substantially all its properties or assets. Upon the occurrence of a Change of
Control (as defined) of the Company, each holder of Notes may require the
Company to repurchase such holder's Notes at 101% of the principal amount
thereof plus accrued interest.
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 been impacted by the enactment of the 1996 Act
and are currently the subject of court appeals and administrative rulemakings
that are significant to the Company. Neither the outcome of the foregoing
proceedings 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 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.
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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 buildout 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 has 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 extended to
broadband PCS and ESMR licensees. Further, the FCC has 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 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 has also 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. As adopted, 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. On November 24, 1997, the Cellular Telecommunications
Industry Association requested the FCC to extend the June 30, 1999 deadline by
nine months, to March 31, 2000. The request is pending.
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 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
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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.
The FCC has routinely renewed the Company's Youngstown and Sharon licenses
on the basis of the Company's demonstration of not only its compliance with FCC
regulations, but also its service in the public interest. 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 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. Certain of
the rules adopted by the FCC in August, 1996 to implement the pro-competition
interconnection provisions of the 1996 Act were struck down by the U.S. Court of
Appeals for the Eighth Circuit in a decision issued on July 17, 1997. The U.S.
Supreme Court has agreed to review the Eighth Circuit's decision. The Company is
unable to predict the outcome of the Supreme Court's review or the effect of the
FCC's final rules relating to interconnection services between cellular carriers
and LECs. The Company believes that any such new rules are likely to reduce the
interconnection expenses incurred by the Company.
As required by the 1996 Act, the FCC has adopted 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 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.
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The overall impact of the 1996 Act on the business of the Company will
likely remain unclear 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. 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 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 has adopted rules concerning emission standards. 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.
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.
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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.
RISK FACTORS
LEVERAGE AND ABILITY TO MEET REQUIRED DEBT SERVICE
The Company considers itself highly leveraged. The Company's high 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, through its Subsidiary, finances its capital expenditures and
ongoing operations primarily using cash flow from operations and credit
availability under the Bank Credit Facility. 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 "Financing." The ability of the Subsidiary to fund 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 are general
unsecured obligations of the Company and 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 are not guaranteed by the Subsidiary. As a result, all
indebtedness of the Subsidiary, including the Subsidiary's borrowings under the
Bank Credit Facility, are structurally senior to the Notes. In addition, the
Company has pledged 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. 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 restricted by the terms of existing
and future indebtedness of the Subsidiary, including the Bank Credit Facility.
See "Financing."
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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 as systems designed to provide PCS and ESMR continue to be
constructed and become operational. Most of the PCS and ESMR competitors are
larger and have greater financial resources than the company. Additionally, the
company 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 business 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 and retain highly skilled and qualified personnel. Each of the
Company's key executives have entered into written employment agreements with
the Company. See "Management."
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 and Sharon, PA MSA
cellular licenses expired in 1995 and 1996, respectively and were renewed by the
FCC in due course. The Company's Erie, PA MSA and OH-11 RSA initial licenses
expire in 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
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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 offices, its microwave links, certain of its cell sites or certain
operating locations 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 new standards.
YEAR 2000 ISSUE
The Year 2000 issue is the result of the inability of some computer
programs to distinguish the Year 1900 from the Year 2000. Most computer programs
and operating systems were written using two digits to define the applicable
year rather than four digits. This means that any equipment containing computer
programs with time-sensitive software may recognize a date using "00" as the
Year 1900 rather than the Year 2000. The Company has formed a Year 2000 employee
group to evaluate and resolve Year 2000 issues in other parts of the Company's
operations. In some instances this could result in system failures, disruption
in operations and possible inaccuracies of data.
The Company's vulnerability as it relates to this issue is mainly with the
third party vendors whose computer equipment is used in the operations of the
MTSO and the customer billing system. The Company has initiated formal
communications with these vendors about the Year 2000 issue. These vendors have
responded with some assurance that their respective systems are or will be able
to accommodate the Year 2000 date. However, currently there can be no assurance
that these systems will be converted on a timely basis and that the Year 2000
issue will not have an adverse effect on the Company's operations.
RELIANCE ON ONE BILLING VENDOR
The Company relies primarily on one vendor to produce all of its customer
billings. If this billing vendor for any reason were to encounter significant
problems affecting its ability to fulfill its contractual obligations, the
Company's ability to generate billings to its customers would be materially
impaired for an undetermined amount of time.
16
<PAGE> 19
ITEM 2. PROPERTIES
The Company maintains its corporate headquarters in Canfield, Ohio. The
Company leases this space, which is approximately 6,000 square feet. As of
December 31, 1997, the Company's cellular operations lease 59 and own one sales
and administrative office. 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.
ITEM 3. LEGAL PROCEEDINGS
The Company is not currently involved in any pending legal proceedings that
individually or in the aggregate are material to the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no established trading market for the Common Stock. As of February
11, 1998, there were five record holders of the Company's Class A Common Stock
and 43 record holders of the Company's Class B Common Stock. The Company
declared dividends of $261,625 in 1996. At December 31, 1997, the Company was
prohibited from paying dividends on the Common Stock under the terms of the Bank
Credit Facility and the Notes. See Item 1, "Business -- Financing"; Item 7
"Management's Discussion and Analysis of Financial Condition and Results of
Operation -- Liquidity and Capital Resources"; and Note 6, Notes to Consolidated
Financial Statements. In addition, without the approval of at least one of the
directors designated by Boston Ventures Limited Partnership IV, the Company will
not be permitted to declare dividends on the Common Stock. See Item 13, "Certain
Relationships and Related Transactions."
17
<PAGE> 20
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data are derived from the historical
financial statements of the Company. The data should be read in conjunction with
the audited consolidated financial statements, related notes and other financial
information included herein.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenue........................ $ 85,634 $ 44,796 $24,577 $18,048 $14,474
Cost of services..................... 10,048 5,509 3,366 3,452 2,515
Cost of equipment sales.............. 9,663 5,816 4,164 1,624 930
General and administrative expense... 16,976 9,852 5,564 4,710 4,583
Selling and marketing expense........ 10,841 6,080 3,082 2,312 1,995
Depreciation and amortization........ 28,719 10,038 3,487 2,639 1,951
Operating income..................... 9,387 7,501 4,914 3,311 2,500
Interest expense..................... 29,902 11,174 2,660 964 652
Other expense, net................... 101 195 304 625 325
(Loss) income before extraordinary
item.............................. (20,616) (3,868) 1,950 1,722 1,523
Net (loss)income..................... (20,616) (5,288) 1,950 1,722 1,523
Net loss per share (pro forma for
1996) applicable to common
shareholders(1)
Before extraordinary item............ (2.93) (.74)
Net loss............................. (2.93) (.97)
BALANCE SHEET DATA:
Working capital (deficit)............ $ (2,520) (387) $ 1,880 $ (331) $ 4
Net fixed assets..................... 53,007 43,959 21,049 14,084 11,127
Total assets......................... 340,986 344,178 79,618 27,418 20,553
Long-term debt....................... 305,500 312,250 69,500 18,264 10,928
Total liabilities.................... 321,768 326,442 75,332 22,649 15,224
Redeemable preferred stock........... 19,718
Shareholders' equity (deficit)....... 19,218 (1,982) 4,286 4,769 5,329
Cash dividends declared(2)........... 262 714 2,128 996
</TABLE>
- ---------------
(1) Historical earnings per share data is not presented because such data is not
meaningful.
(2) Cash dividends declared per common share is not presented because such data
are not relevant due to the restructuring described in Note 1, Notes to
Consolidated Financial Statements.
ITEM 7. 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 audited consolidated financial statements and the notes thereto
appearing elsewhere in this report. As a result of the acquisition on October 9,
1996 of the Horizon Systems (Horizon Acquisition) and the acquisition on
September 29, 1995 of Erie Cellular Telephone Company (Erie Acquisition)
(collectively, the Acquisitions), 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 statements. Certain comparative
information is presented on a pro forma basis as if the Horizon Acquisition had
occurred January 1, 1996.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
For 1997, the Company posted total revenue of $85.6 million, which was
almost double the total revenue of $44.8 million for 1996. Earnings before
interest, taxes, depreciation and amortization, and other non-cash
18
<PAGE> 21
expenses (EBITDA) more than doubled to $38.1 million (44.5% of total revenue)
for 1997 from $17.5 million (39.2% of total revenue) during 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 $20.6 million for 1997,
which was greater than the net loss of $5.3 million for 1996.
Subscriber revenue grew by 69.3% to $52.6 million for 1997 from $31.1
million for 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 22.8% year to
year due to growth in the subscriber base, despite a decline in average revenue
per subscriber. The Company's subscribers grew by 34.1% to 142,934 at December
31, 1997 from 106,574 at December 31, 1996 due mainly to internal growth. On a
pro forma basis, including the effect of the Horizon Acquisition, average
monthly revenue per subscriber declined by 7.7% to $54.32 during 1997 from
$58.83 in 1996. This was due to 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, increased
promotional activity and competitive market pressures.
Roamer revenue almost tripled to $27.0 million during 1997 compared to $9.7
million for 1996. This increase was mainly a result of the Horizon Acquisition
as well as increased roaming traffic throughout all of the Company's systems. On
a pro forma basis including the effects of the Horizon Acquisition, roamer
revenue grew by 21.5% year to year due mainly to a greater volume of roaming
traffic despite a slight reduction in roaming revenue per minute. The roaming
revenue per minute for 1997 decreased to $0.58 from $0.59 for 1996 on a pro
forma basis including the effects of the Horizon Acquisition. This decrease was
mainly a result of reductions in roaming rates with roaming partners.
Equipment sales almost doubled to $4.3 million for 1997 compared to $2.4
million for 1996. This increase was due mainly to the Horizon Acquisition, an
increased number of telephones and accessories distributed as new subscriber
acquisitions increased, as well as from additional sales of equipment to
existing customers. On a pro forma basis including the effect of the Horizon
Acquisition, equipment sales for 1997 increased 12.4% over the comparable period
for 1996.
Cost of services almost doubled to $10.0 million during 1997 from $5.5
million for 1996 due mainly to the Horizon Acquisition. On a pro forma basis
including the Horizon Acquisition, cost of services for 1997 increased by 12.0%
from 1996. This increase was mainly a result of an increase in billing, call
delivery and roaming costs associated with the growth in the subscriber base,
partially offset by lower rates for interconnection and long distance charges.
As a percentage of total revenues, on a pro forma basis including the effects of
the Horizon Acquisition, cost of services was 11.7% in 1997 compared to 12.7% in
1996.
Cost of equipment sales almost doubled to $9.7 million for 1997 from $5.8
million in 1996. 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 1997 increased
18.6% over the comparable period for 1996.
General and administrative costs grew by 72.3% to $17.0 million in 1997
from $9.9 million in 1996. This increase was due primarily to the Horizon
Acquisition and an increase in operating costs due to internal growth. On a pro
forma basis including the effects of the Horizon Acquisition, general and
administrative expenses for 1997 increased 19.8% over the comparable period for
1996. This increase was mainly a result of an increase in compensation, customer
retention, occupancy and maintenance expenses associated with the growth in the
subscriber base as well as the additional cell sites added during 1997. As a
percentage of total revenues, on a pro forma basis including the effects of the
Horizon Acquisition, general and administrative expense was 19.8% in 1997
compared to 20.0% in 1996.
Selling and marketing costs grew by 78.3% to $10.8 million for 1997 from
$6.1 million in the comparable period for 1996. This increase is due to the
Horizon Acquisition and a higher level of new subscribers added period to
period. On a pro forma basis including the effects of the Horizon Acquisition,
selling and marketing
19
<PAGE> 22
costs grew by 12.3% year to year reflecting improved efficiency as the Company
added 26.8% more net subscribers in 1997 than in 1996. Selling and marketing
cost per gross new subscriber decreased to $291 for 1997 from $324 in 1996
reflecting a decrease in cost of telephones and accessories in addition to
improved operating efficiencies.
Depreciation and amortization increased to $28.7 million for 1997 from
$10.0 million 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 $10.3 million to
this increased amortization. For 1997, the Company spent $25.6 million in
capital expenditures, primarily for new cell sites, cell site conversions, and
system growth.
Interest expense increased to $29.9 million in 1997 from $11.2 million in
1996. This increase was primarily a result of increased borrowings associated
with the Horizon Acquisition.
At December 1997, the Company has a net operating loss carryforward of
$28.7 million. No benefit of the loss carryforward has been recorded in 1997. If
in the future this loss carryforward is utilized, the related benefits will be
recorded.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
For 1996, the Company posted total revenue of $44.8 million, an 82.3%
increase over total revenue of $24.6 million for 1995. EBITDA more than doubled
to $17.5 million (39.2% of total revenue) for 1996 from $8.4 million (34.2%. of
total revenue) during 1995. The growth in revenue and EBITDA was the result of
the Acquisitions and continued growth of the subscriber base. Increased interest
expense, depreciation, and amortization charges related to the Acquisitions more
than offset the increased revenue and EBITDA to produce a net loss of $5.3
million for 1996, a decrease from net income of $2.0 million for 1995.
Subscriber revenue grew by 80.8% to $31.0 million for 1996 compared to
$17.2 million for 1996 mainly as a result of the Acquisitions and continued
subscriber growth in the Company's markets. The Company's subscribers more than
doubled to 106,574 at December 31, 1996 from 44,665 at December 31, 1995 due
mainly to the Horizon Acquisition as well as internal growth. On a pro forma
basis, including the effects of the Horizon Acquisition, the subscriber base
increased by 36.8% to 106,574 at December 31, 1996 from 77,891 at December 31,
1995 due mainly to internal growth. On a per subscriber basis including the
effects of the Horizon Acquisition, average monthly revenue declined to $58.83
during 1996 from $64.04 in 1995 due in part to 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 as
well as competitive market pressures.
Roamer revenue more than doubled to $9.7 million during 1996 compared to
$4.2 million in 1995. This increase was mainly a result of the Acquisitions as
well as increased roaming traffic throughout all of the Company's systems.
Roamer revenue per minute during 1996 decreased slightly to $0.55 from $0.57 in
1995. This decrease was due mainly to strategic reductions made to regional
roaming rates received from other cellular carriers in the first quarter of 1995
which were in effect for the full year in 1996, offset somewhat by the effects
of the Horizon Acquisition.
Equipment sales increased by 58.1% to $2.4 million in 1996 compared to $1.5
million in 1995. This increase was due mainly to the Acquisitions, 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 declined to $1.6 million in 1996 from $1.7
million in 1995 as equipment rental revenue continued to decrease due to the
continued phase out of rental programs.
Cost of services increased by 63.7% to $5.5 million in 1996 from $3.4
million in 1995 due mainly to the Acquisitions. This growth rate was less than
the growth rate of subscriber revenue which grew 80.8% during the same period,
which was the result of operating efficiencies gained from the Acquisitions.
20
<PAGE> 23
Cost of equipment sales increased by 39.7% to $5.8 million in 1996 from
$4.2 million in the comparable 1995 period. This increase was due mainly to the
Acquisitions and to an increased number of telephones and accessories
distributed as new subscriber acquisitions increased. The increased cost of
equipment sold resulting from the increase in gross activations is somewhat
offset by the declining cost to acquire new telephones.
General and administrative costs increased by 77.1% to $9.9 million in 1996
from $5.6 million in 1995. This increase is due primarily to the Acquisitions
and the effects of a third quarter 1995 one time adjustment to the personal
property tax accrual resulting from a substantial decrease in tax rates.
Selling and marketing costs almost doubled to $6.1 million in 1996 from
$3.1 million in 1995. This increase is due to the Acquisitions 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 $310 in 1996
from $345 for the comparable period in 1995 as a result of a decrease in cost of
telephones and accessories in addition to improved efficiencies.
Depreciation and amortization increased to $10.0 million in 1996 from $3.5
million in 1995 due to depreciation on higher levels of fixed assets resulting
from the Acquisitions and purchases for system growth, and amortization of the
licenses from the Acquisitions. The amortization of the acquired cellular
licenses and subscriber lists contributed $3.4 million to this increased
amortization. For 1996, the Company spent $10.0 million in capital expenditures,
primarily for new cell sites, cell site conversions, and system growth.
Interest expense increased to $11.2 million in 1996 from $2.7 million in
1995. This increase was primarily a result of increased borrowings associated
with the Acquisitions. In October 1996, the Company incurred an extraordinary
loss of $1.4 million to write-off unamortized financing costs associated with
the extinguished bank credit agreement. See Item 1, "Business -- Financing"; and
Note 4, Notes to Consolidated Financial Statements.
At December 1996, the Company had a net operating loss carryforward of $7.5
million. No benefit of the loss carryforward has been recorded in 1996. If in
the future this loss carryforward is utilized, the related benefits will be
recorded. Income tax expense was $65,400 in 1995.
IMPACT OF YEAR 2000
The Year 2000 issue is the result of the inability of some computer
programs to distinguish the Year 1900 from the Year 2000. Most computer programs
and operating systems were written using two digits to define the applicable
year rather than four digits. This means that any equipment containing computer
programs with time-sensitive software may recognize a date using "00" as the
Year 1900 rather than the Year 2000. In some instances this could result in
system failures, disruption in operations and possible inaccuracies of data.
The Company's vulnerability as it relates to this issue is mainly with the
third party vendors whose computer equipment is used in the operations of the
MTSO and the customer billing system.
To assess the exposure to Year 2000 issues for all areas of the business,
the Company has staffed a project team. This project team will evaluate all
vendors to determine if they are Year 2000 ready as well as identify and test
the computer equipment on which the Company is dependent for business
operations.
To date, the Company has initiated formal communications with its
significant third party vendors about the Year 2000 issue. These vendors have
responded with some assurance that their respective systems are or will be able
to accommodate the Year 2000 date. However, the project team has not yet tested
these systems to provide assurance of compliance and currently there can be no
assurance that these systems will be converted on a timely basis and that the
Year 2000 issue will not have an adverse effect on the Company's operations.
21
<PAGE> 24
The cost to the Company of being prepared for the Year 2000 has not yet
been determined. The goal of the project team is to assess the impact of the
Year 2000 issue and develop a plan and cost estimate by mid 1998 that will allow
the Company to resolve any Year 2000 issues by December 31, 1998.
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 1997, the Company issued additional Common
Stock and redeemed its outstanding Preferred Stock. See Note 9 and 10, Notes to
Consolidated Financial Statements. In addition, 1 million outstanding shares of
Class B Common Stock were purchased by Boston Ventures Limited Partnership V
directly from shareholders pursuant to a tender offer and, upon purchase based
on the corporate restructuring described in Item 1 "Business -- Corporate
Restructuring," became shares of Class A Common Stock.
Net cash provided by operating activities was $9.4 million for 1997
compared to $14.8 million for 1996 and $2.4 million in 1995. This decrease from
1996 to 1997 was primarily due to interest paid of $30.0 million in 1997
compared to $4.7 million in 1996, which was offset significantly by the increase
in revenue and EBITDA due to growth in subscribers. The increase from 1995 to
1996 was primarily the result of the increase in the number of subscribers and
the related growth in revenue.
In 1997, capital expenditures of $25.6 million were primarily for system
buildout. In 1996 and 1995, investing activities included the Horizon and Erie
Acquisitions, respectively, and capital expenditures required to support the
growth of the business.
Net cash provided by financing activities was $15.0 million for 1997
compared to $251.2 million for 1996 and $46.6 million in 1995. The 1997 amount
includes $43.6 million in net proceeds from the sale of Common Stock which were
used primarily to redeem the Preferred Stock, reduce bank debt, and fund capital
expenditures. The 1996 amount includes primarily funds received, net of
financing costs, from the issuance of Senior Notes and Preferred Stock and
borrowings under the bank credit facilities to fund acquisitions. Dividends of
$0.3 million and $1.2 million were paid in 1996 and 1995, respectively.
The Company's plans include a continued buildout of its systems in order to
improve coverage and increase usage. During 1998, the Company plans to build 15
to 20 new cell sites. It also plans to strengthen its existing cellular network
by sectorizing high traffic cells, increasing microwave capacity and upgrading
the Ohio and Pennsylvania systems to state of the art IS-136 TDMA digital.
Capital expenditures are projected to be $15 to $20 million for the year ending
December 31, 1998. The Company plans to use internally generated funds plus
funds available under the Bank Credit Facility to finance this capital
expenditure program. At December 31, 1997, the Company had $95.1 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.
22
<PAGE> 25
EFFECT OF NEW ACCOUNTING STANDARDS
In June 1997, the FASB issued Statement No. 130, Reporting Comprehensive
Income, which is required to be adopted effective 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 effective 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 statement disclosures is not expected to be material.
INFLATION
The Company does not believe that inflation has had a significant impact on
the Company's consolidated operations.
FORWARD LOOKING STATEMENTS
The description of the Company's capital expenditure plans and Year 2000
preparedness 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 Item 1 "Business -- Risk Factors." The Company disclaims
any duty to release publicly any updates or revisions to these forward looking
statements.
23
<PAGE> 26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
FINANCIAL STATEMENTS:
Report of Independent Auditors............................ 25
Consolidated Balance Sheets as of December 31, 1997 and
1996................................................... 26
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995....................... 27
Consolidated Statements of Shareholders' Equity (Deficit)
for the years ended December 31, 1997, 1996 and 1995... 28
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996, and 1995...................... 29
Notes to Consolidated Financial Statements................ 30
SUPPLEMENTARY DATA:
Schedule-II Valuation and Qualifying Accounts............. 39
</TABLE>
24
<PAGE> 27
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Sygnet Wireless, Inc.
We have audited the accompanying consolidated balance sheets of Sygnet
Wireless, Inc. as of December 31, 1997 and 1996, and the related consolidated
statements of operations, shareholders' equity (deficit), and cash flows for
each of the three years in the period ended December 31, 1997. Our audits also
included the financial statement schedule listed in the Index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Sygnet Wireless, Inc. at December 31, 1997 and 1996 and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1997 in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
Cleveland, Ohio
February 6, 1998
25
<PAGE> 28
SYGNET WIRELESS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 860,086 $ 2,257,748
Accounts receivable, less allowance for doubtful accounts
of $809,800 at December 31, 1997 and $1,168,800 at
December 31, 1996...................................... 10,711,627 8,857,028
Inventory................................................. 1,867,445 1,696,952
Prepaid expenses.......................................... 309,460 531,171
------------ ------------
Total current assets.............................. 13,748,618 13,342,899
Other assets:
Cellular licenses -- net.................................. 245,866,235 252,271,468
Customer lists -- net..................................... 19,382,087 24,535,885
Deferred financing costs -- net........................... 8,982,430 10,068,956
------------ ------------
Total other assets................................ 274,230,752 286,876,309
Property and equipment -- net............................... 53,007,015 43,958,969
------------ ------------
Total assets...................................... $340,986,385 $344,178,177
============ ============
LIABILITIES, REDEEMABLE PREFERRED STOCK AND SHAREHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................... $ 3,264,206 $ 2,826,629
Deferred revenue.......................................... 2,058,066 1,679,873
Accrued expenses and other liabilities.................... 4,196,230 2,744,789
Interest payable.......................................... 6,749,755 6,940,623
------------ ------------
Total current liabilities......................... 16,268,257 14,191,914
Long-term debt.............................................. 305,500,000 312,250,000
Redeemable Series A Senior Cumulative Nonvoting Preferred
Stock, $.01 par, aggregate redemption value of
$20,690,411, 500,000 shares authorized, 200,000 shares
issued and outstanding and warrants....................... -- 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 December 31, 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 December 31, 1997; 6,167,977
shares issued and outstanding as of December 31,
1996................................................... 51,599 61,679
Additional paid-in capital................................ 47,598,498 5,812,211
Retained deficit.......................................... (28,222,124) (7,605,730)
Note receivable from officer/shareholder.................. (249,952) (249,952)
------------ ------------
Total shareholders' equity (deficit).............. 19,218,128 (1,981,765)
------------ ------------
Total liabilities, redeemable preferred stock and
shareholders' equity (deficit).................. $340,986,385 $344,178,177
============ ============
</TABLE>
See accompanying notes.
26
<PAGE> 29
SYGNET WIRELESS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------------
1997 1996 1995
------------ ----------- -----------
<S> <C> <C> <C>
REVENUE:
Subscriber revenue............................... $ 52,638,712 $31,084,883 $17,191,291
Roamer revenue................................... 26,992,584 9,687,284 4,175,809
Equipment sales.................................. 4,323,052 2,416,769 1,529,284
Other revenue.................................... 1,679,412 1,607,245 1,680,544
------------ ----------- -----------
Total revenue............................ 85,633,760 44,796,181 24,576,928
COSTS AND EXPENSES:
Cost of services................................. 10,048,416 5,508,386 3,365,954
Cost of equipment sales.......................... 9,663,251 5,816,144 4,163,890
General and administrative....................... 16,975,592 9,852,004 5,563,887
Selling and marketing............................ 10,841,059 6,080,308 3,082,492
Depreciation and amortization.................... 28,718,937 10,038,439 3,486,554
------------ ----------- -----------
Total costs and expenses................. 76,247,255 37,295,281 19,662,777
------------ ----------- -----------
Income from operations............................. 9,386,505 7,500,900 4,914,151
OTHER:
Interest expense................................. 29,901,678 11,173,688 2,660,248
Other expense, net............................... 101,221 194,723 303,867
------------ ----------- -----------
(Loss) income before extraordinary item............ (20,616,394) (3,867,511) 1,950,036
Extraordinary loss on extinguishment of debt....... -- (1,420,864) --
------------ ----------- -----------
Net (loss) income.................................. $(20,616,394) $(5,288,375) $ 1,950,036
============ =========== ===========
Earnings per share information (pro forma for
1996):
Loss before preferred stock dividend and
accretion..................................... $(20,616,394) (5,288,375)
Preferred stock dividend and accretion........... $ (2,121,423) $ (718,028)
------------ -----------
Net loss applicable to common shareholders....... $(22,737,817) $(6,006,403)
============ ===========
Net loss per share applicable to common
shareholders
Before extraordinary item..................... $ (2.93) $ (.74)
Extraordinary item............................ -- (.23)
------------ -----------
Net loss...................................... $ (2.93) $ ( .97)
============ ===========
Weighted average common shares outstanding......... 7,773,370 6,170,630
============ ===========
</TABLE>
See accompanying notes.
27
<PAGE> 30
SYGNET WIRELESS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
WILCOM CORPORATION SYGNET COMMUNICATIONS, INC. SYGNET
COMMON STOCK COMMON STOCK WIRELESS, INC.
------------------------------------- ----------------------------------------------- ---------
TYPE A TYPE B TYPE A TYPE B CLASS A
----------------- ----------------- -------------------- ------------------------ ---------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES
------ -------- ------ -------- -------- --------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AS OF JANUARY 1,
1995.................... 500 $ 12,500 2,500 $ 62,500 209,362 $ 209,362 1,046,801 $ 1,046,801 --
Net Income..............
Dividends declared......
Type A common stock
repurchased...........
Type B common stock
repurchased...........
---- -------- ------ -------- -------- --------- ---------- ----------- ---------
BALANCE AS OF DECEMBER
31, 1995................ 500 12,500 2,500 62,500 209,362 209,362 1,046,801 1,046,801
Net loss................
Dividends declared......
Corporate merger........ (500) (12,500) (2,500) (62,500) 4,360 4,360 21,800 21,800
Retirement of treasury
stock................. 8,024 (40,173)
Sygnet Wireless
capitalization........ (205,698) (213,722) (1,028,428) (1,068,601)
Capital contribution of
S Corporation
earnings..............
Preferred stock
dividend..............
Accretion of preferred
stock.................
Exchange of common
shares................ 2,653
---- -------- ------ -------- -------- --------- ---------- ----------- ---------
BALANCE AS OF DECEMBER
31, 1996................ -- -- -- -- -- -- -- -- 2,653
Net loss................
Preferred stock
dividend..............
Accretion of preferred
stock.................
Stock option
compensation..........
Excess of redemption
price over carrying
value of preferred
stock.................
Net proceeds from
issuance of common
shares to Boston
Ventures.............. 3,000,000
Exchange of common
shares................ 1,008,000
---- -------- ------ -------- -------- --------- ---------- ----------- ---------
BALANCE AS OF DECEMBER
31, 1997................ -- $ -- -- $ -- -- $ -- -- $ -- 4,010,653
==== ======== ====== ======== ======== ========= ========== =========== =========
<CAPTION>
SYGNET WIRELESS, INC.
------------------------------ NOTE
CLASS A CLASS B ADDITIONAL RETAINED RECEIVABLE TREASURY STOCK
------- -------------------- PAID-IN EARNINGS FROM OFFICER/ ------------------------
AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) SHAREHOLDER SHARES AMOUNT
------- ---------- ------- ------------ ------------ ------------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AS OF JANUARY 1,
1995.................... $ -- -- $ -- $ 4,170,368 $ (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 AS OF DECEMBER
31, 1995................ 4,170,368 753,675 (249,952) 48,197 $(1,718,991)
Net loss................ (5,288,375)
Dividends declared...... (261,625)
Corporate merger........ 48,840
Retirement of treasury
stock................. (1,718,991) (48,197) 1,718,991
Sygnet Wireless
capitalization........ 6,170,630 61,706 1,220,617
Capital contribution of
S Corporation
earnings.............. 2,809,405 (2,809,405)
Preferred stock
dividend.............. (690,411)
Accretion of preferred
stock................. (27,617)
Exchange of common
shares................ 27 (2,653) (27)
------- ---------- ------- ------------ ------------ --------- ---------- -----------
BALANCE AS OF DECEMBER
31, 1996................ 27 6,167,977 61,679 5,812,211 (7,605,730) (249,952) -- --
Net loss................ (20,616,394)
Preferred stock
dividend.............. (1,149,040)
Accretion of preferred
stock................. (46,849)
Stock option
compensation.......... 306,000
Excess of redemption
price over carrying
value of preferred
stock................. (925,534)
Net proceeds from
issuance of common
shares to Boston
Ventures.............. 30,000 43,601,710
Exchange of common
shares................ 10,080 (1,008,000) (10,080)
------- ---------- ------- ------------ ------------ --------- ---------- -----------
BALANCE AS OF DECEMBER
31, 1997................ $40,107 5,159,977 51,599 $ 47,598,498 $(28,222,124) $(249,952) -- $ --
======= ========== ======= ============ ============ ========= ========== ===========
</TABLE>
See accompanying notes.
28
<PAGE> 31
SYGNET WIRELESS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------------------
1997 1996 1995
------------ ------------- ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net (loss) income............................... $(20,616,394) $ (5,288,375) $ 1,950,036
Adjustments to reconcile net (loss) income to
net cash provided by operating activities:
Depreciation.................................. 16,018,841 5,948,693 2,765,816
Amortization.................................. 12,700,096 4,089,746 720,738
Compensation expense from issuance of stock
options.................................... 306,000
Loss on disposal of equipment................. 102,955 177,633 161,222
Extraordinary loss on extinguishment of
debt....................................... 1,420,864
Changes in operating assets and liabilities:
Accounts receivable........................ (1,854,599) (184,315) (2,838,833)
Inventory.................................. (170,493) (287,900) (184,951)
Prepaid and deferred expenses.............. 232,548 28,649 7,951
Accounts payable and accrued expenses...... 2,866,653 2,424,406 (589,925)
Accrued interest payable................... (190,868) 6,481,912 452,933
------------ ------------- ------------
Net cash provided by operating
activities.......................... 9,394,739 14,811,313 2,444,987
INVESTING ACTIVITIES
Acquisitions of Horizon and Erie................ (599,442) (254,150,136) (40,533,104)
Purchases of property and equipment............. (25,575,837) (10,049,999) (9,056,098)
Proceeds from sale of equipment................. 405,995 513,730
------------ ------------- ------------
Net cash used in investing
activities.......................... (25,769,284) (264,200,135) (49,075,472)
FINANCING ACTIVITIES
Dividends paid.................................. (261,625) (1,158,980)
Proceeds from long-term debt.................... 30,500,000 320,750,000 51,986,188
Principal payments on long-term debt............ (37,250,000) (78,000,000) (750,000)
Increase in financing costs..................... (65,376) (10,290,097) (1,716,230)
Net proceeds from issuance of preferred stock... 19,000,000
Redemption of preferred stock................... (21,839,451)
Net proceeds from issuance of common stock...... 43,631,710
Purchase of treasury stock...................... (1,718,991)
------------ ------------- ------------
Net cash provided by financing
activities.......................... 14,976,883 251,198,278 46,641,987
(Decrease) increase in cash and cash
equivalents................................... (1,397,662) 1,809,456 11,502
Cash and cash equivalents at beginning of
year.......................................... 2,257,748 448,292 436,790
------------ ------------- ------------
Cash and cash equivalents at end of
year................................ $ 860,086 $ 2,257,748 $ 448,292
============ ============= ============
</TABLE>
See accompanying notes.
29
<PAGE> 32
SYGNET WIRELESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
These 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
consolidated accounts of Sygnet Wireless, Inc. and its wholly-owned subsidiary
Sygnet Communications, Inc. (Sygnet) (hereinafter collectively referred to as
the "Company") thereafter. The Company owns and operates cellular telephone
systems serving one large cluster with an approximate population of 2.4 million
in Northeastern Ohio, Western Pennsylvania and Western New York.
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. This
merger was a business combination between entities under common control whereby
the assets and liabilities so transferred were accounted for at historical cost
in a manner similar to that in pooling-of-interest accounting. Also, in
conjunction with this merger, the shareholders of SYGNET amended the articles of
incorporation to change SYGNET's name to Sygnet Wireless, Inc.
Prior to the restructuring, SYGNET and Wilcom had been operating their
cellular business through three partnerships (Youngstown Cellular Telephone
Company (YCTC), Erie Cellular Telephone Company (Erie), and Wilcom Cellular) and
Sharon-Youngstown Cellular, Inc. (Sharon). As a result of the restructuring and
merger, Sharon was renamed Sygnet and is the wholly-owned subsidiary and
operating company of Sygnet Wireless, Inc. The existence of YCTC, Erie, and
Wilcom Cellular terminated on October 1, 1996 when all partnership interests
transferred to Sygnet.
2. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the FASB issued Statement No. 130, Reporting Comprehensive
Income, which is required to be adopted effective 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 effective January 1, 1998. This Statement changes the way companies
report selected 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 statement disclosures is not expected to be material.
3. 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 "Horizon") for cash of
$252.9 million. The acquired systems provide cellular service to an estimated
population of 1.4 million in contiguous markets in Western Pennsylvania and
Western New York.
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.
30
<PAGE> 33
SYGNET WIRELESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The above transactions were accounted for as purchases and, accordingly,
the results of operations of the companies acquired have been included in the
consolidated financial statements since the dates of acquisition.
Cash paid for acquisitions is summarized below:
<TABLE>
<CAPTION>
1996 1995
------------ -----------
<S> <C> <C>
Current assets acquired.................................. $ 3,613,696 $ 923,234
Property and equipment................................... 18,986,400 1,349,195
Cellular licenses........................................ 207,223,616 40,289,743
Customer lists........................................... 25,700,000
Current liabilities assumed.............................. (774,134) (108,878)
------------ -----------
Net assets and liabilities acquired...................... 254,749,578 42,453,294
Amounts payable in future periods........................ (599,442) (1,920,190)
------------ -----------
Cash paid................................................ $254,150,136 $40,533,104
============ ===========
</TABLE>
The pro forma unaudited condensed combined results of operations for the
year ended December 31, 1996 as if the purchase occurred on January 1, 1996 are
as follows:
<TABLE>
<CAPTION>
1996
------------
<S> <C>
Revenue..................................................... $ 69,851,000
============
Loss before extraordinary item.............................. $(15,283,000)
============
Net loss.................................................... $(16,704,000)
============
Pro forma net loss per share applicable to common
shareholders.............................................. $ (3.25)
============
</TABLE>
4. SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
The consolidated financial statements include the accounts of the parent
company and its wholly-owned subsidiary. Intercompany balances and transactions
have been eliminated in the consolidated financial statements.
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
31
<PAGE> 34
SYGNET WIRELESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
complied with its obligations under the Communications Act of 1934. 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 met, and will continue to meet all requirements
necessary to secure renewal of its cellular licenses.
The Company has acquired cellular licenses and customer lists through its
acquisition of interests in various cellular systems. The cost of licenses and
customer lists acquired was $231,003,426 in 1996. The Company uses a 40 year
useful life to amortize its licenses under the straight-line method. Purchased
cellular and 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>
1997 1996
------------ ------------
<S> <C> <C>
Cellular licenses....................................... $255,849,696 $255,849,696
Customer lists.......................................... 25,819,792 25,819,792
------------ ------------
281,669,488 281,669,488
Accumulated amortization................................ (16,421,166) (4,862,135)
------------ ------------
$265,248,322 $276,807,353
============ ============
</TABLE>
Amortization expense was $11,559,031, $3,652,470 and $523,768 in 1997, 1996
and 1995, respectively.
The ongoing value and remaining useful lives of intangible and other
long-term 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 and other long-term 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 terms of the bank
credit facility and senior notes. Accumulated amortization was $1,409,754 and
$266,084 at December 31, 1997 and 1996, respectively. Amortization expense was
$1,141,065, $437,276 and $196,970 in 1997, 1996 and 1995, respectively. Upon
entering into a new bank credit facility in October 1996, an extraordinary loss
of $1,420,864 was incurred to write-off unamortized financing costs under the
extinguished bank credit agreement as described in Note 6.
ADVERTISING COSTS
Advertising costs are recorded as expense when incurred. Advertising
expense was $1,841,138, $1,225,151 and $933,498 in 1997, 1996 and 1995,
respectively.
32
<PAGE> 35
SYGNET WIRELESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NET LOSS PER COMMON SHARE
In 1997, the Company adopted FASB Statement No. 128, Earnings per Share,
which replaced the computation of primary and fully diluted earnings per share
with basic and diluted earnings per share. No restatement of prior year earnings
per share amounts was necessary since the impact was not significant.
Net loss per share is computed using the weighted average number of shares
of common stock outstanding during the period. The pro forma net loss per share
for 1996 is based on the number of common shares outstanding, as if the
corporate restructuring described in Note 1 occurred at the beginning of the
year. The effect of stock options is not included in the computation of dilutive
earnings per share since it is anti-dilutive.
Losses applicable to common shareholders include adjustments for Preferred
Stock dividends and accretions and the excess of the redemption price paid over
the carrying value of the Preferred Stock. Earnings per share for 1995 is not
presented because such data prior to the restructuring described in Note 1 is
not meaningful.
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
43%, 48% and 62% of the Company's Roamer Revenue was earned from two cellular
carriers in 1997, 1996 and 1995, respectively.
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.
The Company may be exposed to credit loss in the event of nonperformance by
the counterparties to its interest rate swap agreements. The Company anticipates
the counterparties will be able to fully satisfy its obligations under the
agreements.
33
<PAGE> 36
SYGNET WIRELESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
At December 31, 1997 and 1996, the carrying value of cash equivalents,
accounts receivable, the interest rate swap and the long-term bank debt
approximated fair value. The fair value of the long-term unsecured senior notes,
calculated based on quoted market prices, was $118,800,000 and $112,750,000 at
December 31, 1997 and 1996, respectively.
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
USEFUL LIFE 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Land, building and improvements.......... 5-19 years $ 10,575,573 $ 7,296,770
Cellular system and equipment............ 2.5-19 years 57,010,440 41,498,865
Customer premise equipment............... 3 years 665,935 1,690,906
Office furniture and equipment........... 3-10 years 9,257,464 4,341,459
Cell site construction in progress....... 1,522,275 1,076,817
------------ ------------
79,031,687 55,904,817
Accumulated depreciation................. (26,024,672) (11,945,848)
------------ ------------
$ 53,007,015 $ 43,958,969
============ ============
</TABLE>
At December 31, 1997, the Company had purchase commitments of approximately
$9.3 million for equipment.
6. 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 commencing April 1, 1997. 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 acquisition of Horizon described in
Note 3.
On October 9, 1996, Sygnet 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 $300.0 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 (LIBOR) or
the prime rate. Interest payments are made quarterly. As of December 31, 1997,
$195.5 million was outstanding under the Bank Credit Facility.
Among other things, the Bank Credit Facility contains financial covenants
which require the maintenance of debt service ratios and the hedging of interest
rate risk and limit distributions to shareholders and sales of assets. In
connection with these covenants, the Company has a three year interest rate swap
with a total underlying notional amount of $80 million. The swap agreements
converted the interest rate on $80 million notional amount of the credit
facility from a variable rate based upon a three month LIBOR (5.81% at December
31, 1997) to fixed rates ranging from 5.79% to 6.03%. Amounts paid or received
under these agreements are recognized as adjustments to interest expense.
34
<PAGE> 37
SYGNET WIRELESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
There are no future minimum payments based upon the borrowing levels at
December 31, 1997 for the next five years.
Interest paid was $30,076,031, $4,691,776 and $2,202,345 in 1997, 1996 and
1995 respectively.
7. 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.
Minimum future rental payments under operating leases having remaining
terms in excess of one year as of December 31, 1997 are as follows:
<TABLE>
<S> <C>
1998............................................ $ 1,777,262
1999............................................ 1,445,209
2000............................................ 1,182,204
2001............................................ 817,668
2002............................................ 505,431
Thereafter...................................... 6,657,092
-----------
Total........................................... $12,384,866
===========
</TABLE>
Rent expense was approximately $2,077,644, $906,042 and $460,800 in 1997,
1996 and 1995, respectively.
8. 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 $293,000, $181,000 and $114,000 in 1997, 1996 and 1995, respectively.
9. REDEEMABLE PREFERRED STOCK AND WARRANTS
On April 3, 1997, 100,000 shares of Series A Senior Cumulative Nonvoting
Preferred Stock (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 10.
The Preferred Stock had a redemption value of $100 per share and was
recorded at fair value on the date of issuance less issuance costs. Dividends
were cumulative from the date of issuance, accrued quarterly in arrears and were
payable in shares of Preferred Stock. The dividend rates increased annually from
15% in 1997 to 21% in 2000 and thereafter. As of December 31, 1996, the Company
accrued stock dividends in the amount of $690,411 (which represented 6,904
shares). The Preferred Stock included the potential issuance of warrants to
purchase shares of the Company's Class A Common Stock. For financial reporting
purposes, the estimated fair value of the warrants was included with the
Preferred Stock in the accompanying balance sheet and the excess of the
redemption value of the Preferred Stock over the carrying value was accreted by
periodic charges to additional paid-in capital over the life of the issue. No
warrants were issued.
The Company has authorized 5 million shares of Nonvoting Preferred Stock,
par value $.01 per share, of which 500,000 are designated as Series A Senior
Cumulative Nonvoting Preferred Stock.
35
<PAGE> 38
SYGNET WIRELESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company has also authorized 10 million shares of Voting Preferred
Stock, par value $.01 per share, none of which are issued as of December 31,
1997.
10. 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 Sales). The proceeds of
$43.6 million, net of issuance fees of $1.4 million, were used to redeem the
remaining outstanding Preferred Stock as described in Note 9, and to reduce
amounts outstanding under the Bank Credit Facility. As a condition of the Common
Stock Sales, Boston Ventures appointed 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
based on the requirements of the corporate restructuring described in Note 1,
became Class A Common Stock.
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 split, effective on September 20, 1996. These shares
are entitled to ten votes per share.
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 were accounted for at cost and held as
treasury stock until August 28, 1996 when they were retired.
Under the most restrictive of the covenants discussed in Note 6, the
Company could not declare any additional dividends on its common stock at
December 31, 1997.
On December 29, 1994, the Company received a promissory note from an
officer/shareholder for $249,952 for the purchase of common shares from a
shareholder. The note requires annual payment of interest at 8.23% with
principal repayment commencing on December 31, 1998 through December 31, 2001.
11. INCOME TAXES
On August 31, 1996, SYGNET and Wilcom terminated their status as Subchapter
S Corporations. As a result of this termination, application of the provisions
of Statement of Financial Accounting Standards 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. As a result of the termination of their Subchapter S
Corporation status, SYGNET and Wilcom contributed their undistributed earnings
to additional paid-in capital. At December 31, 1997, the Company has net
operating loss carryforwards of $28.7 million that expire in 2011 and 2012. For
financial reporting purposes, a valuation allowance of $7,747,300 has been
recognized to offset the net deferred tax assets which primarily relate to the
net operating loss carryforward.
36
<PAGE> 39
SYGNET WIRELESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Amounts for deferred tax assets and liabilities at December 31, 1997 and
1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Deferred tax liabilities:
Depreciation............................................ $ -- $ 787,200
Amortization............................................ 3,593,000 1,271,800
----------- -----------
Total deferred tax liabilities............................ 3,593,000 2,059,000
Deferred tax assets:
AMT credit carryforward................................. 63,400 63,400
Allowance for doubtful accounts......................... 275,300 397,400
Depreciation............................................ 958,400
Net operating loss carryforward......................... 9,756,800 2,550,000
Other................................................... 390,400 201,700
----------- -----------
11,444,300 3,212,500
Valuation allowance....................................... (7,851,300) (1,153,500)
----------- -----------
Total deferred tax assets................................. 3,593,000 2,059,000
----------- -----------
Net deferred tax assets................................... $ -- $ --
=========== ===========
</TABLE>
The components of the income tax provision (benefit) in the consolidated
statements of operations for the year ended December 31, 1997 and 1996 are as
follows:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Cumulative effect of conversion from S to C corporation
status.................................................. $ -- $ 745,000
Deferred income tax (benefit)............................. (6,697,800) (1,898,500)
Valuation allowance....................................... 6,697,800 1,153,500
----------- -----------
Total provision for income tax (benefit).................. $ -- $ --
=========== ===========
</TABLE>
12. STOCK OPTION PLAN
The Company has stock option plans that provide for the purchase of Class A
common stock by employees and directors of the Company. Under the stock option
plans the Company is authorized to issue 1,250,000 options for the purchase of
shares of Class A common stock (1,000,000 for employees and 250,000 for
non-employee directors). These options vest over a period ranging from grant
date to five years, are exercisable based upon the terms of the grants and
expire at the end of ten years. The Company applies APBO No. 25, Accounting for
Stock issued to Employees and related Interpretations in accounting for the
plan, which requires that for certain options granted, the Company recognizes as
compensation expense the excess of the deemed fair value for accounting purposes
of the common stock over the exercise price of the options. For the majority of
options, no compensation cost has been recognized. Had compensation plans been
determined based on the fair value at the grant dates for awards under those
plans consistent with the method of SFAS No. 123, Accounting for Stock-Based
Compensation, the Company's net loss and net loss per share would not have been
materially different from the amounts reported.
For pro forma calculations the fair value of each option is estimated on
the date of grant using the Minimum Value option-pricing model with the
following weighted-average assumptions used for grants in both 1997 and 1996:
risk-free interest rates ranging from 6.9% to 5.9% and average expected lives
ranging from 5.25 to 7.5 years for issued options.
37
<PAGE> 40
SYGNET WIRELESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the status of the company's stock option plan as of December
31, 1997 and 1996 and changes during the years then ended is presented below:
<TABLE>
<CAPTION>
1997 1996
---------------------------- ---------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
-------- ---------------- ------- ----------------
<S> <C> <C> <C> <C>
Outstanding at beginning of
year......................... 533,200 $10.00 -- $ --
Granted........................ 183,000 10.31 533,200 10.00
Exercised...................... -- -- -- --
Canceled....................... -- -- -- --
-------- ------ ------- ------
Outstanding at year end........ 716,200 $10.08 533,200 10.00
======== ====== ======= ======
Options exercisable at year
end.......................... 651,200 --
Weighted-average fair value of
options granted during
the year..................... $ 7.80 $ --
Weighted-average remaining
contractual life............. 8.87 9.68
</TABLE>
At December 31, 1997, there were 533,800 options available for future
grant.
38
<PAGE> 41
SYGNET WIRELESS, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
DECEMBER 31, 1997
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D COL. E
------ ------ ------ ------ ------
ADDITIONS
------------------------------
BALANCE AT CHARGED TO BALANCE AT
BEGINNING OF COSTS END OF
DESCRIPTION PERIOD AND EXPENSES ACQUISITIONS(1) DEDUCTIONS(2) PERIOD
- -------------------------------------- ------------ ------------ --------------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1997:
Deducted from asset account:
Allowance for doubtful accounts... $1,168,798 $1,313,973 $ -- $(1,672,928) $ 809,843
Year Ended December 31, 1996:
Deducted from asset account:
Allowance for doubtful accounts... $ 402,800 $1,158,844 $391,098 $ (783,944) $1,168,798
Year Ended December 31, 1995:
Deducted from asset account:
Allowance for doubtful accounts... $ 163,440 $ 413,025 $ 80,203 $ (253,868) $ 402,800
</TABLE>
- ---------------
(1) Represents allowance for doubtful accounts related to accounts receivable
purchased as part of the acquisitions described in Note 3, Notes to
Consolidated Financial Statements.
(2) Represents the write-off of uncollectible accounts.
39
<PAGE> 42
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
MANAGEMENT
<TABLE>
<CAPTION>
NAME AGE OFFICE
---- --- ------
<S> <C> <C>
Warren P. Williamson, III............ 67 Director and Chairman
Albert H. Pharis, Jr................. 48 Director, President and Chief Executive Officer
Craig T. Sheetz...................... 38 Vice President, Chief Financial Officer and
Gregory T. Pauley.................... 35 Vice President and Chief Technical Officer
Joseph D. Williamson, II............. 52 Director
Lowry A. Stewart..................... 43 Director
Raymond S. Tittle, Jr................ 67 Director
Philip N. Winkelstern................ 67 Director
Ralph A. Beard....................... 50 Director
L. B. McKelvey....................... 52 Director
Gregory L. Ridler.................... 51 Director
Anthony J. Bolland................... 44 Director
John Hunt............................ 32 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 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 a Trustee 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. 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.
WILLIAM ZLOTNICK is Vice President and Chief Operating Officer of the
Company. He joined the Company in 1996, immediately following the Horizon
Acquisition. Prior to joining the Company, Mr. Zlotnick served as Regional
General Manager for Horizon Cellular Telephone Company in Western Pennsylvania,
a position he 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.
40
<PAGE> 43
JOSEPH D. WILLIAMSON, II has been a Director of the Company and its
predecessor company since its inception. In 1993, 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. 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 a Director since November 1996. Mr.
Winkelstern served as Senior Vice President and Chief Financial Officer of
Commercial Intertech Corporation (CIC), a publicly held manufacturer, 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.
RALPH A. BEARD has been a Director since November 1996. Mr. Beard has
served as legal counsel for the Company since 1987. He is a member of
Harrington, Hoppe & Mitchell, Ltd. Mr. Beard is also general counsel and a
Director of WKBN Broadcasting Corporation.
L. B. MCKELVEY has been a Director since November 1996. Mr. McKelvey is
currently Chairman and President of Smythe, Cramer Co., which is a real estate
brokerage firm founded in 1903. Mr. McKelvey has been with Smythe, Cramer Co.
for 30 years.
GREGORY L. RIDLER has been a Director since November 1996. Mr. Ridler is
the President and CEO of Mahoning National Bank, a position he has held since
1989. He is also a Director of WKBN Broadcasting Corporation.
ANTHONY J. BOLLAND has been a Director since June 1997. Mr. Bolland is a
Managing Director and principal shareholder of the General Partner of Boston
Ventures Management, Inc. Prior to that date, he had been a Vice President of
First Venture Capital Corporation. Mr. Bolland received his L.L.B. degree from
Warwick University, England in 1975. He is currently a director of American
Media, Inc., Six Flags Entertainment Corporation and a member of the first
Carolina Cable TV Partners Committee.
JOHN HUNT has been a Director since June 1997. Mr. Hunt is currently an
Associate Director for Boston Ventures Management, Inc. From 1988 to 1990 he was
employed by Bear, Stearns & Co., Inc. Mr. Hunt received his BA degree from the
University of Massachusetts, Amherst in 1988. He is currently a director of
Shore-Varrone, Inc. and a shareholder of BVC V, L.L.C.
Messrs. Bolland and Hunt were designated for election as Directors by
Boston Ventures Limited Partnerships V. See Item 13, "Certain Relationships and
Related Transactions."
41
<PAGE> 44
ITEM 11. 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 years ended December 31, 1997, 1996 and 1995.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL ------------------
COMPENSATION AWARDS
------------------- ------------------
SECURITIES OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS UNDERLYING OPTIONS COMPENSATION(3)
--------------------------- ---- -------- ------- ------------------ ---------------
<S> <C> <C> <C> <C> <C>
Warren P. Williamson, III..... 1997 $240,000(1) $32,682 $7,959
Chairman 1996 $256,015(1) 100,000 Shares $7,812
1995 $233,587(1) $7,620
Albert H. Pharis, Jr.......... 1997 $240,000 $44,046 $9,500
President and 1996 $218,158 $50,000 225,000 Shares $9,500
Chief Executive Officer 1995 $171,900 $50,000 $7,620
Craig T. Sheetz............... 1997 $139,800 $22,060 50,000 Shares $6,786
Vice President, Chief 1996 $127,278 $50,000 53,600 Shares $9,103
Financial
Officer and Treasurer 1995 $ 85,885 $25,000 $5,790
Greg T. Pauley................ 1997 $120,800 $26,146 40,000 Shares $7,347
Vice President and 1996 $104,556 60,000 Shares $5,468
Chief Technical Officer 1995 $ 78,000 $25,000 $4,476
William Zlotnick.............. 1997 $120,000 $ 9,091 $6,455
Vice President and 1996 $ 27,450(2) 50,000 Shares $1,000
Chief Operating 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.
(2) Mr. Zlotnick has been employed by the Company since October 9, 1996. For
1996, his salary information, as provided, is for the period October 9
through December 31, 1996.
(3) Represents contributions by the Company to its 401(k) retirement plan.
1996 STOCK OPTION PLAN
The Company adopted a 1996 Stock Option Plan (the SOP). 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.
42
<PAGE> 45
The following table presents certain information concerning options to
purchase shares of Class A Common Stock granted in 1997 to the executive
officers and employees of the Company.
OPTIONS GRANTED IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
NUMBER OF % TOTAL AT ASSUMED ANNUAL RATES
SECURITIES OF OPTIONS MARKET OF STOCK PRICE APPRECIATION
UNDERLYING GRANTED TO PRICE ON FOR OPTION TERM(3)
OPTIONS EMPLOYEES PER SHARE THE DATE OF EXPIRATION ---------------------------
NAME GRANTED(1) IN FISCAL YEAR EXERCISE PRICE GRANT(2) DATE 5% 10%
---- ---------- -------------- -------------- ----------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Craig T. Sheetz....... 50,000 32.25 10.00 $15.00 12/31/2007 $721,671 $1,445,306
Gregory T. Pauley..... 40,000 25.81 10.00 $10.00 02/20/2007 251,558 637,497
All Others............ 65,000 41.94 10.00 $10.00 04/01/2007 408,782 1,035,433
------- ------
Total Options....... 155,000 100.00%
<CAPTION>
GRANT
DATE
VALUE
--------
NAME 0%
---- --------
<S> <C>
Craig T. Sheetz....... $250,000
Gregory T. Pauley..... --
All Others............ --
Total Options.......
</TABLE>
- ---------------
(1) Options granted to Messrs. Sheetz and Pauley were exercisable and vested in
full effective on the date of grant. All other options granted during 1997
were exercisable in full and vest at the rate of 20% on each anniversary of
the date of grant. Unvested options terminate if the holder's employment
with the Company terminates.
(2) The fair market value of the shares for the options granted on February 20,
1997 and April 1, 1997 is assumed to be $10.00 per share. For the options
granted on December 31, 1997, the fair market value is assumed to be $15.00
per share. There is no established trading market for the Class A or Class B
Common Stock.
(3) The amounts shown under these columns are the result of calculations at 5%
and 10% rates as required by the SEC and are not intended to forecast future
appreciation of the stock price of the Class A Common Stock.
The following table presents certain information concerning the value of
unexercised options to purchase shares of Class A Common Stock as of December
31, 1997 for the executive officers of the Company. No options were exercised in
fiscal 1997. All outstanding options were exercisable in full.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION
VALUES
<TABLE>
<CAPTION>
NUMBER OF VALUE OF UNEXERCISED
SHARES SECURITIES UNDERLYING IN-THE-MONEY
ACQUIRE ON VALUE UNEXERCISED OPTIONS OPTIONS AT
NAME EXERCISE REALIZED AT DECEMBER 31, 1997 DECEMBER 31, 1997(1)
---- ---------- -------- --------------------- --------------------
<S> <C> <C> <C> <C>
Albert H. Pharis, Jr.................... 0 $0.00 225,000 $1,125,000
W. P. Williamson, III................... 0 0.00 100,000 500,000
Craig T. Sheetz......................... 0 0.00 103,600 518,000
Gregory T. Pauley....................... 0 0.00 100,000 500,000
William Zlotnick........................ 0 0.00 50,000 250,000
</TABLE>
- ---------------
(1) The fair market value of the shares at December 31, 1997 is assumed to be
$15.00 per share. There is no established trading market for the Class A or
Class B Common Stock.
BONUS PLAN
The Board of Directors of the Company has instituted a cash bonus program
for executive officers for 1998 that will pay 40% of base salaries if certain
targets are met. The actual payments under this bonus plan may vary depending on
whether these targets are met. The criteria to be used and the specific targets
to be met by each officer are set by the Board.
43
<PAGE> 46
EMPLOYMENT AGREEMENTS
The Company entered into employment agreements effective October 1996 with
Messrs. Pharis and Williamson for an initial term of three years and with
Messrs. Sheetz, Pauley and Zlotnick for an initial term of two years. All
agreements have automatic one-year renewals after the initial terms expire. The
agreements provide for minimum annual base salaries of $240,000, $240,000,
$135,000, $120,000 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 also
provides 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, or owner. 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.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board of Directors of the Company
determines the compensation of the Company's executive officers. During fiscal
year 1997, the members of the Compensation Committee were Gregory L. Ridler,
Philip N. Winkelstern, Joseph D. Williamson, II and Lowry A. Stewart.
In fiscal year 1997, Warren P. Williamson, III, Chairman and a Director of
the Company, served as a Director and a member of the Executive Committee of
Mahoning National Bank, which Committee performs the equivalent functions of a
compensation committee, and Mr. Ridler, President of Mahoning National Bank,
served as a Director and a member of the Compensation Committee of the Company.
Warren P. Williamson, III also served as a Director of WKBN Broadcasting
Corporation (WKBN). Mr. Stewart and Joseph D. Williamson, II, both Directors and
executive officers of WKBN, served as Directors and members of the Compensation
Committee of the Company. The Board of Directors of WKBN performs the equivalent
functions of a compensation committee.
The Company provided cellular telephone service during 1997 for $48,287 to
WKBN and management companies that provide services to WKBN. WKBN is a company
owned by the Williamson family. Warren P. Williamson, III, a Director and
Chairman of the Company, provided consulting services to WKBN and was paid
$107,526 in 1997 for such services. In 1997, the Company purchased advertising
services and facilities from WKBN and management companies that provide services
to WKBN for $158,691. Warren P. Williamson, III is the Chairman of WKBN. Joseph
D. Williamson, II, a Director of the Company, is the President of WKBN. Lowry A.
Stewart, a Director of the Company, is the Treasurer and a Director of WKBN.
DIRECTOR COMPENSATION
Directors are compensated for their attendance at meetings at a rate of
$500 per Board meeting, $400 per Committee meeting separate from a Board meeting
and $150 per Committee meeting in conjunction with a Board meeting. In addition,
the Company will reimburse Board members for actual travel not to exceed $500
per meeting.
In addition, the Company adopted the 1996 Stock Option Plan for
Non-Employee Directors (the Director Plan). Under the Director Plan, options to
purchase up to an aggregate of 250,000 shares of Class A Common Stock are
available for grants to non-employee directors of the Company. All options
granted under the Director Plan will be nonqualified stock options. Options to
purchase 4,000 shares are granted to each non-employee director upon election to
the Board of Directors of the Company and vest and are exercisable six months
from the date of grant. Further, following each annual shareholders' meeting of
the Company, each non-employee director is granted an option to acquire 2,000
shares, half of which are exercisable six months after the date grant and the
balance one year after the date of grant. The options expire ten years from the
date of grant. The Director Plan will terminate by its terms in 2010.
44
<PAGE> 47
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of the Company's Class A and Class B Common Stock as of February 11,
1998 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
BENEFICIALLY OWNED(1) % SHARES BENEFICIALLY OWNED
NAME OF BENEFICIAL OWNER --------------------------------- ------------------------------
- -------------------------------------- CLASS A CLASS B CLASS A CLASS B
DIRECTORS AND NAMED EXECUTIVE OFFICERS COMMON STOCK(2) COMMON STOCK COMMON STOCK(3) COMMON STOCK
- -------------------------------------- --------------- --------------- --------------- ------------
<S> <C> <C> <C> <C>
J.D. Williamson, II................. 4,000 1,393,484 .09 27.01
Warren P. Williamson, III........... 100,000 1,353,510(4) 2.15 26.23
Lowry A. Stewart.................... 4,000 304,390(5) .09 5.90
Raymond Tittle, Jr.................. 4,000 281,223 .09 5.45
Albert H. Pharis, Jr................ 225,000 30,275 4.83 0.59
Craig T. Sheetz..................... 103,600 2.22
William Zlotnick.................... 50,000 1.07
Gregory T. Pauley................... 100,000 2.15
Ralph A. Beard...................... 8,000 .17
Lucius B. McKelvey.................. 8,000 .17
Gregory L. Ridler................... 8,000 .17
Philip N. Winkelstern............... 8,000 .17
All directors and officers as a group
(14 persons)...................... 622,600 3,362,882(6) 13.36 65.17
OTHER 5% OWNERS
Boston Ventures..................... 4,000,000 85.80
1 Federal Street, 23rd Floor
Boston, MA 02110
Mahoning National Bank
of Youngstown..................... 652,872(7) 12.65
P.O. Box 479
Trust Department
Youngstown, OH 44501
Martha J. Stewart................... 336,730(8) 6.53
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. At February 11, 1998 the Company's total issued and outstanding
stock was 9,170,630 shares, 4,010,653 of which were Class A and 5,159,977
were Class B. 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 ten votes per share.
(2) Consists of shares of Class A Common Stock underlying currently exercisable
employee stock options granted under the SOP.
(3) For purposes of determining the percentage ownership, outstanding shares of
Class A Common Stock include 4,010,653 shares outstanding and 615,200 shares
underlying currently exercisable stock options.
(4) 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.
(5) Includes 5,645 shares of Class B Common Stock held by Lowry A. Stewart as
custodian for his daughter Kathryn A. Stewart.
(6) May include stock jointly or separately owned with or by a spouse.
45
<PAGE> 48
(7) Represents Class B Common Stock beneficially owned by Mahoning National Bank
of Youngstown as trustee under certain Williamson family trusts.
(8) Includes 14,540 shares of Class B Common Stock held by Martha J. Stewart as
successor trustee for her niece Kathryn A. Stewart; 14,540 shares of Class B
Common Stock held by Martha J. Stewart as successor trustee for her niece
Cristina Marie Sparks-Stewart; and 13,960 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.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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 note
requires annual payment of interest at 8.23% with principal repayment commencing
on 12/31/98 through 12/31/01.
During fiscal year 1997, the Company paid Harrington, Hoppe & Mitchell,
Ltd. fees of $126,689 for certain legal services, and the Company expects to
retain that firm to provide legal services in fiscal year 1998. Ralph A. Beard,
a Director of the Company, is a member of Harrington, Hoppe & Mitchell, Ltd.
See Item 11, "Executive Compensation -- Compensation Committee Interlocks
and Insider Participation."
On June 20, 1997, the Company sold 3,000,000 shares of its Class A Common
Stock, $.01 par value, to Boston Ventures Limited Partnership V ("Boston
Ventures") at a price of $15.00 per share (the "Private Placement"). In
connection with the Private Placement, Boston Ventures offered to purchase up to
1,000,000 additional shares of Common Stock from the Company's existing
shareholders at a price of $15.00 per share (the "Offer"). The following
directors and executive officers of the Company sold shares of Common Stock to
Boston Ventures pursuant to the Offer: J. D. Williamson, II 467,990 shares;
Warren P. Williamson, III 100,000 shares; Lowry A. Stewart 30,000 shares;
Raymond Tittle, Jr. 30,000 shares; and Albert H. Pharis, Jr. 10,000.
In connection with the Private Placement, the Company entered into three
agreements with Boston Ventures; an Investment Agreement, a Registration Rights
Agreement and a Stockholders Agreement. The following summary description of
these agreements is qualified in its entirety by the actual terms of the
agreements.
Investment Agreement
Under the Investment Agreement, persons designated by Boston Ventures
("Investor Directors") are to constitute at least 2/11ths of the Boards of
Directors of the Company and its subsidiaries and of the executive committee. In
addition, the Company is required to obtain the approval of at least one
Investor Director before it may, among other things, enter into certain
transactions such as significant related party transactions, certain mergers or
acquisitions, significant sales of assets or stock, incur significant
indebtedness, pay dividends, redeem stock, hire or terminate executive officers
or materially alter executive compensation agreements. The foregoing provisions
will generally continue until such time as Boston Ventures holds less than 40%
of the Common Stock issued to it.
Registration Rights Agreement
The Registration Rights Agreement, dated as of June 20, 1997, among the
Company, Boston Ventures and J.D. Williamson, II and Warren P. Williamson, III
(the "Williamsons"), provides Boston Ventures and the Williamsons and certain of
their transferees (together the "Stockholders") with certain rights with respect
to the registration of their shares for sale under the federal and state
securities laws. The Stockholders may, after the earlier of the Company's
initial public offering or January 1, 2000, request that the Company file a
registration statement for the public offering of their shares provided the
anticipated aggregate offering price for the shares is at least $25,000,000. The
Stockholders are entitled to three such demand registrations and will
46
<PAGE> 49
also have certain piggyback and other registration rights. The Company will bear
the costs of registrations, including the fees of the selling shareholders'
counsel. In addition, the Company may not grant registration rights to any other
person without the prior written consent of Boston Ventures.
Stockholders Agreement
The Stockholders Agreement, dated as of June 20, 1997, among the Company,
Boston Ventures and the Williamsons prohibits transfers of shares of Common
Stock by Boston Ventures or the Williamsons prior to January 1, 2000 (except for
transfers pursuant to the Offer and certain estate planning transfers by the
Williamsons) and establishes rights of first refusal with respect to other
transfers. If a Stockholder desires to transfer shares, such Stockholder must
first offer such shares to the Company and the other Stockholders.
The Stockholders Agreement requires each Stockholder to vote his shares in
a manner consistent with the Company's obligations under the Investment
Agreement. Except for provisions relating to the Board of Directors and voting,
the Stockholders Agreement terminates upon the initial public offering of the
Company's Common Stock.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) The following financial statements of Sygnet Wireless, Inc. are included
in Item 8:
Consolidated Balance Sheets as of December 31, 1997 and 1996.
Consolidated Statements of Operations for the years ended December 31,
1997, 1996, and 1995.
Consolidated Statements of Shareholders' Equity (Deficit) for the years
ended December 31, 1997, 1996 and 1995.
Consolidated Statements of Cash Flows for the years ended December 31,
1997, 1996, and 1995.
Notes to Consolidated Financial Statements.
(2) The following consolidated financial statement schedule of Sygnet
Wireless, Inc. is included in Item 8:
Schedule II-Valuation and Qualifying Accounts.
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are unapplicable, and therefore, have been omitted.
(3) Exhibits.
<TABLE>
<C> <S>
2.1 Certificate of Merger dated August 26, 1996, including the
Amended and Restated Agreement and Plan of Merger dated
August 19, 1996.(1)[2.1]
2.2 Amended and Restated Agreement and Plan of Transfer of
Assets dated August 28, 1996.(1)[2.2]
2.3 Agreement and Plan of Recapitalization of Sygnet Wireless,
Inc. dated August 28, 1996.(1)[2.3]
3.1 Amended and Restated Articles of Incorporation of Sygnet
Wireless, Inc.(2)[3.1] 3.2 Code of Regulations of Sygnet
Wireless, Inc.(2)[3.2]
4.1 Indenture dated as of September 26, 1996 between Sygnet
Wireless, Inc. and Fleet National Bank, as Trustee(2)[4]
10.1 Employment Agreement dated August 26, 1996 between the
Registrant and Albert H. Pharis, Jr.#(1)[10.1]
</TABLE>
47
<PAGE> 50
<TABLE>
<C> <S>
10.2 Employment Agreement dated August 26, 1996 between the
Registrant and Warren P. Williamson, III.#(1)[10.2]
10.3 Employment Agreement dated August 26, 1996 between the
Registrant and Craig T. Sheetz.#(1)[10.3]
10.4 Employment Agreement dated August 26, 1996 between the
Registrant and Gregory T. Pauley.#(1)[10.4]
10.5 Employment Agreement dated August 26, 1996 between the
Registrant and William Zlotnick#(3)
10.6 Sygnet Wireless, Inc. 1996 Stock Option Plan (including form
of Stock Option Agreement).#(1)[10.5]
10.7 Sygnet Wireless, Inc. 1996 Stock Option Plan for
Non-Employee Directors. #(2)[10]
10.8 Office Lease Agreement dated September 16, 1994 by and
between K&T Realty and SYGNET Communications, Inc. for the
premises located at 6550 Seville Drive, Canfield.(1)[10.6]
10.9 Ground Lease Agreement dated December 15, 1987 between WKBN
Broadcasting Corporation. And Youngstown Cellular Telephone
Company.(1)[10.11]
10.10 DMS-MTX Cellular Supply Agreement dated June 1, 1996 between
Youngstown Cellular Telephone Company and Northern Telecom,
Inc.(1)[10.12]
10.11 Intercarrier Services Agreement dated April 25, 1995 between
Youngstown Cellular Telephone Company and EDS Personal
Communications Corporation.(1)[10.13]
10.12 Software License Agreement dated April 20, 1995 between
Youngstown Cellular Telephone Company and International
Telecommunication Data Systems, Inc.(1)[10.14]
10.13 License Agreement between JSJ Software, Inc. and Youngstown
Cellular Telephone Company.(1)[10.15]
10.14 Product Service Agreement dated February 1, 1995 between
Glenayre Care and Wilcom Cellular.(1)[10.16]
10.15 Asset Acquisition Agreement dated July 11, 1996 between
Horizon Cellular Telephone Company of Chautauqua, L.P.,
Horizon Cellular Telephone Company of Crawford, L.P.,
Horizon Cellular Telephone Company of Indiana, L.P., and
SYGNET Communications, Inc.(1)[10.17]
10.16 Agreement for Purchase of Partnership Interest dated
September 15, 1995 between SYGNET Communications, Inc. and
Erie Cellular Systems, Inc.(1)[10.18]
10.17 Stock Purchase Agreement between SYGNET Communications,
Inc., Wilcom Corporation, and Advent IV Capital Liquidating
Trust, TA Associates IV, TA Venture Investors Limited
Partnership, Elden J. Heinz, Security Investment Management
& Trust Company, The Planned Giving Foundation, Inc., and
Erma Heinz.(1)[10.19]
10.18 Credit Agreement dated October 9, 1996 among the Registrant
and The Toronto- Dominion Bank and PNC Bank, National
Association.(3)[10.20]
10.19 Promissory Note dated December 29, 1994 executed and
delivered by Albert H. Pharis, Jr. in favor of the
Registrant.(1)[10.22]
10.20 Cellular One License Agreement dated February 28, 1992
between Cellular One Group and Erie Cellular Telephone
Company.(1)[10.23]
10.21 Preferred Stock and Common Stock Warrant Purchase Agreement
dated October 9, 1996 between the Registrant and Toronto
Dominion Investments, Inc.(4)[10.21]
10.22 Preferred Stock Sale Agreement dated April 3, 1997 among
Sygnet Redemption Corp., a wholly owned subsidiary of Sygnet
Wireless, Inc., and Toronto Dominion Investments, Inc.,
Northstar High Total Return Fund and PNC Venture
Corp.(4)[10.21]
</TABLE>
48
<PAGE> 51
<TABLE>
<C> <S>
10.23 Investment Agreement dated as of June 20, 1997 between
Sygnet Wireless, Inc. and Boston Ventures Limited
Partnership V.(5)[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.(5)[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(5)[10.25]
21.1 Subsidiary of Sygnet Wireless, Inc.(1)[21.1]
24.1 Powers of Attorney (included on the signature page to the
Annual Report).
27.1 Financial Data Schedule.
</TABLE>
- ---------------
# Denotes officer/director compensation plan or arrangement.
(1) Filed as an exhibit to the Company's Registration Statement on Form S-1
(Registration No. 333-10161), 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 September 30, 1996, as the exhibit number indicated
in brackets and incorporated by reference herein.
(3) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996, as the exhibit number indicated in
brackets and incorporated by reference herein.
(4) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 1997, as the exhibit number indicated in
brackets and incorporated by reference herein.
(5) 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.
49
<PAGE> 52
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SYGNET WIRELESS, INC.
By: /s/ WARREN P. WILLIAMSON, III
------------------------------------
Warren P. Williamson, III
Director and Chairman
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Warren P. Williamson, III, Albert H.
Pharis, Jr., and Craig T. Sheetz, and each of them, as true and lawful
attorneys-in-fact and agents, with full power of substitution and resubstitution
for him or her and in his or her name, place, stead, in any and all capacities,
to sign any and all amendments to this Annual Report, and to file the same, with
all exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully and to all intents and purposes as he or she might or could
do in person, hereby ratifying and confirming all which said attorneys-in-fact
and agents or any of them, or their or his substitute or substitutes, lawfully
do, or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<C> <S> <C>
/s/ WARREN P. WILLIAMSON, III Director and Chairman February 18, 1998
- ---------------------------------------
Warren P. Williamson, III
/s/ ALBERT H. PHARIS, JR. Director, President and Chief Executive February 18, 1998
- --------------------------------------- Officer
Albert H. Pharis, Jr.
/s/ CRAIG T. SHEETZ Vice President, Chief Financial February 18, 1998
- --------------------------------------- Officer, Treasurer
Craig T. Sheetz
/s/ WILLIAM ZLOTNICK Vice President, Chief Operating Officer February 18, 1998
- ---------------------------------------
William Zlotnick
/s/ GREGORY T. PAULEY Vice President, Chief Technical Officer February 18, 1998
- ---------------------------------------
Gregory T. Pauley
/s/ JOSEPH D. WILLIAMSON, II Director February 18, 1998
- ---------------------------------------
Joseph D. Williamson, II
/s/ LOWRY A. STEWART Director February 18, 1998
- ---------------------------------------
Lowry A. Stewart
/s/ RAYMOND S. TITTLE, JR. Director February 18, 1998
- ---------------------------------------
Raymond S. Tittle, Jr.
/s/ PHILIP N. WINKELSTERN Director February 18, 1998
- ---------------------------------------
Philip N. Winkelstern
/s/ RALPH A. BEARD Director February 18, 1998
- ---------------------------------------
Ralph A. Beard
</TABLE>
50
<PAGE> 53
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<C> <S> <C>
/s/ L. B. MCKELVEY Director February 18, 1998
- ---------------------------------------
L. B. McKelvey
/s/ GREGORY L. RIDLER Director February 18, 1998
- ---------------------------------------
Gregory L. Ridler
/s/ ANTHONY J. BOLLAND Director February 18, 1998
- ---------------------------------------
Anthony J. Bolland
/s/ JOHN HUNT Director February 18, 1998
- ---------------------------------------
John Hunt
</TABLE>
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO
SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES
PURSUANT TO SECTION 12 OF THE ACT.
The Company has not sent an annual report to security holders covering its
last fiscal year, nor has the Company sent a proxy statement, form of proxy or
other proxy soliciting material to its security holders with respect to any
annual meeting of security holders. The Company intends to furnish such report
and proxy material to security holders subsequent to this filing.
51
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000879313
<NAME> SYGNET WIRELESS, INC.
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 860,086
<SECURITIES> 0
<RECEIVABLES> 10,711,627
<ALLOWANCES> 0
<INVENTORY> 1,867,445
<CURRENT-ASSETS> 13,748,618
<PP&E> 53,007,015
<DEPRECIATION> 0
<TOTAL-ASSETS> 340,986,385
<CURRENT-LIABILITIES> 16,268,257
<BONDS> 305,500,000
0
0
<COMMON> 91,706
<OTHER-SE> 19,126,422
<TOTAL-LIABILITY-AND-EQUITY> 340,986,385
<SALES> 85,633,760
<TOTAL-REVENUES> 85,633,760
<CGS> 19,711,667
<TOTAL-COSTS> 76,247,255
<OTHER-EXPENSES> 101,221
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 29,901,678
<INCOME-PRETAX> (20,616,394)
<INCOME-TAX> 0
<INCOME-CONTINUING> (20,616,394)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (20,616,394)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
