-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DR+BgPDdRTfW9URrxnOLxej8dRLowbbpM2VRDm/VESadIEvgjzGfuZaYxmd1tkWg jUd8JxQ0kyWn77lK+OJ94A== 0000950152-98-001628.txt : 19980304 0000950152-98-001628.hdr.sgml : 19980304 ACCESSION NUMBER: 0000950152-98-001628 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980302 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SYGNET WIRELESS INC CENTRAL INDEX KEY: 0000879313 STANDARD INDUSTRIAL CLASSIFICATION: RADIO TELEPHONE COMMUNICATIONS [4812] IRS NUMBER: 341689165 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 333-10161 FILM NUMBER: 98554989 BUSINESS ADDRESS: STREET 1: 6550 SEVILLE DRIVE CITY: CANFIELD STATE: OH ZIP: 44406 BUSINESS PHONE: 3305659505 MAIL ADDRESS: STREET 1: 6550 SEVILLE DRIVE CITY: CANFIELD STATE: OH ZIP: 44406 FORMER COMPANY: FORMER CONFORMED NAME: SYGNET COMMUNICATIONS INC DATE OF NAME CHANGE: 19960812 10-K405 1 SYGNET WIRELESS FORM 10-K405 1 ================================================================================ 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) 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)
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. ================================================================================ 2 SYGNET WIRELESS, INC. 1997 REPORT ON FORM 10K TABLE OF CONTENTS
ITEM NUMBER PAGE - ------ ---- 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
3 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 1 4 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. 2 5 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.
DATE OF TOTAL POPS OWNERSHIP NET POPS ACQUISITION ---------- --------- --------- ----------- 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
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.
MARKETS COMPETITORS ------- ----------- 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
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. 3 6 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. 4 7 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. 5 8 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:
AS OF DECEMBER 31, ---------------------------------------------- 1992 1993 1994 1995 1996 ------ ------ ------ ------ ------ 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%
- --------------- (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 6 9 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 7 10 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. 8 11 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 9 12 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. 10 13 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 11 14 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. 12 15 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. 13 16 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." 14 17 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 15 18 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 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 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.
YEAR ENDED DECEMBER 31, ----------------------------------------------------- 1997 1996 1995 1994 1993 -------- -------- ------- ------- ------- (IN THOUSANDS) 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
- --------------- (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 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 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 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 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 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 26 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
PAGE NUMBER ------ 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
24 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 28 SYGNET WIRELESS, INC. CONSOLIDATED BALANCE SHEETS
DECEMBER 31 ---------------------------- 1997 1996 ------------ ------------ 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 ============ ============
See accompanying notes. 26 29 SYGNET WIRELESS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31 ------------------------------------------ 1997 1996 1995 ------------ ----------- ----------- 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 ============ ===========
See accompanying notes. 27 30 SYGNET WIRELESS, INC. CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
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 ------ -------- ------ -------- -------- --------- ---------- ----------- --------- 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 ==== ======== ====== ======== ======== ========= ========== =========== ========= 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 ------- ---------- ------- ------------ ------------ ------------- ---------- ----------- 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) -- $ -- ======= ========== ======= ============ ============ ========= ========== ===========
See accompanying notes. 28 31 SYGNET WIRELESS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31 --------------------------------------------- 1997 1996 1995 ------------ ------------- ------------ 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 ============ ============= ============
See accompanying notes. 29 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 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:
1996 1995 ------------ ----------- 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 ============ ===========
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:
1996 ------------ 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) ============
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 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:
1997 1996 ------------ ------------ 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 ============ ============
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 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 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:
USEFUL LIFE 1997 1996 ------------ ------------ ------------ 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 ============ ============
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 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: 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 ===========
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 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 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:
1997 1996 ----------- ----------- 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................................... $ -- $ -- =========== ===========
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:
1997 1996 ----------- ----------- 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).................. $ -- $ -- =========== ===========
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 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:
1997 1996 ---------------------------- --------------------------- WEIGHTED-AVERAGE WEIGHTED-AVERAGE SHARES EXERCISE PRICE SHARES EXERCISE PRICE -------- ---------------- ------- ---------------- 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
At December 31, 1997, there were 533,800 options available for future grant. 38 41 SYGNET WIRELESS, INC. SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS DECEMBER 31, 1997
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 - -------------------------------------- ------------ ------------ --------------- ------------- ---------- 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
- --------------- (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 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
NAME AGE OFFICE ---- --- ------ 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
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 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 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
LONG-TERM COMPENSATION ANNUAL ------------------ COMPENSATION AWARDS ------------------- ------------------ SECURITIES OTHER NAME AND PRINCIPAL POSITION YEAR SALARY BONUS UNDERLYING OPTIONS COMPENSATION(3) --------------------------- ---- -------- ------- ------------------ --------------- 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
- --------------- (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 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
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% ---- ---------- -------------- -------------- ----------- ---------- ----------- ------------- 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% GRANT DATE VALUE -------- NAME 0% ---- -------- Craig T. Sheetz....... $250,000 Gregory T. Pauley..... -- All Others............ -- Total Options.......
- --------------- (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
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) ---- ---------- -------- --------------------- -------------------- 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
- --------------- (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 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 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.
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 - -------------------------------------- --------------- --------------- --------------- ------------ 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
- --------------- (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 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 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. 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]
47 50 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]
48 51 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.
- --------------- # 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 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.
SIGNATURES TITLE DATE ---------- ----- ---- /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
50 53
SIGNATURES TITLE DATE ---------- ----- ---- /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
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 EX-27 2 EXHIBIT 27
5 0000879313 SYGNET WIRELESS, INC. YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 860,086 0 10,711,627 0 1,867,445 13,748,618 53,007,015 0 340,986,385 16,268,257 305,500,000 0 0 91,706 19,126,422 340,986,385 85,633,760 85,633,760 19,711,667 76,247,255 101,221 0 29,901,678 (20,616,394) 0 (20,616,394) 0 0 0 (20,616,394) 0 0
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