AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 28, 1995
REGISTRATION STATEMENT 33-60393
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
COMMNET CELLULAR INC.
(Exact name of registrant as specified in its charter)
COLORADO 84-0924904
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation)
5990 GREENWOOD PLAZA BOULEVARD
ENGLEWOOD, COLORADO 80111
(303) 694-3234
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
AMY M. SHAPIRO, ESQ.
SECRETARY AND GENERAL COUNSEL
COMMNET CELLULAR INC.
5990 GREENWOOD PLAZA BOULEVARD
ENGLEWOOD, COLORADO 80111
(303) 694-3234
(Name, address, including zip code, and telephone number, including area code,
of registrant's agent for service)
------------------------
COPIES TO:
John D. Watson, Jr., Esq. Mark C. Smith, Esq.
Latham & Watkins Skadden, Arps, Slate, Meagher & Flom
1001 Pennsylvania Avenue, N.W. 919 Third Avenue
Washington, D.C. 20004-2505 New York, New York 10022
(202) 637-2200 (212) 735-3000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE REGISTRATION STATEMENT BECOMES EFFECTIVE.
------------------------
If the securities being registered on this Form are being offered pursuant
to dividend or interest reinvestment plans, please check the following box. / /
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / / ________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / ________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. /X/
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED JUNE 28, 1995
P_R_O_S_P_E_C_T_U_S
$80,000,000
LOGO
% SUBORDINATED NOTES DUE 2005
--------------
Interest on the % Subordinated Notes due 2005 (the "Notes") is payable
semi-annually on and of each year, commencing
, 1996. In the event the Conversion Condition (as defined) is
satisfied, from and after the Convertible Redemption Date (as defined), the
interest rate on the Notes will decrease .25% to a rate of % per annum. The
Notes will mature on , 2005 and will be redeemable at the option of
CommNet Cellular Inc. (the "Company"), in whole or in part, at any time on or
after , 2000 at the redemption prices set forth herein, plus accrued
and unpaid interest, if any, to the date of redemption. Upon a Change of Control
(as defined), each holder of the Notes may require the Company to repurchase all
or a portion of such holder's Notes at a price in cash equal to 101% of the
principal amount thereof, together with accrued and unpaid interest, if any, to
the date of repurchase.
The Notes will be unsecured subordinated obligations of the Company,
subordinated in right of payment to all existing and future Senior Indebtedness
(as defined) of the Company. As of March 31, 1995, on a pro forma basis, after
giving effect to the sale of the Notes offered hereby and the application of the
estimated net proceeds therefrom as described herein, the aggregate outstanding
principal amount of Senior Indebtedness of the Company would have been
approximately $185.0 million (assuming all of the Company's outstanding 6 3/4%
Convertible Subordinated Debentures (as defined) are redeemed by the Company)
and $156.4 million (assuming all of the Company's outstanding 6 3/4% Convertible
Subordinated Debentures are converted by the holders thereof into shares of the
Company's Common Stock). See "Description of the Notes."
SEE "RISK FACTORS" ON PAGES 12-15 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE NOTES.
-------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC (1) COMMISSION (2) COMPANY (1)(3)
Per Note.......................... % % %
Total............................. $ $ $
<FN>
(1) Plus accrued interest, if any, from , 1995.
(2) The Company has agreed to indemnify the Underwriters against certain
liabilities, including certain liabilities under the Securities Act of
1933, as amended. See "Underwriting."
(3) Before deducting expenses payable by the Company estimated at $ .
-------------------
The Notes are being offered by the Underwriters, subject to prior sale,
when, as and if delivered to and accepted by the Underwriters and subject to
certain other conditions. The Underwriters reserve the right to withdraw, cancel
or modify such offer and to reject orders in whole or in part. It is expected
that delivery of the Notes will be made in New York, New York, on or about
, 1995.
-------------------
MERRILL LYNCH & CO. SMITH BARNEY INC.
------------
The date of this Prospectus is , 1995.
[MAP SEE ANNEX A]
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents which have been filed by the Company with the
Securities and Exchange Commission (the "Commission") are hereby incorporated by
reference in this Prospectus:
(1) the Company's Annual Report on Form 10-K for the fiscal year ended
September 30, 1994, as amended by Form 10-K/A No. 1 dated January 11,
1995, Form 10-K/A No. 2 dated May 25, 1995 and Form 10-K/A No. 3 dated
June 16, 1995;
(2) the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended
December 31, 1994, as amended by Form 10-Q/A No. 1 dated May 25, 1995;
and
(3) the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended
March 31, 1995, as amended by Form 10-Q/A No. 1 dated June 16, 1995.
In addition, all documents subsequently filed by the Company pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), prior to the termination of this offering shall be
deemed to be incorporated by reference in this Prospectus and to be a part
hereof from the date of filing of such documents (such documents, and the
documents enumerated above, being hereinafter referred to as the "Incorporated
Documents"). Any statement contained in an Incorporated Document shall be deemed
to be modified or superseded for all purposes to the extent that a statement
contained in this Prospectus or in any other subsequently filed Incorporated
Document or in an accompanying prospectus supplement modifies or supersedes such
statement.
The Company will provide without charge to each person to whom this
Prospectus is delivered, on the written or oral request of such person, a copy
(without exhibits unless such exhibits are specifically incorporated by
reference) of any or all of the Incorporated Documents. Written requests for
such copies should be directed to the Secretary, CommNet Cellular Inc., 5990
Greenwood Plaza Boulevard, Englewood, Colorado 80111. Telephone requests may be
directed to (303) 694-3234.
CERTAIN DEFINITIONS
As used herein, "pops" means the estimated total 1993 population of a
Metropolitan Statistical Area ("MSA") or Rural Service Area ("RSA") as initially
licensed by the Federal Communications Commission ("FCC"), based upon Strategic
Marketing, Inc. 1993 population estimates. "Net Company pops" means an MSA's or
RSA's pops multiplied by the Company's net ownership interest in the entity
licensed by the FCC to operate a cellular telephone system in that MSA or RSA.
An MSA or RSA is referred to herein as a "market," and a market served by a
cellular telephone system that is managed, directly or indirectly, by the
Company is referred to herein as a "managed market." The radio signal from the
Company's managed systems currently covers approximately 88% of the total pops
within the managed markets, and the Company intends to increase signal coverage
to approximately 96% by September 30, 1995 and to approximately 98% by September
30, 1996 (pops covered by the Company's radio signal being referred to herein as
"covered pops"). The Company does not thereafter intend to significantly expand
radio signal coverage within its managed markets, and, accordingly, the number
of covered pops will be marginally lower than the number of total pops on a
going-forward basis. The number of pops does not represent the current number of
users of cellular services and is not necessarily indicative of the number of
users of cellular services in the future. Those corporations and partnerships
through which the Company holds ownership interests in cellular licensees and
those cellular licensees in which the Company holds a direct ownership interest
are referred to herein as "affiliates." Any reference herein to an "affiliate"
does not necessarily imply that the Company exercises, or has the power to
exercise, control over the management and policies of such entity.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE NOTES AT A
LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS. REFERENCES IN THIS PROSPECTUS TO
FISCAL YEARS ARE TO THE COMPANY'S FISCAL YEARS ENDED SEPTEMBER 30 OF EACH YEAR
(FOR EXAMPLE, REFERENCES TO "FISCAL YEAR 1994" ARE TO THE COMPANY'S FISCAL YEAR
ENDED SEPTEMBER 30, 1994). UNLESS THE CONTEXT INDICATES OTHERWISE, THE "COMPANY"
MEANS COMMNET CELLULAR INC. AND ITS CONSOLIDATED SUBSIDIARIES.
THE COMPANY
The Company operates, manages and finances cellular telephone systems,
primarily in rural markets in the mountain and plains regions of the United
States. The Company's cellular interests currently represent approximately
3,356,000 net Company pops in 93 markets located in 15 states. These markets
consist of 83 RSA markets having a total of 6,152,000 pops and 10 MSA markets
having a total of 1,274,000 pops, of which the Company's interests represent
2,734,000 and 622,000 net Company pops, respectively. Systems in which the
Company holds an interest constitute the largest geographic collection of
contiguous cellular markets in the United States.
The Company was formed to acquire cellular interests through participation
in the licensing process conducted by the FCC. In order to participate in that
process, the Company formed affiliates which originally were owned at least 51%
by one or more independent telephone companies and no more than 49% by the
Company. See "Business -- Federal Regulation." In exchange for the Company's 49%
interest, the Company agreed to provide financing to affiliates for their
ongoing capital needs, as well as certain management services. The Company
subsequently has purchased additional interests in many of such affiliates, as
well as in additional cellular properties. The Company currently manages 55 of
the 93 markets in which it holds an interest and owns a greater than 50%
interest in 45 of its 55 managed markets. The Company currently finances
entities holding interests representing approximately 4,459,000 pops, of which
3,356,000 are included in net Company pops and 1,103,000 are attributable to
parties other than the Company.
Since completion of the licensing process, the Company has concentrated on
creating an integrated network of contiguous cellular systems comprised of
markets which are managed by the Company (the "network"). The network currently
consists of 55 markets (48 RSA and 7 MSA markets) spanning eight states and
represents approximately 3,905,000 pops and 2,915,000 net Company pops. As of
March 31, 1995, the RSA and MSA managed markets had 87,377 and 36,680
subscribers, respectively. The Company has been significantly expanding radio
signal coverage, with the construction of 50 cell sites already complete in
fiscal year 1995 and 57 additional cell sites expected to be completed by the
end of the fiscal year. The Company expects that by September 30, 1995, radio
signal coverage will reach 96% of the population within the managed markets and
will reach 98% during fiscal year 1996. No significant expansion of radio signal
coverage within the 55 managed markets is contemplated thereafter.
The Company's integrated network of contiguous cellular systems benefits
from certain technical, operational and marketing efficiencies which have
enabled the Company to produce operating results that compare favorably with
other cellular operators. For example, for the calendar year 1994, the Company's
average monthly revenue per subscriber in managed markets was approximately $68,
compared to an industry average of $64. During the same period, the Company's
acquisition cost per net added subscriber was $520, compared to $625 for the
industry as a whole. In addition, during this same period the Company achieved a
penetration rate (I.E., the number of subscribers expressed as a percentage of
the total covered pops) of 3.5%, notwithstanding the fact that a substantial
majority of the markets within the network have been operational for less than
five years and are not as mature as more established markets, particularly large
MSA markets with longer operating histories. Finally, the Company has achieved
annual subscriber growth of over 60% in each of the last two fiscal years and
has recorded positive EBITDA for the last eight quarters. "EBITDA" represents,
for any relevant period, the sum of operating income (loss), depreciation or
write-downs of property, plant and equipment and amortization of intangible
assets included in operating
3
income (loss). EBITDA should not be considered in isolation to, or be construed
as having greater significance than, other indicators of an entity's
performance. See "Summary Consolidated Financial Data" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
General."
The Company believes that certain demographic characteristics of the rural
marketplace should further facilitate commercial exploitation of the network. As
compared to urban residents, rural residents travel greater distances by
personal vehicle and have access to fewer public telephones along drive routes.
The Company believes that these factors will sustain demand for mobile
telecommunication service in the rural marketplace. These same factors produce
"roaming" revenues that are higher as a percentage of total revenues than would
likely be the case in more densely populated urban areas ("roaming" is an
industry term for calls made by cellular customers when traveling in another
carrier's cellular system). Roaming revenues result in higher margins because
roaming calls are priced at higher rates than local calls without generating
associated sales commission costs. During the 12 months ended March 31, 1995,
roaming revenues constituted 30% of the Company's total managed markets service
revenues, compared to 13% of industry service revenues generally for calendar
year 1994.
STRATEGY
The Company's primary objective is to grow revenue and cash flow through
increased market penetration and subscriber usage and expansion of the network.
The Company intends to accomplish this objective by leveraging existing network
advantages and brand name recognition, through acquisitions and dispositions of
cellular properties and through product line extensions.
NETWORK ADVANTAGES. The Company seeks to leverage the substantial
competitive and cost advantages created by the network. For example, the network
uses only 12 switching facilities that provide sufficient capacity to serve all
55 of the Company's managed markets. Cost savings are realized as the Company
uses one network-wide operations center, centralizes services such as
interconnection, billing, roamer verification, maintenance and support and has
access to volume discount purchasing of cellular system equipment. The network
also affords the Company certain technical advantages in the provision of
enhanced services such as call delivery and call forwarding. With respect to the
competing cellular carrier in any given managed market, the network also gives
the Company important marketing advantages by permitting the Company to offer
service over expanded geographic territories at favorable rates and to offer
enhanced call delivery service. In addition, the Company has entered into
agreements with other cellular carriers that permit the Company to offer its
subscribers preferred rates and enhanced services when travelling outside the
network. See "Business -- The Company's Operations -- Network Construction and
Operations."
MARKETING. The Company's marketing strategy is to market its cellular
service on a network-wide basis under the CommNet Cellular name. The use of a
single name over a broad geographic territory has created strong brand-name
recognition and allowed the Company to achieve advertising efficiencies.
Historically, the Company has relied to a significant extent on direct sales
representatives and on independent sales agents. The Company is currently
emphasizing development of a new channel of distribution represented by 17
Company-owned retail stores located within the network, which will be
supplemented by 11 additional Company-owned retail stores scheduled to open by
the end of fiscal year 1995. The retail distribution channel is also being
expanded by the addition of 19 Wal-Mart-Registered Trademark- kiosks staffed by
Company employees. The Company believes that development of retail distribution
channels owned or staffed by the Company will increase customer additions,
enhance customer service and generate cost efficiencies in the acquisition of
new subscribers. The Company also maintains 46 direct sales representatives and
596 independent sales agents or outlets, including 52 Radio Shack and eight
- -C-Sears stores which have exclusive distribution agreements with the Company.
See "Business -- The Company's Operations -- Marketing."
ACQUISITIONS AND DISPOSITIONS. The Company continually evaluates
acquisitions of cellular properties that are geographically and operationally
compatible with the network. In evaluating acquisition targets, the Company
considers, among other things, demographic factors, including population size
and density, traffic patterns, cell site coverage, required capital expenditures
and the likely ability of the Company to integrate the target market into the
network. In pursuing such acquisitions, the Company may exchange interests in
4
nonmanaged markets for interests in existing or new markets that serve to expand
the network. The Company also from time to time may sell nonmanaged assets to
raise capital for network expansion. For example, the Company has entered into
an agreement to sell an indirect interest in ten Nebraska RSA markets not
managed by the Company for approximately $24.3 million in cash. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Acquisitions and Sales."
ADDITIONAL CELLULAR APPLICATIONS; PAGING. Demand for "traditional" cellular
service within the network is not expected to use all available system capacity.
As a result, the Company is actively exploring the use of the network to
transmit data in innovative and cost-effective ways that can be tailored for use
by a variety of industrial and agricultural customers. The Company expects that
this additional capacity may be adapted (at a nominal marginal cost) for data
transmission, monitoring, control and other cellular uses that are well suited
for agriculture, energy and other industries that have widespread operations
within the Company's rural marketplace.
The Company also believes that certain attributes of the Company's operating
infrastructure, including existing towers, established distribution channels and
other administrative resources, can be utilized to offer one-way paging service
throughout the managed markets on a cost-efficient basis. The Company intends to
commence offering such paging services in fiscal year 1996, subject to the
receipt of sufficient FCC paging licenses to offer economically feasible paging
services. See "Business -- The Company's Operations -- Services and Products."
The Company maintains its registered office and executive offices at 5990
Greenwood Plaza Boulevard, Englewood, Colorado 80111. The Company's telephone
number is (303) 694-3234.
5
THE OFFERING
Notes Offered..................... $80,000,000 principal amount of % Subordinated Notes
due 2005.
Maturity Date..................... , 2005.
Interest Rate..................... The Notes will bear interest at a rate of % per
annum; provided that in the event the Conversion
Condition (as described below) is satisfied, from and
after the Convertible Redemption Date, the interest rate
on the Notes will decrease .25% to a rate of % per
annum. See "Description of the Notes -- Principal,
Maturity and Interest."
Conversion Condition.............. The Company intends to redeem its 6 3/4% Convertible
Subordinated Debentures due 2009 (the "6 3/4%
Convertible Subordinated Debentures") with the net
proceeds from the sale of the Notes (the "Offering").
Holders of the 6 3/4% Convertible Subordinated
Debentures have the right, exercisable at any time on or
prior to the Convertible Redemption Date for such
debentures (approximately 20 days after the consummation
of the Offering) to convert such debentures into the
Company's Common Stock at a conversion price of $27.625
per share of Common Stock. The Conversion Condition will
be satisfied if a majority in aggregate principal amount
of the outstanding 6 3/4% Convertible Subordinated
Debentures is converted by the holders thereof on or
prior to the Convertible Redemption Date into shares of
the Company's Common Stock. The last reported sales
price of the Company's Common Stock on the National
Association of Securities Dealers Automated Quotation
System (the "Nasdaq") National Market on June 27, 1995
was $27. At the close of business on such date, a total
of $74,747,000 in principal amount of the 6 3/4%
Convertible Subordinated Debentures was outstanding. See
"Description of the Notes -- Principal, Maturity and
Interest."
Interest Payment Dates............ and of each year, commencing , 1996.
Optional Redemption............... The Notes are redeemable at the option of the Company,
in whole or in part, at any time on or after ,
2000 at the redemption prices set forth herein, plus
accrued and unpaid interest, if any, to the date of
redemption. See "Description of the Notes -- Redemption
at the Company's Option."
Change of Control................. Upon the occurrence of a Change of Control, each holder
of Notes may require the Company to repurchase all or a
portion of such holder's Notes at a purchase price in
cash equal to 101% of the principal amount thereof,
together with accrued and unpaid interest, if any, to
the date of repurchase. See "Description of the Notes --
Certain Covenants."
Ranking........................... The Notes will be unsecured subordinated obligations of
the Company and will rank subordinate in right of
payment to all existing and future Senior Indebtedness,
including (i) the credit agreements (collectively, the
"Credit Agreements") between Cellular, Inc. Financial
Corporation ("CIFC"), the Company's
6
wholly-owned financing subsidiary, and CoBank, ACB
("CoBank"), (ii) the Company's 11 3/4% Senior
Subordinated Discount Notes due 2003 (the "11 3/4%
Senior Subordinated Discount Notes") and (iii) all other
Indebtedness of the Company whether outstanding on the
date of the Indenture or thereafter created, incurred or
assumed, unless such Indebtedness provides that it is
not superior in right of payment to the Notes. As of
March 31, 1995, on a pro forma basis after giving effect
to the Offering and the application of the estimated net
proceeds therefrom as described in "Use of Proceeds,"
the aggregate outstanding principal amount of Senior
Indebtedness of the Company would have been
approximately $185,000,000 (assuming all of the
outstanding 6 3/4% Convertible Subordinated Debentures
are redeemed by the Company) and $156,387,000 (assuming
all of the outstanding 6 3/4% Convertible Subordinated
Debentures are converted by the holders thereof). See
"Description of the Notes -- Subordination."
Covenants......................... The Indenture will contain certain covenants, including,
but not limited to, covenants with respect to the
following matters: (i) limitation on incurrence of
additional indebtedness by the Company and its
subsidiaries, (ii) limitation on restricted payments,
(iii) limitation on transactions with affiliates, (iv)
limitation on dividend and other payment restrictions
affecting subsidiaries, (v) prohibition on incurrence of
subsidiary indebtedness and the issuance and sale of
preferred stock by subsidiaries, and (vi) restrictions
on mergers, consolidations and the transfer of all or
substantially all of the assets of the Company. See
"Description of the Notes -- Certain Covenants."
Use of Proceeds................... The net proceeds to the Company from the Offering are
estimated to be approximately $77,000,000. The Company
intends to use approximately $76,765,000 of such net
proceeds to redeem all of the outstanding 6 3/4%
Convertible Subordinated Debentures at a redemption
price of 102.7% of the principal amount thereof and the
remainder, if any, of such proceeds to reduce amounts
outstanding under the Credit Agreements. To the extent
the holders of the 6 3/4% Convertible Subordinated
Debentures exercise their right to convert such
debentures into shares of the Company's Common Stock,
the Company will repay up to $28,613,000 of indebtedness
under the Credit Agreements shortly after the
consummation of the Offering. The Company intends to use
the balance of such proceeds for general corporate
purposes, which may include additional reductions in
indebtedness under the Credit Agreements, capital
expenditures or acquisitions. See "Use of Proceeds."
Risk Factors...................... See "Risk Factors" on pages 12-15 for a discussion of
certain factors that should be considered in connection
with an investment in the Notes.
7
SUMMARY CONSOLIDATED FINANCIAL DATA
The following summary consolidated financial data of the Company for the
years ended September 30, 1992, 1993 and 1994 are derived from the consolidated
financial statements of the Company that have been audited by Ernst & Young LLP,
independent auditors. The following summary consolidated financial data of the
Company at March 31, 1995 and for the six months ended March 31, 1994 and 1995
are derived from unaudited consolidated financial statements of the Company,
which, in the opinion of the Company, reflect all adjustments necessary for a
fair presentation of the results for the unaudited periods. The "Adjusted" March
31, 1995 balance sheet data give effect to the Offering and the assumed use of
proceeds thereof, assuming (i) all of the outstanding 6 3/4% Convertible
Subordinated Debentures are redeemed and (ii) all of the outstanding 6 3/4%
Convertible Subordinated Debentures are converted by the holders thereof into
the Company's Common Stock. See "Use of Proceeds." Operating results for the six
months ended March 31, 1995 are not necessarily indicative of the results that
may be achieved for the fiscal year ending September 30, 1995. The data should
be read in conjunction with the consolidated financial statements and other
financial information included or incorporated by reference in this Prospectus.
SIX MONTHS ENDED MARCH 31,
YEAR ENDED SEPTEMBER 30,
-------------------------------------------- ----------------------------
1992 1993 1994 1994 1995
------------ ------------ ------------ ------------ ------------
STATEMENT OF OPERATIONS DATA (1):
Revenues........................................ $ 14,906,349 $ 33,689,311 $ 61,360,051 $ 26,455,523 $ 38,339,762
Depreciation and amortization, including
write-downs.................................... 14,114,817 19,950,508 15,767,111 7,357,198 8,029,368
Operating loss.................................. (18,344,157) (15,430,533) (5,669,335) (5,109,983) (3,413,858)
Equity in net loss of affiliates................ (8,851,753) (6,339,145) (5,092,484) (3,586,024) (2,735,777)
Minority interest in net income of consolidated
affiliates..................................... -- -- (543,607) -- (261,004)
Gains on sales of affiliates and other.......... 14,339,063 7,821,424 3,811,943 2,459,004 67,247
Interest expense................................ (14,800,908) (16,427,796) (21,338,505) (9,860,292) (11,886,742)
Interest income (2)............................. 10,616,024 10,701,511 12,080,836 6,813,532 5,955,762
Extraordinary charge............................ -- (2,991,673) -- -- --
Net loss........................................ (17,041,731) (22,666,212) (16,751,152) (9,283,763) (12,274,372)
OTHER DATA:
EBITDA (3)...................................... $ (4,229,340) $ 4,519,975 $ 10,097,776 $ 2,247,215 $ 4,615,510
Capital expenditures (4)........................ 10,006,787 8,607,732 40,933,127 12,475,110 20,663,454
Cash interest expense (5)....................... 14,800,908 15,581,591 9,205,350 3,996,380 5,249,182
Adjusted cash interest expense (6).............. 12,759,927 7,026,471
Ratio of earnings to fixed charges (7).......... -- -- -- -- --
AS OF MARCH 31, 1995
------------------------------------------
ADJUSTED FOR ADJUSTED FOR
ACTUAL REDEMPTION CONVERSION
------------ ------------ ------------
BALANCE SHEET DATA (1):
Working capital................................. $ 18,308,376 $ 18,543,207 $ 66,695,233
Investment in and advances to affiliates........ 57,063,587 57,063,587 57,063,587
Net property and equipment...................... 86,254,160 86,254,160 86,254,160
Total assets.................................... 290,880,354 292,502,217 340,654,243
Long-term debt.................................. 263,138,161 268,391,161 239,778,018
Total stockholders' equity...................... 7,824,562 4,193,425 80,958,594
<FN>
- ------------------------------
(1) Markets in which the Company holds a greater than 50% net interest are
reflected on a consolidated basis in the Company's consolidated financial
statements. Markets in which the Company holds a net interest which is 50%
or less but 20% or greater are accounted for under the equity method.
Markets in which the Company holds a less than 20% interest are accounted
for under the cost method. The following table sets forth the number of
markets and relevant accounting methods at the end of each of the last
three fiscal years and at March 31, 1994 and 1995.
SEPTEMBER 30, MARCH 31,
------------------ -----------
1992 1993 1994 1994 1995
---- ---- ---- ---- ----
Consolidated.................. 28 36 42 40 44
Equity........................ 37 38 35 37 31
Cost.......................... 18 6 18 6 18
---- ---- ---- ---- ----
Total..................... 83 80 95 83 93
---- ---- ---- ---- ----
---- ---- ---- ---- ----
8
(2) Primarily represents accrued but unpaid interest on advances to affiliates.
Also includes interest income on cash balances and short-term investments.
(3) "EBITDA" represents, for any relevant period, the sum of operating income
(loss), depreciation or write-downs of property, plant and equipment and
amortization of intangible assets included in operating income (loss).
Certain financial analysts consider EBITDA a meaningful measure of an
entity's ability to meet long-term financial obligations, and growth in
EBITDA a meaningful barometer of future profitability, especially in a
capital-intensive industry such as cellular telecommunications. However,
EBITDA should not be considered in isolation to, or be construed as having
greater significance than, other indicators of an entity's performance. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- General."
(4) Includes additions of property and equipment including those temporarily
financed through accounts payable and through vendor long-term debt.
(5) Cash interest expense excludes capitalized interest and deferred financing
fees.
(6) Adjusted to give effect to the Offering and the assumed use of proceeds
thereof (assuming the 6 3/4% Convertible Subordinated Debentures are
redeemed by the Company) as if such transactions occurred as of the
beginning of the latest fiscal or interim period presented. If all of the
6 3/4% Convertible Subordinated Debentures are converted by the holders
thereof, and the Company repays $28,613,000 of indebtedness under the
Credit Agreements, adjusted cash interest expense for fiscal year 1994 and
the six months ended March 31, 1995 would be $10,120,113 and $5,706,564,
respectively. See "Use of Proceeds."
(7) The ratio of earnings to fixed charges is determined by dividing the sum of
earnings before extraordinary item and accounting change, interest expense,
taxes and a portion of rent expense representative of interest by the sum
of interest expense and a portion of rent expense representative of
interest. The ratio of earnings to fixed charges is not meaningful for
periods that result in a deficit. For the years ended September 30, 1992,
1993 and 1994, the deficit of earnings to fixed charges was $17,041,731,
$22,666,212 and $16,751,152, respectively. For the six months ended March
31, 1994 and 1995, the deficit of earnings to fixed charges was $9,283,763
and $12,274,372, respectively.
9
SUMMARY SELECTED COMBINED AND PROPORTIONATE
OPERATING RESULTS OF CELLULAR LICENSEES
The following table presents operating data for all cellular licensees in
which the Company holds an interest. The "Combined," "Financed Proportionate"
and "Company Proportionate" operating results, which are not included in the
Company's consolidated financial statements, are provided to assist in
understanding the results of the licensees in which the Company holds an
interest. Generally accepted accounting principles ("GAAP") prescribe inclusion
of revenues and expenses for consolidated interests (generally interests of more
than 50%), but not for equity interests (generally interests of 20% to 50%) or
cost interests (generally interests of less than 20%). Equity accounting results
in the same net income as consolidation; however the net operating results are
reflected on a single line below operating income. Operating activity related to
interests accounted for under the cost method are not reflected at all in a GAAP
operating statement. For a reconciliation from Company Proportionate to
consolidated net loss, see "Selected Combined and Proportionate Operating
Results of Cellular Licensees."
YEAR ENDED SEPTEMBER 30,
------------------------------------------------------------------------------------------
FINANCED PROPORTIONATE (2) COMPANY PROPORTIONATE (3)
COMBINED (1)
--------------------------- ---------------------------- ----------------------------
1993 1994 1993 1994 1993 1994
------------ ------------ ------------ ------------ ------------ ------------
OPERATIONS DATA:
Revenues........................... $ 98,679,038 $128,478,339 $ 58,223,424 $ 83,187,599 $ 39,345,809 $ 59,201,047
Depreciation and amortization...... 15,647,017 20,330,211 10,557,582 15,343,319 6,213,146 11,489,961
Operating income (loss)............ (3,059,665) 3,749,309 (5,752,345) (96,880) (3,121,304) 7,221
Net loss........................... (10,629,347) (6,867,086) (12,516,546) (9,979,948) (7,615,856) (7,130,376)
EBITDA............................. 12,587,352 24,079,520 4,805,237 15,246,439 3,091,842 11,497,182
Capital expenditures............... 24,032,021 56,934,648 17,059,409 43,595,885 12,721,083 33,530,618
SUBSCRIBER DATA:
Managed market subscribers......... 63,500 99,002 56,524 90,163 41,126 68,378
Nonmanaged market subscribers...... 49,786 78,984 14,695 22,845 7,579 11,198
------------ ------------ ------------ ------------ ------------ ------------
Total subscribers.................. 113,286 177,986 71,219 113,008 48,705 79,576
Total markets...................... 81 95 81 95 81 95
MANAGED MARKETS:
Revenue per subscriber (monthly
average).......................... $ 71 $ 71 $ 73 $ 72 $ 75 $ 74
Marketing cost per net new
subscriber........................ $ 553 $ 546 $ 512 $ 565 $ 511 $ 534
Ending penetration................. 2.48% 3.18%
Covered pops....................... 2,559,584 3,114,628
SIX MONTHS ENDED MARCH 31,
---------------------------------------------------------------------------------------
FINANCED PROPORTIONATE (2) COMPANY PROPORTIONATE (3)
COMBINED (1)
--------------------------- --------------------------- ---------------------------
1994 1995 1994 1995 1994 1995
------------ ------------ ------------ ------------ ------------ ------------
OPERATIONS DATA:
Revenues........................... $ 59,558,872 $ 83,337,124 $ 36,270,337 $ 53,214,615 $ 25,331,313 $ 37,995,247
Depreciation and amortization...... 7,976,101 10,986,459 5,624,505 8,148,181 3,967,637 5,957,343
Operating income (loss)............ (373,524) 2,332,021 (1,852,333) (122,825) (816,900) (15,611)
Net loss........................... (5,040,373) (4,229,421) (6,175,834) (6,273,194) (3,924,083) (4,493,343)
EBITDA............................. 7,602,577 13,318,480 3,772,172 8,025,356 3,150,737 5,941,732
Capital expenditures............... 18,783,090 38,407,300 9,452,442 23,455,056 6,160,835 16,620,316
SUBSCRIBER DATA:
Managed market subscribers......... 78,496 124,057 70,909 114,834 53,040 87,518
Nonmanaged market subscribers...... 63,577 107,118 17,617 31,064 8,698 16,771
------------ ------------ ------------ ------------ ------------ ------------
Total subscribers.................. 142,073 231,175 88,526 145,898 61,738 104,289
Total markets...................... 83 93 83 93 83 93
MANAGED MARKETS:
Revenue per subscriber (monthly
average).......................... $ 68 $ 63 $ 69 $ 63 $ 71 $ 65
Marketing cost per net new
subscriber........................ $ 557 $ 507 $ 616 $ 479 $ 568 $ 472
Ending penetration................. 2.94% 3.67%
Covered pops....................... 2,721,862 3,384,101
10
YEAR ENDED DECEMBER 31,
------------------------
1992 1993 1994
------ ------ ------
INDUSTRY OPERATING DATA (4):
Revenue per subscriber (monthly average)............ $ 74 $ 73 $ 64
Marketing cost per net new subscriber............... $ 700 $ 675 $ 625
Ending penetration.................................. 2.16% 3.10% 4.54%
<FN>
- ------------------------------
(1) Includes 100% of the operating activity of all licensees, regardless of the
Company's ownership interest. This is essentially equivalent to
consolidating all licensees regardless of ownership percentage.
(2) Includes that percentage of a licensee's operating results which equals the
Company's ownership interest as well as the ownership interest held by
affiliates of the Company that are financed by CIFC.
(3) Includes only that percentage of a licensee's operating results which
corresponds to the Company's ownership interest. This is essentially
equivalent to a pro rata consolidation.
(4) Derived from Cellular Telephone Industry Association Data Survey and other
industry market sources.
11
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS AND OTHERWISE
INCORPORATED BY REFERENCE HEREIN, THE FOLLOWING FACTORS SHOULD BE CAREFULLY
CONSIDERED IN EVALUATING THE COMPANY AND ITS BUSINESS BEFORE PURCHASING THE
NOTES OFFERED HEREBY.
HIGHLY LEVERAGED FINANCIAL POSITION; DEBT SERVICE REQUIREMENTS
The Company is highly leveraged and has substantial debt service
requirements. At March 31, 1995, the Company had outstanding long-term debt of
$263,138,000, compared to stockholders' equity of $7,825,000. Interest expense
was $21,339,000 for fiscal year 1994, $9,731,000 of which was payable on a cash
basis and the balance of which constituted accretion on the Company's 11 3/4%
Senior Subordinated Discount Notes. The Credit Agreements provide for the
reborrowing of any loan repayments made to CoBank until the revolving
commitments under the Credit Agreements terminate in December 1995. Upon such
termination, amounts due under the Credit Agreements are converted into term
loans requiring quarterly cash amortization payments through December 31, 2000.
The Company is currently negotiating with CoBank to extend the termination date
under the Credit Agreements until December 1996, and to reduce the principal
amortization period from five to four years. There can be no assurance that the
extension will be obtained. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
The Company's ability to meet its debt service requirements will require
significant and sustained growth in cash flow by the Company and its affiliates.
Historically, the Company has been able to make required interest payments on
its indebtedness from borrowings under bank loans and from equity and debt
financings. The Company will require continued access to such financing sources
until such time as the Company generates sufficient positive cash flow from
operations to service its debt and, to the extent that the Company's leverage
increases, the Company's access to such financing sources may be curtailed or
made more expensive. There can be no assurance that the Company will experience
the necessary growth in cash flow or will be able to access the financing
sources described above.
OPERATING LOSSES AND NET LOSSES
The Company has experienced operating losses and net losses from inception.
The accumulated deficit was $107,239,016 and $113,075,709 at December 31, 1994
and March 31, 1995, respectively. The Company anticipates that losses will
continue over the next several years. Operating losses in fiscal years 1992,
1993 and 1994 were $18,344,000, $15,431,000 and $5,669,000, respectively
(including depreciation, amortization and write-downs of switch assets related
to an upgrade program of $14,115,000, $19,951,000 and $15,767,000,
respectively), and net losses for the same periods were $17,042,000, $22,666,000
and $16,751,000, respectively. Operating losses for the six months ended March
31, 1995 were $3,414,000 (including depreciation and amortization of
$8,029,000), and net losses for the same period were $12,274,000. There can be
no assurance that future operations will be profitable or generate positive
operating income.
HOLDING COMPANY STRUCTURE
A substantial portion of the Company's assets and operations are investments
in its subsidiaries and affiliates and, to that extent, the Company is
effectively a holding company. The Company must rely on dividends, loan
repayments and other intercompany cash flows from its subsidiaries and
affiliates to generate the funds necessary to meet the Company's debt service
obligations, including payment of principal and interest on the Notes. The
Credit Agreements contain restrictions on the ability of any subsidiary or
affiliate of the Company which has borrowed from CIFC to make distributions to
the Company. The Company has guaranteed the obligations of CIFC to CoBank and
has granted a first security interest in all of the assets of the Company as
security for such guaranty. The assets of affiliates which borrow funds from
CIFC are pledged to CIFC, which in turn assigns such pledges to CoBank. See
"Description of Certain Indebtedness" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources." Claims of other creditors of the Company's subsidiaries and
affiliates, including CoBank, tax authorities, trade creditors and creditors of
those affiliates which have financing sources in
12
addition to the Company, will generally have priority as to the assets of such
subsidiaries and affiliates over the claims of the Company and the holders of
certain indebtedness of the Company, including holders of the Notes.
SUBORDINATION
The Notes will be unsecured and subordinated to the prior payment in full of
all existing and future Senior Indebtedness, including the Credit Agreements and
the 11 3/4% Senior Subordinated Discount Notes. As of March 31, 1995, on a pro
forma basis, after giving effect to the Offering and the application of the net
proceeds therefrom the aggregate outstanding principal amount of Senior
Indebtedness would have been approximately $185,000,000 (assuming all of the
outstanding 6 3/4% Convertible Subordinated Debentures are redeemed) and
$156,387,000 (assuming all of the outstanding 6 3/4% Convertible Subordinated
Debentures are converted by the holders thereof). In the event of a bankruptcy,
liquidation or reorganization of the Company, the assets of the Company will be
available to pay obligations on the Notes only after all Senior Indebtedness has
been paid in full, and there may not be sufficient assets remaining to pay
amounts due on any or all of the Notes. In addition, the Company may not pay
principal or premium, if any, or interest on the Notes if any Senior
Indebtedness is not paid when due or any other default on any Senior
Indebtedness occurs and the maturity of such Senior Indebtedness is accelerated
in accordance with its terms, unless in either case, such Senior Indebtedness
has been paid in full or the default has been cured or waived and such
acceleration shall have been rescinded. In addition, if any default occurs with
respect to certain Senior Indebtedness and certain other conditions are
satisfied, the Company may not make any payments on the Notes for a designated
period of time. Finally, if any judicial proceeding shall be pending with
respect to any such default in payment on any Senior Indebtedness, or other
default, with respect to certain Senior Indebtedness, or if the maturity of the
Notes is accelerated because of a default under the Indenture and such default
constitutes a default with respect to any Senior Indebtedness, the Company may
not make any payment on the Notes. See "Description of the Notes --
Subordination."
RESTRICTIONS UNDER DEBT INSTRUMENTS
The Company's operations and financial performance are subject to covenants
contained in certain agreements related to the Company's indebtedness, including
the Credit Agreements and the indenture governing the 11 3/4% Senior
Subordinated Discount Notes. Among other things, those agreements (i) limit the
Company's ability to incur additional indebtedness, including guarantees, sell
or create liens upon its assets, pay dividends on and make other distributions
with respect to its capital stock and enter into new lines of business and (ii)
require the Company to meet certain financial performance tests and use portions
of the net proceeds from the sale of certain assets and the issuance of debt
securities by the Company to repay obligations under certain agreements. These
restrictions could limit the Company's ability to effect future acquisitions or
financing or otherwise restrict corporate activities. See "Description of the
Notes" and "Description of Certain Indebtedness."
NATURE OF COMPANY'S OWNERSHIP OF LICENSES
Many of the Company's interests in cellular systems are owned through
affiliates that are partners in limited partnerships which are the licensees for
their respective systems. In those partnerships in which the Company's affiliate
is a limited partner or is one of several general partners, certain decisions,
such as the timing and amount of cash distributions and sale or liquidation of
the partnership, may not be subject to a vote of the limited partners or may
require a greater percentage vote than that owned by the Company's affiliate. In
those partnerships that are not managed by the Company, the Company is dependent
on the managing partner to meet the licensee's obligations under the FCC's rules
and regulations. There can be no assurance that any partnership in which the
Company holds an interest will make decisions on such matters which will be in
the Company's best interest or that other partners' conduct and character will
not adversely affect the continuing qualification of licensees in which the
Company holds an interest.
LIMITED OPERATING HISTORY; NEW INDUSTRY
Cellular operations within the network began in 1988 and, accordingly, the
Company's operating history is limited. Moreover, its operations to date have
concentrated on the acquisition of interests in cellular systems licenses and
licensees and the construction and initial operation of cellular systems. A
substantial
13
majority of the cellular telephone systems in which the Company holds an
interest have been operational for less than five years. While there are a
substantial number of cellular telephone systems operating in the United States
and in other countries, cellular telecommunications is a relatively new industry
with a limited history. Moreover, most of the cellular systems in which the
Company holds an interest are RSA markets, which have an even more limited
operating history than the larger MSA markets. Based on demographic factors,
including population size and density, traffic patterns and other relevant
market characteristics, the Company believes that successful commercial
exploitation of the RSA and MSA markets in which the Company holds interests can
be achieved. However, there can be no assurance that this will be the case.
COMPETITION; NEW TECHNOLOGIES; OBSOLESCENCE
The FCC licenses two cellular carriers in each market. Competition for
customers between the two systems is principally on the basis of quality,
service and price. The Company's competitors may have financial resources which
are substantially greater than those of the Company and its partners. In
addition, FCC policy requires cellular licensees to provide, on a
nondiscriminatory basis, cellular service to resellers that purchase blocks of
mobile telephone numbers and then resell them to the public. This may create
added competition at the retail level.
Competition also may arise from other technologies, including conventional
mobile telephone services, mobile satellite systems, wireless data services,
paging services and Specialized Mobile Radio ("SMR") systems. The FCC has
recently given approval for the creation of enhanced SMR ("ESMR") systems, which
combine multiple SMR systems in a cellular structure and employ frequency reuse,
like cellular, thereby potentially eliminating much of the current technological
distinction between SMR and cellular.
The FCC has also allocated radio channels for personal communications
services ("PCS"). Among other possible uses, PCS will be capable of providing a
two-way mobile voice and data telephone service that is similar to cellular
service. PCS will be a digital, wireless communications system that will utilize
technology that could allow it to compete effectively with cellular systems,
particularly in densely populated areas. Licenses will be awarded by competitive
bidding. Auctions for the first two spectrum blocks have been completed. Absent
delays caused by any judicial proceedings, PCS systems can be expected to
commence operation in major metropolitan areas as early as the end of calendar
year 1995.
Continuing technological advances in the communications field make it
impossible to predict the extent of additional future competition for cellular
systems, but it is certain that in the future there will be more potential
substitutes for cellular service. There can be no assurance that the Company
will not face significant future competition or that cellular technology will
not eventually become obsolete.
VALUE OF CELLULAR LICENSES DEPENDENT UPON SUCCESS OF OPERATIONS AND INDUSTRY
A substantial portion of the Company's assets consists of interests in
cellular licenses and in entities holding cellular licenses. The value of
cellular licenses will depend significantly upon the success of the operations
of such licensees and the growth of the industry generally. Although a market
for interests in cellular licenses currently exists and the Company believes
that such a market will continue, there can be no assurance that this will be
the case. Even if a market does continue in the future, the values obtainable
for interests in cellular licenses in such a market may be significantly lower
than current values.
REGULATORY CONSIDERATIONS
The licensing, construction, operation, sale and acquisition of cellular
systems are regulated by the FCC. In addition, certain aspects of cellular
operations, such as resale of cellular services, may be subject to public
utility regulation in the state in which the service is provided. The ongoing
operations of the Company may require permits, licenses and other authorization
from regulatory authorities (including but not limited to the FCC) not now held
by the Company. In addition, licensing proceedings and applications for granting
and transferring construction permits and operating licenses have been subject
to substantial delays by the FCC. While the Company expects that it will receive
requisite authorizations and approvals in the ordinary course of business, no
assurance can be given that the applicable regulatory authority will grant such
approvals in a timely manner, if at all. Moreover, changes in regulation, such
as increased price regulation or deregulation of interconnection arrangements,
could adversely affect the Company's financial condition and
14
operating results. Under the FCC rules, licenses for cellular systems are
generally issued for ten-year terms. Although a licensee may apply for renewal
and, under certain circumstances, may be entitled to a renewal expectancy,
renewal is not automatic. The Company's renewal applications may be subject to
petitions to deny or competing applications. Therefore, no assurance can be
given that any license will be renewed.
RADIOFREQUENCY EMISSION CONCERNS
Media reports have suggested that certain radiofrequency ("RF") emissions
from portable cellular telephones might be linked to cancer. Concerns over RF
emissions may have the effect of discouraging the use of cellular telephones,
which could have an adverse effect upon the Company's business. The FCC has a
rulemaking proceeding pending to update the guidelines and methods it uses for
evaluating RF emissions from radio equipment, including cellular telephones. The
proposal would impose more restrictive standards on RF emissions from lower
power devices such as portable cellular telephones.
DEPENDENCE ON KEY PERSONNEL
The Company's affairs are managed by a small number of key personnel, the
loss of which could have an adverse impact on the Company. See "Management."
RESTRICTIONS ON REPURCHASES AT HOLDER'S OPTION
In the event of a Change of Control, the Company would be required, subject
to certain conditions, to offer to repurchase all outstanding Notes at a price
equal to 101% of the principal amount thereof, plus accrued interest thereon. In
addition, the indenture governing the 11 3/4% Senior Subordinated Discount Notes
requires the Company to make an offer to repurchase all outstanding 11 3/4%
Senior Subordinated Discount Notes in the event of a change of control, which is
similar to the Change of Control offer requirement applicable to the Notes.
However, upon a Change of Control, all amounts due under the Credit Agreements
would become immediately due and payable at the election of CoBank. The
subordination provisions relating to the Notes would prohibit any payment under
the Notes until all amounts due under the Credit Agreements and the 11 3/4%
Senior Subordinated Discount Notes were repaid in full. There can be no
assurance that the Company will have the financial resources available to honor
its obligations in respect of the Notes in the event of a Change of Control.
LACK OF A PUBLIC MARKET FOR THE NOTES
There is no public market for the Notes and the Company does not intend to
list the Notes on any securities exchange or for quotation over any
over-the-counter market. The Company has been advised by the Underwriters that,
following the completion of the Offering, the Underwriters presently intend to
make a market in the Notes. However, the Underwriters are under no obligation to
do so and may discontinue any market making activities at any time without
notice. No assurance can be given as to the liquidity of the trading market for
the Notes or that an active public market for the Notes will develop or, if
developed, will continue. If an active public market does not develop or is not
maintained, the market price and liquidity of the Notes may be adversely
affected.
USE OF PROCEEDS
The net proceeds to the Company from the Offering are estimated to be
approximately $77,000,000. The Company intends to use approximately $76,765,000
of such net proceeds to redeem all of the outstanding 6 3/4% Convertible
Subordinated Debentures at a redemption price of 102.7% of the principal amount
thereof and the remainder, if any, of such proceeds to reduce amounts
outstanding under the Credit Agreements. Holders of the 6 3/4% Convertible
Subordinated Debentures have the right, exercisable at any time on or prior to
the Convertible Redemption Date for such debentures, to convert such debentures
into the Company's Common Stock at a conversion price of $27.625 per share of
Common Stock. The last reported sales price of the Company's Common Stock on the
Nasdaq National Market on June 27, 1995 was $27. To the extent the holders of
the 6 3/4% Convertible Subordinated Debentures exercise their right to convert
such debentures into shares of the Company's Common Stock, the Company will
repay up to $28,613,000 of indebtedness under the Credit Agreements shortly
after the consummation of the Offering. The Company does not intend immediately
to reduce borrowings below $34,591,000 in order to avoid
15
penalties relating to early termination of agreements that fix interest rates.
However, the Company will consider further reductions in borrowings under the
Credit Agreements as such agreements fixing interest rates expire. The Company
intends to use the balance of such proceeds for general corporate purposes which
may include additional reductions in indebtedness under the Credit Agreements,
capital expenditures or acquisitions. Indebtedness outstanding under the Credit
Agreements matures in 2000. The Credit Agreements provide, at the Company's
option, for interest at 1.00% over prime or 2.25% over the London Interbank
Offered Rate ("LIBOR"). As of May 31, 1995, the weighted average interest rate
on debt outstanding under the Credit Agreements was 9.94%. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources."
16
CAPITALIZATION
The following table sets forth the capitalization of the Company as of March
31, 1995 and as adjusted to give effect to the Offering and the assumed use of
proceeds thereof, assuming (i) all of the outstanding 6 3/4% Convertible
Subordinated Debentures are redeemed and (ii) all of the outstanding 6 3/4%
Convertible Subordinated Debentures are converted by the holders thereof into
shares of the Company's Common Stock. This table should be read in conjunction
with the Company's consolidated financial statements, related notes and other
financial information included or incorporated by reference in this Prospectus.
AS OF MARCH 31, 1995
-------------------------------------------------------
ADJUSTED FOR ADJUSTED FOR
ACTUAL REDEMPTION CONVERSION (1)
--------------- ------------------ ------------------
Cash and available-for-sale securities................. $ 14,408,024 $ 14,642,855 $ 62,794,881
--------------- ------------------ ------------------
--------------- ------------------ ------------------
Short-term debt:
Current portion of long-term debt(2)................... $ 1,090,870 $ 1,090,870 $ 1,090,870
Obligation under capital leases due within
one year.............................................. 467,798 467,798 467,798
--------------- ------------------ ------------------
Total short-term debt.............................. $ 1,558,668 $ 1,558,668 $ 1,558,668
--------------- ------------------ ------------------
--------------- ------------------ ------------------
Long-term debt:
Secured bank financing (2)........................... $ 63,203,738 $ 63,203,738 $ 34,590,595
Obligation under capital leases...................... 620,138 620,138 620,138
11 3/4% Senior Subordinated Discount Notes (2)....... 119,617,285 119,617,285 119,617,285
% Subordinated Notes due 2005...................... -- 80,000,000 80,000,000
8.75% Convertible Senior Subordinated Notes (3)...... 4,950,000 4,950,000 4,950,000
6 3/4% Convertible Subordinated Debentures (3)....... 74,747,000 -- --
--------------- ------------------ ------------------
Total long-term debt............................... 263,138,161 268,391,161 239,778,018
Stockholders' equity:
Preferred Stock: $.01 par value; 1,000,000 shares
authorized; none issued............................. -- -- --
Common Stock: $.001 par value; 40,000,000 shares
authorized; 11,953,959 shares issued (14,659,733
shares adjusted for conversion)..................... 11,954 11,954 14,660
Capital in excess of par value....................... 120,888,317 120,888,317 194,019,643
Accumulated deficit.................................. (113,075,709) (116,706,846) (113,075,709)
--------------- ------------------ ------------------
Total stockholders' equity......................... 7,824,562 4,193,425(4) 80,958,594(5)
--------------- ------------------ ------------------
Total capitalization............................. $ 270,962,723 $ 272,584,586 $ 320,736,612
--------------- ------------------ ------------------
--------------- ------------------ ------------------
<FN>
- ------------------------
(1) The 6 3/4% Convertible Subordinated Debentures are convertible into shares
of the Company's Common Stock at a conversion price of $27.625 per share of
Common Stock on or prior to the Convertible Redemption Date. As of June 27,
1995, the last reported sales price of the Company's Common Stock on the
Nasdaq National Market was $27.
(2) See "Description of Certain Indebtedness."
(3) See Note 6 to the Consolidated Financial Statements.
(4) Reflects the write-off of deferred loan costs of $1,612,968 and the payment
of the redemption premium of $2,018,169 related to the 6 3/4% Convertible
Subordinated Debentures.
(5) The change in Common Stock and capital in excess of par value reflects the
conversion of the 6 3/4% Convertible Subordinated Debentures and the charge
of deferred loan costs of $1,612,968.
17
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data as of and for each of the
five years in the period ended September 30, 1994 are derived from consolidated
financial statements of the Company that have been audited by Ernst & Young LLP,
independent auditors. The selected financial data as of and for the six months
ended March 31, 1994 and 1995 are derived from the unaudited financial
statements of the Company which, in the opinion of the Company, reflect all
adjustments necessary for a fair presentation of the results for the unaudited
periods. Operating results for the six months ended March 31, 1995 are not
necessarily indicative of the results that may be achieved for the fiscal year
ending September 30, 1995. The data should be read in conjunction with the
financial statements and other financial information included or incorporated by
reference in this Prospectus.
SIX MONTHS ENDED
YEAR ENDED SEPTEMBER 30, MARCH 31,
-------------------------------------------------------------------- --------------------------
1990 1991 1992 1993 1994 1994 1995
------------ ------------ ------------ ------------ ------------ ------------ ------------
STATEMENT OF OPERATIONS DATA
(1):
Revenues...................... $ 1,024,676 $ 4,908,170 $ 14,906,349 $ 33,689,311 $ 61,360,051 $ 26,455,523 $ 38,339,762
Costs and expenses:
Cellular operations......... 2,419,515 11,940,438 18,138,532 30,288,634 50,855,637 23,741,650 33,235,077
Corporate (net of amounts
allocated to affiliates)... 1,518,498 (592,798) 997,157 (1,119,298) 406,638 466,658 489,175
Depreciation and
amortization............... 1,855,678 8,569,325 14,114,817 19,950,508 12,650,855 5,884,296 8,029,368
Write-down of property and
equipment.................. -- -- -- -- 3,116,256 1,472,902 --
------------ ------------ ------------ ------------ ------------ ------------ ------------
Operating loss................ (4,769,015) (15,008,795) (18,344,157) (15,430,533) (5,669,335) (5,109,983) (3,413,858)
Equity in net loss of
affiliates................... (5,071,980) (10,931,161) (8,851,753) (6,339,145) (5,092,484) (3,586,024) (2,735,777)
Minority interest in equity of
affiliates................... -- -- -- -- (543,607) -- (261,004)
Gains on sales of affiliates
and other.................... -- -- 14,339,063 7,821,424 3,811,943 2,459,004 67,247
Interest expense.............. (6,894,329) (11,245,394) (14,800,908) (16,427,796) (21,338,505) (9,860,292) (11,886,742)
Interest income (2)........... 9,028,813 8,484,298 10,616,024 10,701,511 12,080,836 6,813,532 5,955,762
------------ ------------ ------------ ------------ ------------ ------------ ------------
Loss before extraordinary
charge....................... (7,706,511) (28,701,052) (17,041,731) (19,674,539) (16,751,152) (9,283,763) (12,274,372)
Extraordinary charge.......... -- -- -- (2,991,673) -- -- --
------------ ------------ ------------ ------------ ------------ ------------ ------------
Net income (loss)............. $ (7,706,511) $(28,701,052) $(17,041,731) $(22,666,212) $(16,751,152) $ (9,283,763) $(12,274,372)
------------ ------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------ ------------
OTHER DATA:
EBITDA (3).................... $ (2,913,337) $ (6,439,470) $ (4,229,340) $ 4,519,975 $ 10,097,776 $ 2,247,215 $ 4,615,510
Capital expenditures.......... $ 10,119,823 $ 16,683,753 $ 10,006,787 $ 8,607,732 $ 40,933,127 $ 12,475,110 $ 20,663,454
Cash interest expense......... $ 6,202,185 $ 11,245,394 $ 14,800,908 $ 15,581,591 $ 9,205,350 $ 3,996,380 $ 5,249,182
Net income (loss) per common
share........................ $ (1.68) $ (6.00) $ (2.44) $ (2.65) $ (1.45) $ (0.81) $ (1.04)
Weighted average shares
outstanding.................. 4,594,778 4,780,674 6,984,541 8,551,785 11,577,191 11,414,210 11,792,419
Ratio of earnings to fixed
charges (4).................. -- -- -- -- -- -- --
BALANCE SHEET DATA (AT PERIOD
END) (1):
Working capital............... $ 32,058,078 $ 15,317,636 $ 29,477,995 $ 63,560,591 $ 25,524,500 $ 47,062,957 $ 18,308,376
Investment in and advances to
affiliates................... 39,456,182 50,745,576 52,019,577 55,892,372 61,908,761 56,656,672 57,063,587
Net property and equipment.... 13,923,725 33,555,291 44,209,682 53,460,296 79,917,727 57,462,184 86,254,160
Total assets.................. 149,528,094 181,972,276 208,363,573 269,290,185 281,752,821 268,579,932 290,880,354
Long-term debt................ 131,299,631 183,208,596 189,430,430 259,676,224 243,913,168 227,914,886 263,138,161
Total liabilities............. 143,221,602 204,059,999 204,123,685 278,711,956 265,846,354 246,570,843 283,055,792
Stockholders' equity
(deficit)(5)................. 6,306,492 (22,087,723) 4,239,888 (9,421,771) 15,906,467 22,009,089 7,824,562
<FN>
- ------------------------------
(1) Markets in which the Company holds a greater than 50% net interest are
reflected on a consolidated basis in the Company's consolidated financial
statements. Markets in which the Company holds a net interest which is 50%
or less but 20% or greater are accounted for under the equity method.
Markets in which the Company holds a less than 20% interest are accounted
for under the cost method. The following table sets forth the number of
markets and relevant accounting methods at the end of each of the last five
fiscal years and at March 31, 1994 and 1995.
SEPTEMBER 30, MARCH 31,
-------------------------------- -----------
1990 1991 1992 1993 1994 1994 1995
---- ---- ---- ---- ---- ---- ----
Consolidated........ 4 22 28 36 42 40 44
Equity.............. 63 47 37 38 35 37 31
Cost................ 18 18 18 6 18 6 18
---- ---- ---- ---- ---- ---- ----
Total............. 85 87 83 80 95 83 93
---- ---- ---- ---- ---- ---- ----
---- ---- ---- ---- ---- ---- ----
18
(2) Primarily represents accrued but unpaid interest on advances to affiliates.
Also includes interest income on cash balances and short-term investments.
(3) "EBITDA" represents, for any relevant period, the sum of operating income
(loss), depreciation or write-downs of property, plant and equipment and
amortization of intangible assets included in operating income (loss).
Certain financial analysts consider EBITDA a meaningful measure of an
entity's ability to meet long-term financial obligations, and growth in
EBITDA a meaningful barometer of future profitability, especially in a
capital-intensive industry such as cellular telecommunications. However,
EBITDA should not be considered in isolation to, or be construed as having
greater significance than, other indicators of an entity's performance. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- General."
(4) The ratio of earnings to fixed charges is determined by dividing the sum of
earnings before extraordinary item and accounting charges, interest
expense, taxes and a portion of rent expense representative of interest by
the sum of interest expense and a portion of rent expense representative of
interest. The ratio of earnings to fixed charges is not meaningful for
periods that result in a deficit. For the years ended September 30, 1990,
1991, 1992, 1993 and 1994 the deficit of earnings to fixed charges was
$7,706,511, $28,701,052, $17,041,731, $22,666,212 and $16,751,152,
respectively, and for the six months ended March 31, 1994 and 1995 the
deficit of earnings to fixed charges was $9,283,763 and $12,274,372,
respectively.
(5) No cash dividends were declared or paid during any of the periods
presented.
19
SELECTED COMBINED AND PROPORTIONATE
OPERATING RESULTS OF CELLULAR LICENSEES
The following table presents operating data for all cellular licensees in
which the Company holds an interest. The "Combined," "Financed Proportionate"
and "Company Proportionate" operating results, which are not included in the
Company's consolidated financial statements, are provided to assist in
understanding the results of the licensees in which the Company holds an
interest. GAAP prescribe inclusion of revenues and expenses for consolidated
interests (generally interests of more than 50%), but not for equity interests
(generally interests of 20% to 50%) or cost interests (generally interests of
less than 20%). Equity accounting results in the same net income as
consolidation; however the net operating results are reflected on one line below
operating income. Operating activity related to interests accounted for under
the cost method are not reflected at all in a GAAP operating statement.
YEAR ENDED SEPTEMBER 30,
----------------------------------------------------------------------------------
1993 1994 1994 1993 1994
------------ ------------ ------------ ------------ ------------
1993
------------
FINANCED PROPORTIONATE (2) COMPANY PROPORTIONATE (3)
COMBINED (1)
-------------------------- -------------------------- --------------------------
MANAGED MARKETS (4)
Revenues:
Cellular service................. $ 29,635,917 $ 46,628,193 $ 26,374,172 $ 42,682,463 $ 19,454,354 $ 32,766,412
Roaming.......................... 14,357,892 21,724,739 12,813,518 19,845,947 9,249,813 14,881,347
Equipment sales.................. 5,830,780 5,082,082 5,124,328 4,661,880 3,611,838 3,501,916
------------ ------------ ------------ ------------ ------------ ------------
Total revenues............... 49,824,589 73,435,014 44,312,018 67,190,290 32,316,005 51,149,675
Cash costs and expenses:
Cost of sales:
Cellular service (including
roaming)...................... 10,082,848 11,871,044 9,152,718 11,077,524 6,843,566 8,015,495
Equipment sales................ 6,393,571 5,330,514 5,601,091 4,879,149 3,938,476 3,665,013
General and administrative....... 16,953,198 21,777,015 15,116,346 20,026,263 11,158,734 15,189,078
Marketing and selling............ 13,198,287 20,160,573 11,707,982 18,447,497 8,471,407 14,078,272
------------ ------------ ------------ ------------ ------------ ------------
Total cash costs and
expenses.................... 46,627,904 59,139,146 41,578,137 54,430,433 30,412,183 40,947,858
------------ ------------ ------------ ------------ ------------ ------------
EBITDA............................. $ 3,196,685 $ 14,295,868 $ 2,733,881 $ 12,759,857 $ 1,903,822 $ 10,201,817
------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------
Capital expenditures............... $ 14,663,546 $ 38,590,797 $ 14,198,732 $ 37,990,560 $ 11,372,540 $ 30,777,363
Subscribers........................ 63,500 99,002 56,624 90,163 41,126 68,378
Total markets...................... 51 55 51 55 51 55
NONMANAGED MARKETS
Revenues:
Cellular service (including
roaming)........................ $ 46,250,589 $ 51,913,569 $ 13,162,799 $ 15,063,941 $ 6,645,574 $ 7,557,907
Equipment sales.................. 2,603,860 3,129,756 748,607 933,368 384,230 493,465
------------ ------------ ------------ ------------ ------------ ------------
Total revenues............... 48,854,449 55,043,325 13,911,406 15,997,309 7,029,804 8,051,372
Cash costs and expenses:
Cost of sales:
Cellular service............... 14,715,247 17,184,198 4,537,081 5,121,737 2,180,221 2,509,440
Equipment sales................ 3,226,711 1,865,154 956,915 660,441 484,417 340,680
General and administrative....... 11,548,977 13,007,116 3,517,485 3,914,072 1,794,766 2,030,094
Marketing and selling............ 9,972,847 13,203,205 2,828,569 3,814,477 1,382,380 1,875,793
------------ ------------ ------------ ------------ ------------ ------------
Total cash costs and
expenses.................... 39,463,782 45,259,673 11,840,050 13,510,727 5,841,784 6,756,007
------------ ------------ ------------ ------------ ------------ ------------
EBITDA............................. $ 9,390,667 $ 9,783,652 $ 2,071,356 $ 2,486,582 $ 1,188,020 $ 1,295,365
------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------
Capital expenditures............... $ 9,368,475 $ 18,343,851 $ 2,860,677 $ 5,605,325 $ 1,348,543 $ 2,753,255
Subscribers........................ 49,786 78,984 14,695 22,845 7,579 11,198
Total markets...................... 29 40 29 40 29 40
RECONCILIATION FROM COMPANY
PROPORTIONATE EBITDA TO
CONSOLIDATED REPORTING
Total Company Proportionate EBITDA
(managed and nonmanaged
markets).......................... $ 3,091,842 $ 11,497,182
Proportionate depreciation and
amortization...................... (6,213,146) (8,976,825)
Proportionate write-down of
cellular system equipment......... -- (2,513,136)
Proportionate interest............. (4,494,552) (7,137,597)
Equity in nonlicensee affiliates... (3,892,280) (4,361,848)
Minority interests................. (1,897,072) (1,310,177)
Intercompany interest.............. 3,317,736 5,021,225
Amortization of license costs not
owned by affiliates............... (11,038,663) (1,892,465)
Unallocated corporate expenses..... (678,927) (2,516,017)
Gains on sales of affiliates....... 7,821,424 3,811,943
Interest expense (net) and other... (8,682,574) (8,373,437)
------------ ------------
Consolidated net loss.............. $(22,666,212) $(16,751,152)
------------ ------------
------------ ------------
20
SIX MONTHS ENDED MARCH 31,
----------------------------------------------------------------------------------
1994 1995 1995 1994 1995
------------ ------------ ------------ ------------ ------------
1994
------------
FINANCED PROPORTIONATE (2) COMPANY PROPORTIONATE (3)
COMBINED (1)
-------------------------- -------------------------- --------------------------
MANAGED MARKETS
Revenues:
Cellular service................. $ 19,816,799 $ 30,632,634 $ 18,143,975 $ 28,487,884 $ 13,709,098 $ 22,018,537
Roaming.......................... 8,752,626 11,741,508 7,860,799 10,985,625 5,849,634 8,256,246
Equipment sales.................. 2,470,291 2,436,845 2,253,343 2,259,232 1,656,245 1,687,086
------------ ------------ ------------ ------------ ------------ ------------
Total revenues............... 31,039,716 44,810,987 28,258,117 41,732,741 21,214,977 31,961,869
Cash costs and expenses:
Cost of sales:
Cellular service (including
roaming)...................... 6,260,522 9,719,179 5,698,926 9,186,918 3,983,567 6,797,354
Equipment sales................ 2,562,610 2,811,436 2,322,915 2,576,201 1,707,691 1,945,158
General and administrative....... 9,964,834 12,923,156 9,105,600 12,131,513 6,597,336 9,333,603
Marketing and selling............ 9,133,909 12,698,455 8,312,733 11,814,069 6,286,637 9,026,762
------------ ------------ ------------ ------------ ------------ ------------
Total cash costs and
expenses.................... 27,921,875 38,152,226 25,440,174 35,708,701 18,575,231 27,102,877
------------ ------------ ------------ ------------ ------------ ------------
EBITDA............................. $ 3,117,841 $ 6,658,761 $ 2,817,943 $ 6,024,040 $ 2,639,746 $ 4,858,992
------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------
Capital expenditures............... $ 6,390,983 $ 19,522,053 $ 6,249,889 $ 17,295,360 $ 4,594,056 $ 13,389,707
Subscribers........................ 78,496 124,057 70,909 114,834 53,040 87,518
Total markets...................... 54 55 54 55 54 55
NONMANAGED MARKETS
Revenues:
Cellular service (including
roaming)........................ $ 26,859,839 $ 35,592,108 $ 7,501,158 $ 10,628,092 $ 3,847,400 $ 5,543,288
Equipment sales.................. 1,659,317 2,934,029 511,062 853,782 268,936 490,090
------------ ------------ ------------ ------------ ------------ ------------
Total revenues............... 28,519,156 38,526,137 8,012,220 11,481,874 4,116,336 6,033,378
Cash costs and expenses:
Cost of sales:
Cellular service............... 10,425,979 11,713,506 2,988,035 3,487,467 1,494,754 1,784,999
Equipment sales................ (124,750) 2,050,558 83,971 631,365 45,428 347,255
General and administrative....... 6,849,097 7,457,553 2,063,582 2,219,846 1,103,100 1,660,914
Marketing and selling............ 6,884,094 10,644,801 1,922,403 3,141,880 962,063 1,157,470
------------ ------------ ------------ ------------ ------------ ------------
Total cash costs and
expenses.................... 24,034,420 31,866,418 7,057,991 9,480,558 3,605,345 4,950,638
------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------
EBITDA............................. $ 4,484,736 $ 6,659,719 $ 954,229 $ 2,001,316 $ 510,991 $ 1,082,740
------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------
Capital expenditures............... $ 12,392,107 $ 18,885,247 $ 3,202,553 $ 6,159,696 $ 1,566,779 $ 3,230,609
Subscribers........................ 63,577 107,118 17,617 31,064 8,698 16,771
Total markets...................... 29 38 29 38 29 38
RECONCILIATION FROM COMPANY
PROPORTIONATE EBITDA TO
CONSOLIDATED REPORTING
Total proportionate EBITDA (managed
and nonmanaged markets)........... $ 3,150,737 $ 5,941,732
Proportionate depreciation and
amortization...................... (3,967,637) (5,957,343)
Proportionate interest expense..... (3,107,183) (4,477,732)
Equity in nonlicensee affiliates... (2,241,252) (2,613,204)
Minority interests................. (1,096,388) (1,145,423)
Intercompany interest.............. 2,239,556 3,155,605
Amortization of license costs not
owned by affiliates............... (917,611) (1,062,466)
Unallocated corporate expenses..... (3,037,920) (1,617,271)
Gains on sales of affiliates....... 2,459,004 67,247
Interest expense (net) and other... (2,765,069) (4,565,517)
------------ ------------
Consolidated net loss.............. $ (9,283,763) $(12,274,372)
------------ ------------
------------ ------------
<FN>
- ----------------------------------
(1) Includes 100% of the operating activity of all licensees, regardless of the
Company's ownership interest. This is essentially equivalent to
consolidating all licensees regardless of ownership percentage.
(2) Includes that percentage of a licensee's operating results which equals the
Company's ownership interest as well as the ownership interest held by
affiliates of the Company that are financed by CIFC.
(3) Includes only that percentage of a licensee's operating results which
corresponds to the Company's ownership interest. This is essentially
equivalent to a pro rata consolidation.
(4) 1993 Managed Markets include results and statistics related to the Eau
Claire, WI (232) MSA and exclude results and statistics related to the
Montana B1 (523) RSA, which were sold and purchased, respectively, in
August 1993. The Company continued to manage the Eau Claire MSA through
September 30, 1993, and had not yet commenced management of the Montana B1
RSA as of that date. Had 1993 Managed Markets included Montana B1 and
excluded Eau Claire, combined subscribers would have been 60,381.
21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
consolidated financial statements and other financial information included
elsewhere or incorporated by reference in this Prospectus.
GENERAL
Cellular systems typically experience losses and negative cash flow in their
initial years of operation and, consistent with this pattern, the Company has
incurred losses and negative cash flow since its inception. However, operating
losses have declined recently as the Company's focus has shifted from
construction and initial operation of cellular systems to increasing penetration
and subscriber usage, and the Company expects that EBITDA, which was positive
during the fiscal year ended September 30, 1994 and the six months ended March
31, 1995, will also be positive in future fiscal years (although there can be no
assurance that this will be the case). Certain financial analysts consider
EBITDA a meaningful measure of an entity's ability to meet long-term financial
obligations, and growth in EBITDA a meaningful barometer of future
profitability, especially in a capital-intensive industry such as cellular
telecommunications. However, EBITDA should not be considered in isolation to, or
be construed as having greater significance than, other indicators of an
entity's performance. The results discussed below may not be indicative of
future results.
Consolidated results of operations include the revenues and expenses of
those markets in which the Company holds a greater than 50% interest. The
results of operations of 44 markets, 42 of which were consolidated for the
entire period, are included in the consolidated results for the quarter ended
March 31, 1995. The results of operations of 40 markets, 39 of which were
consolidated the entire quarter, are included in the consolidated results for
the quarter ended March 31, 1994. The increase in the number of markets included
in consolidated results is due to acquisitions consummated subsequent to March
31, 1994. Consolidated results of operations also include the operations of CIFC
as well as the operations of Cellular Inc. Network Corporation ("CINC"), a
wholly-owned subsidiary through which the Company holds interests in certain
cellular licenses.
Equity in net loss of affiliates includes the Company's share of net loss in
the markets in which the Company's interest is 50% or less but 20% or greater.
For the quarter ended March 31, 1995, 31 markets were accounted for under the
equity method, compared to 37 such markets for the quarter ended March 31, 1994.
Markets in which the Company's interest is less than 20% are accounted for under
the cost method. Eighteen markets were accounted for under the cost method for
the quarter ended March 31, 1995, compared to six such markets for the quarter
ended March 31, 1994.
Interest income reflects interest income derived from the financing
activities of CIFC and the Company with nonconsolidated affiliates, as well as
interest income derived from the Company's short-term investments. CIFC has
entered into loan agreements with the Company's affiliates pursuant to which
CIFC makes loans to such entities for the purpose of financing or refinancing
the affiliates' costs of construction and operation of cellular telephone
systems. Such loans are financed with funds borrowed by CIFC from CoBank and
from the Company and bear interest at a rate 1% above CoBank's average rate.
From time to time, the Company advances funds on an interim basis to affiliates.
These advances typically are refinanced through CIFC. To the extent that the
cellular markets in which the Company holds an interest mature and generate
positive cash flow, the cash will be used to repay borrowings by the affiliates
from CIFC and thereafter to make cash distributions to equity holders, including
the Company.
RESULTS OF OPERATIONS
SIX MONTHS ENDED MARCH 31, 1995 AND 1994. Cellular service revenues,
including roaming revenues, increased 53% from $21,852,000 for the six months
ended March 31, 1994 to $33,511,000 for the six months ended March 31, 1995. The
growth was primarily due to the increase in the number of subscribers in
consolidated markets. In addition to increases in market penetration, growth
resulted from an increase in the number of markets consolidated for the entire
six months from 36 during the six months ended March 31, 1994 to 42 during the
six months ended March 31, 1995. Growth in subscribers accounted for 90% of the
22
increase, and the number of consolidated markets accounted for 10% of the
increase. Roaming revenues increased 38% or $2,483,000 from $6,495,000 to
$8,978,000 due to increased coverage in cellular markets. Roaming revenues are
expected to increase in the future as a result of industry-wide growth in
subscribers and the Company's expansion of its coverage, particularly along
highway corridors; however, roaming rates may decline, consistent with expected
industry trends.
Average monthly revenue per subscriber, including roaming revenues,
decreased from $69 for the six months ended March 31, 1994 to $65 for the six
months ended March 31, 1995. The decline primarily reflects the fact that
initial subscribers in a market tend to use more cellular service than those who
subscribe after a system has been in operation for a period of time.
Cost of service increased as a percentage of service revenues from 21% for
the six months ended March 31, 1994 to 23% for the six months ended March 31,
1995, primarily due to an increase in costs related to interconnect service.
Cellular equipment revenues increased 5% from $4,603,000 for the six months
ended March 31, 1994 to $4,829,000 for the six months ended March 31, 1995. The
growth was due to the increase in the number of subscribers added, which
accounted for $176,000, or 78%, of the increase. In addition, growth resulted
from an increase in the number of consolidated markets operated during the six
months which represented $50,000, or 22%, of the increase. Cost of equipment
sales increased 13% from $4,501,000 for the six months ended March 31, 1994 to
$5,072,000 for the six months ended March 31, 1995.
General and administrative costs of cellular operations increased 39% from
$7,486,000 for the six months ended March 31, 1994 to $10,381,000 for the six
months ended March 31, 1995, due to the growth in the customer base and the
number of consolidated markets. The majority of these costs were incremental
customer billing expense and customer service support staff. In addition, the
Company more conservatively estimated uncollectible accounts receivable for the
six months ended March 31, 1995, representing approximately $900,000 of the
increase compared to the six months ended March 31, 1994. General and
administrative costs as a percentage of service revenues decreased from 34% for
the six months ended March 31, 1994 to 31% for the six months ended March 31,
1995. The decrease is primarily due to revenues increasing at a faster rate than
incremental general and administrative costs.
Marketing and selling costs increased 42% from $7,104,000 for the six months
ended March 31, 1994 to $10,088,000 for the six months ended March 31, 1995,
primarily as a result of the number of subscribers added in consolidated
markets. The majority of these costs were incremental sales commissions,
advertising costs and incremental sales staff. Marketing costs per net new
subscriber decreased 10% from $584 for the six months ended March 31, 1994 to
$526 for the six months ended March 31, 1995, as a result of increased net
subscriber additions which outpaced increases in costs incurred. The Company is
continuing to expand its own retail presence to capitalize on retail trade while
driving down commission costs. Results of this expansion are expected by the
fourth fiscal quarter.
Depreciation and amortization relating to cellular operations increased from
$4,786,000 for the six months ended March 31, 1994 to $6,901,000 for the six
months ended March 31, 1995, primarily related to increased fixed asset
balances.
Corporate costs and expenses for the six months ended March 31, 1994 were
$1,565,000, which represented gross expenses of $4,451,000 less amounts
allocated to nonconsolidated affiliates of $2,886,000. Corporate costs and
expenses for the six months ended March 31, 1995 were $1,617,000, which
represented gross expenses of $4,850,000 less amounts allocated to
nonconsolidated affiliates of $3,233,000. The increase in expenses and amounts
allocated to nonconsolidated affiliates reflects an increase in corporate costs
attributed to financing operations and incurred costs relative to equipment
distribution and other corporate functions.
Equity in net loss of affiliates decreased 24% from $3,586,000 for the six
months ended March 31, 1994 to $2,736,000 for the six months ended March 31,
1995. The decrease is principally attributable to decreasing losses in markets
being accounted for under the equity method at March 31, 1995 compared to March
31,
23
1994 due to increasing penetration and subscriber usage. This has caused a
consistent trend of improved operating results. In addition, equity in net loss
of affiliates has decreased as fewer markets are being accounted for under the
equity method.
Interest expense increased 15% from $11,024,000 for the six months ended
March 31, 1994 to $12,651,000 for the six months ended March 31, 1995 due to
higher accreted discount note and secured bank financing balances. Cash paid for
interest decreased 1% from $5,702,000 for the six months ended March 31, 1994 to
$5,649,000 for the six months ended March 31, 1995.
The CoBank patronage distribution decreased 34% from $1,164,000 in March
1994 to $764,000 in March 1995. The patronage distribution is calculated using
the Company's prior calendar year interest expense compared to total interest
paid to CoBank by all patrons. The decrease is due to a reduction of
approximately $50,000,000 in the Company's debt to CoBank during the fourth
fiscal quarter of 1993 which resulted in lower average debt balances for
patronage dividend purposes during 1994.
Interest income decreased 13% from $6,814,000 for the six months ended March
31, 1994 to $5,956,000 for the six months ended March 31, 1995. The decrease is
primarily related to the increase in the number of markets consolidated for the
six months ended March 31, 1995, compared to the six months ended March 31,
1994. Consolidation caused the interest earned on advances to the related
affiliates to be eliminated as an intercompany transaction. Additionally,
interest income for the six months ended March 31, 1995 declined due to lower
short-term investment balances.
FISCAL YEAR 1994 COMPARED WITH FISCAL YEAR 1993. As of September 30, 1994,
the Company held interests in 84 RSA markets and 10 MSA markets compared to 70
RSA markets and 10 MSA markets as of September 30, 1993. All markets in which
the Company held an interest were operational as of such dates.
Cellular service revenues, including roaming revenues, increased 82% from
$28,861,000 in fiscal year 1993 to $52,586,000 in fiscal year 1994. The growth
was due to the increase in the number of subscribers in consolidated markets. In
addition to increases in market penetration, growth resulted from an increase in
the number of markets consolidated during the fiscal year from 36 at September
30, 1993 to 42 at September 30, 1994. Growth in subscribers accounted for 75% of
the increase and the number of consolidated markets accounted for 25% of the
increase.
Average monthly revenue per subscriber decreased 1% from $75 in fiscal year
1993 to $74 in fiscal year 1994. The decline reflects the fact that initial
subscribers in a market tend to use more cellular service than those who
subscribe after a system has been in operation for a period of time.
Cost of service decreased as a percentage of service revenues from 21% in
fiscal year 1993 to 18% in fiscal year 1994. Cost of service as a percentage of
revenues is expected to continue to decline slightly from this level as revenues
derived from the growing subscriber base continue to outpace the fixed
components of cost of service.
Cellular equipment revenues increased 82% from $4,829,000 in fiscal year
1993 to $8,774,000 in fiscal year 1994. The growth was due to the increase in
the number of subscribers added as compared to the number of subscribers added
during the prior fiscal year, which accounted for $2,923,000, or 74%, of the
increase. In addition, growth resulted from an increase in the number of
consolidated markets operated during the year which represented $1,022,000, or
26%, of the increase. Cost of equipment sales increased 69% from $5,218,000 in
fiscal year 1993 to $8,835,000 in fiscal year 1994. To enhance subscriber
growth, the Company has sold cellular equipment sometimes below cost. The
equipment sales margin improved in fiscal year 1994, as compared to fiscal year
1993, as the Company focused on minimizing equipment discounting.
General and administrative costs of cellular operations increased 60% from
$10,505,000 in fiscal year 1993 to $16,768,000 in fiscal year 1994, due to the
growth in the customer base and the number of consolidated markets. The majority
of these costs were incremental customer billing expense, roaming validation
services and customer service support staff. General and administrative costs as
a percentage of service revenues decreased from 36% in fiscal year 1993 to 32%
in fiscal year 1994. The decrease is primarily due to revenues increasing at a
faster rate than incremental general and administrative costs.
24
Marketing and selling costs increased 86% from $8,465,000 in fiscal year
1993 to $15,786,000 in fiscal year 1994, primarily as a result of the number of
subscribers added in consolidated markets. The majority of these costs were
incremental sales commissions, advertising costs and incremental sales staff.
Marketing costs per net new subscriber decreased 6% from $606 in fiscal year
1993 to $568 in fiscal year 1994, as a result of subscriber additions which
outpaced increases in costs incurred.
Depreciation and amortization relating to cellular operations decreased 40%
from $17,582,000 in fiscal year 1993 to $10,541,000 in fiscal year 1994,
primarily as a result of the change, effective October 1, 1993, in the Company's
estimate of the useful life of acquired FCC license costs from the remaining
initial ten-year term to 40 years from the date of acquisition. The change is
predicated upon the FCC's establishment of procedures to grant a renewal
expectancy to incumbent cellular licensees virtually assuring that the initial
ten-year term of an FCC license to provide cellular telephone service will be
renewed if a licensee meets broadly defined public service benchmarks. Other
publicly-held cellular telephone companies also treat a cellular license as
economically perpetual. Commencing October 1, 1993, the net book value of
acquired license costs at September 30, 1993 will be amortized over 40 years
less the number of months from the date of the acquisition which gave rise to
such costs. Management believes this treatment complies with accounting
literature given current facts and circumstances and will reevaluate this
estimate as changes in facts and circumstances occur.
During the year ended September 30, 1994, the Company recognized a
$3,116,000 write-down of equipment associated with a program of upgrades to
switching capacity and features, the relocation of certain cell sites to
increase coverage and other nonrecurring events. The program of upgrades to
switching capacity and features will continue into the next fiscal year and will
cause a further write-down of approximately $234,000 when new equipment is
placed into service.
Corporate costs and expenses in fiscal year 1993 were $1,249,000, which
represented gross expenses of $9,491,000 less amounts allocated to
nonconsolidated affiliates of $8,242,000. Corporate costs and expenses in fiscal
year 1994 were $2,516,000, which represented gross expenses of $9,054,000 less
amounts allocated to nonconsolidated affiliates of $6,538,000. The decrease in
expenses and amounts allocated to nonconsolidated affiliates reflects the
decrease in the number of nonconsolidated managed markets as consolidation
caused corporate costs and expenses to be reclassified as cellular costs and
expenses.
Equity in net loss of affiliates decreased 20% from $6,339,000 in fiscal
year 1993 to $5,092,000 in fiscal year 1994. The decrease is principally
attributable to decreasing losses in markets being accounted for under the
equity method at September 30, 1994, compared to September 30, 1993, due to the
shift in focus in these markets from construction and initial operation to
increasing penetration and subscriber usage. This shift has caused a consistent
trend of improved operating results.
Interest expense increased 30% from $16,428,000 in fiscal year 1993 to
$21,339,000 in fiscal year 1994. The increase is a result of the issuance in
August 1993 of the Company's 11 3/4% Senior Subordinated Discount Notes.
However, cash paid for interest decreased 37% from $15,455,000 in fiscal year
1993 to $9,731,000 in fiscal year 1994 as interest accretes during the first
five years of the term of the discount notes.
Interest income increased 13% from $10,702,000 in fiscal year 1993 to
$12,081,000 in fiscal year 1994. The modest increase in interest income was the
result of higher note balances owed to the Company by nonconsolidated
affiliates, offset by lower cash and short-term investment balances, declining
interest rates and the consolidation of six additional markets during fiscal
year 1994. Consolidation caused the interest earned on advances to the related
affiliates to be eliminated as an intercompany transaction.
During fiscal year 1994, the Company recognized a permanent write-down of
certain short-term government bond investments of approximately $744,000 due to
market conditions.
During fiscal year 1994, the Company recognized gains on sales of affiliates
of $2,905,000, primarily related to the sale of its limited partnership interest
in MSA 239 (Joplin, MO) during the second quarter of fiscal 1994 ($1,921,000)
and a multimarket transaction with Contel Cellular, Inc. during the third
quarter of fiscal 1994 ($841,000). An additional $907,000 gain was recognized
due to the write-off of contingent liabilities related to stock price
guarantees. See "Acquisitions and Sales." During fiscal year 1993, the
25
Company recognized gains on sales of affiliates of $7,821,000 primarily related
to the multimarket exchanges with U S WEST NewVector Group, Inc. ("U S WEST
NewVector") during the second quarter of fiscal 1993 ($3,812,000) and Pacific
Telecom Cellular, Inc. ("PTI") during the fourth quarter of fiscal 1993
($4,889,000).
At September 30, 1994, the Company had net operating loss carryforwards for
income tax purposes of $54,725,000, compared to $46,578,000 at September 30,
1993.
FISCAL YEAR 1993 COMPARED WITH FISCAL YEAR 1992. As of September 30, 1993,
the Company held interests in 70 RSA markets and 10 MSA markets compared to 72
RSA markets and 11 MSA markets as of September 30, 1992. All markets in which
the Company held an interest were operational as of such dates.
Cellular service revenues, including roaming revenues, increased 135% from
$12,302,000 in fiscal year 1992 to $28,861,000 in fiscal year 1993. The growth
was due to the increase in the number of subscribers in consolidated markets. In
addition to increases in market penetration, growth resulted from an increase in
the number of markets consolidated during the fiscal year from 28 at September
30, 1992 to 36 at September 30, 1993. Growth in subscribers accounted for 69% of
the increase and the number of consolidated markets accounted for 31% of the
increase.
Average monthly revenue per subscriber decreased 6% from $80 in fiscal year
1992 to $75 in fiscal year 1993. This decline was consistent with industry
trends and reflects the fact that initial subscribers in a market tend to use
more cellular service than those who subscribe after a system has been in
operation for a period of time.
Cost of service decreased as a percentage of service revenues from 35% in
fiscal year 1992 to 21% in fiscal year 1993.
Cellular equipment revenues increased 85% from $2,605,000 in fiscal year
1992 to $4,829,000 in fiscal year 1993. The growth was due to the increase in
the number of subscribers added as compared to the number of subscribers added
during the prior fiscal year, which accounted for $1,381,000, or 62%, of the
increase. In addition, growth resulted from an increase in the number of
consolidated markets operated during the year which represented $843,000, or
38%, of the increase. Cost of equipment sales increased 57% from $3,320,000 in
fiscal year 1992 to $5,218,000 in fiscal year 1993. The equipment sales margin
improved in fiscal year 1993, as compared to fiscal year 1992, as the Company
focused on minimizing equipment discounting.
General and administrative costs of cellular operations increased 100% from
$5,260,000 in fiscal year 1992 to $10,505,000 in fiscal year 1993, due to the
growth in the customer base and the number of consolidated markets. The majority
of these costs were incremental customer billing expense, roaming validation
services and customer service support staff. General and administrative costs as
a percentage of service revenues decreased from 43% in fiscal year 1992 to 36%
in fiscal year 1993.
Marketing and selling costs increased 62% from $5,236,000 in fiscal year
1992 to $8,465,000 in fiscal year 1993, primarily as a result of the number of
subscribers added in consolidated markets. The majority of these costs were
incremental sales commissions, advertising costs and incremental sales staff.
Marketing costs per net new subscriber decreased 6% from $647 in fiscal year
1992 to $606 in fiscal year 1993.
Depreciation and amortization relating to cellular operations increased 51%
from $11,611,000 in fiscal year 1992 to $17,582,000 in fiscal year 1993,
primarily as a result of amortization of intangible assets related to markets
acquired subsequent to September 30, 1992. The Company amortized intangible
assets related to acquired license rights over the remainder of the initial
ten-year license term which in the case of the majority of additions to license
rights from 1993 acquisitions was less than four years.
Corporate costs and expenses in fiscal year 1992 were $3,501,000, which
represented gross expenses of $12,973,000 less amounts allocated to
nonconsolidated affiliates of $9,472,000. Corporate costs and expenses in fiscal
year 1993 were $1,249,000, which represented gross expenses of $9,491,000 less
amounts allocated to nonconsolidated affiliates of $8,242,000. The decrease in
expenses and amounts allocated to nonconsolidated affiliates reflects the
decrease in the number of nonconsolidated managed markets as consolidation
caused corporate costs and expenses to be reclassified as cellular costs and
expenses.
26
Equity in net loss of affiliates decreased 28% from $8,852,000 in fiscal
year 1992 to $6,339,000 in fiscal year 1993. The decrease is principally
attributable to decreasing losses in markets being accounted for under the
equity method at September 30, 1993, compared to September 30, 1992, due to the
shift in focus in these markets from construction and initial operation to
increasing penetration and subscriber usage which has caused a consistent trend
of improved operating results.
Interest expense increased 11% from $14,801,000 in fiscal year 1992 to
$16,428,000 in fiscal year 1993. The increase was commensurate with increases in
long-term debt.
Interest income increased 1% from $10,616,000 in fiscal year 1992 to
$10,702,000 in fiscal year 1993. The modest increase in interest income was the
result of higher note balances owed to the Company by nonconsolidated
affiliates, offset by lower cash and short-term investment balances, declining
interest rates and the consolidation of eight additional markets during fiscal
year 1993. Consolidation caused the interest earned on advances to the related
affiliates to be eliminated as an intercompany transaction.
During fiscal year 1993, the Company recognized gains on sales of affiliates
of $7,821,000, primarily related to the multimarket exchanges with U S WEST
NewVector during the second quarter of fiscal 1993 ($3,812,000) and with PTI
during the fourth quarter of fiscal 1993 ($4,889,000). During fiscal year 1992,
the Company recognized gains on sales of affiliates of $14,339,000 of which
$8,711,000 was related to the disposition of the Company's interest in the
Colorado Springs, Colorado wireline cellular system during the first quarter of
fiscal 1992, $4,157,000 was related primarily to an exchange of interests with
US West NewVector during the second quarter of fiscal 1992 and $2,310,000 was
related to the disposition of the Company's interest in one limited partnership
during the third quarter of fiscal year 1992.
At September 30, 1993, the Company had net operating loss carryforwards for
income tax purposes of $46,578,000, compared to $42,202,000 at September 30,
1992.
ACQUISITIONS AND SALES
In December 1993, the Company acquired 100% of the stock of a corporation
which owns and operates the Rapid City, South Dakota MSA market and owns general
partnership interests in two partitioned RSA markets (South Dakota 5 (B2) and
South Dakota 6 (B2)) for approximately $10,420,000 in cash plus property valued
at approximately $400,000.
In December 1993, the Company sold its interests in affiliates which held a
44.44% limited partnership interest in the wireline licensee for RSA 608 (Oregon
3) for approximately $2,076,000 in cash. The sale resulted in a gain of
approximately $630,000.
In December 1993, the Company acquired additional interests in two
affiliated corporations for approximately $139,000.
In February 1994, the Company acquired an additional 51% of the stock of an
affiliate which held a 28.6% limited partnership interest in MSA 239 (Joplin,
MO) for 69,051 shares of the Company's common stock, then sold the limited
partnership interest for $4,494,000 in cash. The sale resulted in a gain of
approximately $1,921,000.
In March 1994, the Company acquired an additional interest in an affiliated
corporation for 2,732 shares of the Company's common stock.
In April 1994, the Company acquired three affiliated corporations which hold
limited partnership interests in Utah RSA markets for 80,145 shares of the
Company's common stock.
In May 1994, the Company sold its interest in an affiliate which held a
8.125% limited partnership interest in three nonmanaged RSA markets for
approximately $2,468,000 in cash. The sale resulted in a gain of approximately
$841,000. Contemporaneously, the Company acquired additional limited partnership
interests in four managed RSA markets for approximately $373,000.
In July 1994, the Company acquired an additional interest in an affiliated
corporation for approximately $199,000 in cash.
27
In August 1994, the Company acquired an aggregate of 3.07% of the stock of a
corporation which operates cellular systems throughout Kansas from two unrelated
corporations for approximately $3,000,000 in cash.
In November 1994, the Company purchased an additional 5.97% interest in
Nebwest Cellular, Inc. for $1,600,000 in cash. Pursuant to the terms of a
shareholder's agreement, the Company subsequently sold a portion of that
interest to the other shareholders on a pro rata basis for approximately
$450,000 in cash. In February 1995, the Company purchased an additional 3.37%
interest in this corporation for 34,688 shares of the Company's Common Stock. In
March 1995, the Company purchased an additional 2.57% interest in this
corporation for 28,638 shares of the Company's Common Stock.
In January 1995, the Company sold a wholly-owned subsidiary for
approximately $86,000 which resulted in a loss of approximately $297,000.
In January 1995, the Company transferred its 25% interest in one nonmanaged
RSA market to a partner in that market pursuant to a judgment. The judgment is
currently being appealed. The Company received approximately $1,699,000 upon
transfer of the interest which resulted in a gain of approximately $497,000.
In February 1995, the Company purchased additional interests ranging from 2%
to 41% in eleven managed and one nonmanaged markets for approximately $1,259,000
in cash and the issuance of 49,738 shares of the Company's Common Stock.
The Company has entered into an agreement to sell its 61.5% interest in
Nebwest Cellular, Inc. which owns 25.52% of Nebraska Cellular Telephone
Corporation, the licensee for the ten wireline RSA markets in the state of
Nebraska, for approximately $24,300,000 which will result in a gain after tax of
approximately $19,600,000. This transaction is expected to close during July
1995. The interest to be purchased from the Company, as well as interests in the
Nebraska RSA markets to be purchased from other entities, will be acquired at a
cost of over $200 per pop after taking into account debt assumed or refinanced.
In May and June 1995, the Company acquired additional interests ranging from
17% to 51% in two managed and two nonmanaged markets for an aggregate of 138,168
shares of the Company's Common Stock.
The Company has initiated discussions regarding possible acquisition of
markets or interests in Iowa, Wyoming, North Dakota and Kansas. Such
acquisitions will be pursued to the extent they enhance or extend the Company's
network and increase shareholder value. Accordingly, there can be no assurance
that any such acquisitions will be consummated.
CHANGES IN FINANCIAL CONDITION
SIX MONTHS ENDED MARCH 31, 1995 Net cash provided by operating activities
was $747,000 during the six months ended March 31, 1995. This was primarily due
to an increase to accrued interest of $364,000 and decreases of $129,000 to
accounts receivable and $905,000 to inventory and other current assets.
Additionally, a loss of $222,000 was recognized on the sale of
available-for-sale securities during the first quarter of fiscal year 1995.
Working capital increases will likely require cash in future periods as growth
in the subscriber base continues.
Net cash used by investing activities was $1,672,000 for the six months
ended March 31, 1995. This was due primarily to the sale of available-for-sale
securities which provided $21,427,000, offset by $12,529,000 required to fund
the purchase of property and equipment, $7,515,000 to increase the investment in
cellular system equipment, and $2,427,000 used for additions to investments in
and advances to affiliates.
Net cash provided by financing activities was $13,240,000 for the six months
ended March 31, 1995. These proceeds include $13,409,000 of cash from
incremental secured bank financing and $770,000 of cash from the issuance of
Common Stock upon exercise of options.
28
FISCAL YEAR 1994. Net cash used by operating activities was $7,170,000
during the year ended September 30, 1994. The rapid increase in subscribers and
revenues caused an increase of $2,912,000 in accounts receivable and an increase
of $4,363,000 in inventory and other current assets. Working capital increases
will likely require cash in future periods as growth in the subscriber base
continues.
Net cash used by investing activities was $49,864,000 for the year ended
September 30, 1994. This was due primarily to $31,455,000 of cash required to
fund the purchase of property and equipment related to the Company's expansion
efforts, including $6,789,000 related to nonconsolidated affiliates reflected as
additions to investments in and advances to affiliates. In addition, the Company
acquired the Rapid City MSA and interests in other managed markets using
$13,992,000, and sold nonmanaged interests providing cash of $9,037,000.
Net cash provided by financing activities was $13,455,000 for the year ended
September 30, 1994. These proceeds include $11,149,000 of incremental secured
bank financing and $1,479,000 of cash from the issuance of Common Stock upon
exercise of options.
FISCAL YEAR 1993. Net cash used by operating activities was $18,579,000
during the year ended September 30, 1993. The rapid increase in subscribers and
revenues caused an increase of $3,721,000 in accounts receivable and an increase
of $789,000 in inventory and other current assets. Working capital increases
will likely require cash in future periods as growth in the subscriber base
continues.
Net cash used by investing activities was $29,831,000 for the year ended
September 30, 1993. This was due primarily to $7,547,000 of cash required to
fund the purchase of property and equipment related to the Company's expansion
efforts, including $9,274,000 related to nonconsolidated affiliates reflected as
additions to investments in and advances to affiliates. In addition, the Company
acquired interests in other managed markets using $12,082,000, and sold
nonmanaged interests providing cash of $7,334,000.
Net cash provided by financing activities was $69,535,000 for the year ended
September 30, 1993. These proceeds include $100,000,000 from the issuance of
senior discount notes, and $4,950,000 of cash from the issuance of convertible
subordinated notes. In addition, the Company paid down a net of $35,629,000 of
secured bank financing.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL. CommNet Cellular Inc. (referred to herein as the "parent company")
is effectively a holding company and, accordingly, must rely on dividends, loan
repayments and other intercompany cash flows from its affiliates and
subsidiaries to generate the funds necessary to satisfy the parent company's
capital requirements. On a consolidated basis, the Company's principal source of
liquidity is the Credit Agreements, pursuant to which CoBank agreed to lend up
to $130,000,000 to CIFC generally to be reloaned by CIFC to the Company's
affiliates for the construction, operation and expansion of cellular telephone
systems. Of the $130,000,000, up to $57,100,000 was available to be borrowed by
CIFC to be loaned to the Company for general corporate purposes, including
capital expenditures, debt service and acquisitions. The Credit Agreements
restrict the ability of the Company's affiliates and subsidiaries, a substantial
number of which are consolidated for financial statement purposes, to make
distributions to the parent company until such affiliates and subsidiaries have
repaid all outstanding debt to CIFC. As a result, a substantial portion of the
Company's consolidated cash flows and cash balances is not available to satisfy
the parent company's capital and debt service requirements.
The Company's budgeted capital requirements consist primarily of (i) parent
company capital expenditures, working capital, debt service and certain
potential acquisitions and (ii) the capital expenditures, working capital, other
operating and debt service requirements of the affiliates. In addition to
budgeted capital requirements, the Company is constantly evaluating the
acquisition of additional cellular properties (see "Prospectus Summary --
Strategy -- Acquisitions and Dispositions"), and to the extent the Company
consummates acquisitions not presently contemplated by the budget, additional
capital will be required.
As of March 31, 1995, the Company had unused commitments under the Credit
Agreements of $65,940,000, of which approximately $43,000,000 was available to
be loaned to the parent company for
29
general corporate purposes. In addition to the liquidity provided by the Credit
Agreements, at March 31, 1995 the Company, on a consolidated basis, had
available $14,408,000 of cash and cash equivalents, of which $14,341,000 is
available to fund parent company capital and debt service requirements. In
addition, the Company has entered into an agreement to sell its Nebraska RSA
interests for approximately $24,300,000 in cash. See "-- Acquisitions and
Sales." The Company expects that substantially all of the net proceeds from such
sale will be available to fund parent company capital expenditures and
acquisitions, if any.
On a consolidated basis, the Company's capital expenditures for fiscal year
1994 and the six months ended March 31, 1995 were $40,933,000 and $20,663,000,
respectively. The Company plans to make parent company capital expenditures and
fund working capital and acquisition requirements for the balance of fiscal year
1995 and for fiscal year 1996 of $28,686,000 and $29,182,000, respectively,
primarily for switch capacity and computer system upgrades. Capital
expenditures, working capital, and other operating requirements of the Company's
affiliates are expected to be $30,760,000 and $21,221,000 for the balance of
fiscal 1995 and fiscal 1996, respectively, for working capital requirements,
channel expansion and additional cell sites. The Company's affiliates will
require an additional $15,639,000 during calendar year 1996 for principal
amortization of the Credit Agreements if the extension of the termination date
of the Credit Agreements (as described in the following paragraph) is not
obtained. The Company believes operating cash flow, existing cash balances,
borrowing availability under the Credit Agreements and proceeds of the sale of
the Nebraska RSA interests will be sufficient to meet the anticipated capital
requirements of the parent company and the affiliates.
The Company's near-term debt service requirements will consist of interest
payments on the indebtedness incurred under the Credit Agreements, interest
payments on the Company's 8.75% Convertible Senior Subordinated Notes and
interest payments on the Notes. Interest on the Company's 11 3/4% Senior
Subordinated Discount Notes is payable in cash commencing March 1, 1999.
Following the Offering and the application of the net proceeds therefrom
(assuming all of the 6 3/4% Convertible Subordinated Debentures are redeemed),
the Company anticipates its cash interest expense for the balance of fiscal year
1995 and for fiscal year 1996 will be $9,000,000 and $24,000,000, respectively.
Revolving loan indebtedness outstanding under the Credit Agreements will be
converted to term loan indebtedness at December 31, 1995 and will be amortized
over the next five years. The Company is seeking to extend the termination date
of the Credit Agreements to December 31, 1996. See "The Credit Agreements"
below. If the extension is not obtained, the Company expects that principal
amortization of $15,639,000 in respect of the Credit Agreements will be required
during the course of the calendar year ending December 31, 1996. The Company
believes operating cash flow, existing cash balances, borrowing availability
under the Credit Agreements and the proceeds of the sale of the Nebraska RSA
interests will be sufficient to meet the anticipated debt service requirements
of the Company at both the parent company level and on a consolidated basis.
Although the Company believes that the foregoing sources of liquidity will
be sufficient to meet budgeted capital expenditures and debt service
requirements of the parent company and the affiliates, there can be no assurance
that this will be the case. In particular, there can be no assurance that the
Company will be able to consummate the sale of the Nebraska RSA interests or
extend the termination date of the Credit Agreements. In such event the Company
believes it will be able to satisfy its capital expenditure and debt service
requirements with unrestricted operating cash flow; however, the Company may be
required to reduce discretionary capital spending. To the extent the Company's
cash flow is not sufficient to satisfy such requirements, the Company will be
required to raise funds through additional financings or asset sales.
The Company continually evaluates the acquisition of cellular properties.
Acquisitions are likely to require capital in addition to the budgeted capital
requirements described above, and such requirements may in turn require the
issuance of additional debt or equity securities. The Company's ability to
finance the acquisition of additional cellular properties with debt financing
may be constrained by certain restrictions contained in its existing debt
instruments. In such event, the Company would be required to seek amendments to
such instruments. There can be no assurance that such amendments could be
obtained on terms acceptable to the Company.
30
THE CREDIT AGREEMENTS. Pursuant to the Credit Agreements, CoBank has agreed
to loan up to $130,000,000 to CIFC to be reloaned by CIFC to affiliates of the
Company for the construction, operation and expansion of cellular telephone
systems. In addition, as of March 31, 1995, approximately $43,000,000 of the
$130,000,000 is available under the Credit Agreements to be borrowed by CIFC and
loaned to the Company for general corporate purposes. As of March 31, 1995, the
outstanding balance under the Credit Agreements was approximately $64,295,000.
The Credit Agreements provide, at the Company's option, for interest at 1.00%
over prime (10.00% at March 31, 1995) or 2.25% over LIBOR (8.84% at March 31,
1995). The loans are secured by a first lien upon all of the assets of CIFC and
each of the affiliates to which funds are advanced by CIFC. In addition, the
Company has guaranteed the obligations of CIFC to CoBank and has granted CoBank
a first lien on all of the assets of the Company as security for such guaranty.
In accordance with the Company's desire to minimize interest rate
fluctuations and to improve the predictability of costs incurred throughout its
growth stage, CIFC has elected to fix interest rates on approximately
$63,140,000 of its long-term debt payable to CoBank at rates ranging from 8.46%
to 10.90%. Additionally, CIFC has entered into a prime-based interest rate swap
with CoBank as a means of controlling interest rates on $2,500,000 of its
variable rate loans. This swap agreement was entered into on July 1, 1993 for a
three-year period ending July 1, 1996. The swap agreement requires CIFC to pay a
fixed rate of 7.01% over the term of the swap, and CoBank to pay a floating rate
of prime (9.00% at March 31, 1995). The weighted average interest rate of
borrowings under the Credit Agreements, after giving effect to the swap, was
9.94% at May 31, 1995.
The Credit Agreements prohibit the payment of cash dividends, limit the use
of borrowings, prohibit any other senior borrowings, restrict expenditures for
certain investments, require the maintenance of certain minimum levels of net
worth, working capital, cash and operating cash flow and require the maintenance
of certain liquidity, capitalization, debt, debt service and operating cash flow
ratios. The requirements of the Credit Agreements were established in relation
to the anticipated capital and financing needs of the Company's affiliates and
their anticipated results of operations. The Company is currently in compliance
with all covenants and anticipates it will continue to meet the requirements of
the Credit Agreements. CoBank has sold participations in the Credit Agreements
to two other financial institutions whose approval may be required for waivers
or other amendments to the Credit Agreements requested by CIFC or the Company.
CIFC and CoBank are negotiating to increase the facility under the Credit
Agreements from the current $130,000,000 to $165,000,000. Of the increase of
$35,000,000, $10,000,000 will be available for loans to affiliates of the
Company to cover capital, operating and debt service requirements and
$25,000,000 will be available to fund the acquisitions of additional cellular
systems, subject to certain conditions. As a result of this increase request,
CoBank is currently soliciting potential participations in the facility from
commercial banks. The facility will also be amended, among other things, to
extend the termination date of the loans from December 31, 1995 to December 31,
1996, to reduce the principal amortization period from five to four years and to
incorporate new financial covenants. The Company believes that it will be
successful in obtaining the foregoing amendments to the Credit Agreements,
although there can be no assurance that it will be able to do so. The Company
also believes that if necessary it could refinance and replace the Credit
Agreements with a secured bank facility provided by lenders other than CoBank.
However, there can be no assurance that the Company would be able to secure any
such facility.
31
BUSINESS
GENERAL
CommNet Cellular Inc. was organized under the laws of Colorado in 1983. CIFC
subsequently was organized to provide financing to affiliates of the Company,
and CINC was organized to acquire interests in cellular licenses. CIFC and CINC
are wholly-owned subsidiaries of CommNet Cellular Inc.
The Company operates, manages and finances cellular telephone systems,
primarily in rural markets in the mountain and plains regions of the United
States. The Company's cellular interests currently represent approximately
3,356,000 net Company pops in 93 markets located in 15 states. These markets
consist of 83 RSA markets having a total of 6,152,000 pops and 10 MSA markets
having a total of 1,274,000 pops, of which the Company's interests represent
2,734,000 and 622,000 net Company pops, respectively. Systems in which the
Company holds an interest constitute the largest geographic collection of
contiguous cellular markets in the United States.
The Company was formed to acquire cellular interests through participation
in the licensing process conducted by the FCC. In order to participate in that
process, the Company formed affiliates which originally were owned at least 51%
by one or more independent telephone companies and no more than 49% by the
Company. See "-- Federal Regulation." In exchange for the Company's 49%
interest, the Company agreed to provide financing to affiliates for their
ongoing capital needs, as well as certain management services. The Company
subsequently has purchased additional interests in many of such affiliates, as
well as in additional cellular properties. The Company currently manages 55 of
the 93 markets in which it holds an interest and owns a greater than 50%
interest in 45 of its 55 managed markets. The Company currently finances
entities holding interests representing approximately 4,459,000 pops, of which
3,356,000 are included in net Company pops and 1,103,000 are attributable to
parties other than the Company.
Since completion of the licensing process, the Company has concentrated on
creating an integrated network of contiguous cellular systems comprised of
markets which are managed by the Company. The network currently consists of 55
markets (48 RSA and 7 MSA markets) spanning eight states and represents
approximately 3,905,000 pops and 2,915,000 net Company pops. As of March 31,
1995, the RSA and MSA managed markets had 87,377 and 36,680 subscribers,
respectively. The Company has been significantly expanding radio signal
coverage, with construction of 50 cell sites already complete in fiscal year
1995 and 57 additional cell sites expected to be completed by the end of the
fiscal year. The Company expects that by September 30, 1995 radio signal
coverage will reach 96% of the population within the managed markets and will
reach 98% during fiscal year 1996. No significant expansion of radio signal
coverage within the 55 managed markets is contemplated thereafter.
The Company's integrated network of contiguous cellular systems benefits
from certain technical, operational and marketing efficiencies which have
enabled the Company to produce operating results that compare favorably with
other cellular operators. For example, for the calendar year 1994, the Company's
average monthly revenue per subscriber in managed markets was approximately $68,
compared to an industry average of $64. During the same period, the Company's
acquisition cost per net added subscriber was $520, compared to $625 for the
industry as a whole. In addition, during this same period the Company achieved a
penetration rate of 3.5%, notwithstanding the fact that a substantial majority
of the markets within the network have been operational for less than five years
and are not as mature as more established markets, particularly large MSA
markets with longer operating histories. Finally, the Company has achieved
annual subscriber growth of over 60% in each of the last two fiscal years and
has recorded positive EBITDA for the last eight fiscal quarters. EBITDA should
not be considered in isolation to, or be construed as having greater
significance than, other indicators of an entity's performance. See "Summary
Consolidated Financial Data" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- General."
The Company believes that certain demographic characteristics of the rural
marketplace should further facilitate commercial exploitation of the network. As
compared to urban residents, rural residents travel
32
greater distances by personal vehicle and have access to fewer public telephones
along drive routes. The Company believes that these factors will sustain demand
for mobile telecommunication service in the rural marketplace. These same
factors produce roaming revenues that are higher as a percentage of total
revenues than would likely be the case in more densely populated urban areas.
Roaming revenues result in higher margins because roaming calls are priced at
higher rates than local calls without generating associated sales commission
costs. During the 12 months ended March 31, 1995, roaming revenues constituted
30% of the Company's total managed markets service revenues, compared to 13% of
industry service revenues generally for calendar year 1994.
THE COMPANY'S OPERATIONS
GENERAL. Information regarding the Company's interests in each affiliate,
the interest of each affiliate in a cellular licensee and the market subject to
such license as of June 14, 1995, is summarized in the following table. The
table does not reflect transactions that are pending or under negotiation. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Acquisitions and Sales."
AFFILIATE(S)
MSA OR COMPANY INTEREST INTEREST IN 1993 NET COMPANY
RSA CODE (1) STATE IN AFFILIATE(S) (2) LICENSEE (3) POPULATION (4)(5) POPS (6)
- ------------ -------------------- -------------------- -------------------- ------------------ -----------
MSAs:
141 Minnesota 49.00% 16.34% LP 229,336 18,362
185 Indiana 100.00% 16.67% LP 169,124 28,193
241*(7)(8) Colorado 73.99% 100.00% GP 124,638 92,220
253*(7)(8) Iowa 74.50% 100.00% GP 117,652 87,651
267*(7)(8) South Dakota 100.00% 51.00% GP 131,561 67,096
268*(7)(8) Montana 54.10% 100.00% GP 119,363 64,575
279 Maine 33.33% 33.33% GP 103,417 11,488
289*(7)(8) South Dakota 100.00% 100.00% GP 111,371 111,371
297*(7)(8) Montana 100.00% 100.00% GP 80,098 80,098
298*(7)(8) North Dakota 100.00% 70.00% GP 86,977 60,884
---------- -----------
Total MSA 1,273,537 621,938
RSAs:
348*(8) Colorado 10.00% 100.00% GP 43,672 4,367
349*(7)(8) Colorado 58.60% 100.00% GP 61,659 36,132
351*(7)(8) Colorado 61.75% 100.00% GP 62,916 38,851
352*(7)(8) Colorado 66.00% 100.00% GP 25,783 17,017
353*(7)(8) Colorado 100.00% 100.00% GP 65,251 65,251
354*(7)(8) Colorado 69.40% 100.00% GP 44,328 30,764
355*(8) Colorado 49.00% 100.00% GP 44,194 21,655
356*(8) Colorado 49.00% 100.00% GP 27,259 13,357
389 Idaho 100.00% 50.00% LP 64,671 32,336
390 Idaho 100.00% 33.33% LP 15,485 5,162
392*(7)(8) Idaho (B1) 100.00% 100.00% LP 132,888 132,888
393*(7)(8) Idaho 91.64% 100.00% GP 280,569 257,113
415 Iowa 49.00% 20.64% LP 155,247 15,701
416 Iowa 49.00% 78.57% LP 108,129 41,629
417*(7)(8) Iowa 100.00% 100.00% GP 152,597 152,597
419* Iowa 49.00% 91.67% GP 54,659 24,552
420*(7)(8) Iowa 100.00% 100.00% GP 63,458 63,458
424 Iowa 49.00% 35.00% LP 66,743 11,446
425* Iowa 49.00% 27.11% LP 108,426 14,403
426*(8) Iowa 52.65% 93.33% GP 84,932 41,734
427*(8) Iowa 53.64% 91.66% GP 102,773 50,530
33
AFFILIATE(S)
MSA OR COMPANY INTEREST INTEREST IN 1993 NET COMPANY
RSA CODE (1) STATE IN AFFILIATE(S) (2) LICENSEE (3) POPULATION (4)(5) POPS (6)
- ------------ -------------------- -------------------- -------------------- ------------------ -----------
428(8) Kansas 100.00% 3.07% LP 28,103 863
429(8) Kansas 100.00% 3.07% LP 31,121 955
430(8) Kansas 100.00% 3.07% LP 52,640 1,616
431(8) Kansas 100.00% 3.07% LP 129,852 3,986
432(8) Kansas 100.00% 3.07% LP 118,599 3,641
433(8) Kansas 100.00% 3.07% LP 20,138 618
434(8) Kansas 100.00% 3.07% LP 81,515 2,503
435(8) Kansas 100.00% 3.07% LP 126,535 3,885
436(8) Kansas 100.00% 3.07% LP 57,937 1,779
437(8) Kansas 100.00% 3.07% LP 104,942 3,222
438(8) Kansas 100.00% 3.07% LP 81,130 2,491
439(8) Kansas 100.00% 3.07% LP 42,198 1,295
440(8) Kansas 100.00% 3.07% LP 29,155 895
441(8) Kansas 100.00% 3.07% LP 171,226 5,257
442(8) Kansas 100.00% 3.07% LP 154,341 4,738
512 Missouri (B1) 49.00% 30.00% LP 76,061 11,181
523*(7)(8) Montana (B1) 100.00% 100.00% GP 66,841 66,841
523*(7)(8) Montana (B2) 100.00% 98.76% GP 70,350 69,478
524*(7)(8) Montana 61.75% 100.00% GP 37,386 23,086
525*(7)(8) Montana 69.40% 100.00% GP 14,877 10,325
526*(7)(8) Montana 100.00% 100.00% GP 39,843 39,843
527*(7)(8) Montana 100.00% 100.00% GP 174,631 174,631
528*(7)(8) Montana 61.75% 100.00% GP 63,009 38,908
529*(7)(8) Montana 74.50% 100.00% GP 28,742 21,413
530*(7)(8) Montana 61.75% 100.00% GP 83,488 51,554
531*(7)(8) Montana 100.00% 100.00% GP 30,990 30,990
532*(7)(8) Montana 100.00% 100.00% GP 19,431 19,431
533 Nebraska 61.50% 25.52% LP 90,016 14,128
534 Nebraska 61.50% 25.52% LP 31,353 4,921
535 Nebraska 61.50% 25.52% LP 115,108 18,066
536 Nebraska 61.50% 25.52% LP 35,803 5,619
537 Nebraska 61.50% 25.52% LP 142,155 22,311
538 Nebraska 61.50% 25.52% LP 105,599 16,574
539 Nebraska 61.50% 25.52% LP 89,125 13,988
540 Nebraska 61.50% 25.52% LP 58,058 9,112
541 Nebraska 61.50% 25.52% LP 81,697 12,822
542 Nebraska 61.50% 25.52% LP 85,250 13,380
553 New Mexico 49.00% 33.33% LP 245,584 40,108
555 New Mexico 49.00% 25.00% LP 76,635 9,388
557 New Mexico 49.00% 33.33% LP 55,076 8,995
580*(7)(8) North Dakota 52.76% 100.00% GP 102,513 54,086
581*(8) North Dakota 49.00% 100.00% GP 60,131 29,464
582 North Dakota 49.00% 84.59% LP 91,629 37,979
583*(8) North Dakota 49.00% 100.00% GP 65,783 32,234
584*(7)(8) North Dakota 61.75% 100.00% GP 49,671 30,672
634*(7)(8) South Dakota 100.00% 100.00% GP 35,624 35,624
635*(7)(8) South Dakota 56.29% 100.00% GP 22,563 12,701
636*(7)(8) South Dakota 57.50% 100.00% GP 53,724 30,891
638*(7)(8) South Dakota (B1) 100.00% 100.00% GP 16,443 16,443
638*(7)(8) South Dakota (B2) 100.00% 100.00% GP 8,220 8,220
34
AFFILIATE(S)
MSA OR COMPANY INTEREST INTEREST IN 1993 NET COMPANY
RSA CODE (1) STATE IN AFFILIATE(S) (2) LICENSEE (3) POPULATION (4)(5) POPS (6)
- ------------ -------------------- -------------------- -------------------- ------------------ -----------
639*(7)(8) South Dakota (B1) 61.75% 100.00% GP 33,390 20,618
639*(7)(8) South Dakota (B2) 61.75% 100.00% GP 5,568 3,438
640*(7)(8) South Dakota 64.49% 100.00% GP 65,549 42,273
641*(7)(8) South Dakota 61.13% 100.00% GP 71,921 43,965
642*(8) South Dakota 49.00% 100.00% GP 91,706 44,936
675*(7)(8) Utah 100.00% 100.00% GP 51,727 51,727
676*(7)(8) Utah 100.00% 100.00% GP 86,612 86,612
677*(7)(8) Utah (B3) 74.50% 100.00% GP 37,966 28,285
678*(7)(8) Utah 100.00% 80.00% GP 23,840 19,072
718*(7)(8) Wyoming 66.00% 100.00% GP 46,896 30,951
719*(7)(8) Wyoming 100.00% 100.00% GP 72,795 72,795
720*(7)(8) Wyoming 100.00% 100.00% GP 145,382 145,382
---------- -----------
Total RSA 6,151,832 2,734,148
---------- -----------
Total MSA and RSA 7,425,369 3,356,086
---------- -----------
---------- -----------
<FN>
- ------------------------
(1) MSA ranking is based on population as established by the FCC. RSAs have
been numbered by the FCC alphabetically by state.
(2) Represents the composite ownership interest held by the Company in the
respective affiliate(s). Composite ownership by the Company in affiliate(s)
of greater than 50% does not necessarily represent a controlling interest
in any affiliate.
(3) Represents the composite ownership interest of the Company's affiliate(s)
in the licensee for a cellular telephone system in the respective market.
Composite ownership by affiliate(s) in a licensee of greater than 50% does
not necessarily represent a controlling interest in such licensee. GP
indicates that at least one affiliate has a general partner or controlling
interest in the licensee; LP indicates that the affiliate(s) has a limited
partner or minority interest.
(4) Derived from the Strategic Marketing, Inc. 1993 population estimates.
(5) Represents population within the market area initially licensed by the FCC.
The number of pops which are covered by radio signal in a market is
expected to be marginally lower than the market's total pops on a
going-forward basis. See "Certain Definitions."
(6) Net Company Pops represents Company Interest in Affiliate(s) multiplied by
Affiliate(s) Interest in Licensee multiplied by 1993 Population.
(7) The operations of these markets are currently reflected on a consolidated
basis in the Company's consolidated financial statements. The operations of
the other markets in which the Company holds an interest are reflected in
such financial statements on either an equity or a cost basis.
(8) The Company's interest in these markets is held, in whole or in part,
directly in the licensee.
Markets managed by the Company are denoted by an asterisk (*).
35
SUBSCRIBER GROWTH TABLE
Information regarding subscribers to the MSA and RSA cellular systems
managed by the Company is summarized by the following table:
NUMBER OF
MANAGED MARKETS ESTIMATED POPULATION
OF MANAGED MARKETS NUMBER OF SUBSCRIBERS
------------------- --------------------------------------- ----------------------------- SUBSCRIBER
TOTAL MSA RSA TOTAL MSA RSA TOTAL MSA RSA GROWTH
----- ---- ---- ---------- ----------- ------------ -------- -------- ------- ----------
Sept. 30, 1987....... 0 0 0 0 0 0 0 0 0
Sept. 30, 1988....... 4 4 0 504,529 504,529(1) 0 424 424 0
Sept. 30, 1989....... 4 4 0 500,804 500,804(2) 0 1,362 1,362 0 221.23%
Sept. 30, 1990....... 18 4 14 1,687,481 500,804(2) 1,186,677(2) 6,444 3,513 2,931 373.13%
Sept. 30, 1991....... 49 5 44 3,509,779 566,722(3) 2,943,057(3) 17,952 6,387 11,565 178.58%
Sept. 30, 1992....... 49 5 44 3,509,779 566,722(3) 2,943,057(3) 35,884 11,119 24,765 99.89%
Sept. 30, 1993....... 51 6 45 3,665,758 644,526(4) 3,021,232(4) 60,381 17,898 42,483 68.27%
Sept. 30, 1994....... 55 7 48 3,906,063 771,660(5) 3,134,403(5) 99,002 30,711 68,291 63.96%
Dec. 31, 1994........ 55 7 48 3,904,636 771,660(5) 3,132,976(5) 114,918 34,702 80,216 16.08%
March 31, 1995....... 55 7 48 3,904,636 771,660(5) 3,132,976(5) 124,057 36,680 87,377 7.95%
<FN>
- ------------------------
(1) Derived from 1988 Donnelley Market Service population estimates.
(2) Derived from 1989 Donnelley Market Service population estimates.
(3) Derived from 1990 Census Report.
(4) Derived from 1992 Donnelley Market Service population estimates.
(5) Derived from 1993 Strategic Marketing, Inc. population estimates.
NETWORK CONSTRUCTION AND OPERATIONS. Construction of cellular telephone
systems requires substantial capital investment in land and improvements,
buildings, towers, mobile telephone switching offices
("MTSOs"), cell site equipment, microwave equipment, engineering and
installation. The Company believes that it has achieved significant economies of
scale in constructing the network. For example, the network uses cellular
switching systems capable of serving multiple markets. As a result of the
contiguous nature of the network, only 12 MTSOs are currently required to serve
all 55 of the Company's managed markets. By consolidating and deploying high
capacity MTSOs, the Company intends to achieve further economies of scale.
Economies of scale generated by the network also have permitted the Company to
use one network operations center, to centralize services such as network design
and engineering, traffic analysis, interconnection, billing, roamer
verification, maintenance and support and to access volume discount purchasing
of cellular system equipment.
The network also affords the Company certain technical advantages in the
provision of enhanced services, such as call delivery and call forwarding.
Through the use of single switching facilities serving multiple markets, the
Company has implemented continuous coverage on an intrastate basis throughout
most of the network. The Company has widened the area of coverage within the
network by interconnecting MTSOs located in adjoining markets. The Company's
current objective is to provide subscribers with "seamless" coverage throughout
the network, which will permit subscribers, as they travel through the network,
to receive calls and otherwise use their cellular telephone as if they were in
their home market. This will occur once all of the MTSOs managed by the Company
and in adjoining markets within the eight-state area are networked. The Company
has achieved a high degree of network reliability through the deployment of
standardized components and operating procedures, and the introduction of
redundancy in switching and cell site equipment, interconnect facilities and
power supply. Most of the Company's equipment is built by Northern Telecom, Inc.
("NTI"), and interconnection between MTSOs has been achieved using NTI's
internal software and hardware.
36
The Company began implementing the "IS-41" technical interface during fiscal
1994. This technical interface, developed by the cellular industry, allows
carriers that have different types of equipment to integrate their systems with
the eventual goals of establishing a national seamless network, substantially
reducing the cost of validating calls and reducing fraud exposure.
The Company also has entered into and is negotiating agreements with other
cellular carriers to enhance the range of markets and quality of service
available to cellular subscribers when traveling outside the network. Pursuant
to existing agreements with other cellular carriers, the Company's subscribers
are able to "roam" throughout most MSA and RSA markets in the United States and
Canada.
EXPANSION. The Company is in the process of "filling in" the "cellular
geographic service area" or "CGSA" (as defined by the FCC) within its managed
markets by adding network facilities to increase the coverage of the radio
signal. The Company has been significantly expanding radio signal coverage, with
construction of 50 cell sites already complete in fiscal year 1995 and 57
additional cell sites expected to be completed by the end of the fiscal year.
The Company expects that by September 30, 1995, radio signal coverage will reach
approximately 96% of the population within the managed markets. Expansion of
signal coverage is expected to add additional subscribers, enhance use of the
systems by existing subscribers, increase roamer traffic due to the larger
geographic area covered by the radio signal and further improve the overall
efficiency of the network. Under the rules and regulations of the FCC, expansion
of signal coverage will also preserve the Company's right to provide cellular
service in potentially valuable areas within the network which are not currently
covered by the Company's radio signal.
The Company continually evaluates acquisitions of cellular properties that
are geographically and operationally compatible with the network. In evaluating
acquisition targets, the Company considers, among other things, demographic
factors, including population size and density, traffic patterns, cell site
coverage, required capital expenditures and the likely ability of the Company to
integrate the target market into the network. In pursuing such acquisitions, the
Company may exchange interests in nonmanaged markets for interests in existing
or new markets that serve to expand the network. Certain acquisitions and
related dispositions may be subject to rights of first refusal held by the
partners in the respective partnerships in which the Company holds an interest.
Recent and pending acquisitions are described in "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Acquisitions and
Sales." The Company also from time to time may sell nonmanaged assets to raise
capital for network expansion. For example, the Company has entered into an
agreement to sell its interest in ten Nebraska RSA markets not managed by the
Company for approximately $24,300,000 in cash. The transaction is expected to
result in an after-tax gain to the Company of approximately $19,600,000 and to
close in July 1995. The interest to be purchased from the Company, as well as
interests in the Nebraska RSA markets to be purchased from other entities, will
be acquired at a cost of over $200 per pop after taking into account debt
assumed or refinanced. Proceeds from the transaction will be available to the
Company to pursue acquisitions of additional managed interests and to fund
parent company capital expenditures.
In an effort to provide comprehensive availability of mobile communications
services to its subscribers, regardless of location throughout North America,
the Company has entered into a distribution agreement with American Mobile
Satellite Corporation ("AMSC"). AMSC holds an FCC construction permit to build
and operate a mobile satellite service which will complement the existing
terrestrial cellular system by providing mobile voice, fax and data
communications in all areas not covered by cellular service. Subscribers will
access AMSC's satellite through a cellular/satellite mobile phone which will
route calls through the cellular network in those areas covered by cellular
service and will process the call via satellite in the absence of cellular
coverage. AMSC, which launched its satellite in April 1995, anticipates its
service will be available some time this year. The agreement with AMSC is
essentially a roaming arrangement that may add incremental value to certain
customers in remote areas, but is not expected to have a material impact on the
Company.
SERVICES AND PRODUCTS. Mobile subscribers in the Company's managed markets
have available to them substantially all of the services typically provided by
landline telephone systems, including custom-calling features such as call
forwarding, call waiting, three-way conference calling and, in most cases, voice
mail
37
services. Several price plans are presented to prospective customers so that
they may choose the plan that will best fit their expected calling needs. The
plans provide specific charges for custom-calling features and voice mail to
offer value to the customer while enhancing airtime use and revenues for the
Company. The Company also sells cellular equipment at discounted prices as a way
to encourage use of its mobile services. The Company provides warranty and
repair services after the sale through regional equipment service centers, which
provide state-of-the-art test equipment and certified repair technicians. An
ongoing review of equipment and service pricing is maintained to ensure the
Company's competitiveness. Through a centralized procurement and equipment
distribution strategy, the Company obtains the benefits of favorable equipment
costs through bulk purchases. As appropriate, revisions to pricing of service
plans and equipment pricing are made to meet local marketplace demands.
The network affords the Company the opportunity to offer service over
expanded geographic territories at favorable rates. Customers that subscribe to
a stand-alone cellular system generally are charged premium roaming rates when
using a cellular system outside of their home service area. The Company's
subscribers are able to roam within the network and are afforded "home rate
follows" pricing, whereby subscribers are charged the rate applicable in their
home service area when traveling within the network. In addition, the Company's
simplified retail roaming rate structure allows the customer to roam on certain
adjacent carriers' systems at a preferred rate and minimizes confusion by
consolidating the remainder of the country into a uniform rate. Finally, the
Company offers toll-free calling across single or multiple states to its
subscribers for a nominal monthly fee, due to favorably negotiated interconnect
agreements.
Because the licensed radio spectrum available to the Company was designed to
serve densely populated metropolitan areas, demand for "traditional" cellular
service within the network is not expected to use all available spectrum. The
Company expects that this excess capacity may be adapted (at a nominal marginal
cost) for data transmission, monitoring, control transaction processing and
other cellular uses that are well suited for agriculture, energy and other
industries that have widespread operations within the Company's rural
marketplace, such as wireless network systems for mobile office applications,
credit card verifications, telemetry and polling systems. The Company is working
with equipment manufacturers, system integrators and value added resellers to
develop and deploy these systems. The Company also is exploring the potential
uses of packet data systems, an efficient method of multi-point, simultaneous
polling of wireless monitoring devices, to expand the potential market for other
uses of cellular technology.
The Company also believes that certain attributes of the Company's operating
infrastructure, including existing towers, established distribution channels and
other administrative resources, can be utilized to offer one-way paging service
throughout the managed markets on a cost-efficient basis. The Company intends to
commence offering such paging services in fiscal year 1996 subject to the
receipt of sufficient FCC paging licenses to offer economically feasible paging
services.
The Company is committed to providing consistently high quality customer
service. The Company maintains a comprehensive, centralized customer assistance
department which offers the advantages of expanded customer service hours,
specialized roaming and key account representatives and an automated customer
information database that allows for efficiency and accuracy, while decreasing
the time spent on each customer contact. The customer assistance department also
supports the administrative functions required to activate a customer's phone
through a high speed, call-in process and to enter the customer into the
informational databases required for customer service and billing. The Company
believes this centralized approach provides cost efficiencies while also
addressing the critical need for quality control. To ensure that it is
delivering a consistently high level of quality service, the Company monitors
customer satisfaction with its network quality, sales and customer service
support, billing and quality of roaming through regular surveys conducted by an
independent research firm.
38
In 1992 the Company began investing in TVX, Inc., which holds the
distribution rights for the TVX camera systems in North, Central and South
America. The TVX system provides visual verification of the cause of an alarm at
the time of an incident to distinguish actual emergencies from false alarms. The
TVX camera takes four pictures within five seconds and transmits them to a host
computer via either the cellular or wireline networks. The Company intends to
work closely with TVX, Inc. to market cellular service in conjunction with the
TVX system for use at locations where phone lines are not available or as a
backup when phone lines have been disabled. The Company and Automated Security
Holdings, PLC ("ASH") each hold a 41% equity interest in TVX, Inc.
MARKETING. The Company coordinates the marketing strategy for each of its
managed markets. The Company markets cellular telephone service principally
under the CommNet Cellular name. The use of a single name over a broad
geographic territory creates strong brand-name recognition and allows the
Company to achieve advertising efficiencies.
The Company believes that a key competitive advantage in marketing its
service is the large geographic area covered by the network. The seamless
coverage being developed in the network is critical to marketing, as customers
are attracted to the higher percentage of delivered calls that such coverage
provides. Furthermore, the Company's "home rate follows" pricing allows
customers to make calls from anywhere in the network without incurring
additional daily fees or surcharges which usually occur when customers roam
outside of their home market. Additionally, the Company uses the "Follow Me
Roaming" service provided by GTE Telecommunication Services, Inc. ("GTE") which
permits customers to receive calls in any market that is part of the Follow Me
Roaming system without having to dial complicated access codes. The Company also
offers discounted roaming prices, and expects to be able to offer enhanced
services, in certain markets as a result of arrangements to link with certain
adjacent markets managed by other cellular carriers. See "-- The Company's
Operations -- Network Construction and Operations." In addition, the Company
offers toll-free calling statewide or across multiple states to its subscribers
for a nominal monthly fee. In a majority of the Company's managed RSA markets,
the Company was the first cellular system operator to provide service in the
market, thereby affording a significant competitive advantage.
Historically, the Company has relied to a significant extent on direct sales
representatives and on independent sales agents. The Company is currently
emphasizing development of a new channel of distribution represented by 17
Company-owned retail stores located within the network, which will be
supplemented by 11 additional Company-owned retail stores scheduled to open by
the end of fiscal year 1995. The retail distribution channel is also being
expanded by the addition of 19 Wal-Mart-Registered Trademark- kiosks staffed by
Company personnel. The Company believes that development of retail distribution
channels owned or staffed by the Company will increase customer additions,
enhance customer service and generate cost efficiencies in the acquisition of
new subscribers. The Company also maintains 46 direct sales representatives and
596 agents or outlets, including 52 Radio Shack and eight -C-Sears stores which
have exclusive distribution agreements with the Company. In general, such agents
earn a fixed commission which can vary depending upon the price plan sold when a
customer subscribes to the Company's cellular service and remains a subscriber
for a certain period of time. Being first to market in the majority of the
Company's managed RSA markets has also allowed the Company to obtain exclusive
marketing agreements with the leading telecommunication retailers in a
particular market and to obtain prime locations for its sales centers.
SUBSCRIBERS. To date, a substantial majority of the subscribers who use
cellular service in markets in which the Company holds interests have been
business users of mobile communication services. This trend is consistent with
the experience of the cellular industry generally, although given the Company's
geographic presence in the mountain and plains states, its customers have tended
to include proportionally more persons in the agricultural and energy
industries. The Company believes that certain demographic characteristics of the
rural marketplace will enhance the Company's ability to market cellular service
to its primary customer base within its managed RSA markets. On average, rural
residents spend a higher percentage of their annual household income on
transportation and travel a relatively greater distance by personal vehicle than
do urban residents. The relatively large average distance between public
telephones in the rural marketplace is an additional factor that increases the
need for mobile telecommunication services in that market.
39
MANAGEMENT AGREEMENTS. Management agreements generally applicable to the
Company's RSA markets appoint the Company as exclusive management agent of the
licensee with specifically enumerated responsibilities relating to the
day-to-day business operation of the licensee, although the licensee retains
ultimate control over its cellular system. Generally, the RSA management
agreements are for an initial term of five years and are automatically renewed
for additional terms unless terminated by notice from either party prior to
expiration of the then current term. The agreements provide for reimbursement to
the Company of expenses incurred on behalf of the affiliate or licensee.
The Company has entered into management agreements with three MSA affiliates
pursuant to which the Company has been appointed the exclusive management agent
for each such affiliate. The MSA management agreements appoint the Company as
managing agent of the respective MSA affiliate with specifically enumerated
responsibilities relating to the day-to-day business operation of the affiliate.
In cases in which the affiliate is the general partner in the licensee, the
Company acts as exclusive management agent for the licensee, although the
licensee retains ultimate control over its cellular system. The MSA management
agreements provide for compensation to the Company in an amount equal to 10% of
the distributions to the affiliate derived from the affiliate's interest in the
licensee, although compensation to date under these agreements has not been
material. The agreements also provide for reimbursement for reasonable
administrative and overhead expenses. In cases in which the affiliate is a
general partner in the licensee, the agreements generally were for an initial
term of two years, were extended for an additional three years and are
automatically renewed for one-year terms thereafter unless terminated by notice
from either party prior to expiration of the then current term. In cases in
which the affiliate is a limited partner in the licensee, the agreements
generally were for an initial term of five years and are automatically renewed
for additional five-year terms unless terminated by notice from either party
prior to expiration of the then current term.
The Company has also entered into a management agreement with CINC, whereby
it manages all systems owned by CINC and in which CINC is the general partner.
HISTORY. The Company initially acquired its cellular interests by
participating in the wireline licensing process conducted by the FCC. In order
to participate in that process, the Company formed affiliates which were
originally owned at least 51% by one or more independent telephone companies and
no more than 49% by the Company. In exchange for the Company's 49% interest, the
Company provided a financing commitment to the affiliates for their capital
needs, as well as certain management services. In addition to obtaining
interests in cellular markets through participation in the FCC licensing
process, the Company also has purchased direct interests in additional markets
in order to expand the network.
FINANCING ARRANGEMENTS WITH AFFILIATES; CIFC. CIFC has entered into loan
agreements with RSA and MSA affiliates to finance or refinance the costs related
to the construction, operation and expansion of cellular telephone systems in
which such affiliates own an interest. The loans are financed with funds
borrowed by CIFC from CoBank and the Company. As of March 31, 1995, CIFC had
entered into loan agreements with 50 RSA affiliates, 5 MSA affiliates and CINC
and had advanced $193,754,000 thereunder, including $104,928,000 to entities
which are consolidated for financial reporting purposes. All loans to affiliates
from CIFC bear interest at 1% over the average cost of CoBank borrowings and are
secured by a lien upon all assets of the entity to which funds are advanced.
Loans from CIFC to affiliates will be repaid from funds generated by operations
of the licensee or distributions to affiliates by licensees in which such
affiliates own an interest. Amounts paid to CIFC will be applied by CIFC towards
payment of its obligations to CoBank and the Company. The repayments allocated
to the Company will be retained by CIFC and used to offset future loans which
would otherwise have been made by the Company. The Company has made and will
continue to make advances to affiliates on an interim basis. Funds borrowed from
CIFC by affiliates are used to repay the Company for such interim advances. As
of March 31, 1995, the Company had outstanding interim advances of $33,537,000
to affiliates, which advances bear interest at 2% over the prime rate.
As of March 31, 1995, the Company and CIFC had advanced a total of
$197,242,000 to RSA and MSA affiliates and to finance switches. Based on its
proportionate ownership interests in these affiliates, the
40
Company's share of total affiliate and switch loans and advances was
$145,002,000. The assets of the affiliates in which the Company has investments
or advances represent 4,459,000 pops, which include 3,356,000 net Company pops.
THE CELLULAR TELEPHONE INDUSTRY. Cellular telephone service is a form of
wireless telecommunication capable of providing high quality, high capacity
service to and from mobile, portable and fixed radio telephones. Cellular
telephone technology is based upon the division of a given market area into a
number of regions, or "cells," which in most cases are contiguous. Each cell
contains a low-power transmitter-receiver at a "base station" or "cell site"
that communicates by radio signal with cellular telephones located in the cell.
The 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. Cells generally have radiuses ranging from two miles to more than 25
miles. Cell boundaries are determined by the strength of the signal emitted by
the cell's transmitter-receiver. Each cell site is connected to a MTSO, which,
in turn, is connected to the local landline telephone network.
When a cellular subscriber in a particular cell dials a number, the cellular
telephone sends the call by radio signal to the cell's transmitter-receiver,
which then sends it to the MTSO. The MTSO completes the call by connecting it
with the landline telephone network or another cellular telephone unit. Incoming
calls are received by the MTSO, which instructs the appropriate cell to complete
the communications link by radio signal between the cell's transmitter-receiver
and the cellular telephone. By leaving the cellular telephone on, a signal is
emitted so the MTSO can sense in which cell the cellular telephone is located.
The MTSO also records information on system usage and subscriber statistics.
The FCC has allocated the cellular telephone systems frequencies in the 800
MHz band of the radio spectrum. Each of the two licensees in each cellular
market is assignedq 416 frequency pairs. Each conversation on a cellular system
occurs on a pair of radio talking paths, thus providing full duplex (i.e.,
simultaneous two-way) service. Two distinguishing features of cellular telephone
systems are: (i) frequency reuse, enabling the simultaneous use of the same
frequency in two or more adequately separated cells, and (ii) call hand-off,
occurring when a deteriorating transmission path between a cell site and a
cellular telephone is rerouted to an adjacent cell site on a different channel
to obtain a stronger signal and maintain the call. A cellular telephone system's
frequency reuse and call hand-off features result in far more efficient use of
available frequencies and enable cellular telephone systems to process more
simultaneous calls and service more users over a greater area than pre-cellular
mobile telephone systems.
Frequency reuse is one of the most significant characteristics of cellular
telephone systems. Each cell in a cellular telephone system is assigned a
specific set of frequencies for use between that cell's base station and
cellular telephones located within the cell, so that the radio signals being
used in one cell do not interfere with those being used in adjacent cells.
Because of the relatively low transmission power of the base stations and
cellular telephones, two or more cells sufficiently far apart can use the same
frequencies in the same market without interfering with one another.
A cellular telephone system's capacity can be increased in various ways.
Within certain limitations, increasing demand may be met by simply adding
available frequency capacity to cells as required or, by using directional
antennas, dividing a cell into discrete multiple sectors or coverage areas,
thereby facilitating frequency reuse in other cells. Furthermore, an area within
a system may be served by more than one cell through procedures which 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
serviced by lower-power transmitters, thereby increasing the reuse factor and
the number of calls that can be handled in a given area. Expected digital
transmission technologies will provide cellular licensees with additional
capacity to handle calls on cellular frequencies. As a result of present
technology and assigned spectrum, however, there are limits to the number of
signals that can be transmitted simultaneously in a given area. In highly
populated MSAs, the level of demand for mobile and portable service is often
large in relation to the existing capacity. Because the primary objective of the
cellular licensing process is to address mobile and portable uses, operators in
highly populated MSAs may have capacity constraints which limit their ability to
provide alternate cellular service. The Company does
41
not anticipate that the provision of mobile and portable services within the
network will require as large a proportion of the systems' available spectrum
and, therefore, the systems will have more available spectrum with which to
pursue data applications, which may enhance revenues.
Call hand-off in a cellular telephone system is automatic and virtually
unnoticeable to either party to the call. The MTSO and base stations
continuously monitor the signal strength of calls in progress. The signal
strength of the transmission between the cellular telephone and the base station
declines as the caller moves away from the base station in that cell. When the
signal strength of a call declines to a predetermined threshold level, the MTSO
automatically determines if the signal strength is greater in another cell and,
if so, hands off the cellular telephone to that cell. The automatic hand-off
process within the system takes a fraction of a second. However, if the cellular
telephone leaves the reliable service areas of the cellular telephone system,
the call is disconnected unless an appropriate technical interface is
established with an adjacent system through intersystem networking arrangements.
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, so that a cellular telephone may be
used wherever a subscriber 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 subscriber
to change from one cellular service provider to another within a service area.
Because cellular telephone systems are fully interconnected with the
landline telephone network and long distance networks, subscribers can receive
and originate both local and long-distance calls from their cellular telephones.
Cellular telephone systems operate under interconnection agreements with
various local exchange carriers and interexchange 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 subscribers to
call landline subscribers and vice versa. The technical and financial details of
such interconnection arrangements are subject to negotiation and vary from
system to system.
While most MTSOs process information digitally, most radio transmission of
cellular telephone calls are done on an analog basis. Digital technology offers
advantages, including improved voice quality, larger system capacity, and
perhaps lower incremental costs for additional subscribers. The conversion from
analog to digital radio technology is expected to be an industry-wide process
that will take a number of years. However, based on estimated capacity
requirements, the Company does not foresee a need to convert to digital radio
transmission technology in the near or intermediate term.
COMPETITION
GENERAL. The cellular telephone business is a regulated duopoly. The FCC
awarded only two licenses in each market, although certain markets have been
subdivided as a result of voluntary settlements. One of these licenses initially
was awarded to an entity that was majority owned by local telephone companies or
their affiliates and the other license was awarded to an entity that did not
provide such service. Each licensee has the exclusive use of a defined frequency
band within its market.
The primary competition for the Company's mobile cellular service in any
market comes from the other licensee in such market, which may have
significantly greater resources than the Company and its affiliates. Competition
is principally on the basis of coverage, services and enhancements offered,
technical quality of the system, quality and responsiveness of customer service
and price. Such competition may increase to the extent that licenses pass from
weaker stand-alone operators into the hands of better capitalized and more
experienced cellular operators who may be able to offer consumers certain
network advantages similar to those offered by the Company. Within the network,
the Company has three primary direct competitors, in
42
addition to a number of stand-alone operators. The Company also faces
competition from other communications technologies that now exist, such as SMR
and paging services, and may face competition from technologies introduced in
the future.
COMPETITION FROM OTHER TECHNOLOGIES. Potential users of cellular systems
may find an increasing number of current and developing technologies able to
meet their communication needs. For example, SMRs of the type generally used by
taxicab and tow truck services and other communications services have the
technical capability to handle mobile telephone calls (including interconnection
to the landline telephone network) and may provide competition in certain
markets.
Although SMR operators are currently subject to limitations that make usage
of SMR frequencies more appropriate for short dispatch messages, the FCC has
granted waivers of its rules to permit the construction and operation of low
powered "cellular-like" services using a collection of SMR frequencies ("ESMR")
in a number of markets in the United States. Recent legislation permits
commercial mobile service providers, including SMR providers, to obtain upon
demand physical interconnection with the landline telephone network. Such
interconnection enhances an SMR provider's ability to compete with cellular
operators, including the Company. The FCC has encouraged ESMR activities and has
amended its rules to establish an Expanded Mobile Service Provider ("EMSP")
licensing approach that would facilitate such operations. The new rules grant a
new type of 800 Mhz wide-area license that would permit channels to be
aggregated for operation of systems throughout defined geographic areas. A new
rulemaking is underway to determine what protections will be afforded to
existing SMR licensees that may now be subject to relocation.
One-way paging or beeper services that feature voice message and
data-display as well as tones may be adequate for potential cellular subscribers
who do not need to transmit back to the caller. SMR and paging systems are in
operation in many of the service areas within the network.
The FCC is now licensing commercial PCS. PCS is not a specific technology,
but a variety of potential technologies that could compete with cellular
telephone systems. The FCC has identified two categories of PCS: broadband and
narrowband. In 1993, Congress enacted legislation requiring the FCC to adopt
final rules for licensing broadband and narrowband PCS by February 1994. This
legislation also required the FCC to commence issuing licenses for narrowband
PCS by October 1994 and broadband PCS by December 1994. Licenses will be awarded
by competitive bidding. Auctions for the first two spectrum blocks have been
completed. Absent delays caused by any judicial proceedings, PCS systems can be
expected to commence operation in major metropolitan areas as early as the end
of calendar year 1995. See "Federal Regulation -- Recent Legislation."
The FCC has adopted rules to authorize the operation of new narrowband PCS
systems in the 900 Mhz band. The possible new services using this 900 MHz band
spectrum include advanced voice paging, two-way acknowledgment paging, data
messaging, electronic mail and facsimile transmissions. These services most
likely will be provided using a variety of devices, such as laptop and palmtop
computers and computerized "personal organizers" that allow receipt of office
messages, calendar planning, and document editing from remote locations in some
circumstances.
The FCC also has adopted rules to authorize the operation of new, broadband
PCS systems in the 2 GHz band. Equipment proposed for broadband PCS includes
small, lightweight and wireless telephone handsets; computers that can
communicate over the airwaves wherever they are located; and portable facsimile
machines and other graphic devices. The regulatory plan adopted for broadband
PCS includes an allocation of spectrum, a flexible regulatory structure,
eligibility restrictions and technical and operational rules. In a related
matter in the same proceeding, the FCC revised its cellular rules to explicitly
state that cellular licensees may provide any PCS-type services (including
wireless PBX, data transmission and telepoint services) on their 800 MHz band
cellular channels without prior notification to the FCC (other than the
notification required to report the construction of new cell sites).
The FCC has allocated 140 MHz of spectrum in the 2 GHz band for the
provision of licensed and unlicensed broadband PCS. Much of the spectrum
allocated for broadband PCS is already occupied by microwave licensees. As a
general proposition, broadband PCS licensees will be required to pay the costs
associated with relocating these existing microwave users to other portions of
the radio spectrum.
43
Of the 140 MHz of spectrum allocated to broadband PCS, 120 MHz has been
allocated for licensed PCS. The 120 MHz of spectrum allocated to licensed PCS
has been divided into six channel blocks, as follows: i) two channel blocks
(Blocks A and B) have been allocated 30 MHz of spectrum each, and will be
licensed on the basis of 51 Major Trading Areas ("MTAs"), iii) three channel
blocks (Blocks D, E and F) have been allocated 10 MHz of spectrum each and will
be licensed on the basis of 493 Basic Trading Areas ("BTAs"). In a separate
proceeding dealing with spectrum auctions and consistent with a directive
contained in recently-enacted legislation, the FCC has granted licensing
preferences on the Block C and F spectrum allocations for small businesses,
rural telephone companies and minority/woman-owned businesses, although the
validity of such preferences may be subject to legal challenge. The FCC has
recently initiated a rulemaking proceeding to withdraw the licensing preferences
granted to minority/woman-owned businesses in light of uncertainty regarding the
constitutionality of such preferences.
Subject to a five percent cross-ownership benchmark, spectrum aggregation
will be permitted in broadband PCS, but will be limited to 40 MHz of spectrum
per service area to prevent any one person or entity from exercising undue
market power.
As a general rule, cellular licensees will be permitted to participate in
broadband PCS on the 30 MHz frequency block outside of their existing cellular
service areas or in any area where the cellular licensee serves less than ten
percent of the 1990 census population of the PCS service area. Under this
criterion, a cellular licensee will be ineligible to apply for one of the 30 MHz
spectrum blocks if the composite reliable service area contour of its cellular
system embraces ten percent or more of the 1990 census population of the PCS
service area. Generally, with respect to PCS service areas in which there is ten
percent or more cumulative 1990 census population overlap between the cellular
and PCS service areas, the cellular carrier will be eligible to hold only one 10
MHz BTA license in addition to its cellular interest.
The ownership attribution benchmark for cellular interests has been set at
20%. Therefore, for eligibility purposes, cellular licensees are defined as
entities which have an ownership interest of 20% or more in a cellular system.
Broadband PCS licensees will be subject to minimum construction
requirements. Broadband PCS licenses will be awarded for a period of ten years,
with provisions for a license renewal expectancy similar to the rules that
currently apply to cellular licensees.
Of the 160 MHz of spectrum allocated for broadband PCS, the remaining 40 MHz
has been allocated for unlicensed devices. These unlicensed devices will be used
in a variety of contexts, such as office environments, to provide such services
as high and low speed data links between computing devices, cordless telephones
and wireless PBXs. The unlicensed devices will be governed under Part 15 of the
FCC's rules, and will not be subject to auctions.
It is uncertain what the effect on the Company of these new personal
communications services will be. The Company believes that PCS likely will not
compete directly with cellular telephone service in the rural marketplace, but
there can be no assurance that this will be the case. Management of the Company
believes that technological advances in present cellular telephone technology in
conjunction with buildout of the present cellular systems throughout the nation
with cell splitting and microcell technology would provide essentially the same
services as the proposals described above, but there is no assurance that this
will happen. The FCC is expected to issue operating authority for personal
communications services competitive to the Company's services in the markets in
which the Company holds interests in cellular systems. This could result in one
or more additional competitors in each of the Company's markets.
Technological advances in the communications field continue to occur and
make it difficult to predict the extent of additional future competition for
cellular systems. For example, several mobile satellite systems are planning to
initiate service in the 1995 - 1999 time frame, and AMSC has launched its mobile
satellite in April 1995 and anticipates that its service will be available
sometime this year. See "Business -- The Company's Operations -- Expansion."
Although satellite service may offer a customer worldwide coverage, the
substantial investments required to initiate service, as well as significant
technical, political, and regulatory hurdles that need to be overcome may impede
the early growth of this technology. Recent legislation
44
may make available up to 200 MHz of spectrum for new communications systems. See
"Federal Regulation -- Recent Legislation." Each of these systems could provide
services that compete with those provided by the Company. The FCC has also
authorized Basic Exchange Telecommunications Radio Service to make basic
telephone service more accessible to rural households and businesses.
FEDERAL REGULATION
OVERVIEW. The construction, operation and acquisition of cellular systems
in the United States are regulated by the FCC pursuant to the Communications Act
and the rules and regulations promulgated thereunder (the "FCC rules"). The FCC
rules govern applications to construct and operate cellular systems, licensing
and administrative appeals and technical standards for the provision of cellular
telephone service. The FCC also regulates coordination of proposed frequency
usage, height and power of base station transmitting facilities and types of
signals emitted by such stations. In addition, the FCC regulates (or forbears
from regulating) certain aspects of the business operations of cellular systems.
It has declined to regulate the price and terms of offerings to the public. See
"-- Recent Legislation."
INITIAL REGULATION. For licensing purposes, the FCC established 734
discrete geographically defined market areas comprising 306 MSAs and 428 RSAs.
In each market area, the FCC awarded only two licenses authorizing the use of
radio frequencies for cellular telephone service. The allocated cellular
frequencies were divided into two equal 25 MHz blocks. One block of frequencies,
and the associated operating license, was initially reserved for exclusive use
by an entity that was majority owned and controlled by local landline telephone
companies or their affiliates. The second block of frequencies initially was
reserved for use by entities that did not provide landline telephone service in
the market area. Upon the issuance of a construction permit, either wireline or
nonwireline, such construction permit could be sold to any qualified buyer,
regardless of telephone company affiliation. The FCC generally prohibits a
single entity from holding an interest in both the wireline and the nonwireline
licensee in the same market.
RSAs were divided along county lines and consist of one or more contiguous
counties within a single state. The RSAs were numbered alphabetically by state,
rather than on the basis of population. The FCC applied a licensing policy for
RSA markets similar to that utilized in the MSAs. Applications for both the
wireline and nonwireline license in each RSA were filed simultaneously. In RSAs,
the FCC allowed only wireline applicants to form pre-lottery settlement
entities. If a full market wireline settlement was not negotiated, the FCC chose
among mutually exclusive applicants for each license through the use of a
lottery.
Upon favorable review of the lottery winner or settlement entity,
designation of the tentative selectee and following a public comment period, the
FCC issued a construction permit for the cellular telephone system on each
frequency block in a specified market. An operating license was then granted for
an initial term of ten years (although a license may be revoked during its term
for cause after formal proceedings by the FCC).
LICENSE RENEWAL. The FCC has established rules and procedures to process
cellular renewal applications filed by existing carriers and the competing
applications filed by renewal challengers. Subject to one exception discussed
below, the renewal proceeding is a two-step hearing process. The first step of
the hearing process is to determine whether the existing cellular licensee is
entitled to a renewal expectancy, and otherwise remains basically qualified to
hold a cellular license. Two criteria are evaluated to determine whether the
existing licensee will receive a renewal expectancy. The first criterion is
whether the licensee has provided "substantial" service during its past license
term, defined as service which is sound, favorable and substantially above a
level of mediocre service which minimally might justify renewal. The second
criterion requires that the licensee must have substantially complied with
applicable FCC rules and policies and the Communications Act. Under this second
criterion, the FCC determines whether the licensee has demonstrated a pattern of
compliance. The second criterion does not require a perfect record of
compliance, but if a licensee has demonstrated a pattern of noncompliance it
will not receive a renewal expectancy. If the FCC grants the licensee a renewal
expectancy during the first step of the hearing process and the licensee is
45
basically qualified, its license renewal application will be automatically
granted and any competing applications will be denied. If however, the FCC
denies the licensee's request for renewal expectancy, the licensee's application
will be comparatively evaluated under specifically enumerated criteria with the
applications filed by competing applicants.
The exception to the two-step renewal hearing process allows a competing
applicant proposing to provide service that far exceeds the service presently
being provided by the incumbent licensee to request a waiver of the two-step
process. If the waiver request is granted, the FCC will hold only a comparative
hearing, I.E., it will not make a threshold determination in the first instance
as to whether the incumbent licensee is entitled to a renewal expectancy.
CELLULAR SERVICE AREA. Under FCC rules, the authorized service area for a
cellular licensee in a market is referred to as the CGSA. In all FCC-designated
markets, at least one cell site must have been placed into commercial service
within 18 months after the award of the construction permit. The CGSA is defined
as the area served by the cellular licensee (as computed by a mathematical
formula based on the height and power of operating cell sites within which the
licensee is entitled to protection from interference on its frequencies). The
CGSA will be smaller than the designated FCC market if a licensee has not fully
built-out its system, or it may be larger than the market if the licensee serves
areas of adjacent markets that are unserved by the adjacent licensee. Cellular
licensees do not need to obtain FCC authority prior to increasing the CGSA
within their FCC-designated market during the five-year period after the
construction permit is initially granted for the market. However, FCC
notification of construction is still generally required. After the five-year
exclusive period has expired, any entity may apply to serve the unserved areas
of the market that comprise at least 50 contiguous square miles and are outside
of the licensees' CGSA (an "unserved area application"). The Company has
selected target expansion areas based upon specific financial criteria and does
not plan to expand in areas where these criteria are not projected to be met.
Unserved area applications are filed in two phases, Phase I and Phase II.
During the first half of 1993, the FCC accepted Phase I unserved area
applications for frequency blocks in all markets where: the five-year fill-in
period had already expired or would expire on or before March 15, 1993; no
applications for initial authorizations were filed; and authorizations were
surrendered, or canceled for failure to meet the 18-month construction deadline
or other reasons. For all other markets, Phase I applications are due on the
31st day following expiration of the five-year fill-in period. All Phase I
applications for a given market are deemed mutually exclusive even if their
proposed CGSAs do not overlap. Once an authorization has been granted to a Phase
I applicant, the permittee has 90 days within which to file an application
requesting FCC authority to make major modifications to its Phase I system. The
FCC will not accept any other applications for unserved areas in the market
during this period that are mutually exclusive with the Phase I carrier's major
modification application.
Phase II unserved area applications for any remaining area may be filed on
the 121st day after the Phase I authorization has been granted (or if no Phase I
applications are filed, on the first day after Phase I applications for that
market are permitted). In the event mutually exclusive applications are filed
the authorization will be issued by auction. Phase II applications may propose
CGSAs that cover area in more than one market. Phase II applications are deemed
to be mutually exclusive only if their CGSAs overlap in such a way that the
grant of one would preclude the grant of the other. Phase II applications will
be placed on public notice by the FCC, and all interested and qualified parties
will have an opportunity to apply for the same market area within 30 days of the
public notice.
Applicants for unserved areas not contiguous with licensed systems must
propose to serve a minimum of 50 contiguous square miles and must demonstrate
their financial qualifications to construct the proposed system and to operate
it for one year (assuming no revenues). Existing licensees proposing to expand
their systems through the filing of an unserved area application are not subject
to the 50 square mile minimum coverage rule, nor are they required to make a
financial qualifications showing. Under recent legislation described below,
mutually exclusive unserved area applications are processed by lottery selection
procedures (for applications filed prior to July 26, 1993) or by auctions (for
applications filed after July 26, 1993), and existing cellular carriers receive
no preference in the lottery selection or auction process.
46
Unserved area cellular carriers (both Phase I and Phase II) are accorded one
year within which to complete construction of their systems. Unserved area
cellular carriers are not accorded a five-year fill-in period. If an unserved
area cellular carrier forfeits its authorization for failure to construct, the
areas which thereby revert to "unserved" status may be applied for under Phase
II procedures.
ALIEN OWNERSHIP RESTRICTIONS. The Communications Act prohibits the issuance
of a license to, or the holding of a license by, any corporation of which any
officer or director is a non-U.S. citizen or of which more than 20% of the
capital stock is owned of record or voted by non-U.S. citizens or their
representatives or by a foreign government or a representative thereof, or by
any corporation organized under the laws of a foreign country. The
Communications Act also prohibits the issuance of a license to, or the holding
of a license by, any corporation directly or indirectly controlled by any other
corporation of which any officer or more than 25% of the directors are non-U.S.
citizens or of which more than 25% of the capital stock is owned of record or
voted by non-U.S. citizens or their representatives or by a foreign government
or representative thereof, or by any corporation organized under the laws of a
foreign country, although the FCC has the power in appropriate circumstances to
waive these restrictions. The FCC has interpreted these restrictions to apply to
partnerships and other business entities as well as corporations, with certain
modifications. Failure to comply with these requirements may result in denial or
revocation of licenses. The Articles of Incorporation of the Company contain
prohibitions on foreign ownership or control of the Company that are
substantially similar to those contained in the Communications Act.
RECENT LEGISLATION. The Omnibus Budget Reconciliation Act of 1993 (the
"Budget Act"), among other things, generally requires the FCC to work with the
Department of Commerce to reallocate at least 200 MHz of spectrum from federal
government use to private commercial use; to issue initial licenses for radio
spectrum for which mutually exclusive applications have been filed for the
purpose of offering commercial communications services to subscribers either by
comparative hearing or competitive bidding (I.E., auctions); to treat as common
carriers PCS licensees as well as providers of commercial mobile services
(including SMR services) that previously were regulated as private carriers; to
issue final rules relating to the licensing of PCS; and to impose regulatory
fees upon virtually all FCC licensees, including cellular licensees, to help
recover the FCC's administrative costs in regulating such entities (the
"Spectrum Legislation").
In devising a methodology for auctions between mutually exclusive
applicants, the Spectrum Legislation directs the FCC, among other things, to
promote the development and rapid deployment of new technologies, products and
services to the public, including those residing in rural areas. Further, the
Spectrum Legislation prohibits the FCC from conducting lotteries to issue
initial licenses for commercial services for which mutually exclusive
applications are filed, unless one or more applications for such license were
accepted for filing prior to July 26, 1993. Thus, all future initial
applications for cellular unserved areas (if deemed to be mutually exclusive)
and all applications for PCS licenses, would be issued by a competitive bidding
process. Competitive bidding will not apply to applications for license renewal
or applications to assign or transfer control of existing licenses.
The Spectrum Legislation also preempts state rate or entry regulation on
commercial mobile services unless a particular state petitions the FCC for
authority to exercise (or continue exercising) such regulatory authority and the
FCC grants the petition. Several states filed such petitions, all of which have
now been denied. The Spectrum Legislation also directs the FCC to assess and
collect regulatory fees from virtually all FCC licensees, including cellular
carriers. Under the initial fee schedule, cellular carriers are required to pay
an annual fee of $60.00 per 1,000 subscribers.
STATE, LOCAL AND OTHER REGULATION
STATE. Following receipt of an FCC construction permit and prior to the
commencement of commercial service (prior to construction in certain states), a
cellular licensee must also obtain any necessary approvals from the appropriate
regulatory bodies in each of the states in which it will offer cellular service.
Certain states require cellular system operators to be certified by such state
to serve as common carriers. In addition, certain state authorities regulate
certain service practices of cellular system operators. While such state
regulations may affect the manner in which the Company's affiliates conduct
their business and could
47
adversely affect their profitability, they should not place the Company's
affiliates at a competitive disadvantage with other service providers in the
same markets. The Company has not experienced and does not presently contemplate
any regulatory constraints, difficulties or delays.
FAA, ZONING AND OTHER LAND USE. The location and construction of cellular
transmitter towers and antennas are subject to Federal Aviation Administration
("FAA") regulations and may be 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 systems in which the Company's affiliates have an interest
will not be changed in the future or that regulatory requirements will not be
adopted in those states and localities which currently have none.
EMPLOYEES
As of June 15, 1995, the Company had 414 full-time employees. The Company
engages the services of independent contractors on an as-needed basis.
PROPERTIES
In addition to the direct and attributable interests in cellular licensees
discussed in this Prospectus, the Company leases its principal executive offices
(consisting of approximately 49,900 square feet) located in Englewood, Colorado.
The Company and its affiliates lease and own locations for inventory storage,
microwave, cell site and switching equipment and administrative offices.
LEGAL PROCEEDINGS
There are no material, pending legal proceedings to which the Company or any
of its subsidiaries is a party or of which any of their property is the subject
which, if adversely decided, would have a material adverse effect on the
Company.
MANAGEMENT
EXECUTIVE OFFICES AND DIRECTORS
The following table sets forth certain information regarding the executive
officers and directors of the Company:
NAME AGE POSITION
- ---------------------------- --- ----------------------------------------------------------------------
Arnold C. Pohs 66 Chairman of the Board, President, Chief Executive Officer and Director
Daniel P. Dwyer (1) 35 Executive Vice President, Treasurer, Chief Financial Officer and
Director
Andrew J. Gardner 40 Senior Vice President and Controller
Homer Hoe 45 Executive Vice President and Chief Information Officer
Doron Lurie 35 Executive Vice President and Chief Operating Officer
David S. Lynn 38 Senior Vice President -- Network Operations
Timothy S. Morrissey 42 Senior Vice President -- Sales Operations
Amy M. Shapiro 41 Vice President, Secretary and General Counsel
John E. Hayes, Jr. (1)(2) 57 Director
Robert J. Paden (2) 39 Director
David E. Simmons (1)(2) 37 Director
<FN>
- ------------------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
48
The Company's Articles of Incorporation provide for a classified Board of
Directors consisting of three classes, each class to be as nearly equal in
number as possible. The members of each class are elected to a three-year term
and one class is elected at each annual meeting. Messrs. Pohs and Paden are
members of Class I with terms expiring at the 1997 Annual Meeting of
Stockholders (to be held in February 1998); Mr. Simmons is a member of Class II
with a term expiring at the 1995 Annual Meeting (to be held in February 1996);
and Messrs. Dwyer and Hayes are members of Class III with terms expiring at the
1996 Annual Meeting (to be held in February 1997).
ARNOLD C. POHS has been Chairman of the Board of the Company since February
1991, President and Chief Executive Officer since August 1989 and a director
since September 1985. Mr. Pohs served as Executive Vice President of the Company
from January 1986 through August 1989. Mr. Pohs was designated Chief Operating
Officer of the Company in August 1987, prior to which time he was the Chief
Financial Officer of the Company. Mr. Pohs currently serves as Second Vice
Chairman and a member of the Executive Committee of the Board of Directors of
the Cellular Telecommunications Industry Association, as Vice Chairman and a
director of the CTIA Foundation for Wireless Telecommunications, a non-profit
industry association, as Chairman of the CTIA Industry Information Council and
as Chairman of the Board of TVX, Inc.
DANIEL P. DWYER has been Executive Vice President of the Company since
November 1992, a director of the Company since March 1990 and Chief Financial
Officer since August 1988 and Treasurer since August 1987. He was Vice President
- -- Finance of the Company from November 1989 until November 1992, Secretary from
August 1987 until March 1990, Assistant Secretary from January 1987 until August
1987, Controller from May 1986 until November 1988 and accounting manager for
the Company from March 1986 until May 1986. From January 1984 until March 1986,
Mr. Dwyer was a staff accountant with Ernst & Young LLP. He is a Certified
Public Accountant and a member of the American Institute of Certified Public
Accountants and the Colorado Society of Certified Public Accountants. Mr. Dwyer
currently serves as a director of TVX, Inc.
ANDREW J. GARDNER was named Senior Vice President of the Company in July
1994. He was Vice President and Controller from November 1992 to July 1994 and
Assistant Vice President -- Accounting and Tax from August 1990 to October 1992.
From August 1986 until joining the Company in August 1990, Mr. Gardner was
employed by U S WEST, Inc. in various corporate financial management capacities,
most recently Manager, Financial Results. Mr. Gardner is a Certified Public
Accountant.
HOMER HOE was elected Executive Vice President and Chief Information Officer
of the Company in October 1994. From August 1992 until joining the Company in
October 1994, he was a self-employed consultant to the Information Services
industry, and was contracted by the Company as interim CIO from April to October
1994. From August 1991 to August 1992, Mr. Hoe was Director of Information
Services for Tenneco Minerals, a subsidiary of Tenneco, Inc. From May 1986 to
August 1991, he was employed by Digital Equipment Corporation, most recently as
Senior Consultant, specializing in multi-vendor computer system integration.
DORON LURIE was elected Executive Vice President of the Company in October
1994. He was named Chief Operating Officer in July 1994. Mr. Lurie was Senior
Vice President -- Operations of the Company from November 1993 to July 1994.
From October 1992 until joining the Company in August 1993, he was Managing
Director of MobiLink Corporation, a joint venture of 15 cellular
telecommunications companies. From April 1988 until August 1993, Mr. Lurie was
employed by PacTel Cellular in various corporate and operational capacities,
most recently as Director, Sales/Marketing for PacTel's San Diego market.
DAVID S. LYNN was named Senior Vice President -- Network Operations of the
Company in July 1994. He was Vice President -- Network Operations from March
1993 until July 1994, Vice President -- Network Development from February 1992
until March 1993, Assistant Vice President -- Finance from June 1990 until
February 1992, Controller from November 1988 until June 1990 and Manager,
Financial Reporting from August 1988 until November 1988. From August 1982 until
joining the Company in August 1988, Mr. Lynn was employed by American Television
and Communications Corporation in various accounting and financial management
capacities.
49
TIMOTHY S. MORRISSEY was named Senior Vice President -- Sales Operations of
the Company in February 1995. He was General Sales Manager of the Company's
Midwest Region from July 1993 until February 1995. From February 1990 until
joining the Company in July 1993, Mr. Morrissey was President and General
Manager of the Washington D.C. and Baltimore Cellular operations for
Southwestern Bell Mobile Systems.
AMY M. SHAPIRO has been Vice President of the Company since November 1992,
Secretary of the Company since March 1990 and General Counsel since October
1989. From February 1986 until joining the Company in October 1989, Ms. Shapiro
was an associate with Hall & Evans LLC, a Denver, Colorado law firm.
JOHN E. HAYES, JR. was elected a director of the Company in October 1990.
Mr. Hayes has served as Chairman of the Board, President and Chief Executive
Officer of Western Resources, Inc. since October 1989. From May 1989 to October
1989, Mr. Hayes was Chairman of the Board of Triad Capital Partners, a venture
capital firm. Mr. Hayes was President and Chief Executive Officer of
Southwestern Bell Telephone Company from September 1986 to January 1989. Mr.
Hayes is a director of the Automobile Club of Missouri, Boatmen's Bancshares,
Inc., American Gas Association, Edison Electric Institute, Security Benefit
Group, the Topeka Community Foundation, Boys Hope, Kansas Wildscape and Boy
Scouts of America and a Trustee of Midwest Research Institute, Menninger
Foundation and Rockhurst College.
ROBERT J. PADEN has been a director of the Company since December 1985. For
the past ten years, Mr. Paden has been General Manager/Vice President of the
Stanton Telephone Company, Stanton, Nebraska. He is also a board member of the
Nebraska Telephone Association.
DAVID E. SIMMONS has been a director of the Company since August 1987. Mr.
Simmons has served as President of Simmons Family Incorporated, a broadcasting
and communications company, since 1989 and as its Executive Vice President from
1985 to 1989. Mr. Simmons also serves as Chairman and Chief Executive Officer of
Keystone Communications, Inc., a satellite communications company.
DESCRIPTION OF CERTAIN INDEBTEDNESS
THE CREDIT AGREEMENTS. Pursuant to the Credit Agreements, CoBank has agreed
to loan up to $130,000,000 to CIFC to be reloaned by CIFC to affiliates of the
Company for the construction, operation and expansion of cellular telephone
systems and to the Company for the construction and expansion of switches. In
addition, as of March 31, 1995, approximately $43,000,000 of the $65,940,000
unused commitment that is available under the Credit Agreements can be borrowed
by CIFC and loaned to the Company for general corporate purposes. As of March
31, 1995, the outstanding balance under the Credit Agreements was approximately
$64,295,000. The Credit Agreements provide for interest at 1.00% over prime
(10.00% at March 31, 1995) or 2.25% over LIBOR (8.84% at March 31, 1995). The
loans are secured by a first lien upon all of the assets of CIFC and each of the
affiliates to which funds are advanced by CIFC. In addition, the Company has
guaranteed the obligations of CIFC to CoBank and has granted CoBank a first lien
on all of the assets of the Company as security for such guaranty.
The Credit Agreements prohibit the payment of cash dividends, prohibit any
other senior borrowings, limit the use of borrowings, restrict expenditures for
certain acquisitions and investments, require the maintenance of certain minimum
levels of net worth, working capital, cash and operating cash flow and require
the maintenance of certain liquidity, capitalization, debt, debt service and
operating cash flow ratios. The requirements of the Credit Agreements were
established in relation to the anticipated capital and financing needs of the
Company's affiliates and their anticipated results of operations. The Company is
currently in compliance with all covenants and anticipates it will continue to
meet the requirements of the Credit Agreements. CoBank has sold participations
in the Credit Agreements to two other financial institutions whose approval may
be required for waivers or other amendments to the Credit Agreements requested
by CIFC or the Company.
CIFC and CoBank are negotiating to increase the facility under the Credit
Agreements from the current $130,000,000 to $165,000,000. Of the increase of
$35,000,000, $10,000,000 will be available for loans
50
to affiliates of the Company to cover capital, operating and debt service
requirements and $25,000,000 will be available to fund the acquisitions of
additional cellular systems, subject to certain conditions. As a result of this
increase request, CoBank is currently soliciting potential participations in the
facility from commercial banks. The facility will also be amended, among other
things, to extend the termination date of the loans from December 31, 1995 to
December 31, 1996, to reduce the principal amortization period from five to four
years and to incorporate new financial covenants. The Company believes that it
will be successful in obtaining the foregoing amendments to the Credit
Agreements, although there can be no assurance that it will be able to do so.
The Company also believes that if necessary it could refinance and replace the
Credit Agreements with a secured bank facility provided by lenders other than
CoBank. However, there can be no assurance that the Company would be able to
secure any such facility.
THE 11 3/4% SENIOR SUBORDINATED DISCOUNT NOTES. The 11 3/4% Senior
Subordinated Discount Notes, which have an aggregate principal amount of
$176,651,000, were issued at a substantial discount from their principal amount
in an underwritten public offering that produced gross proceeds of approximately
$100,000,000. The 11 3/4% Senior Subordinated Discount Notes accrete to their
principal amount without the payment of cash interest until September 1, 1998;
thereafter, interest accrues on the 11 3/4% Senior Subordinated Discount Notes
at a rate of 11 3/4% per annum and is payable in cash on each March 1 and
September 1, commencing March 1, 1999. The 11 3/4% Senior Subordinated Discount
Notes mature on September 1, 2003.
The indenture governing the 11 3/4% Senior Subordinated Discount Notes (the
"Discount Notes Indenture") limits the ability of the Company and its
subsidiaries to, among other things, incur indebtedness, including (i)
indebtedness senior in right of payment to the 11 3/4% Senior Subordinated
Discount Notes and (ii) subordinated indebtedness of the Company's subsidiaries,
pay dividends or make other restricted payments, enter into certain transactions
with affiliates, consummate certain asset sales, enter into agreements that
restrict the ability of a subsidiary to pay dividends or make certain payments
to the Company, merge or consolidate with any other person or sell, assign,
transfer, lease or convey or otherwise dispose of all or substantially all of
the assets of the Company.
The 11 3/4% Senior Subordinated Discount Notes are general unsecured
obligations of the Company and are subordinate in right of payment to all Senior
Debt (as defined in the Discount Notes Indenture), including all amounts due
under the Credit Agreements. The 11 3/4% Senior Subordinated Discount Notes rank
senior in right of payment to the Notes.
DESCRIPTION OF THE NOTES
The Notes are to be issued under an Indenture, to be dated as of ,
1995 (the "Indenture"), between the Company and American Bank National
Association, as Trustee (the "Trustee"). The Indenture is subject to and
governed by the Trust Indenture Act of 1939, as amended. The statements under
this caption relating to the Notes and the Indenture are summaries and do not
purport to be complete, and where reference is made to particular provisions of
the Indenture, such provisions, including the definitions of certain terms, are
incorporated by reference as a part of such summaries, which are qualified in
their entirety by such reference. The form of the Indenture has been filed with
the Commission as an exhibit to the Registration Statement of which this
Prospectus is a part. References in this "Description of the Notes" to the
"Company" are to CommNet Cellular Inc., without including its subsidiaries.
GENERAL
The Notes will be unsecured obligations of the Company and will rank
subordinate in right of payment to all Senior Indebtedness of the Company,
including (i) the Credit Agreements, (ii) the 11 3/4% Senior Subordinated
Discount Notes and (iii) all other Indebtedness of the Company, whether
outstanding on the date of the Indenture or thereafter created, incurred or
assumed, unless such Indebtedness provides that it is not superior in right of
payment to the Notes. The Notes will rank PARI PASSU with the Company's 8.75%
Convertible Senior Subordinated Notes due 2001.
The Indenture provides that the Company may issue up to $125,000,000
aggregate principal amount of the Notes, of which $80,000,000 will be issued in
the Offering made hereby. After consummation of the
51
Offering, the Company may issue up to an additional $45,000,000 aggregate
principal amount of Notes under the Indenture. The Company has no current plans
to issue additional Notes. In the event that the Company issues additional
Notes, purchasers of the Notes in the Offering will experience a reduction in
the percentage of aggregate principal amount of the Notes then outstanding held
by such initial purchasers. See "-- Events of Default" and "-- Modifications and
Amendments."
The Notes will be issued in fully registered form only, without coupons, in
denominations of $1,000 and integral multiples thereof. Initially, the Trustee
will act as Paying Agent and Registrar for the Notes. The Notes may be presented
for registration of transfer and exchange at the offices of the Registrar, which
initially will be the Trustee's corporate trust office. The Company may change
any Paying Agent and Registrar without notice to holders.
PRINCIPAL, MATURITY AND INTEREST
The Notes offered hereby are limited in aggregate principal amount to
$80,000,000 and will mature on , 2005. Each Note will bear interest at
the rate of % per annum from , 1995 and interest will be payable in
cash semi-annually on each and , commencing , 1996,
to the persons who are registered holders at the close of business on each
and immediately preceding the applicable interest payment
date; provided, however, that in the event a majority in aggregate principal
amount of the outstanding 6 3/4% Convertible Subordinated Debentures (I.E., not
less than $37,374,000 aggregate principal amount) is converted by the holders
thereof on or prior to the Convertible Redemption Date (the "Conversion
Condition") into shares of the Company's Common Stock, from and after the
Convertible Redemption Date, the interest rate on the Notes will decrease .25%
to a rate of % per annum. The Company intends to redeem the 6 3/4%
Convertible Subordinated Debentures with the net proceeds from the Offering.
Holders of the 6 3/4% Convertible Subordinated Debentures have the right,
exercisable at any time on or prior to the Convertible Redemption Date for such
debentures, to convert such debentures into the Company's Common Stock at a
conversion price of $27.625 per share of Common Stock. The last reported sales
price of the Company's Common Stock on the Nasdaq National Market on June 27,
1995 was $27. At the close of business on such date, a total of $74,747,000 in
principal amount of the 6 3/4% Convertible Subordinated Debentures was
outstanding.
Interest on the Notes will accrue from the most recent date to which
interest has been paid or, if no interest has been paid, from the original date
of issuance. Interest will be computed on the basis of a 360-day year comprised
of twelve 30-day months. The Notes are not subject to any mandatory sinking
fund.
REDEMPTION AT THE COMPANY'S OPTION
The Notes may be redeemed at the Company's option upon notice as described
below, in whole or in part from time to time, at any time on or after ,
2000 at the following Redemption Prices (expressed as a percentage of the
principal amount) if redeemed during the 12-month period beginning of
the years set forth below, plus, in each case, accrued interest thereon to the
date of redemption:
REDEMPTION
YEAR PRICE
- -------------------------------------------------------------------- ----------
2000................................................................ %
2001................................................................ %
2002................................................................ %
and thereafter at a Redemption Price equal to 100% of the principal amount
redeemed.
Notice of intention to redeem Notes will be given to the holders of the
Notes in accordance with "Notices" below. Notice will be given not more than 60
nor less than 30 days prior to the Redemption Date.
Notice of redemption will specify the Redemption Date, the applicable
redemption price, and, in the case of partial redemption, the aggregate
principal amount of the Notes to be redeemed, the aggregate principal amount of
the Notes that will be outstanding after such partial redemption and the serial
numbers and the portions thereof called for redemption.
52
Any Note which is to be redeemed in part only shall be redeemed in principal
amounts of $1,000 or any integral multiple thereof. If less than all the Notes
are to be redeemed, the Trustee shall select the Notes or portions of the Notes
to be redeemed by such method as the Trustee shall deem fair and appropriate.
SUBORDINATION
Payment of the principal of and premium, if any, and interest on the Notes
is, to the extent set forth in the Indenture, subordinated in right of payment
to the prior payment in full of all Senior Indebtedness. Upon any payment or
distribution of assets to creditors upon any liquidation, dissolution, winding
up, reorganization, assignment for the benefit of creditors, marshalling of
assets or any bankruptcy, insolvency or similar proceedings of the Company, the
holders of all Senior Indebtedness will first be entitled to receive payment in
full of all amounts due or to become due thereon before the holders of the Notes
will be entitled to receive any payment with respect to the principal of or
premium, if any, or interest on the Notes. No payments on account of principal,
premium, if any, or interest in respect of the Notes may be made if (i) there
shall have occurred and be continuing a default in any payment with respect to
any Senior Indebtedness; or (ii) an event of default shall have occurred
resulting in the acceleration thereof; or (iii) an event of default in respect
to any Designated Senior Indebtedness shall have occurred permitting the holders
thereof to accelerate the maturity thereof which shall be the subject of an
Enforcement Notice (as defined below); or (iv) any judicial proceedings shall be
pending with respect to any such default; or (v) any of the Notes become due and
payable prior to the date on which they otherwise would have become due and
payable because of a default under the Indenture and such default or
acceleration under the Indenture constitutes a default with respect to any
outstanding issue of Designated Senior Indebtedness. "Enforcement Notice" for
purposes of the subordination provisions shall mean a written notice delivered
by any holder of an outstanding issue of Designated Senior Indebtedness which
shall state that facts constituting an event of default (other than a default in
payment) have occurred, describe in reasonable detail the nature of the event of
default and any facts constituting any other event of default (other than a
default in payment) then known to the holder of such Designated Senior
Indebtedness delivering such notice and shall indicate the intention of such
holder of Designated Senior Indebtedness, subject to such holder's right to
withdraw such notice, to initiate judicial proceedings with respect to any of
the events of default so identified. An Enforcement Notice may be withdrawn by
the holder of such Designated Senior Indebtedness at any time. An Enforcement
Notice shall be deemed to have been withdrawn and shall not affect any payments
on the Notes if the holder of such Designated Senior Indebtedness within 150
days of giving the Enforcement Notice to the Trustee does not commence and
diligently pursue a judicial proceeding with respect to any events of defaults
identified in such Enforcement Notice. After an Enforcement Notice is withdrawn
or deemed withdrawn, the Company shall promptly resume making any and all
payments on the Notes, including missed payments. The holders of any outstanding
issue of Designated Senior Indebtedness shall not be entitled to give more than
one Enforcement Notice with respect to all defaults known to such holders at the
time of giving any such Enforcement Notice during any consecutive 12-month
period; provided, however, that if an event of default with respect to such
Designated Senior Indebtedness has resulted in an Enforcement Notice and such
event of default has been waived or been cured by an amendment to the Designated
Senior Indebtedness, an Enforcement Notice may be given by any holder of such
Designated Senior Indebtedness within such 12-month period with respect to an
event of default relating to any term or condition of such waiver or amendment.
See "Events of Default" for the circumstances under which the failure to make
certain payments on Senior Indebtedness, or the acceleration of Senior
Indebtedness, would constitute a default under the Indenture.
For purposes of the subordination provisions, the payment, issuance or
delivery of cash, property or securities (other than stock and certain
subordinated securities of the Company) upon conversion, repurchase or other
acquisition of a Note will be deemed to constitute payment on account of the
principal of such Note.
By reason of the subordination provisions, in the event of insolvency,
holders of Notes may recover less, ratably, than holders of Senior Indebtedness.
53
"Senior Indebtedness" is defined in the Indenture as all amounts payable
under (i) the Credit Agreements; (ii) the Company's obligations under the
Guaranty; (iii) Capitalized Lease Obligations of the Company; (iv) Attributable
Debt; and (iv) all other Indebtedness of the Company whether outstanding on the
Issue Date or thereafter created, incurred or assumed, other than (a) the Notes;
and (b) any Indebtedness which provides or in respect of which any instrument
creating or evidencing such Indebtedness or pursuant to which the same is
outstanding it is provided that such Indebtedness is not superior in right of
payment to the Notes. Notwithstanding anything to the contrary in the foregoing,
Senior Indebtedness shall not include (i) Indebtedness that is represented by
Disqualified Capital Stock, (ii) any liability for federal, state, local or
other taxes owed or owing by the Company, (iii) Indebtedness of the Company to
any Subsidiary or other Affiliate of the Company, except for any such
Indebtedness that is pledged to secure Indebtedness Incurred pursuant to the
Credit Agreements, (iv) trade payables and (v) Indebtedness which when incurred
is without recourse to the Company or any Subsidiary.
"Designated Senior Indebtedness" means (i) the Indebtedness outstanding
under the Credit Agreements and the Guaranty, including letters of credit and
reimbursement obligations in respect thereof, (ii) the 11 3/4% Senior
Subordinated Discount Notes and (iii) any other Senior Indebtedness permitted
under the Indenture having a principal amount of at least $20,000,000 that is
designated as "Designated Senior Indebtedness" by written notice from the
Company to the Trustee.
After giving pro forma effect to the issuance of the Notes and the
application of the net proceeds therefrom, at March 31, 1995, the aggregate
outstanding principal amount of Senior Indebtedness of the Company would have
been approximately $185,000,000 (assuming all of the outstanding 6 3/4%
Convertible Subordinated Debentures are redeemed by the Company) and
$156,387,000 (assuming all of the outstanding 6 3/4% Convertible Subordinated
Debentures are converted by the holders thereof into shares of the Company's
Common Stock).
CERTAIN COVENANTS
LIMITATION ON INCURRENCE OF ADDITIONAL INDEBTEDNESS
The Company will not, and will not permit any of its Subsidiaries to, Incur
any Indebtedness (including Acquired Indebtedness), other than Permitted
Indebtedness. Notwithstanding the foregoing limitations, the Company and its
Subsidiaries may Incur Indebtedness if (i) no Default or Event of Default shall
have occurred and be continuing at the time of or as a consequence of the
Incurrence of such Indebtedness and (ii) after giving effect to the Incurrence
of such Indebtedness (and all other Indebtedness Incurred since the end of the
most recently completed fiscal quarter of the Company preceding the date of
determination), Indebtedness of the Company, calculated on a consolidated basis
in accordance with GAAP, shall not be more than the greater of (x) the product
of the EBITDA of the Company for the four most recent fiscal quarters for which
financial information is available multiplied by ten for the period beginning
with the Issue Date through July , 1997 and multiplied by eight thereafter and
(y) the product of Financed Pops as of the last day of such four fiscal quarter
period multiplied by $70.00. The calculations in the preceding sentence shall be
made assuming in the case of acquisitions or dispositions which occurred during
such four-quarter period or subsequent to such four-quarter period and on or
prior to the date of the transaction giving rise to the calculations referred to
in the preceding sentence, that such acquisitions or dispositions occurred (on a
pro forma basis) on the first day of such four-quarter period.
LIMITATION ON RESTRICTED PAYMENTS
The Company will not, directly or indirectly:
(i) declare or pay any dividend on, or make any distribution to the
holders of, any shares of the Company's Capital Stock (other than dividends
or distributions payable in its Capital Stock (other than Disqualified
Capital Stock) or in options, warrants or other rights to purchase Capital
Stock (other than Disqualified Capital Stock)), or
(ii) purchase, redeem or otherwise acquire or retire for value, Capital
Stock of the Company (including options, warrants or other rights to acquire
such Capital Stock), or
54
(iii) make any Investment other than a Permitted Investment (each of the
foregoing actions set forth in clauses (i) through (iii) being referred to
as a "Restricted Payment"); unless, at the time of such Restricted Payment,
and after giving effect thereto:
(a) no Default or Event of Default shall have occurred and be
continuing;
(b) after giving effect to such Restricted Payment (and all other
Restricted Payments made since the end of the most recently completed
fiscal quarter of the Company preceding the date of determination) and
the Incurrence of any Indebtedness the net proceeds of which are used to
finance such Restricted Payment (and such other Restricted Payments), the
Company would be permitted under the Indenture to Incur at least $1 of
additional Indebtedness, other than Permitted Indebtedness; and
(c) (1) after giving effect to such Restricted Payment, the aggregate
amount of all Restricted Payments (including those made pursuant to
clause (c)(2) below) made on or after July 1, 1995 shall not exceed the
sum of (i) the amount determined by subtracting (x) 1.5 times the
Consolidated Interest Expense of the Company for the period (taken as one
accounting period) from July 1, 1995 to the last day of the fiscal
quarter preceding the date of the Restricted Payment (the "Computation
Period") from (y) EBITDA of the Company for the Computation Period, plus
(ii) the aggregate net proceeds, including the fair market value of
property other than cash (as determined by the Board of Directors, whose
good faith determination shall be conclusive and evidenced by a
resolution filed with the Trustee), received by the Company from the
issuance or sale on or after the Issue Date of any shares of its Capital
Stock (excluding Disqualified Capital Stock, but including Capital Stock
issued upon the conversion of, or exchange for, any Indebtedness
convertible into or exchangeable for Capital Stock of the Company (other
than Disqualified Capital Stock) or options, warrants or rights to
purchase Capital Stock of the Company (other than Disqualified Capital
Stock)) to any Person (other than a Subsidiary of the Company); provided,
however, that in the event the Conversion Condition is satisfied, the
aggregate net proceeds received by the Company from the issuance and sale
of its Capital Stock in respect of the conversion of the 6 3/4%
Convertible Subordinated Debentures shall be excluded from the aggregate
net proceeds received by the Company pursuant to this clause (ii).
(2) The Company may make Restricted Payments not subject to
clauses (b) and (c)(1) above in an aggregate amount not to exceed
$10,000,000 on or after July 1, 1995.
For purposes of clause (c)(ii) above, the value of the aggregate net
proceeds received by the Company from the issuance or sale of its Capital Stock
upon conversion or exercise of any other securities convertible into or
exchangeable for Capital Stock of the Company will be deemed to be an amount
equal to (a) the sum of (i) (x) in the case of Indebtedness convertible into
shares of Capital Stock, the principal amount or accreted value (whichever is
less) of such Indebtedness on the date of such conversion or exchange or (y) in
the case of options, warrants or other rights to purchase shares of Capital
Stock, the cash proceeds, if any, received by the Company upon issuance of such
options, warrants or other rights, and (ii) the additional cash consideration,
if any, received by the Company upon conversion or exchange, less any payment on
account of fractional shares, minus (b) all expenses incurred in connection with
such issuance or sale.
Notwithstanding the foregoing, these provisions do not prohibit: (1) the
payment of any dividend or making of any distribution within 60 days after the
date of its declaration if the dividend or distribution would have been
permitted on the date of declaration; (2) the acquisition of Capital Stock
either (i) solely in exchange for shares of Qualified Capital Stock, or (ii)
through the application of net proceeds of a substantially concurrent sale for
cash (other than to a Subsidiary of the Company) of shares of Qualified Capital
Stock; (3) the elimination of fractional shares or warrants; and (4) the
purchase for value of shares of Capital Stock of the Company held by directors,
officers or employees upon death, disability, retirement, termination of
employment not to exceed $1,000,000; provided that in the case of clauses (2),
(3) and (4), no Default or Event of Default shall have occurred or be continuing
at the time of such payment or as a result thereof. In determining the aggregate
amount of Restricted Payments made subsequent to the Issue Date, amounts
expended pursuant to clauses (1), 2(ii), (3) and (4) shall be included in such
calculation.
55
LIMITATION ON TRANSACTIONS WITH AFFILIATES
The Company will not, and will not permit any of its Subsidiaries to,
directly or indirectly, enter into or permit to exist any transaction
(including, without limitation, the purchase, sale, lease or exchange of any
property or the rendering of any service) with or for the benefit of, an
Affiliate of the Company or any Subsidiary (other than transactions between the
Company and a wholly owned Subsidiary of the Company) (an "Affiliate
Transaction"), other than Affiliate Transactions on terms that are no less
favorable in the aggregate than those that might reasonably have been obtained
in a comparable transaction on an arm's-length basis from a person that is not
an Affiliate; provided that neither the Company nor any of its Subsidiaries
shall enter into an Affiliate Transaction or series of related Affiliate
Transactions involving value of $10,000,000 or more, unless a majority of
disinterested members of the Board of Directors of the Company determines in
good faith as evidenced by a Board Resolution that the terms are no less
favorable in the aggregate to the Company than those that might reasonably have
been obtained in a comparable transaction on an arm's-length basis from a Person
that is not an Affiliate.
REPURCHASE AT OPTION OF HOLDERS UPON CHANGE OF CONTROL
If there occurs any Change of Control (as defined below) with respect to the
Company, each holder of Notes shall have the right, at the holder's option, to
require the Company to repurchase all or any portion of such holder's Notes
(except that Notes must be repurchased in $1,000 denominations or integral
multiples thereof), on the date (the "Repurchase Date") that is 45 days after
the date of the Company Notice (as defined below) at a price equal to 101% of
the principal amount of the Notes to be repurchased (the "Repurchase Price"),
together with accrued interest, if any, to the Repurchase Date.
Within 30 days after the occurrence of a Change of Control, the Company is
obligated to give notice (the "Company Notice"), in the manner prescribed for
notices of redemption, of the occurrence of such Change of Control and of the
repurchase right arising in connection therewith. The Company must deliver a
copy of the Company Notice to the Trustee and holders of Senior Indebtedness.
The Company will comply with the requirements of Rule 14e-1 under the Exchange
Act and any other securities laws and regulations thereunder to the extent such
laws and regulations are applicable in connection with the repurchase of Notes
pursuant to a Change of Control. To exercise the repurchase right, holders of
Notes must deliver on or before the 30th day after the date of mailing the
Company Notice written notice to the Company (or an agent designated by the
Company for such purpose) and the Trustee of the holder's exercise of such
right, together with the Notes with respect to which the right is being
exercised, duly endorsed for transfer.
A "Change of Control" of the Company shall be deemed to have occurred at
such time as (i) any Person (including any syndicate or group deemed to be a
"person" under Section 13(d)(3) of the Exchange Act) is or becomes the
beneficial owner, directly or indirectly, through a purchase, merger or other
acquisition transaction or series of transactions, of more than 40% of the total
voting power of all shares of Capital Stock of the Company entitled to vote in
the election of directors, (ii) during any period of two consecutive years,
individuals who at the beginning of such period constituted the Board of
Directors of the Company (together with any new directors whose election by such
Board or whose nomination for election by the shareholders of the Company was
approved by a vote of a majority of the directors of the Company still in office
who were either directors at the beginning of such period or whose election or
nomination for election was previously so approved) cease for any reason to
constitute a majority of the Board of Directors of the Company then in office,
or (iii) the Company consolidates with or merges with or into another
corporation or conveys, transfers or leases all or substantially all of its
assets to any person, in either event pursuant to a transaction in which the
outstanding shares of capital stock of the Company entitled to vote in the
election of directors is changed into or exchanged for cash, securities or other
property (excluding, however, any such transaction where the outstanding shares
of the Company entitled to vote in the election of directors is changed into or
exchanged for (x) voting stock of the surviving or transferee corporation which
is neither Redeemable Stock nor Exchangeable Stock or (y) cash, securities and
other property in an amount which could be paid by the Company as a Restricted
Payment (and such amount will be treated as a Restricted Payment for all
purposes of the Indenture)). "Beneficial owner" shall be determined in
accordance with Rule 13d-3 promulgated by the Commission under the Exchange Act,
as in effect on the Issue Date.
56
Due to limitations on the Company's ability to repurchase Notes, there can
be no assurance that the Company will be able to repurchase the Notes upon a
Change of Control as required by the Indenture. See "Risk Factors --
Restrictions on Repurchases at Holder's Option."
Except as described above with respect to a Change of Control, the Indenture
will not contain provisions permitting the holders of the Notes to require the
Company to repurchase or redeem the Notes in the event of a takeover,
recapitalization or similar transaction. Subject to the limitations described
above or otherwise contained in the Indenture, the Company, its management or
its Affiliates could, in the future, enter into certain transactions, including
acquisitions, refinancings or other recapitalizations, that would not constitute
a Change of Control under the Indenture, but that could increase the amount of
indebtedness outstanding at such time or otherwise affect the Company's capital
structure or credit ratings.
LIMITATION ON DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES
The Company will not, and will not permit any of its Subsidiaries to,
directly or indirectly, create or otherwise cause or permit to exist, or become
effective any encumbrance or restriction on the ability of any Subsidiary to (a)
pay dividends or make any other distributions on its Capital Stock, (b) make
loans or advances or to pay any Indebtedness or other obligation owed to the
Company or a Subsidiary of the Company or (c) transfer any of its properties or
assets to the Company, except for such encumbrances or restrictions existing
under or by reason of: (1) applicable law; (2) the Indenture; (3) customary non-
assignment provisions of any lease governing a leasehold interest of the Company
or any Subsidiary of the Company; (4) any instrument governing Acquired
Indebtedness, which encumbrance or restriction is not applicable to the Company
or any Subsidiary of the Company, or the properties or assets of the Company or
any Subsidiary of the Company, other than the Person, the properties or assets
so acquired and which encumbrance or restriction was not put in place in
anticipation of or in connection with such acquisition; (5) agreements existing
on the Issue Date; (6) security agreements permitted by the Indenture securing
Indebtedness permitted by the Indenture to the extent such security agreements
restrict the transfer of the property subject thereto; (7) the Credit Agreements
as in effect on the Issue Date; or (8) an agreement effecting a refinancing,
modification, replacement, renewal, restatement, refunding, deferral, extension,
substitution, supplement, reissuance or resale of Indebtedness issued, assumed
or incurred pursuant to an agreement referred to in clause (2), (4), (5), (6) or
(7) above; provided, however, that the provisions relating to such encumbrance
or restriction contained in any such refinancing, replacement or substitution
agreement are not less favorable to the Company in any material respect in the
reasonable judgment of the Board of Directors of the Company than the provisions
relating to such encumbrance or restriction contained in agreements referred to
in such clause (2), (4), (5), (6) or (7).
PROHIBITION ON INCURRENCE OF SUBSIDIARY INDEBTEDNESS AND
ISSUANCE AND SALE OF PREFERRED STOCK BY SUBSIDIARIES
After the Issue Date, the Company shall not permit any of its Subsidiaries
to incur any Indebtedness other than (i) Indebtedness incurred pursuant to a
Senior Secured Credit Facility, (ii) Vendor Financing Indebtedness, and (iii)
Intercompany Indebtedness. After the Issue Date, the Company shall not permit
any of its Subsidiaries to issue any Preferred Stock (other than to the Company
or a Wholly Owned Subsidiary of the Company).
LIMITATION ON LIENS WITH RESPECT TO PARI PASSU OR SUBORDINATED INDEBTEDNESS
The Company will not, and will not permit any Subsidiary of the Company to
incur as security for any Pari Passu Indebtedness or Subordinated Indebtedness
(including any assumption, guarantee or other liability with respect thereto by
any Subsidiary of the Company), any Lien of any kind upon any property or assets
(including any intercompany notes) of the Company or any Subsidiary of the
Company, or any income or profits therefrom, unless the Notes are directly
secured equally and ratably with (or prior to in the case of Subordinated
Indebtedness) the obligation or liability secured by such Lien, except for any
Lien securing Acquired Indebtedness; provided that any such Lien only extends to
the assets that were subject to such Lien securing such Acquired Indebtedness
prior to the related acquisition by the Company.
57
ADDITIONAL COVENANTS
The Indenture also contains covenants with respect to, among others, the
following matters: (i) payment of principal and interest; (ii) maintenance of an
office or agency in the City of New York; (iii) arrangements regarding the
handling of money held in trust; (iv) maintenance of corporate existence and (v)
the provision of financial information.
MERGER OR SALE OF ASSETS
The Company will not, in any transaction or series of transactions,
consolidate with or merge with or into any other Person or convey, transfer or
lease its properties and assets substantially as an entirety to any Person, and
the Company may not permit any Person to consolidate with or merge into the
Company or convey, transfer or lease its properties and assets substantially as
an entirety to the Company, unless:
(1) in case the Company will consolidate with or merge into another
Person or convey, transfer or lease its properties and assets substantially
as an entirety to any Person, such Person (any such surviving Person or
transferee Person being the "Surviving Person") shall be a corporation or
partnership, shall be organized and validly existing under the laws of the
United States of America or any political subdivision thereof and shall
expressly assume by supplemental indenture the due and punctual payment of
the principal of and premium, if any, and interest on all the Notes and the
performance of every covenant of the Indenture on the part of the Company to
be performed or observed; and
(2) immediately after giving effect to such transaction, no Event of
Default, and no event which, after notice or lapse of time or both, would
become an Event of Default, shall have happened and be continuing; and
(3) the Company or the Surviving Person, as the case may be, after
giving effect to such transactions or series of transactions on a pro forma
basis (including any Indebtedness Incurred or anticipated to be Incurred in
connection with or in respect of such transaction or series of transactions
) could Incur $1.00 of additional Indebtedness (other than Permitted
Indebtedness) under the "Limitation on Incurrence of Additional
Indebtedness" covenant described above; provided, however, that the
foregoing clause (3) shall not prohibit the merger of a Wholly Owned
Subsidiary into the Company.
EVENTS OF DEFAULT
The following will be "Events of Default" under the Indenture:
(i) failure to pay principal of or premium, if any, on any Note when due
(upon acceleration, optional redemption, required purchase or otherwise);
(ii) failure to pay any interest on any Note when due and payable for 30
days;
(iii) (a) failure to perform any covenant or agreement of the Company in
the Indenture (other than a default in the performance, or breach, of a
covenant or agreement which is specifically dealt with in clause (i) or (ii)
or in clause (b) of this clause (iii)), for 30 days after written notice has
been given as provided in the Indenture; or (b) failure of the Company to
comply with its obligations under "Merger or Sale of Assets" or "Repurchase
at Option of Holders upon Change of Control" above;
(iv) default or defaults under any mortgage, indenture or instrument
under which there may be issued or by which there may be secured or
evidenced any Indebtedness of the Company (or the payment of which is
guaranteed by the Company) whether such indebtedness or guarantee now exists
or is created after the date of the Indenture which default (a) is caused by
a failure to pay when due principal or interest on such Indebtedness within
the grace period provided in such Indebtedness (a "Payment Default") or (b)
results in the acceleration of such Indebtedness prior to its maturity and,
in each case, the principal amount of any such Indebtedness, together with
the principal amount of any other such Indebtedness under which there has
been a Payment Default or the maturity of which has
58
been so accelerated, aggregates $10,000,000 and such Payment Default or
acceleration of Indebtedness has not been rescinded or annulled within 10
days after written notice has been given as provided in the Indenture;
(v) one or more judgments in an aggregate amount in excess of
$10,000,000 shall have been rendered against the Company or any of its
Subsidiaries, and such judgments remain undischarged or unstayed for a
period of 60 days after such judgment or judgments become final and
non-appealable; and
(vi) certain events in bankruptcy, insolvency or reorganization with
respect to the Company shall have occurred. Subject to the provisions of the
Indenture relating to the duties of the Trustee in case an Event of Default
shall occur and be continuing, the Trustee will be under no obligation to
exercise any of its rights or powers under the Indenture at the request or
direction of any of the holders, unless such holders shall have offered to
the Trustee reasonable indemnity. Subject to such provisions for the
indemnification of the Trustee, the holders of a majority in aggregate
principal amount of the Notes then outstanding may direct the time, method
and place of conducting any proceeding for any remedy available to the
Trustee or exercising any trust or power conferred on the Trustee.
If an Event of Default (other than as specified in clause (vi) above) shall
occur and be continuing, either the Trustee or the holders of at least 25% in
aggregate principal amount of the Notes then outstanding may, and the Trustee,
upon the request of the holders of not less than 25% in aggregate principal
amount of Notes outstanding, shall, accelerate the maturity of all Notes. Such
acceleration may be annulled by the action of the holders of a majority in
aggregate principal amount of the Notes then outstanding. If an Event of Default
specified in clause (vi) above with respect to the Company occurs and is
continuing, then all unpaid principal and accrued interest on all Notes
outstanding shall IPSO FACTO become and be immediately due and payable without
any declaration or other act on the part of the Trustee or any other holder.
No holder of any Note will have any right to institute any proceeding with
respect to the Indenture or for any remedy thereunder unless such holder shall
have previously given to the Trustee written notice of a continuing Event of
Default and unless the holders of at least 25% in aggregate principal amount of
the Notes then outstanding shall have made written request, and offered
reasonable indemnity, to the Trustee to institute such proceeding as trustee,
and the Trustee shall not have received from the holders of a majority in
aggregate principal amount of the Notes a direction inconsistent with such
request and shall have failed to institute such proceeding within 60 days.
However, such limitations do not apply to a suit instituted by a holder of a
Note for the enforcement of payment of the principal of and premium, if any, or
interest on such Note on or after the respective due dates expressed in such
Note.
The Company will be required to furnish to the Trustee annually a statement
as to the performance by the Company of certain of its obligations under the
Indenture and as to any default in such performance.
DEFEASANCE AND COVENANT DEFEASANCE
DEFEASANCE AND DISCHARGE
Under the terms of the Indenture, the Company at its option will be
discharged from all of its obligations with respect to the Notes (except for
certain obligations to exchange or register the transfer of Notes, to replace
stolen, lost or mutilated Notes, to maintain paying agencies and to hold moneys
in trust) upon the deposit in trust for the benefit of the holders of the Notes
of money or U.S. Government Obligations (as such term is defined in the
Indenture), or both, which through the payment of principal and interest in
respect thereof in accordance with their terms, will provide money in an amount
sufficient to pay the principal of and interest on the Notes in accordance with
the terms of the Indenture. Such defeasance and discharge may occur only if,
among other things, the Company has delivered to the Trustee an opinion of
counsel to the effect that the Company has received from or there has been
published by the Internal Revenue Service a ruling, or there has been a change
in tax law, in either case to the effect that holders of the Notes will not
recognize gain or loss for Federal income tax purposes as a result of such
deposit, defeasance or discharge and will be subject to Federal income tax on
the same amounts, in the same manner and at the same time as would have been the
case if such deposit, defeasance and discharge were not to occur.
59
DEFEASANCE OF CERTAIN COVENANTS
Under the terms of the Indenture, the Company may omit to comply with
certain covenants of the Indenture including those described under "Certain
Covenants" and the occurrence of certain Events of Default, which are described
above in clauses (iii)(a), (iii)(b), (iv) and (v) under "Events of Default" will
not be deemed to be or result in an Event of Default. The Company, in order to
exercise such options, will be required to deposit, in trust for the benefit of
the holders of such Notes, money or U.S. Governmental Obligations, or both,
which, through the payment of principal and interest in respect thereof in
accordance with their terms will provide money in an amount sufficient to pay
the principal of and interest on the Notes in accordance with the terms of the
indenture. The Company will also be required to, among other things, deliver to
the Trustee an opinion of counsel to the effect that holders of the Notes will
not recognize gain or loss for Federal income tax purposes as a result of such
deposit and defeasance and will be subject to Federal income tax on the same
amounts, in the same manner and at the same time as would have been the case if
such deposit and defeasance were not to occur. In the event that the Company
exercised this option and the Notes were declared due and payable because of any
Event of Default or became payable on any Redemption Date at the option of the
Company, the amount of money and U.S. Government Obligations so deposited in
trust would be sufficient to pay amounts due on the Notes at the time of their
final maturity but may not be sufficient to pay amounts due on the Notes at the
time of acceleration or redemption. In such case, the Company shall remain
liable for such payments.
MODIFICATIONS AND AMENDMENTS
From time to time the Company and the Trustee, without the consent of the
holder of any Note, may modify or amend the Indenture for certain specified
purposes, including (i) adding to the covenants of the Company for the benefit
of the holders of Notes or surrendering any right or power conferred upon the
Company; (ii) evidencing the succession of another Person to the Company; or
(iii) curing any ambiguity or correcting any provision which the Company and the
Trustee may deem necessary or desirable and which will not adversely affect the
interests of the holders of Notes in any material respect.
Modifications and amendments of the Indenture also may be made, and past
defaults by the Company may be waived, with the consent of the holders of not
less than a majority in aggregate principal amount of the Notes then
outstanding; however, no such modification, amendment or waiver may, without the
consent of the holder of each Note affected thereby, (i) change the final
maturity of the principal of, or any installment of interest on, any Notes; (ii)
reduce the principal amount of, or the premium, if any, or interest on, any
Note; (iii) change the currency of payment of principal of, or premium or
interest on, any Note; (iv) modify the obligations of the Company to maintain
offices or agencies in New York City; (v) impair the right to institute suit for
the enforcement of any payment on or with respect to any Note; (vi) modify the
subordination provisions in a manner adverse to the holders of the Notes; or
(vii) reduce the above-stated percentage of Notes necessary to modify or amend
the Indenture or waive any past default.
CANCELLATION
All Notes which are redeemed or purchased by the Company will forthwith be
canceled and cannot be reissued or resold.
NOTICES
Notices to holders of Notes will be given by mail to the addresses of such
holders as they appear in the register. Such notices will be deemed to have been
given on the date of such mailing.
REPLACEMENT OF NOTES
Notes that become mutilated, destroyed, stolen or lost will be replaced by
the Company at the expense of the holder upon delivery to the Trustee of the
Notes or evidence of the loss, theft or destruction thereof satisfactory to the
Company and the Trustee. In the case of a lost, stolen or destroyed Note an
indemnity satisfactory to the Trustee and the Company may be required at the
expense of the holder of such Note before a replacement Note will be issued.
60
CONCERNING THE TRUSTEE
The Company has appointed American Bank National Association as the Trustee
and Registrar and as the paying agent for the Notes.
TRANSFER AND EXCHANGE
At the option of the holder upon request confirmed in writing, and subject
to the terms of the Indenture, Notes are exchangeable into an equal aggregate
principal amount of Notes of different authorized denominations.
Notes may be presented for exchange and registration of transfer (with the
form of transfer endorsed thereon duly executed), at the office of any transfer
agent or at the office of the Registrar, without service charge and upon payment
of any taxes and any other governmental charges as described in the Indenture.
Any registration of transfer or exchanges will be effected upon the transfer
agent or the Registrar, as the case may be, being satisfied with the documents
of title and identity of the person making the request, and subject to such
reasonable regulations as the Company, transfer agent and the registrar may
implement from time to time.
The Company has initially appointed as Registrar the Trustee acting through
its corporate trust offices in New York City. The Company reserves the right to
vary or terminate the appointment of the Registrar or of any transfer agent or
to appoint additional or other registrars or transfer agents or to approve any
change in the office through which any registrar or transfer agent acts;
provided that there will at all times be a registrar in New York City.
In the event of a redemption in part, the Company will not be required (i)
to register the transfer of, or exchange, Notes for a period of 15 days
immediately preceding the date notice is given identifying the serial numbers of
the Notes called for such redemption; or (ii) to register the transfer of, or
exchange, any such Note or portion thereof, called for redemption.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms contained in
the Indenture. Reference is made to the Indenture for the full definition of all
such terms, as well as any other terms used herein for which no definition is
provided.
"Acquired Indebtedness" means Indebtedness of a Person or any of its
Subsidiaries existing at the time such Person becomes a Subsidiary of the
Company or assumed in connection with the acquisition of assets from each Person
and not incurred by such Person in connection with or in anticipation or
contemplation of, such Person becoming a Subsidiary of the Company or such
acquisition.
"Affiliate" of any specified Person means any other Person who directly or
indirectly through one or more intermediaries controls, or is controlled by, or
is under common control with, such specified Person. The term "control" means
the possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of a Person, whether through the
ownership of voting securities, by contract or otherwise; and the terms
"affiliated", "controlling" and "controlled" have meanings correlative to the
foregoing. For purposes of the covenant "Limitation on Transactions with
Affiliates," the term "affiliate" shall include any Person who, as a result of
any transaction described in the "Limitation on Transactions with Affiliates"
covenant, would become an Affiliate.
"Asset Sale" means the sale, lease (other than an operating lease),
assignment or other disposition (including, without limitation, dispositions
pursuant to Sale and Leaseback Transactions) by the Company or one of its
Subsidiaries to any Person other than the Company or one of its Subsidiaries of
(i) any capital stock of any Subsidiary, or (ii) all or substantially all of the
properties and assets of any division or line of business of the Company or any
Subsidiary of the Company. For the purposes of this definition, the term "Asset
Sale" shall not include the sale or other disposition of Capital Stock of the
Company.
"Attributable Debt" in respect of a Sale and Leaseback Transaction means, at
the time of determination, the present value (discounted at the interest rate
implicit in the lease, compounded semi-annually) of the obligation of the lessee
of the property subject to such Sale and Leaseback Transaction for rental
61
payments during the remaining term of the lease included in such transaction
including any period for which such lease has been extended or may, at the
option of the lessor, be extended or until the earliest date on which the lessee
may terminate such lease without penalty or upon payment of penalty (in which
case the rental payments shall include such penalty), after excluding all
amounts required to be paid on account of maintenance and repairs, insurance,
taxes, assessments, water, utilities and similar charges.
"Capital Lease" means, as applied to any Person, any lease of any property
(whether real, personal or mixed) by that Person as lessee which, in conformity
with generally accepted accounting principles, is accounted for as a capital
lease on the balance sheet of such Person.
"Capitalized Lease Obligation" means the discounted present value of the
rental obligation under any Capital Lease.
"Capital Stock" means (i) with respect to any Person, any and all shares,
interests, participation or other equivalents (however designated) of corporate
stock, including each class of common stock and preferred stock of such Person
and (ii) with respect to any other Person formed other than as a corporation,
any and all partnership or other equity interest of such other Person.
"Cash Equivalents" means (i) marketable direct obligations issued by, or
unconditionally guaranteed by, the United States Government or issued by any
agency thereof and backed by the full faith and credit of the United States, in
each case maturing within one year from the date of acquisition thereof, (ii)
marketable direct obligations issued by any state of the United States of
America or any political subdivision of any such state or any public
instrumentality thereof maturing within one year from the date of acquisition
thereof and, at the time of acquisition, having one of the two highest ratings
obtainable from either Standard & Poor's Corporation or Moody's Investors
Service, (iii) commercial paper maturing no more than one year from the date of
creation thereof and, at the time of acquisition, having a rating of at least
A-1 from Standard & Poor's Corporation or at least P-1 from Moody's Investors
Service, (iv) certificates of deposit or bankers' acceptances maturing within
one year from the date of acquisition thereof issued by any commercial bank
organized under the laws of the United States of America or any state thereof or
the District of Columbia or any U.S. branch of a foreign bank having at the date
of acquisition thereof combined capital and surplus of not less than $250
million, (v) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clause (i) above entered into
with any bank meeting the qualifications specified in clause (iv) above, (vi)
investments in money market funds which invest substantially all their assets in
securities of the types described in clauses (i) through (v) above, and (vii)
corporate debt obligations maturing within one year from the date of acquisition
thereof and, at the time of acquisition, having an investment grade rating from
Standard & Poor's Corporation and Moody's Investors Service.
"Consolidated Interest Expense" means, for any period, the amount of
interest in respect of Indebtedness (including amortization of original issue
discount, amortization of debt issuance costs, non-cash interest payments on any
Indebtedness, the interest portion of any deferred payment obligation and the
interest component of rentals in respect of any Capitalized Lease Obligation
paid, accrued or scheduled to be paid or accrued by such Person during such
period), determined on a consolidated basis in accordance with GAAP. For
purposes of this definition, interest on a Capitalized Lease Obligation shall be
deemed to accrued at an interest rate reasonably determined by such Person to be
the rate of interest implicit in such Capitalized Lease Obligation in accordance
with GAAP consistently applied.
"Consolidated Net Income (Loss)" means, with respect to any Person, for any
period, the consolidated net income (or loss) of such Person on a consolidated
basis for such period as determined in accordance with GAAP consistently applied
adjusted, to the extent included in calculating such net income, by excluding,
without duplication, (i) all extraordinary gains or losses (net of fees and
expenses relating to the transaction giving rise thereto) and the non-recurring
cumulative effect of accounting changes, (ii) the portion of net income (or
loss) of such Person and its consolidated Persons allocable to minority
interests in unconsolidated Persons to the extent that cash dividends or
distributions have not actually been received by such Person or one of its
consolidated Persons, (iii) net income (or loss) of any Person combined with
such Person or one of its consolidated Persons on a "pooling of interests" basis
attributable to any period prior to the date of combination, (iv) gains or
losses (on an after tax basis) in respect of any Asset Sales by such Person or
62
one of its consolidated Persons (net of fees and expenses relating to the
transaction given rise thereto), and (v) all management fees, or other income
relating to services that are in the nature of management, corporate overhead or
administrative services, to the extent cash is not actually received by such
Person with respect to such services.
"Conversion Condition" means the conversion of a majority in aggregate
principal amount (i.e. not less than $37,374,000 aggregate principal amount) of
the Company's outstanding 6 3/4% Convertible Subordinated Debentures due 2009 by
the holders thereof on or prior to the Convertible Redemption Date into shares
of the common stock of the Company.
"Convertible Redemption Date" means 11:00 a.m. New York City time on the
date on which the option to convert the 6 3/4% Convertible Subordinated
Debentures into the Common Stock of the Company shall terminate, which shall in
no event be later than July 31, 1995.
"Credit Agreements" means the Amended and Second Restated Loan Agreement for
RSAs, dated as of March 31, 1993, as amended by Amendment No. 1 thereto dated as
of August 2, 1993 and Amendment No. 2 thereto dated as of February 22, 1994,
between Cellular, Inc. Financial Corporation and National Bank for Cooperatives
(now known as CoBank, ACB) and the Amended and Restated Loan Agreement for MSAs,
dated as of March 31, 1993, as amended by Amendment No. 1 thereto dated as of
August 2, 1993 and Amendment No. 2 thereto dated as of February 22, 1994 between
Cellular, Inc. Financial Corporation and National Bank for Cooperatives (now
known as CoBank, ACB) and any related notes, any related security agreements,
any related letters of credit and any other related documents as such agreements
may be amended, supplemented or modified from time to time including any and all
refinancings, modifications, replacements, renewals, restatements, refundings,
deferrals, extensions, substitutions, supplements or reissuances, including any
agreement increasing the amount of Indebtedness incurred thereunder or available
to be borrowed thereunder, provided that on the date such Indebtedness is
Incurred it would not be prohibited by the covenant described under the caption
"Limitation on Incurrence of Additional Indebtedness" above.
"Default" means an event or condition the occurrence of which is, or with
the lapse of time or the giving of notice or both would be, an Event of Default.
"Disqualified Capital Stock" means any Capital Stock which, by its terms (or
by the terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or is redeemable
at the sole option of the holder thereof, in whole or in part, on or prior to
the final maturity date of the Notes.
"Disqualified Pops" means Pops (to the extent such Pops are included in Net
Company Pops) in those MSAs and RSAs in which the Company directly or indirectly
has an ownership interest in the entity licensed by the FCC to operate a
cellular telephone system in such MSAs and RSAs, to which entity a Person other
than the Company, a Wholly Owned Subsidiary of the Company or the lender(s)
under a Senior Secured Credit Facility pursuant to which the Company or a Wholly
Owned Subsidiary of the Company is the primary obligor or guarantor of all
obligations thereunder, as of the date of determination, directly or indirectly
provides debt financing.
"EBITDA" means, for any Person, for any period, an amount equal to:
(A) the sum of (i) Consolidated Net Income (Loss) for such period, plus
(ii) the provision for taxes for such period based on income or profits to
the extent such income or profits were included in computing Consolidated
Net Income (Loss) and any provision for taxes utilized in computing net loss
under clause (i) hereof, plus (iii) Consolidated Interest Expense for such
period, plus (iv) depreciation for such period on a consolidated basis, plus
(v) amortization of intangibles for such period on a consolidated basis,
plus (vi) any other non-cash items reducing Consolidated Net Income (Loss)
for such period, all determined in accordance with GAAP consistently
applied, minus
(B) the sum of (i) all non-cash items increasing Consolidated Net Income
for such period, and (ii) interest income for such period, all for such
Person on a consolidated basis determined in accordance with GAAP
consistently applied.
63
"Exchangeable Stock" of any issuer means any Capital Stock which is
exchangeable or convertible into a debt security of such issuer or any of its
Subsidiaries.
"Financed Pops" means the sum of, without duplication, (i) Net Company Pops,
plus (ii) Secured Pops, minus (iii) Disqualified Pops.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as approved by a significant segment of the accounting profession
which are in effect in the United States; provided, however, that for purposes
of determining compliance with covenants in the Indenture "GAAP" means such
generally accepted accounting principles as in effect from time to time.
"Guaranty" means the Amended and Second Restated Guaranty dated March 31,
1993, as amended by Amendment No. 1 thereto dated as of August 2, 1993 and
Amendment No. 2 thereto dated as of February 22, 1994, given by the Company for
National Bank for Cooperatives (now known as CoBank ACB) and any related
security agreement, as in effect or amended from time to time, including any and
all refinancings, modifications, replacements, renewals, restorations,
deferrals, extensions, substitutions, supplements or reissuances, including any
agreement increasing the amount of Indebtedness guaranteed thereunder or
available to be guaranteed thereunder, provided that on the date such
Indebtedness is Incurred it would not be prohibited by the covenant described
under the caption "Limitation on Incurrence of Additional Indebtedness" above.
"Incur" means, with respect to any Indebtedness or other obligation of any
Person, to create, issue, incur (by conversion, exchange or otherwise), assume,
guarantee or otherwise become liable in respect of such Indebtedness or other
obligation or the recording, as required pursuant to GAAP or otherwise, of any
such Indebtedness or other obligation on the balance sheet of such Person (and
"Incurrence", "Incurred", "Incurrable" and "Incurring" shall have meanings
correlative to the foregoing); provided, however, that a change in GAAP that
results in an obligation of such Person that exists at such time becoming
Indebtedness shall not be deemed an Incurrence of such Indebtedness.
Indebtedness otherwise Incurred by a Person before it becomes a Subsidiary of
the Company will be deemed to have been Incurred at the time it becomes such a
Subsidiary. Neither the accrual of interest (including the issuance of "pay in
kind" securities or similar instruments in respect of such accrued interest)
pursuant to the terms of Indebtedness incurred in compliance with the
"Limitation on Incurrence of Additional Indebtedness" covenant, nor the
accretion of original issue discount, nor the mere extension of the maturity of
any Indebtedness shall be deemed to be an Incurrence of Indebtedness.
"Indebtedness" of a Person means without duplication (a) all debt of such
Person which is (i) for money borrowed or (ii) evidenced by a note or similar
instrument given in connection with the acquisition of any businesses,
properties or assets of any kind, but excluding any other trade accounts payable
or accrued liabilities arising in the ordinary course of business, (b)
Capitalized Lease Obligations, (c) Attributable Debt, (d) all obligations of
such Person under Interest Swap and Hedging Obligations, (e) Disqualified
Capital Stock of such Person, (f) any debt or obligation of others secured by a
Lien on the assets of such Person, whether or not such debt or obligation is
assumed or guaranteed by such Person, (g) any debt or obligations assumed or
guaranteed by such Person (but only to the extent assumed or guaranteed by such
Person) if the debt or obligation of the other Person is of the type referred to
in clause (a), (b), (c), (d) or (e) and (h) amendments, renewals, extensions,
modifications and refundings of any debt or obligations referred to in clause
(a), (b), (c), (d) or (e). The outstanding principal amount on any date of any
Indebtedness issued with original issue discount is the face amount of such
Indebtedness less the remaining unamortized portion of the original issue
discount of such Indebtedness on such date.
"Intercompany Indebtedness" means (i) Indebtedness Incurred by the Company
or a Subsidiary from a Wholly Owned Subsidiary of the Company, (ii) loans and
advances from the Company to a Subsidiary made in the ordinary course of
business and (iii) loans and advances from the Company to a Wholly Owned
Subsidiary of the Company.
64
"Interest Swap and Hedging Obligations" means any obligations of any Person
pursuant to any interest rate swaps, caps, collars and similar arrangements
providing protection against fluctuations in interest rates. For purposes of the
Indenture, the amount of such obligations shall be the amount determined in
respect thereof as of the end of the then most recently ended fiscal quarter of
such Person, based on the assumption that such obligation had terminated at the
end of such fiscal quarter, and in making such determination, if any agreement
relating to such obligation provides for the netting of amounts payable by and
to such Person thereunder or if any such agreements provides for the
simultaneous payment of amounts by and to such Person, then in each such case,
the amount of such obligations shall be the net amount so determined, plus any
premium due upon default by such Person.
"Investment" means any transfer or delivery of cash, stock or other property
of value in exchange for Indebtedness, stock or other security or ownership
interest by way of loan, advance or capital contribution. The amount of any
non-cash Investment shall be the fair market value of such Investment, as
determined in good faith by management of the Company unless the fair market
value of such Investment exceeds $5,000,000, in which case such fair market
value shall also be determined in good faith by the Board of Directors or other
equivalent governing body of the Company at the time such Investment is made.
"Issue Date" means the date of original issuance of the Notes.
"Lien" means any mortgage, charge, pledge, lien (statutory or otherwise),
security interest, hypothecation or other encumbrance upon or with respect to
any property of any kind, real or personal, movable or immovable, now owned or
hereafter acquired.
"Net Company Pops" means the aggregate number of Pops in those MSAs and RSAs
in which the Company directly or indirectly has an ownership interest in the
entity licensed by the FCC to operate a cellular telephone system in those MSAs
and RSAs, multiplied by the Company's net ownership interest in such entity.
"Obligations" means all obligations for principal, premium, interest,
penalties, fees, indemnifications, reimbursements, damages and other liabilities
payable under the documentation governing any Indebtedness.
"Pari Passu Indebtedness" means any Indebtedness of the Company that is pari
passu in right of payment to the Notes.
"Permitted Indebtedness" means (i) the Notes issued pursuant to the
Indenture in an aggregate principal amount not to exceed $125,000,000, (ii)
Indebtedness of the Company and its Subsidiaries outstanding on the Issue Date
reduced by the amount of any scheduled amortization payments or mandatory
prepayments when actually paid or permanent reductions thereon, (iii)
Indebtedness Incurred under or pursuant to the Credit Agreements in an aggregate
principal amount at any time outstanding not to exceed $165,000,000, LESS the
amount of Indebtedness under the Credit Agreements exchanged, extended,
refinanced, renewed, replaced, substituted for or with the proceeds of
Indebtedness Incurred pursuant to clause (v) below, (iv) additional Indebtedness
incurred for any purpose not to exceed, at any time outstanding, $20,000,000,
(v) Indebtedness created, Incurred, issued, assumed or given in exchange for, or
the proceeds of which are used substantially concurrently to, extend, refinance,
renew, replace, substitute or refund such Indebtedness, including any additional
Indebtedness Incurred to pay premiums and fees in connection therewith (the
"Refinancing Indebtedness"); provided that (A) the principal amount of such
Refinancing Indebtedness shall not exceed the outstanding principal amount of
Indebtedness so extended, refinanced renewed replaced, substituted or refunded
plus any amounts Incurred to pay premiums and fees in connection therewith; and
(B) if the Weighted Average Life to Maturity of the Indebtedness so extended,
refinanced, renewed, replaced, substituted or refunded is equal to or greater
than the Weighted Average Life to Maturity of the Notes, then the Refinancing
Indebtedness shall have no installments of principal (or redemption payment)
scheduled to come due on or prior to the stated maturity of the Notes, provided
that subclause (B) of this clause (v) will not apply to any refunding or
refinancing of the Credit Agreements, and (vi) Intercompany Indebtedness.
65
"Permitted Investments" means in the case of the Company or its
Subsidiaries, (i) an Investment related to the business of the Company and its
Subsidiaries as it is conducted on the Issue Date, including, but not limited,
joint ventures existing on the Issue Date, (ii) Investments in the Company by
any Subsidiary or Investments by the Company or any Subsidiary (including
acquisitions) in any other Person, if after giving effect of any such
Investment, such Person would be a Wholly Owned Subsidiary of the Company, (iii)
Investments in cash and Cash Equivalents, and (iv) Investments in Productive
Assets.
"Person" means an individual, partnership, corporation, unincorporated
organization, trust or joint venture, or a governmental agency or political
subdivision thereof.
"Pops" means the estimated total population of a Metropolitan Statistical
Area or a Rural Service Area, based on the most recently available Strategic
Marketing Inc. population estimates or, if Strategic Marketing Inc. no longer
publishes such information, other similar market service of general acceptance
in the cellular telephone industry.
"Preferred Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated) of such
Person's preferred or preference stock whether now outstanding or issued after
the Issue Date, and including, without limitation, all classes and series of
preferred or preference stock of such Person.
"Productive Assets" means assets (including Capital Stock) of a kind used or
usable in the business of the Company and its Subsidiaries as conducted on the
Issue Date.
"Purchase Money Obligations" means indebtedness of any Person secured by
Liens (i) on property purchased, acquired or constructed after the Issue Date
and used in the ordinary course of business and (ii) securing the payment of all
or any part of the purchase price or construction cost of such assets and
limited to the property so acquired and improvements thereof; provided that the
aggregate principal amount of Indebtedness secured thereby shall not, at the
time such Indebtedness is Incurred, exceed 100% of the purchase price to such
Person of the assets subject to such Lien.
"Qualified Capital Stock" means any stock that is not Disqualified Capital
Stock.
"Sale and Leaseback Transaction" of any Person means any direct arrangement
with any other Person or to which such other Person is a party providing for the
leasing by such Person of any property, whether owned by such Person at the
Issue Date or later acquired, which has been or is to be sold or transferred by
such Person to such other Person or to any other Person from whom funds have
been or are to be advanced by such other Person on the security of such
property.
"Secured Pops" means the aggregate number of Pops in those MSAs and RSAs in
which the Company directly or indirectly has an ownership interest in the entity
licensed by the FCC to provide cellular telephone service in such MSAs and RSAs
and to which entity as of the date of determination, any of (i) the Company,
(ii) a Subsidiary of the Company or (iii) the lender(s) pursuant to a Senior
Secured Credit Facility pursuant to which the Company or a Wholly Owned
Subsidiary of the Company is the primary obligor or guarantor of all obligations
thereunder, directly or indirectly, provides financing, and in which in each
case, all or substantially all of the assets (except assets which may be
encumbered by Purchase Money Obligations) are pledged to the Company, a
Subsidiary of the Company or such lender(s) on a perfected first priority basis.
"Senior Secured Credit Facility" shall mean the Amended and Second Restated
Loan Agreement for RSAs, dated as of March 31, 1993 as amended by Amendment No.
1 thereto dated as of August 2, 1993 and Amendment No. 2 thereto dated as of
February 22, 1994 between Cellular, Inc. Financial Corporation and National Bank
for Cooperatives (now known as CoBank, ACB) and the Amended and Restated Loan
Agreement for MSAs dated as of March 31, 1993 as amended by Amendment No. 1
thereto dated as of August 2, 1993 and Amendment No. 2 thereto dated as of
February 22, 1994 between Cellular, Inc. Financial Corporation and National Bank
for Cooperatives (now known as CoBank, ACB) and any related notes, security
agreements, letters of credit, as such documents may be amended, supplemented or
modified from time to time and any successor senior secured credit agreement
that may be entered into by the Company or the Subsidiaries.
66
"Subordinated Indebtedness" means Indebtedness of the Company, subordinated
in right of payment to the Notes.
"Subsidiary" with respect to any Person, means (i) any corporation of which
at least a majority of whose Capital Stock with voting power, under ordinary
circumstances, to elect directors is at the time, directly or indirectly, owned
by such Person, by such Person and one or more Subsidiaries of such Person or by
one or more Subsidiaries of such Person, or (ii) a partnership in which such
Person or a Subsidiary of such Person owns, at the time, a majority of the
general partner interests in such partnership, or (iii) any other Person of
which at least a majority of the voting interest under ordinary circumstances is
at the time, directly or indirectly, owned by such Person.
"Vendor Financing Indebtedness" means, with respect to any Person, an
obligation owed by such Person to a vendor of any property or materials used in
such Person's business, or to a bank or other financial institution that has
financed or refinanced the purchase or lease of such property or materials from
such a vendor, in each case solely in respect of the purchase price or lease of
such property or materials, or of any services provided by such vendor (and
only, in the case of any such obligation owed to such a bank or financial
institution, to the extent and for as long as such obligation is guaranteed by,
or secured by property or assets of, such vendor).
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (a) the then outstanding
aggregate principal amount of such Indebtedness into (b) the total of the
product obtained by multiplying (i) the amount of each then remaining
installment, sinking fund, serial maturity or other required payment of
principal, including payment at final maturity, in respect thereof, by (ii) the
number of years (calculated to the nearest one-twelfth) which will elapse
between such date and the making of such payment.
"Wholly Owned Subsidiary" means a Subsidiary of the Company, all of the
outstanding equity interests of which are owned by the Company or another wholly
owned Subsidiary.
67
UNDERWRITING
Subject to the terms and conditions set forth in a purchase agreement (the
"Purchase Agreement") among the Company and the Underwriters, each of the
Underwriters has severally agreed to purchase from the Company, and the Company
has agreed to sell to each of the Underwriters, the principal amount of the
Notes set forth opposite its name below. Pursuant to the Purchase Agreement, the
Underwriters will be obligated to purchase all of the Notes if any are
purchased.
UNDERWRITER PRINCIPAL
----------- AMOUNT
------------
Merrill Lynch, Pierce, Fenner & Smith
Incorporated............................................. $
Smith Barney Inc...................................................
------------
Total.................................................... $ 80,000,000
------------
------------
The several Underwriters propose to offer the Notes to the public at the
public offering price set forth on the cover page of the Prospectus, and to
certain dealers at such price less a concession not in excess of % of the
principal amount of the Notes. The Underwriters may allow, and such dealers may
reallow, a discount not in excess of % of the principal amount of the Notes to
certain other dealers. After the initial public offering of the Notes, the
public offering price, concession and discount may be changed.
There is no public market for the Notes and the Company does not intend to
list the Notes on any securities exchange or for quotation over any
over-the-counter market. The Company has been advised by the Underwriters that,
following the completion of the Offering, the Underwriters presently intend to
make a market in the Notes. However, the Underwriters are under no obligation to
do so and may discontinue any market making activities at any time without
notice. No assurance can be given as to the liquidity of the trading market for
the Notes or that an active public market for the Notes will develop or, if
developed, will continue. If an active public market does not develop or is not
maintained, the market price and liquidity of the Notes may be adversely
affected.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as amended.
LEGAL MATTERS
The validity of the Notes offered hereby will be passed upon for the Company
by Latham & Watkins, Washington, D.C. Certain legal matters will be passed upon
for the Underwriters by Skadden, Arps, Slate, Meagher & Flom, New York, New
York. Certain other legal matters related to the Offering will be passed upon
for the Company by Amy M. Shapiro, Vice President, Secretary and General Counsel
for the Company. As of June 14, 1995, Ms. Shapiro was the beneficial owner (for
purposes of the Exchange Act) of 22,959 shares of the Company's Common Stock.
EXPERTS
The consolidated financial statements of the Company at September 30, 1993
and 1994, and for each of the three years in the period ended September 30,
1994, appearing in this Prospectus and Registration Statement and incorporated
herein by reference to the Company's Annual Report on Form 10-K for the fiscal
year ended September 30, 1994, as amended by Form 10-K/A No. 1 dated January 11,
1995, Form 10-K/A No. 2 dated May 25, 1995 and Form 10-K/A No. 3 dated June 16,
1995, have been audited by Ernst & Young LLP, independent auditors, and the
information under the caption "Selected Consolidated Financial Data" as of and
for each of the five years in the period ended September 30, 1994 appearing in
this prospectus and Registration Statement has been derived from consolidated
financial statements audited by Ernst & Young LLP as set forth in their reports
thereon appearing elsewhere herein and incorporated herein by reference. The
consolidated financial statements and selected consolidated financial data are
included and incorporated herein by reference in reliance upon such reports
given upon the authority of such firm as experts in accounting and auditing.
68
ADDITIONAL INFORMATION
The Company is subject to the periodic reporting and other informational
requirements of the Exchange Act and, in accordance therewith, files reports,
proxy statements, information statements and other information with the
Commission. Such reports, proxy statements, information statements and other
information filed by the Company can be inspected and copied at the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549, and at the following Regional Offices of the Commission: New York
Regional Office, Seven World Trade Center, 13th Floor, New York, New York,
10048; and Chicago Regional Office, 500 West Madison Street, Suite 1400,
Chicago, Illinois, 60661. Copies of such material can be obtained from the
Public Reference Section of the Commission, Washington, D.C. 20549, at
prescribed rates. The Company's Common Stock is quoted on the Nasdaq National
Market under the symbol "CELS". Material filed by the Company can be inspected
at the offices of the National Association of Securities Dealers, Inc., 9513 Key
West Avenue, Rockville, MD, 20850.
The Company has filed with the Commission under the Securities Act of 1933,
as amended, a Registration Statement with respect to the Notes offered hereby.
This Prospectus does not contain all the information set forth in the
Registration Statement and in the exhibits and schedules thereto. With respect
to each such contract, agreement or other document filed as an exhibit to the
Registration Statement, reference is made to the exhibit for a more complete
description of the matter involved, and each such statement shall be deemed
qualified in its entirety by such reference. For further information with
respect to the Company and the Notes, reference is made to the Registration
Statement and to the exhibits and schedules filed therewith. All of these
documents may be inspected without charge at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C., 20549,
and copies of such material can be obtained from the public reference section of
the Commission, Washington, D.C., 20549, at prescribed rates.
69
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
CommNet Cellular Inc.
We have audited the accompanying consolidated balance sheets of CommNet
Cellular Inc. (formerly Cellular, Inc.) as of September 30, 1994 and 1993, and
the related consolidated statements of operations, stockholders' equity
(deficit), and cash flows for each of the three years in the period ended
September 30, 1994. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our 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
CommNet Cellular Inc. at September 30, 1994 and 1993, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended September 30, 1994, in conformity with generally accepted
accounting principles.
As discussed in Note 1 to the financial statements, in the fiscal year ended
September 30, 1994, the Company changed its methods of accounting for income
taxes and short-term investments.
ERNST & YOUNG LLP
Denver, Colorado
December 2, 1994
F-1
COMMNET CELLULAR INC.
CONSOLIDATED BALANCE SHEETS
ASSETS (NOTE 5)
SEPTEMBER 30,
------------------------------
1994 1993
-------------- -------------- MARCH 31, 1995
--------------
(UNAUDITED)
Current assets:
Cash and cash equivalents........................................... $ 2,081,591 $ 45,660,761 $ 14,396,471
Available-for-sale securities (Note 3).............................. 21,198,698 21,092,859 11,553
Accounts receivable, net of allowance for doubtful accounts of
$2,677,124 and $1,384,181 in 1994 and 1993, respectively........... 12,706,452 9,397,055 13,532,361
Inventory and other................................................. 7,316,770 2,945,485 6,412,957
-------------- -------------- --------------
Total current assets.............................................. 43,303,511 79,096,160 34,353,342
Investment in and advances to affiliates (Notes 2 and 4).............. 61,908,761 55,892,372 57,063,587
Investment in cellular system equipment............................... 9,732,075 4,366,362 17,246,637
Property and equipment, at cost (Note 7):
Cellular system equipment........................................... 79,215,294 53,976,077 88,405,886
Land, buildings and improvements.................................... 17,361,917 11,377,969 19,511,990
Furniture and equipment............................................. 14,796,494 10,463,838 15,999,645
-------------- -------------- --------------
111,373,705 75,817,884 123,917,521
Less accumulated depreciation....................................... 31,455,978 22,357,588 37,663,361
-------------- -------------- --------------
Net property and equipment........................................ 79,917,727 53,460,296 86,254,160
Other assets, less accumulated amortization of $25,979,913 and
$24,361,752 in 1994 and 1993, respectively:
FCC licenses and filing rights (Note 2)............................. 80,458,461 68,174,551 90,203,145
Deferred loan costs and other....................................... 6,432,286 8,300,444 5,759,483
-------------- -------------- --------------
Total other assets................................................ 86,890,747 76,474,995 95,962,628
-------------- -------------- --------------
$ 281,752,821 $ 269,290,185 $ 290,880,354
-------------- -------------- --------------
-------------- -------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.................................................... $ 10,327,933 $ 5,791,135 $ 7,057,169
Accrued liabilities................................................. 3,441,149 4,401,151 4,733,735
Accrued interest.................................................... 2,331,034 4,031,780 2,695,394
Current portion of long-term debt................................... 1,090,870 1,071,330 1,090,870
Obligation under capital leases due within one year................. 588,025 240,173 467,798
-------------- -------------- --------------
Total current liabilities......................................... 17,779,011 15,535,569 16,044,966
Long-term debt:
Secured bank financing (Note 5)..................................... 50,448,361 39,318,703 63,203,738
Obligation under capital leases due after one year (Note 7)......... 785,082 306,127 620,138
11 3/4% senior subordinated discount notes (Note 6)................. 112,979,725 100,846,570 119,617,285
Convertible subordinated debentures (Note 6)........................ 79,700,000 117,572,181 79,697,000
Obligations under purchase agreements................................. -- 1,632,643 --
Minority interests.................................................... 4,154,175 3,500,163 3,872,665
Commitments (Note 8)
Stockholders' equity (deficit) (Notes 2, 3, 5, 6, 10, 11 and 12):
Preferred Stock, $.01 par value; 1,000,000 shares authorized; no
shares issued...................................................... -- -- --
Common Stock, $.001 par value; 40,000,000 shares authorized;
11,739,108 and 8,911,579 shares issued at September 30, 1994 and
1993, respectively................................................. 11,739 8,911 11,954
Capital in excess of par value...................................... 117,146,376 74,619,503 120,888,317
Unrealized losses on available-for-sale securities.................. (450,311) -- --
Accumulated deficit................................................. (100,801,337) (84,050,185) (113,075,709)
-------------- -------------- --------------
Total stockholders' equity (deficit).............................. 15,906,467 (9,421,771) 7,824,562
-------------- -------------- --------------
$ 281,752,821 $ 269,290,185 $ 290,880,354
-------------- -------------- --------------
-------------- -------------- --------------
See accompanying notes.
F-2
COMMNET CELLULAR INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED SIX MONTHS ENDED
SEPTEMBER 30, MARCH 31,
---------------------------------------------- ------------------------------
1994 1993 1992 1995 1994
-------------- -------------- -------------- -------------- --------------
(UNAUDITED) (UNAUDITED)
Revenues:
Cellular service....................... $ 36,113,748 $ 19,577,153 $ 8,014,506 $ 24,532,722 $ 15,356,656
Roaming................................ 16,472,391 9,283,377 4,287,058 8,977,812 6,495,465
Equipment sales........................ 8,773,912 4,828,781 2,604,785 4,829,228 4,603,402
-------------- -------------- -------------- -------------- --------------
61,360,051 33,689,311 14,906,349 38,339,762 26,455,523
Costs and expenses:
Cellular operations:
Cost of cellular service............. 9,467,025 6,100,229 4,322,152 7,692,715 4,650,091
Cost of equipment sales.............. 8,834,865 5,218,012 3,319,903 5,072,459 4,501,358
General and administrative........... 16,767,717 10,505,106 5,260,148 10,381,459 7,486,387
Marketing and selling................ 15,786,030 8,465,287 5,236,329 10,088,444 7,103,814
Depreciation and amortization........ 10,541,476 17,581,946 11,611,460 6,901,272 4,785,936
Write-down of property and
equipment........................... 2,864,589 -- -- -- 1,472,902
Corporate:
General and administrative........... 6,944,193 7,122,454 10,469,437 3,721,863 3,352,832
Depreciation and amortization........ 2,109,379 2,368,562 2,503,357 1,128,096 1,098,360
Write-down of property and
equipment........................... 251,667 -- -- -- --
Less amounts allocated to
nonconsolidated affiliates.......... (6,537,555) (8,241,752) (9,472,280) (3,232,688) (2,886,174)
-------------- -------------- -------------- -------------- --------------
67,029,386 49,119,844 33,250,506 41,753,620 31,565,506
-------------- -------------- -------------- -------------- --------------
Operating loss........................... (5,669,335) (15,430,533) (18,344,157) (3,413,858) (5,109,983)
Equity in net loss of affiliates (Note
4)...................................... (5,092,484) (6,339,145) (8,851,753) (2,735,777) (3,586,024)
Minority interest in net income of
consolidated affiliates................. (543,607) -- -- (261,004) --
Gains on sales of affiliates and other
(Note 2)................................ 3,811,943 7,821,424 14,339,063 67,247 2,459,004
Interest expense......................... (21,338,505) (16,427,796) (14,800,908) (11,886,742) (9,860,292)
Interest income (Note 4)................. 12,080,836 10,701,511 10,616,024 5,955,762 6,813,532
-------------- -------------- -------------- -------------- --------------
Loss before extraordinary charge......... (16,751,152) (19,674,539) (17,041,731) (12,274,372) (9,283,763)
Extraordinary charge related to early
extinguishment of secured bank financing
(Note 5)................................ -- (2,991,673) -- -- --
-------------- -------------- -------------- -------------- --------------
Net loss................................. $ (16,751,152) $ (22,666,212) $ (17,041,731) $ (12,274,372) $ (9,283,763)
-------------- -------------- -------------- -------------- --------------
-------------- -------------- -------------- -------------- --------------
Loss per common share:
Loss before extraordinary charge....... $ (1.45) $ (2.30) $ (2.44) $ (1.04) $ (0.81)
Extraordinary charge................... -- (.35) -- -- --
-------------- -------------- -------------- -------------- --------------
Net loss per common share.............. $ (1.45) $ (2.65) $ (2.44) $ (1.04) $ (0.81)
-------------- -------------- -------------- -------------- --------------
-------------- -------------- -------------- -------------- --------------
Weighted average shares outstanding...... 11,577,191 8,551,785 6,984,541 11,792,419 11,414,210
-------------- -------------- -------------- -------------- --------------
-------------- -------------- -------------- -------------- --------------
See accompanying notes.
F-3
COMMNET CELLULAR INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
COMMON STOCK CAPITAL IN
----------------------- EXCESS OF UNREALIZED ACCUMULATED
SHARES AMOUNT PAR VALUE GAINS (LOSSES) DEFICIT
------------ --------- -------------- -------------- ---------------
Balance at September 30, 1991.................. 4,801,610 $ 4,802 $ 22,249,717 $ -- $ (44,342,242)
Exercise of options.......................... 54,375 54 534,321 -- --
Issuance of Common Stock -- public offering
(Note 12)................................... 2,875,000 2,875 37,256,375 -- --
Offering costs............................... -- -- (656,155) -- --
Issuance of Common Stock -- acquisitions
(Note 2).................................... 559,009 559 5,967,011 -- --
Issuance of Common Stock -- ESOP (Note 11)... 21,798 22 264,280 -- --
Net loss..................................... -- -- -- -- (17,041,731)
------------ --------- -------------- -------------- ---------------
Balance at September 30, 1992.................. 8,311,792 8,312 65,615,549 -- (61,383,973)
Exercise of options.......................... 35,000 35 636,077 -- --
Issuance of Common Stock -- acquisitions
(Note 2).................................... 405,226 405 5,942,965 -- --
Issuance of Common Stock -- ESOP (Note 11)... 17,232 17 297,235 -- --
Debenture conversion......................... 142,329 142 2,127,677 -- --
Net loss..................................... -- -- -- -- (22,666,212)
------------ --------- -------------- -------------- ---------------
Balance at September 30, 1993.................. 8,911,579 8,911 74,619,503 -- (84,050,185)
Exercise of options.......................... 121,250 122 1,478,587 -- --
Issuance of Common Stock -- acquisitions
(Note 2).................................... 156,132 156 2,761,396 -- --
Issuance of Common Stock -- ESOP (Note 11)... 20,953 21 477,969 -- --
Debenture conversion......................... 2,529,194 2,529 37,808,921 -- --
Unrealized losses............................ -- -- -- (450,311) --
Net loss..................................... -- -- -- -- (16,751,152)
------------ --------- -------------- -------------- ---------------
Balance at September 30, 1994.................. 11,739,108 11,739 117,146,376 (450,311) (100,801,337)
Exercise of options (unaudited).............. 94,325 94 770,023 -- --
Issuance of Common Stock -- acquisitions
(unaudited)................................. 120,418 121 2,968,935 -- --
Debenture conversion (unaudited)............. 108 -- 2,983 -- --
Unrealized losses (unaudited)................ -- -- -- 450,311
Net loss (unaudited)......................... -- -- -- -- (12,274,372)
------------ --------- -------------- -------------- ---------------
Balance at March 31, 1995 (unaudited).......... 11,953,959 $ 11,954 $ 120,888,317 $ -- $ (113,075,709)
------------ --------- -------------- -------------- ---------------
------------ --------- -------------- -------------- ---------------
See accompanying notes.
F-4
COMMNET CELLULAR INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SIX MONTHS ENDED
SEPTEMBER 30, MARCH 31,
--------------------------------------------- -----------------------------
1994 1993 1992 1995 1994
------------- ------------- ------------- ------------- -------------
(UNAUDITED) (UNAUDITED)
Operating activities:
Net loss................................... $ (16,751,152) $ (22,666,212) $ (17,041,731) $ (12,274,372) $ (9,283,763)
Adjustments to reconcile net loss to net
cash used by operating activities:
Minority interest........................ 543,607 -- -- 261,004 --
Compensation expense related to ESOP and
option grants........................... 477,990 554,648 264,302 -- --
Depreciation and amortization............ 12,650,855 19,950,508 14,114,817 8,029,368 5,884,296
Equity in net loss of affiliates......... 5,092,484 6,339,145 8,851,753 2,735,777 3,586,024
Gains on sales of affiliates and other... (3,811,943) (7,821,424) (14,339,063) (67,247) (2,459,004)
Loss on available-for-sale securities.... -- -- -- 221,598 --
Interest expense on 11 3/4% senior
discount notes.......................... 12,133,155 846,205 -- 6,637,560 5,863,912
CoBank patronage income.................. (814,837) (719,005) (329,002) (534,690) (814,837)
Accrued interest on advances to
affiliates.............................. (11,380,231) (9,542,484) (9,151,074) (5,570,098) (5,427,093)
Write-down of property and equipment..... 3,116,256 -- -- -- 1,472,902
Write-down of short-term investments..... 743,511 -- -- -- --
Change in operating assets and liabilities,
net of effects from consolidating acquired
interests (Note 2):
Accounts receivable...................... (2,912,318) (3,721,023) 235,471 128,779 (3,886,535)
Inventory and other...................... (4,363,083) (789,336) 46,673 904,908 (1,144,961)
Accounts payable and accrued
liabilities............................. (1,230,322) 2,368,345 (2,136,240) (90,218) 329,713
Accrued interest......................... (663,529) 126,982 577,287 364,360 (1,822,327)
Offering costs related to issuance of senior
discount notes.............................. -- (3,260,396) -- -- --
Offering cost related to issuance of
convertible subordinated debentures......... -- (245,000) -- -- --
------------- ------------- ------------- ------------- -------------
Net cash provided (used) by operating
activities............................ (7,169,557) (18,579,047) (18,906,807) 746,729 (7,701,673)
Investing activities:
Purchases of available-for-sale
securities................................ (16,788,067) (28,994,122) (40,466,570) (11,553) (13,485,157)
Sales of available-for-sale securities..... 15,488,406 21,692,323 37,853,347 21,427,411 3,963,892
Additions to investments in and advances to
affiliates................................ (6,789,273) (9,274,470) (9,544,385) (2,426,811) (2,188,547)
Reductions in (additions to) investment in
cellular system equipment................. (5,365,713) 98,370 126,873 (7,514,562) (4,821,271)
Additions to property and equipment........ (31,455,008) (7,547,311) (7,512,126) (12,528,606) (6,330,624)
Disposals of (additions to) other assets... -- (1,057,834) -- (14,396) --
Proceeds from sales of interests in
affiliates (Note 2)....................... 9,037,328 7,334,198 4,642,920 1,835,349 6,569,210
Purchase of interests in affiliates, net of
cash acquired and net of assets and
liabilities recorded due to consolidation
(Note 2).................................. (13,992,000) (12,082,316) (6,276,406) (2,439,005) (10,420,426)
------------- ------------- ------------- ------------- -------------
Net cash used by investing
activities............................ (49,864,327) (29,831,162) (21,176,347) (1,672,173) (26,712,923)
Financing activities:
Proceeds from secured bank financing....... 13,779,086 38,566,144 9,612,445 13,408,742 2,680,780
Payments of secured bank financing......... (2,629,888) (74,195,558) (2,342,770) (653,364) (1,346,669)
Additions (reductions) of obligation under
capital leases............................ 826,807 (163,989) (301,603) (285,171) (132,477)
Proceeds from issuance of senior discount
notes..................................... -- 100,000,000 -- -- --
Issuance of convertible subordinated
debentures................................ -- 4,950,000 -- -- --
Issuance of Common Stock, net of offering
costs..................................... 1,478,709 378,716 37,401,772 770,117 1,433,959
------------- ------------- ------------- ------------- -------------
Net cash provided by financing
activities............................ 13,454,714 69,535,313 44,369,844 13,240,324 2,635,593
------------- ------------- ------------- ------------- -------------
Net increase (decrease) in cash and cash
equivalents................................. (43,579,170) 21,125,104 4,286,690 12,314,880 (31,779,003)
Cash and cash equivalents at beginning of
year........................................ 45,660,761 24,535,657 20,248,967 2,081,591 45,660,761
------------- ------------- ------------- ------------- -------------
Cash and cash equivalents at end of year..... $ 2,081,591 $ 45,660,761 $ 24,535,657 $ 14,396,471 $ 13,881,758
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
See accompanying notes.
F-5
COMMNET CELLULAR INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED SIX MONTHS ENDED
SEPTEMBER 30, MARCH 31,
--------------------------------------------- -----------------------------
1994 1993 1992 1995 1994
------------- ------------- ------------- ------------- -------------
(UNAUDITED) (UNAUDITED)
Supplemental schedule of additional cash flow
information and noncash activities:
Cash paid during the year for interest..... $ 9,731,301 $ 15,454,609 $ 14,223,623 $ 5,648,665 $ 5,701,880
Purchase of cellular system equipment
through accounts payable.................. 4,112,406 1,158,791 1,633,069 620,286 1,323,215
Purchase of cellular system equipment
through vendor long-term debt............. -- -- 988,465 -- --
Impact on investments and advances to
affiliates from minority interest recorded
due to reorganization of eight Nebraska
affiliates, six of which were accounted
for under the equity method, into one
consolidated Nebraska affiliate........... -- 1,839,571 -- -- --
Purchases of interests in affiliates by
issuance of Common Stock.................. 2,761,552 6,532,467 7,011,116 2,969,056 1,469,214
Addition to deferred loan costs related to
convertible subordinated debentures and
senior discount notes..................... -- 3,505,761 -- -- --
Conversion of convertible subordinated
debentures to Common Stock................ 37,811,450 2,127,819 -- 2,983 37,811,450
See accompanying notes.
F-6
COMMNET CELLULAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1994 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BASIS OF PRESENTATION
CommNet Cellular Inc. (formerly Cellular, Inc.) and its majority-owned
affiliates (the "Company") operates, manages and finances cellular telephone
systems principally in the mountain and plains regions of the United States.
Cellular telephone systems are capable of providing a wide variety of
telecommunication services including high quality wireless local and
long-distance telephone service within a specified market area through mobile,
portable or fixed telephone equipment.
The Federal Communications Commission ("FCC") initially granted only two
licenses in each cellular market area, one to a telephone company with an
exchange presence in the area ("wireline" license), and one to an entity other
than a telephone company ("nonwireline" license).
The Company initially acquired its cellular interests by participating in
the wireline licensing process conducted by the FCC. In order to participate in
that process, the Company formed affiliates which were originally owned at least
51% by one or more independent telephone companies and no more than 49% by the
Company. In addition to obtaining interests in cellular markets through
participation in the FCC licensing process, the Company also has purchased
direct interests in additional markets in order to expand the network.
All affiliate investments in which the Company has greater than a 50%
interest are consolidated. All affiliate investments in which the Company has a
50% or less but 20% or greater interest are accounted for under the equity
method. All affiliate investments in which the Company has less than a 20%
interest are accounted for under the cost method.
The Company and its affiliates participated in the following markets as of
September 30, 1994:
COMPANY AFFILIATE(S)
MSA OR INTEREST IN INTEREST
RSA CODE (1) STATE AFFILIATE(S) (2) IN LICENSEE (3)
- --------------- -------------------- ---------------- ---------------
MSAs: 141 Minnesota 49.00% 16.34% LP
152 Maine (4) 33.33% 33.33% LP
185 Indiana 100.00% 16.67% LP
241 Colorado 73.99% 100.00% GP
253 Iowa 74.50% 100.00% GP
267 South Dakota 100.00% 51.00% GP
268 Montana 49.00% 90.00% GP
279 Maine 33.33% 33.33% GP
289 South Dakota 100.00% 100.00% GP
297 Montana 100.00% 100.00% GP
298 North Dakota 100.00% 70.00% GP
RSAs: 348 Colorado 10.00% 100.00% GP
349 Colorado 58.60% 100.00% GP
351 Colorado 61.75% 100.00% GP
352 Colorado 66.00% 100.00% GP
353 Colorado 100.00% 75.00% GP
354 Colorado 61.75% 80.00% GP
355 Colorado 49.00% 100.00% GP
356 Colorado 49.00% 100.00% GP
389 Idaho 49.00% 50.00% LP
390 Idaho 49.00% 33.33% LP
392 Idaho (B1) 100.00% 100.00% LP
F-7
COMMNET CELLULAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1994 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COMPANY AFFILIATE(S)
MSA OR INTEREST IN INTEREST
RSA CODE (1) STATE AFFILIATE(S) (2) IN LICENSEE (3)
- --------------- -------------------- ---------------- ---------------
393 Idaho 91.64% 100.00% GP
415 Iowa 49.00% 20.64% LP
416 Iowa 49.00% 78.57% LP
417 Iowa 100.00% 100.00% GP
419 Iowa 49.00% 91.67% GP
420 Iowa 100.00% 100.00% GP
424 Iowa 49.00% 30.00% LP
425 Iowa 49.00% 27.11% LP
426 Iowa 52.65% 93.33% GP
427 Iowa 53.64% 91.66% GP
428 Kansas 100.00% 3.07% LP
429 Kansas 100.00% 3.07% LP
430 Kansas 100.00% 3.07% LP
431 Kansas 100.00% 3.07% LP
432 Kansas 100.00% 3.07% LP
433 Kansas 100.00% 3.07% LP
434 Kansas 100.00% 3.07% LP
435 Kansas 100.00% 3.07% LP
436 Kansas 100.00% 3.07% LP
437 Kansas 100.00% 3.07% LP
438 Kansas 100.00% 3.07% LP
439 Kansas 100.00% 3.07% LP
440 Kansas 100.00% 3.07% LP
441 Kansas 100.00% 3.07% LP
442 Kansas 100.00% 3.07% LP
512 Missouri (B1) 49.00% 30.00% LP
523 Montana (B1) 49.00% 100.00% GP
523 Montana (B2) 100.00% 98.11% GP
524 Montana 61.75% 100.00% GP
525 Montana 59.20% 100.00% GP
526 Montana 59.20% 100.00% GP
527 Montana 61.75% 100.00% GP
528 Montana 61.75% 100.00% GP
529 Montana 61.75% 100.00% GP
530 Montana 61.75% 100.00% GP
531 Montana 61.75% 100.00% GP
532 Montana 61.75% 100.00% GP
533 Nebraska 51.27% 25.52% LP
534 Nebraska 51.27% 25.52% LP
535 Nebraska 51.27% 25.52% LP
536 Nebraska 51.27% 25.52% LP
537 Nebraska 51.27% 25.52% LP
538 Nebraska 51.27% 25.52% LP
539 Nebraska 51.27% 25.52% LP
F-8
COMMNET CELLULAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1994 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COMPANY AFFILIATE(S)
MSA OR INTEREST IN INTEREST
RSA CODE (1) STATE AFFILIATE(S) (2) IN LICENSEE (3)
- --------------- -------------------- ---------------- ---------------
540 Nebraska 51.27% 25.52% LP
541 Nebraska 51.27% 25.52% LP
542 Nebraska 51.27% 25.52% LP
553 New Mexico 49.00% 33.33% LP
555 New Mexico 49.00% 25.00% LP
557 New Mexico 49.00% 33.33% LP
580 North Dakota 52.14% 100.00% GP
581 North Dakota 49.00% 100.00% GP
582 North Dakota 49.00% 84.59% LP
583 North Dakota 46.96% 100.00% GP
584 North Dakota 61.75% 100.00% GP
611 Oregon 100.00% 25.00% LP(5)
634 South Dakota 61.75% 100.00% GP
635 South Dakota 56.29% 100.00% GP
636 South Dakota 57.50% 100.00% GP
638 South Dakota (B1) 82.99% 100.00% GP
638 South Dakota (B2) 82.99% 100.00% GP
639 South Dakota (B1) 60.66% 100.00% GP
639 South Dakota (B2) 60.66% 100.00% GP
640 South Dakota 64.49% 100.00% GP
641 South Dakota 61.13% 100.00% GP
642 South Dakota 49.00% 100.00% GP
675 Utah 100.00% 100.00% GP
676 Utah 100.00% 100.00% GP
677 Utah (B3) 74.50% 100.00% GP
678 Utah 100.00% 80.00% GP
718 Wyoming 66.00% 100.00% GP
719 Wyoming 83.00% 100.00% GP
720 Wyoming 100.00% 100.00% GP
<FN>
- ------------------------
(1) Metropolitan Statistical Area ("MSA") ranking is based on population as
established by the FCC. Rural Service Area ("RSAs") have been numbered by
the FCC alphabetically by state.
(2) Represents the composite ownership interest held by the Company in the
respective affiliate(s).
(3) Represents the composite ownership interest of the Company's affiliate(s)
in the licensee for a cellular telephone system in the respective market.
GP indicates that at least one affiliate has a general partner or
controlling interest in the licensee; LP indicates that the affiliate(s)
has (have) a limited partner or minority interest.
(4) The license for the Portland, Maine market has been vacated.
(5) The ownership percentages for the market are the subject of litigation.
F-9
COMMNET CELLULAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1994 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its majority-owned affiliates. All significant intercompany transactions
have been eliminated.
Minority interest, occurring only when other stockholders or partners
provide funding to the affiliates, is classified with noncurrent liabilities in
the accompanying balance sheets. For all other majority-owned affiliates, the
Company records all operating losses given that the minority interests have no
funding obligations. At such time as the cumulative net income attributed to
these nonfunding minority interests exceeds the cumulative net losses previously
absorbed, the Company will record a minority interest liability for such
entities.
INTERIM FINANCIAL STATEMENTS
The Company, in its opinion, has included all adjustments (consisting only
of normal recurring accruals) necessary for a fair presentation of its financial
position at March 31, 1995 and the results of its operations for the six months
ended March 31, 1995 and 1994. The results of operations for the six months
ended March 31, 1995 are not necessarily indicative of the results for a full
year.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
SHORT-TERM INVESTMENTS
The Company adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," as of September 30, 1994. In accordance with the Statement,
prior-period financial statements have not been restated to reflect the change
in accounting principle. The cumulative effect as of September 30, 1994 of
adopting Statement 115, including the reversal of $450,311 of lower of cost or
market adjustments recorded in the current year, decreased net loss by $450,311.
The ending balance of shareholders' equity also was decreased by $450,311 to
reflect the net unrealized holding loss on securities classified as
available-for-sale that were previously classified as held for investment and
held for sale, and carried at amortized cost and lower of cost or market,
respectively. All of the Company's short-term investments are classified as
available-for-sale at September 30, 1994.
ACCOUNTS RECEIVABLE
The Company performs periodic credit evaluations of its customers' financial
condition and generally does not require collateral. Receivables generally are
due within 30 days. Credit losses relating to the Company's customers
consistently have been within management's expectations and comparable to losses
for the portfolio as a whole.
INVENTORY
Inventories are stated at the lower of cost (first-in, first-out) or market
and are comprised of cellular communication equipment and accessories held for
resale to the Company's subscribers.
INVESTMENT IN CELLULAR SYSTEM EQUIPMENT
Investment in cellular system equipment relates to cellular system equipment
under construction or held in inventory at the Company's warehouse facility.
During the twelve months ended September 30, 1994, the Company replaced and
upgraded certain cellular system equipment. As a result, the Company has
realized a loss representing the excess of net book over realizable values
totaling $3,116,000.
F-10
COMMNET CELLULAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1994 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEFERRED LOAN COSTS
Deferred loan costs relate to the offerings of senior notes and convertible
subordinated debentures and to the CoBank loan agreements (see Notes 5 and 6).
These costs are being amortized over the respective terms of the debentures,
notes and loans.
FCC LICENSES AND FILING RIGHTS
FCC licenses represent the costs of the FCC licenses acquired by
consolidated affiliates. Filing rights represent costs associated with acquiring
the rights to file for cellular telephone licenses. The excess of the purchase
price of affiliate interests acquired over the fair market value of the related
net assets acquired is included as the cost of FCC licenses and filing rights.
Effective October 1, 1993, the Company revised its estimate of the useful
life of FCC license acquisition costs from the remaining initial ten-year term
to 40 years from the date of acquisition to conform with industry practices.
This change in estimate was accounted for prospectively and resulted in a
reduction of amortization expense for the year ended September 30, 1994 of
approximately $11,024,000, or $.95 per common share.
REVENUE RECOGNITION
Cellular service revenues based upon subscriber usage are recognized at the
time service is provided. Access and special feature cellular service revenues
are recognized when earned. Equipment sales are recognized at the time equipment
is delivered to the subscriber or to an unaffiliated agent.
DEPRECIATION AND AMORTIZATION
Depreciation of property and equipment is provided principally on the
straight-line method over estimated useful lives as follows:
YEARS
------
Cellular system equipment............................................... 8-15
Building and improvements............................................... 6-10
Furniture and equipment................................................. 3-5
COST ALLOCATIONS
The Company allocates shared operating costs to its managed affiliates.
Costs which bear an identifiable causal relationship are allocated directly to
the affiliate. Indirect costs are allocated based on a methodology negotiated
with the affiliates and applied consistently to all managed markets. This
methodology allocates functional cost pools on a pro rata basis taking into
consideration total property, plant and equipment, population, subscribers and
other attributes of the managed markets. In addition, effective October 1, 1993,
and for all comparative periods presented, the Company reclassified allocated
cellular operations depreciation from cellular operations cost of cellular
service, general and administrative and marketing and selling to cellular
operations depreciation and amortization. This change does not impact operating
or net loss.
During the twelve months ended September 30, 1994, the Company incurred
certain overhead costs related to expansion. As a result, the Company
capitalized $3,991,000, which is included in property and equipment, and
investment in cellular system equipment. In addition, the Company allocated
$713,000 to nonconsolidated affiliates.
INCOME TAXES
Effective October 1, 1993, the Company changed its method of accounting for
income taxes from the deferred method to the liability method required by SFAS
No. 109, "Accounting for Income Taxes" (see Note 9 --"Income taxes").
F-11
COMMNET CELLULAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1994 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET LOSS PER COMMON SHARE
Net loss per Common share is based on the weighted average number of Common
shares outstanding during the periods, excluding Common Stock equivalents which
are anti-dilutive. Fully diluted earnings per share are not presented because
conversion of the convertible subordinated debentures and notes would be
anti-dilutive. The convertible subordinated debentures and notes are not
considered to be Common Stock equivalents.
2. BUSINESS ACQUISITIONS AND DISPOSITIONS
1992
In October 1991, the Company disposed of its interest in the Colorado
Springs, Colorado wireline cellular system in satisfaction of its promissory
notes to U S West NewVector totaling $8,400,000 and accrued interest. As a
result, the Company realized a gain in the approximate amount of $8,700,000.
In December 1991, the Company acquired, by merger, the outstanding shares of
a corporation which was the 51% general partner of the Company's affiliates
holding an interest in three RSA markets and one MSA market in Indiana for
approximately $1,463,000 paid through the issuance of 147,192 shares of Common
Stock to the corporation's shareholder.
In December 1991 and January 1992, the Company acquired, by merger, the
outstanding shares of two corporations each of which owned a 51% general
partnership interest in an affiliate of the Company for approximately $1,614,000
paid through the issuance of 149,085 shares of Common Stock to the shareholders
of the two corporations. The Company subsequently transferred its interests in
the affiliates to U S West NewVector in connection with the multimarket exchange
discussed below.
In January 1992, the Company consummated a series of transactions pursuant
to which it divested itself of 100% of the nonwireline license for RSA 392
(Idaho 5) and acquired a 71.4% interest in the wireline license for such market.
In addition, the Company acquired a 33.33% interest in the wireline licensee for
RSA 675 (Utah 3), bringing the Company's net ownership interest in such market
to 57.83%. The Company also received cash proceeds of approximately $2,493,000,
but recognized a $467,000 loss.
In February 1992, the Company acquired the assets of an independent
telephone company in South Dakota for $425,000 in cash.
In March 1992, the Company completed a multimarket exchange with US West
NewVector in which the Company acquired from U S West NewVector interests in 13
managed markets within the states of Idaho, Iowa, Utah and South Dakota, in
exchange for limited partnership interests in three markets and $2,645,000 in
cash. The exchange resulted in a gain of approximately $4,157,000.
In May 1992, the Company sold its 49% limited partnership interest in the
entity which owned a 36.5% interest in the wireline licensee for RSA 350
(Colorado 3) for approximately $3,080,000. The sale resulted in a gain of
approximately $2,311,000.
In June 1992, the Company acquired 75.41% of the outstanding shares of a
corporation which is the 51% general partner of an entity which owns 66.67% of
the wireline licensee for RSA 393 (Idaho 6) for $3,700,000 consisting of
$1,685,000 in cash and 161,200 shares of the Company's Common Stock. As a result
of this acquisition, the Company holds, directly and indirectly, 91.64% of the
licensee for this market.
In July 1992, the Company acquired a 7.15% interest in the wireline license
for RSA 392 (Idaho 5) for $629,000 in cash. As a result, the Company holds
78.55% of the license for this market.
F-12
COMMNET CELLULAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1994 IS UNAUDITED)
2. BUSINESS ACQUISITIONS AND DISPOSITIONS (CONTINUED)
In August 1992, the Company acquired the nonwireline cellular system serving
RSA 420 (Iowa 9) for approximately $1,910,000. The Company issued 101,532 shares
of Common Stock and assumed approximately $590,000 in liabilities.
1993
In December 1992, the Company acquired from U S West NewVector its 70%
general partner interest in the licensee for MSA 298 (Bismarck, North Dakota),
its 51% general partner interest in the licensee for MSA 267 (Sioux Falls, South
Dakota) and its 16.66% general partner interest in the licensee for RSA 642
(South Dakota 9). The aggregate purchase price was approximately $10,800,000
paid in cash by the Company. In May 1993, the remaining partners in the licensee
for RSA 642 exercised an option to purchase such interest and paid the Company a
total of $1,074,000 in cash.
In December 1992, the Company acquired an additional 16.07% interest in the
licensee for RSA 640 (South Dakota 7) and an additional 11.28% interest in the
licensee for RSA 641 (South Dakota 8) for approximately $469,000 which was paid
by the issuance of 31,491 shares of Common Stock of the Company.
In December 1992, the Company acquired the outstanding shares of a
corporation which is a limited partner in two Colorado MSA markets for 40,252
shares of Common Stock valued at approximately $563,000. In December 1992, the
Company also acquired the 51% general partner interest in the affiliate which
was a limited partner in one Utah RSA market for $1,261,000 paid by the issuance
of 43,025 shares of Common Stock and $615,000 in cash. In February 1993, the
Company acquired the outstanding shares of two affiliates which were limited
partners in two Colorado MSA markets for 94,811 shares of Common Stock valued at
approximately $1,268,000. The Company subsequently transferred such affiliates'
interest in certain licensees to U S West NewVector pursuant to the multimarket
exchange discussed below.
In March 1993, the Company completed an additional multimarket exchange with
U S West NewVector in which the Company transferred to U S West NewVector the
Company's interest in one nonmanaged RSA market and two nonmanaged MSA markets
in exchange for U S West NewVector's interest in seven RSA markets and one MSA
market managed by the Company plus approximately $3,418,000 in cash. The
exchange resulted in a gain to the Company of approximately $3,812,000.
In March 1993, the Company acquired all of the outstanding shares of a
corporation which is the 51% general partner of the affiliate which is the 50%
general partner of the wireline licensee for RSA 353 (Colorado 6) for $228,000
in cash.
In June 1993, RSA 392 (Idaho 5) was partitioned by the FCC into two markets
and the Company exchanged its 78.55% interest in the Sun Valley (B2) portion of
the market for U S West NewVector's 21.45% interest in the Twin Falls (B1)
portion of the market and $12,000 in cash.
In August 1993, the Company transferred its interest in two affiliates which
held interests in one nonmanaged RSA market and one managed MSA market in
exchange for a 98.11% interest in an RSA market which will be managed by the
Company and $3,916,000 in cash pursuant to an exchange agreement with Pacific
Telecom Cellular, Inc. ("PTI"). In order to fulfill its obligations under the
agreement, the Company acquired the outstanding shares of four corporations for
approximately $3,499,000 paid by the issuance of 194,474 shares of Common Stock
of the Company and approximately $478,000 in cash. The exchange resulted in a
gain to the Company of approximately $4,889,000. The agreement also provides for
the sale by the Company of its interest in two additional affiliates which hold
interests in nonmanaged RSA markets. The sale of one interest was consummated in
December 1993 (see below). The sale of the second interest is the subject of
pending litigation and, accordingly, there can be no assurance that such sale
will be consummated.
F-13
COMMNET CELLULAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1994 IS UNAUDITED)
2. BUSINESS ACQUISITIONS AND DISPOSITIONS (CONTINUED)
1994
In December 1993, the Company acquired 100% of the stock of a corporation
which owns and operates the Rapid City, South Dakota MSA market and owns general
partnership interests in two partitioned RSA markets (South Dakota 5 (B2) and
South Dakota 6 (B2)) for approximately $10,420,000 in cash plus property valued
at approximately $400,000.
In December 1993, the Company sold its interests in affiliates which held a
44.44% limited partnership interest in the wireline licensee for RSA 608 (Oregon
3) for approximately $2,076,000 in cash. The sale resulted in a gain of
approximately $630,000.
In December 1993, the Company acquired additional interests in two
affiliated corporations for approximately $139,000.
In February 1994, the Company acquired an additional 51% of the stock of an
affiliate which held a 28.6% limited partnership interest in MSA 239 (Joplin,
MO) for 69,051 shares of the Company's Common Stock, then sold the Company's
entire limited partnership interest for $4,494,000 in cash. The sale resulted in
a gain of approximately $1,921,000.
In March 1994, the Company acquired an additional interest in an affiliated
corporation for 2,732 shares of the Company's Common Stock.
In April 1994, the Company acquired three affiliated corporations which hold
limited partnership interests in Utah RSA managed markets for 80,145 shares of
the Company's Common Stock.
In May 1994, the Company sold its interest in an affiliate which held an
8.125% limited partnership interest in three nonmanaged RSA markets for
approximately $2,468,000 in cash. The sale resulted in a gain of approximately
$841,000. Contemporaneously, the Company acquired additional limited partnership
interests in four managed RSA markets for approximately $373,000.
In July 1994, the Company acquired an additional interest in an affiliated
corporation for approximately $199,000 in cash.
In August 1994, the Company acquired an aggregate of 3.07% of the stock of a
corporation which operates cellular systems throughout Kansas from two unrelated
corporations for approximately $3,000,000 in cash.
During fiscal year 1994, the Company recognized a gain of approximately
$907,000 due to the write-off of contingent liabilities related to stock price
guarantees in acquisition agreements.
Each of the above acquisitions was accounted for using the purchase method
of accounting. The applicable results of operations of the acquired interests
have been included in the Company's consolidated statements of operations from
the respective acquisition dates.
The following represents the pro forma results of operations as if the above
noted acquisitions had occurred at the beginning of the respective period in
which the acquisition occurred, as well as at the beginning of the immediately
preceding period:
YEAR ENDED SEPTEMBER 30,
----------------------------------------------
1994 1993 1992
-------------- -------------- --------------
Revenues............................................... $ 62,273,235 $ 41,241,051 $ 23,371,759
Equity in net loss of affiliates....................... (4,479,329) (4,854,046) (6,989,099)
Net loss............................................... (17,480,917) (20,019,844) (11,165,859)
Loss per common share.................................. (1.50) (2.25) (1.46)
F-14
COMMNET CELLULAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1994 IS UNAUDITED)
2. BUSINESS ACQUISITIONS AND DISPOSITIONS (CONTINUED)
In addition, the Company has initiated discussions with other cellular
telephone carriers regarding acquisition of markets or interests in Iowa, North
Dakota, Kansas, Nebraska and Wyoming. Such acquisitions will be pursued to the
extent that enhancement or extension of the Company's network is accomplished,
although there can be no assurance any such acquisitions will be consummated.
In November 1994, the Company purchased an additional 5.97% interest in
Nebwest Cellular, Inc. for $1,600,000 in cash. Pursuant to the terms of a
shareholder's agreement, the Company subsequently sold a portion of that
interest to the other shareholders on a pro rata basis for approximately
$450,000 in cash. In February 1995, the Company purchased an additional 3.37%
interest in this corporation for 34,688 shares of the Company's Common Stock. In
March 1995, the Company purchased an additional 2.57% interest in this
corporation for 28,638 shares of the Company's Common Stock.
In January 1995, the Company sold a wholly-owned subsidiary for
approximately $86,000 which resulted in a loss of approximately $297,000.
In January 1995, the Company transferred its 25% interest in one nonmanaged
RSA market to a partner in that market pursuant to a judgment. The judgment is
currently being appealed. The Company received approximately $1,699,000 upon
transfer of the interest which resulted in a gain of approximately $497,000.
In February 1995, the Company purchased additional interests ranging from
19% to 25% in eleven managed and one nonmanaged markets for approximately
$1,259,000 in cash and the issuance of 49,738 shares of the Company's Common
Stock.
The Company has entered into an agreement to sell its 61.5% interest in
Nebwest Cellular, Inc. which owns 25.52% of Nebraska Cellular Telephone
Corporation, the licensee for the ten wireline RSA markets in the state of
Nebraska, for approximately $24.3 million which will result in a gain after tax
of approximately $19.6 million. The interest to be purchased from the Company,
as well as interests in the Nebraska RSA markets to be purchased from other
entities, will be acquired at a cost of over $200 per pop after taking into
account debt assumed or refinanced. This transaction is expected to close during
July 1995.
3. SHORT-TERM INVESTMENTS
On September 30, 1994, the Company adopted SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," and classified all
short-term investments as available-for-sale.
The following is a summary of available-for-sale securities:
AVAILABLE-FOR-SALE SECURITIES
------------------------------------------------------
GROSS GROSS ESTIMATED
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------- ----------- ----------- -------------
U.S. treasury securities and obligations of U.S.
government agencies............................. $ 9,182,411 $ -- $ 242,151 $ 8,940,260
U.S. government treasuries and agencies funds.... 11,500,000 -- 184,098 11,315,902
U.S. corporate bonds............................. 966,597 -- 24,062 942,535
------------- ----------- ----------- -------------
$ 21,649,008 $ -- $ 450,311 $ 21,198,697
------------- ----------- ----------- -------------
------------- ----------- ----------- -------------
The gross realized loss on sales of available-for-sale securities totaled
$744,000 for the year ended September 30, 1994. The net adjustment to unrealized
holding gains (losses) on available-for-sale securities included as a separate
component of shareholders' equity totaled $450,000 as of September 30, 1994.
F-15
COMMNET CELLULAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1994 IS UNAUDITED)
3. SHORT-TERM INVESTMENTS (CONTINUED)
The amortized cost and estimated fair value of debt and marketable equity
securities at September 30, 1994 are shown below. Expected maturities will
differ from contractual maturities because the issuers of the securities may
have the right to prepay obligations without prepayment penalties.
ESTIMATED
COST FAIR VALUE
------------- -------------
Available-for-Sale:
Due in one year or less...................................... $ 16,620,000 $ 16,378,522
Due after one year through three years....................... 170,000 171,074
Due after three years........................................ 4,859,008 4,649,101
------------- -------------
$ 21,649,008 $ 21,198,697
------------- -------------
------------- -------------
4. INVESTMENT IN AND ADVANCES TO AFFILIATES
Investment in and advances to the Company's nonconsolidated affiliates
consisted of the following:
SEPTEMBER 30,
------------------------------
1994 1993
-------------- --------------
Investment.................................................... $ 12,605,395 $ 13,170,362
Equity in loss -- cumulative.................................. (24,049,632) (23,410,622)
Advances and other............................................ 73,352,998 66,132,632
-------------- --------------
$ 61,908,761 $ 55,892,372
-------------- --------------
-------------- --------------
The combined financial position of the nonconsolidated affiliates is as
follows:
SEPTEMBER 30,
------------------------------
1994 1993
-------------- --------------
Current assets.......................................................... $ 8,597,246 $ 9,699,996
Investment in affiliated limited partnerships........................... 10,446,767 7,803,769
Property and equipment, net of accumulated depreciation................. 33,162,750 25,245,274
Other assets............................................................ 4,079,497 3,607,741
-------------- --------------
Total assets........................................................ $ 56,286,260 $ 46,356,780
-------------- --------------
-------------- --------------
Due to CommNet Cellular Inc............................................. $ 11,981,737 $ 4,835,411
Due to Cellular, Inc. Financial Corporation............................. 55,428,739 57,433,612
Other liabilities....................................................... 21,389,471 12,627,438
Minority interest....................................................... 859,823 1,788,098
Stockholders' deficit................................................... (33,373,510) (30,327,779)
-------------- --------------
Total liabilities and stockholders' deficit......................... $ 56,286,260 $ 46,356,780
-------------- --------------
-------------- --------------
F-16
COMMNET CELLULAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1994 IS UNAUDITED)
4. INVESTMENT IN AND ADVANCES TO AFFILIATES (CONTINUED)
Combined operations of these nonconsolidated affiliates are summarized as
follows:
YEAR ENDED SEPTEMBER 30,
----------------------------------------------
1994 1993 1992
-------------- -------------- --------------
Revenues............................................... $ 42,160,218 $ 27,121,816 $ 9,093,887
Operating costs........................................ (50,519,584) (36,205,918) (23,902,180)
Minority interest...................................... 7,333 324,259 951,514
Equity in income (loss) of affiliates.................. 369,495 (660,397) (2,681,979)
-------------- -------------- --------------
Net loss............................................... $ (7,982,538) $ (9,420,240) $ (16,538,758)
-------------- -------------- --------------
-------------- -------------- --------------
Interest income from affiliates on advances was $11,380,231, $9,542,484, and
$9,543,783 for the years ended September 30, 1994, 1993 and 1992, respectively.
Certain advances to affiliates bear interest at the prime rate of Norwest
Bank (7.75% at September 30, 1994 and 6% at September 30, 1993) plus 2%. These
advances to and receivables from affiliates are temporary. They are generally
refinanced under loan agreements with the Company's financing subsidiary,
Cellular, Inc. Financial Corporation ("CIFC"). Advances made under such loan
agreements have a term of ten years with interest only payable until December
31, 1995. Principal and interest payments are payable thereafter, until December
31, 2000. These loans bear interest at 1% over CIFC's average cost of borrowing
from nonaffiliated lenders. Such advances will be repaid from income derived
from the operation of the cellular system or income derived from the affiliates'
interest in the partnership providing cellular service.
5. SECURED BANK FINANCING
Secured bank financing consists of the following:
SEPTEMBER 30,
----------------------------
1994 1993
------------- -------------
Secured bank financing due December 31, 2000, interest only payable
quarterly through March 31, 1996, thereafter quarterly principal and
interest payments payable through maturity.............................. $ 47,516,124 $ 35,295,597
Secured bank financing (MSA switch loans) due September 30, 1997;
quarterly principal and interest payments payable through maturity...... 2,476,577 3,238,600
Secured bank financing (RSA switch loans) due June 30, 1999; quarterly
principal and interest payments payable through maturity................ 1,546,530 1,855,836
------------- -------------
51,539,231 40,390,033
Less current portion..................................................... (1,090,870) (1,071,330)
------------- -------------
Totals............................................................... $ 50,448,361 $ 39,318,703
------------- -------------
------------- -------------
The bank credit agreements are between CIFC and CoBank. Under the terms of
these agreements, CoBank has agreed to loan to CIFC a maximum of $130,000,000 to
be reloaned by CIFC to affiliates of the Company for the construction, operation
and expansion of cellular telephone systems. Interest is payable at either the
Chase Manhattan Bank prime rate plus 1.00% for variable rate loans (8.75% at
September 30, 1994) or LIBOR (London InterBank Offered Rate) plus 2.25% for
fixed rate loans (5.767% at the six-month rate at September 30, 1994). CIFC
continues to maintain fixed interest rates on $35.1 million of loans terminating
in 1996 at interest rates of 10.8% and 10.9%. The loans are secured by a first
lien on all assets of CIFC, as well as all assets of each of the affiliates to
which loans are made by CIFC. CIFC's assets totaled
F-17
COMMNET CELLULAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1994 IS UNAUDITED)
5. SECURED BANK FINANCING (CONTINUED)
approximately $197,100,000 and $179,400,000 at September 30, 1994 and 1993,
respectively. In addition, the Company has guaranteed the obligations of CIFC to
CoBank and has granted CoBank a first security interest in all of the assets of
the Company as security for such guaranty. A commitment fee of .5% per annum is
payable by CIFC to CoBank on the average daily unborrowed commitment.
On September 8, 1993, CIFC paid down $57.1 million of its outstanding loans
from CoBank. The loan repayment was funded by an advance from the Company, the
proceeds of which were provided by the issuance of senior subordinated discount
notes (see Note 6). As a result of this repayment, CIFC terminated all but one
$2.5 million interest rate swap agreement previously entered into with CoBank,
which resulted in an extraordinary charge of $2,992,000 in the fiscal year ended
September 30, 1993. The remaining swap agreement was entered into on July 1,
1993 for a three-year period ending July 1, 1996. The swap agreement requires
CIFC to pay a fixed rate of 7.01% over the term of the swap, and CoBank to pay a
floating rate of prime (7.75% at September 30, 1994).
The CoBank credit agreements prohibit the payment of cash dividends,
prohibit any other senior borrowings, limit the use of borrowings, restrict
expenditures for certain acquisitions and investments, require the maintenance
of certain minimum levels of net worth, working capital, cash and operating cash
flow and require the maintenance of certain liquidity, capitalization, debt,
debt service and operating cash flow ratios. The requirements of the credit
agreements were established in relation to the anticipated capital and financing
needs of the Company's affiliates and their anticipated results of operations.
The Company is currently in compliance with all covenants and anticipates it
will continue to meet the requirements of the credit agreements. CoBank has sold
participations in the credit agreements to two other financial institutions
whose approval may be required for waivers or other amendments to the credit
agreements requested by CIFC or the Company.
Aggregate maturities of the secured bank financing for each of the next five
years ending September 30 are as follows: 1995 -- $1,090,870; 1996 --
$4,819,063; 1997 -- $9,153,564; 1998 -- $9,419,608; 1999 -- $10,156,571; and
thereafter -- $16,899,555.
6. CONVERTIBLE SUBORDINATED DEBENTURES AND SENIOR NOTES
In August 1989, the Company completed a public offering of $74,750,000
aggregate principal amount of 6 3/4% Convertible Subordinated Debentures due
2009. The debentures are convertible at any time prior to maturity, unless
previously redeemed or repurchased, into Common Stock of the Company at a
conversion price of $27 5/8 per share, subject to adjustment under certain
conditions.
The 6 3/4% debentures are redeemable, in whole or in part, at any time, at
the option of the Company at the redemption prices (together with accrued
interest) of 106.75% if redeemed in 1989, decreasing to 100% of the principal
amount in 1999. The debentures will also be redeemable through operation of a
sinking fund at 100% of the principal amount thereof. Mandatory annual sinking
fund payments, sufficient to retire 10% of the aggregate principal amount of the
debentures issued, will be made on each July 15, commencing July 15, 2004. These
payments are calculated to retire 50% of the issue prior to maturity. The
debenture holders may require the Company to repurchase the debentures, in whole
or in part, upon the occurrence of a change in control of the Company (as
defined in the Indenture) prior to July 15, 1999. The debentures are unsecured
and subordinated to all existing and future Senior Debt of the Company.
In May 1990, the Company completed an offering of $40,000,000 in aggregate
principal amount of 8% Convertible Subordinated Debentures due 2000. The 8%
debentures were convertible at any time prior to maturity, unless previously
redeemed or repurchased, into Common Stock of the Company at a conversion price
of $14.95 per share, subject to adjustment under certain circumstances. On
September 8, 1993, the Company called all outstanding 8% debentures for
redemption. As of September 30, 1993, $2,127,800 of the
F-18
COMMNET CELLULAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1994 IS UNAUDITED)
6. CONVERTIBLE SUBORDINATED DEBENTURES AND SENIOR NOTES (CONTINUED)
debentures had been converted into 142,329 shares of the Company's Common Stock.
In October 1993, the remaining $37,812,200 of 8% debentures were converted into
2,529,194 shares of the Company's Common Stock, and the Company paid
approximately $60,000 to the remaining holders of the debentures.
In January 1993, the Company completed a private placement of $4,950,000 of
8.75% Convertible Senior Subordinated Notes Due 2001. The Notes are general
unsecured obligations of the Company and are subordinate in right of payment to
all Senior Debt of the Company. The Notes may be redeemed at the option of the
Company at the redemption prices (together with accrued interest) of 105 15/32%
if redeemed in 1996 decreasing to 101 3/32% of the principal amount in 2001. The
Note holders may convert the Notes into shares of the Company's Common Stock at
the price of $15.00 per share. Subsequent to year end, the majority holder of
Notes exercised its right to demand registration, which is expected to occur
during the second fiscal quarter of 1995.
In September 1993, the Company completed an offering of $176,651,000
aggregate principal amount of 11 3/4% Senior Subordinated Discount Notes Due
2003. The Notes were issued at a substantial discount from their principal
amount resulting in gross proceeds to the Company of approximately $100,000,000.
After deducting offering costs, net proceeds were $96,739,604. The Notes are
general unsecured obligations of the Company and are subordinate in right of
payment to all Senior Debt of the Company.
Commencing September 1, 1998, interest will accrue until maturity on the
Notes at the rate of 11 3/4% per annum. Interest on the Discount Notes is
payable semi-annually on March 1 and September 1, commencing March 1, 1999. The
Discount Notes mature on September 1, 2003 and are redeemable, in whole at any
time or in part from time to time, at the option of the Company at the
redemption prices (together with accrued interest) of 105.87% if redeemed in
1998 decreasing to 101.46% of the principal amount in 2001. The Discount Note
holders may require the Company to repurchase the Discount Notes, in whole or in
part, in certain instances constituting a change of control of the Company.
The Company has reserved the appropriate number of shares for any
conversions prior to maturity on the convertible debt issues.
7. CAPITAL LEASES
The Company leases assets, primarily computer equipment, under capital
leases of $2,466,711 (less accumulated depreciation of $913,687) at September
30, 1994.
Future minimum lease payments under capital leases at September 30, 1994 are
as follows:
1995................................................................ $ 655,450
1996................................................................ 334,555
1997................................................................ 285,979
1998................................................................ 179,991
1999................................................................ --
----------
1,455,975
Less amount representing interest and sales tax..................... 82,868
----------
1,373,107
Obligation under capital leases due within one year................. 588,025
----------
$ 785,082
----------
----------
F-19
COMMNET CELLULAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1994 IS UNAUDITED)
8. COMMITMENTS
The Company leases office space and equipment under agreements which provide
for rental payments based on lapse of time. Rent expense was $1,366,169,
$1,135,849 and $1,172,115 for the years ended September 30, 1994, 1993 and 1992,
respectively.
The aggregate annual rental commitment as of September 30, 1994 is as
follows:
1995............................................................... $ 1,694,418
1996............................................................... 1,163,884
1997............................................................... 826,727
1998............................................................... 753,762
1999............................................................... 410,417
Future years....................................................... 1,738,899
-----------
$ 6,588,107
-----------
-----------
On May 15, 1989, the Company adopted a retirement savings plan (pursuant to
Section 401(k) under the Internal Revenue Code) providing for a deferred
compensation and Company matching provision. Under the plan, eligible employees
are permitted to contribute up to 15% of gross compensation into the retirement
plan and the Company will match at the minimum 25% of each employee's
contribution up to 3% of the employee's eligible compensation. The expense under
the retirement savings plan was approximately $77,871, $55,920 and $52,480 for
the years ended September 30, 1994, 1993 and 1992, respectively.
9. INCOME TAXES
As permitted under SFAS No. 109, prior years' financial statements have not
been restated. The adoption of SFAS No. 109 as of October 1, 1993 had no
cumulative effect on net loss, and has no effect on operating loss and net loss
for the year ended September 30, 1994.
At September 30, 1994, the Company had cumulative net operating loss
carryforwards of $54,725,000 for income tax purposes. If not offset against
taxable income, the tax loss carryforwards will expire between 2001 and 2009.
Prior net operating losses have been restated to reflect the impact of entities
consolidated in 1994 that incurred NOLs prior to becoming part of the
consolidated reporting group. The Company has no liability for regular tax
expense due to tax net operating losses.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. As of
F-20
COMMNET CELLULAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1994 IS UNAUDITED)
9. INCOME TAXES (CONTINUED)
September 30, 1994 and 1993, the Company's net deferred tax asset has been fully
reserved with a valuation allowance. Significant components of the Company's
deferred tax assets and liabilities as of September 30, 1994 are as follows:
Deferred tax assets:
Equity method investments............................................ $ 2,953,000
Intangible asset differences......................................... 8,621,000
Inventory adjustments................................................ 456,000
Accrued liabilities.................................................. 700,000
Interest expense on zero coupon bonds................................ 4,932,000
Other -- net......................................................... 537,000
Net operating loss carryforwards..................................... 20,796,000
-----------
Total deferred tax assets.......................................... 38,995,000
-----------
Deferred tax liabilities:
Difference in license costs.......................................... 21,573,000
Fixed asset differences.............................................. 3,599,000
-----------
Total deferred tax liabilities..................................... 25,172,000
-----------
Net deferred tax asset............................................... 13,823,000
Valuation allowance.................................................. (13,823,000)
-----------
Net deferred taxes..................................................... $ --
-----------
-----------
10. COMMON STOCK OPTIONS
In 1987, the Company adopted a Key Employees' Nonqualified Stock Option Plan
whereby employees may be granted options to purchase up to 500,000 shares of the
Company's Common Stock. All outstanding options were granted at an exercise
price which represented at least 100% of the quoted market value of the
Company's Common Stock at the date of grant and were exercisable for a period of
five years from the date of grant. In November 1992, the Company terminated the
Key Employees' Nonqualified Stock Option Plan as to future grants.
The Company adopted an Omnibus Stock and Incentive Plan, effective November
1, 1991, pursuant to which 500,000 shares of the Company's Common Stock are
reserved for issuance pursuant to Options, Stock Appreciation Rights, Stock
Bonuses or Phantom Stock Rights. In February 1993, the Company's shareholders
approved an increase of an additional 500,000 shares of the Company's Common
Stock to be reserved for issuance pursuant to the Omnibus Stock and Incentive
Plan plus 1% of the number of shares outstanding at the end of each fiscal year.
F-21
COMMNET CELLULAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1994 IS UNAUDITED)
10. COMMON STOCK OPTIONS (CONTINUED)
An analysis of options related to the Company's benefit plans is as follows:
KEY EMPLOYEES' OMNIBUS STOCK
NONQUAL. STOCK AND INCENTIVE EXERCISE PRICE
OPTION PLAN PLAN RANGE
-------------- -------------- -----------------
Outstanding options at September 30, 1992........... 133,500 216,500 $ 7.00 - $26.00
Granted............................................. -- 296,000 $13.00 - $14.88
Forfeitures......................................... (24,000) (188,000)
Exercised........................................... (10,000) -- $ 8.50
------- --------------
Outstanding options at September 30, 1993........... 99,500 324,500 $ 7.00 - $26.00
Granted............................................. -- 261,000 $19.50 - $19.63
Forfeitures......................................... (2,500) (28,875)
Exercised........................................... (8,000) (12,000) $ 8.50 - $15.75
------- --------------
Outstanding options at September 30, 1994........... 89,000 544,625 $ 7.00 - $26.00
------- --------------
Options available for grant at September 30, 1994... -- 615,217
------- --------------
Options exercisable at September 30, 1994........... 67,625 110,500
------- --------------
------- --------------
Subsequent to September 30, 1994, the Company granted 689,000 options to
officers and employees of the Company at an exercise price of $25.625 pursuant
to the Company's Omnibus Stock and Incentive Plan. Contemporaneously, the Board
of Directors authorized 750,000 additional shares for grant pursuant to the
Omnibus Stock and Incentive Plan, subject to approval by the shareholders at the
1994 Annual Meeting to be held February 28, 1995.
In July 1993, the Company granted options to purchase 152,500 shares of
Common Stock to two former officers at exercise prices ranging from $7.00 to
$15.75. As a result, the Company recognized compensation expense of
approximately $370,000. The options become exercisable at various intervals
through November 1995 and expire on June 30, 1996. During the fiscal years ended
September 30, 1994 and 1993, options to purchase 101,250 and 25,000 shares were
exercised, respectively. As of September 30, 1994, none of the options were
exercisable. Subsequent to year end, 7,500 of the options were exercised.
11. EMPLOYEE STOCK OWNERSHIP PLAN
On October 1, 1988, the Company adopted an Employee Stock Ownership Plan
("ESOP"). The cost of the ESOP is borne by the Company through annual
contributions to a Trustee in amounts determined by the Board of Directors.
Employees are eligible to participate in the ESOP after one year of service.
Shares of Common Stock acquired by the ESOP are to be allocated to each employee
and held until the employee's retirement or death. The employee can also choose
early partial withdrawal under certain circumstances. Each employee's account
vests ratably over a period of five years. Contributions totaling approximately
$478,000 (20,953 shares), $297,000 (17,232 shares) and $264,000 (21,798 shares)
were made to the ESOP for the years ended September 30, 1994, 1993 and 1992,
respectively. Shares are deemed issued for accounting purposes in the year that
ESOP contributions expense is recognized.
12. STOCKHOLDERS' EQUITY
In December 1990, the Board of Directors declared a dividend distribution of
one right (a "Right") attached to each outstanding share of the Company's Common
Stock at any point in time. Each Right, when exercisable, entitles the
registered holder to purchase from the Company one one-hundredth of a share of
Series A Preferred Stock, at a price of $45 per one one-hundredth of a share,
subject to adjustment (the "Purchase Price").
F-22
COMMNET CELLULAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1994 IS UNAUDITED)
12. STOCKHOLDERS' EQUITY (CONTINUED)
The Rights will detach from the Common Stock and a "Distribution Date" will
occur upon the earliest of (i) ten days following a public announcement that a
person or group has acquired, or obtained the right to acquire, beneficial
ownership of 20% or more of the outstanding shares of the Company's Common Stock
(the "Stock Acquisition Date"), (ii) ten business days following commencement of
a tender offer or exchange offer that would result in a person or group
beneficially owning 30% or more of the Company's Common Stock, or (iii) ten
business days after the Board of Directors have made a determination that
someone has become the beneficial owner of a substantial amount of the Company's
Common Stock and that such ownership is adverse to the Company's interest.
Should these events occur, each holder of a Right will thereafter have the right
to receive, upon exercise, the Company's Common Stock (or, in certain
circumstances, cash, property or other securities of the Company) having a value
equal to two times the Purchase Price. Similarly, in the event that at any time
following a Stock Acquisition Date, the Company is acquired in a merger or other
business combination transaction in which the Company is not the surviving
corporation or 50% or more of its assets, cash flow or earning power is sold or
transferred, each holder of a Right shall thereafter have the right to receive,
upon exercise, Common Stock of the acquiring entity having a value equal to two
times the Purchase Price. Under certain circumstances, any Rights that are owned
by the acquiring person or the adverse person will be null and void.
In general, the Company may redeem the Rights in whole, but not in part, at
a price of $.01 per Right, at any time until ten days following the acquisition
by a person or group of 20% or more of the Company's outstanding Common Stock or
the declaration by the Board of Directors that a person is an adverse person.
The Rights will expire on December 24, 2000, unless earlier redeemed.
In February 1992, the Company completed a public offering of 2,875,000
shares of Common Stock at $13.75 per share for aggregate proceeds of
$39,531,000. The Company incurred $2,272,000 in underwriting discounts and
commissions, and $656,000 in other costs associated with this offering.
13. SUBSEQUENT EVENTS
Subsequent to September 30, 1994, the Company acquired an additional
interest in an affiliated corporation for $1,600,000 in cash. Pursuant to the
terms of a shareholder's agreement, the Company has offered to (i) sell the
interest to the other shareholders on a pro rata basis and (ii) buy the
interests of such shareholders at the same price per share.
14. FAIR VALUES OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires disclosure of fair value information about financial instruments for
which it is practicable to estimate that value, whether or not recognized in the
balance sheet. In cases where quoted market prices are not available, fair
values are based on estimates using present value or other valuation techniques.
Statement 107 excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements. Accordingly, the aggregate fair
value amounts do not represent the underlying value of the Company.
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:
ADVANCES TO AFFILIATES: The fair value of advances to and receivables from
affiliates are estimated using discounted cash flow analyses, based on the
Company's borrowing rate at September 30, 1994, plus 1%.
LONG AND SHORT-TERM DEBT: The carrying amounts of the Company's variable
rate borrowings under its credit agreements approximate their fair value. The
fair value of the Company's fixed rate debt is estimated using discounted cash
flow analyses, based on the Company's current incremental borrowing rates. Other
long-term debt is valued based on quoted market prices.
F-23
COMMNET CELLULAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1994 IS UNAUDITED)
14. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
The carrying amounts and fair values of the Company's financial instruments
at September 30, 1994 are as follows:
CARRYING AMOUNT FAIR VALUE
---------------- -------------
Advances to affiliates................................................. $ 73,352,998 $ 57,589,914
Secured bank financing:
Variable rate loans.................................................. 6,520,244 6,520,244
Fixed rate loans..................................................... 45,018,987 40,460,098
11 3/4% senior discount notes.......................................... 112,979,725 73,436,821
Convertible subordinated debentures.................................... 79,700,000 75,962,500
15. QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly financial data and per share data are presented below:
FIRST SECOND FOURTH
QUARTERLY FINANCIAL DATA QUARTER QUARTER THIRD QUARTER QUARTER
- ------------------------------------------ ------------- ------------- ------------- -------------
1993
Revenues................................ $ 6,074,174 $ 6,378,024 $ 9,674,191 $ 11,562,922
Operating loss.......................... (3,681,022) (5,620,661) (4,493,216) (1,635,634)
Loss before extraordinary charge........ (7,180,130) (5,268,089) (6,635,441) (590,879)
Net loss................................ (7,180,130) (5,268,089) (6,635,441) (3,582,552)
Loss per share:
Loss before extraordinary charge...... (0.86) (0.62) (0.77) (0.07)
Net loss.............................. (0.86) (0.62) (0.77) (0.41)
1994
Revenues................................ $ 12,770,278 $ 13,685,245 $ 15,305,934 $ 19,598,594
Operating loss.......................... (1,721,297) (3,388,686) (530,441) (28,911)
Net loss................................ (4,713,227) (4,570,536) (2,966,006) (4,501,383)
Net loss per share...................... (0.42) (0.39) (0.25) (0.39)
The Company capitalized $648,000 and $985,000 of corporate costs and
expenses related to construction projects in process at September 30, 1994 and
1993, respectively. In addition, as described in Note 5, CIFC terminated all but
$2.5 million of interest rate swap agreements previously entered into with
CoBank, which resulted in an extraordinary charge of $2,992,000 in the fourth
fiscal quarter of 1993.
F-24
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFER CONTAINED HEREIN, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR BY THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY, ANY SECURITIES IN ANY
JURISDICTION TO ANY PERSON TO WHOM IT IS NOT LAWFUL TO MAKE ANY SUCH OFFER OR A
SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION
THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE
DATE HEREOF.
-------------------
TABLE OF CONTENTS
PAGE
---------
Incorporation of Certain Information by
Reference..................................... 2
Certain Definitions............................ 2
Prospectus Summary............................. 3
Risk Factors................................... 12
Use of Proceeds................................ 15
Capitalization................................. 17
Selected Consolidated Financial Data........... 18
Selected Combined and Proportionate Operating
Results of Cellular Licensees................. 20
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 22
Business....................................... 32
Management..................................... 48
Description of Certain Indebtedness............ 50
Description of the Notes....................... 51
Underwriting................................... 68
Legal Matters.................................. 68
Experts........................................ 68
Additional Information......................... 69
$80,000,000
LOGO
% SUBORDINATED NOTES
DUE 2005
-------------------
P R O S P E C T U S
-------------------
MERRILL LYNCH & CO.
SMITH BARNEY INC.
, 1995
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Set forth below is an estimate of the approximate amount of the fees and
expenses payable by the Company in connection with the issuance and distribution
of the securities being registered hereby.
AMOUNT PAYABLE
ITEM BY COMPANY
- ---------------------------------------------------------------- --------------
S.E.C. Registration Fee......................................... $ 27,586.20
N.A.S.D. Filing Fee............................................. 8,500.00
State Securities Law (Blue Sky) Fees and Expenses............... 30,000.00
Printing and Engraving.......................................... 90,000.00
Legal Fees...................................................... 150,000.00
Accounting Fees and Expenses.................................... 85,000.00
Trustee's Fees and Expenses..................................... 8,000.00
Miscellaneous Expenses.......................................... 913.80
--------------
Total....................................................... $ 400,000.00
--------------
--------------
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article IX of the Company's Amended and First Restated Articles of
Incorporation provides in part:
A. The Corporation shall, to the fullest extent permitted by applicable
law, (i) indemnify, and (ii) advance litigation expenses prior to the final
disposition of an action, to any person made or threatened to be made a
party to an action or proceeding, whether criminal, civil, administrative or
investigative, by reason of the fact that he or she is or was a director or
officer of the Corporation or served any other enterprise as a director or
officer at the request of the Corporation and such rights of indemnification
and to advancement of litigation expenses shall also be applicable to the
heirs, executors, administrators and legal representatives of such director
or officer.
B. The foregoing provisions of Article IX shall be deemed to be a
contract between the Corporation and each director and officer who serves in
such capacity at any time while this Article IX is in effect, and any repeal
or modification hereof shall not affect the rights or obligations then or
therefore existing or any action, suit or proceeding theretofore or
thereafter brought based in whole or in part upon any such stated facts.
C. The foregoing rights to indemnification and to advancement of
litigation expenses shall not be deemed exclusive of any other rights to
which a director or officer or his or her legal representatives may be
entitled apart from the provisions of this Article IX.
II-1
ITEM 16. EXHIBITS.
EXHIBIT NO.
- -----------
*1.1 Form of Purchase Agreement.
*4.1 Form of Indenture between the Registrant and American Bank National Association, as Trustee, relating
to the Registrant's % Subordinated Notes due 2005.
*4.2 Specimen Certificate for the Registrant's % Subordinated Notes due 2005 (included in Exhibit 4.1).
*5.1 Opinion of Latham & Watkins regarding the legality of the Registrant's % Subordinated Notes due
2005.
**12.1 Statement regarding computation of ratio of earnings to fixed charges.
*23.1 Consent of Independent Auditors.
*23.2 Consent of Latham & Watkins (included in the opinion filed as Exhibit 5.1).
**24.1 Powers of Attorney (see page II-4).
**25.1 Statement of eligibility on Form T-1 of American Bank National Association, as Trustee under the
Indenture relating to the Registrant's % Subordinated Notes due 2005.
<FN>
- ------------------------
*Filed herewith.
**Previously filed and unchanged.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes that:
(1) for purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial BONA FIDE offering thereof.
(3) For purposes of determining any liability under the Securities Act,
each filing of the Registrant's annual report pursuant to Section 13(a) or
Section 15(d) of the Securities Exchange Act of 1934 that is incorporated by
reference in the Registration Statement shall be deemed to be a new
registration statement relating to the securities offered herein, and the
offering of such securities at that time shall be deemed to be the initial
BONA FIDE offering thereof.
(4) Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended (the "Securities Act") may be permitted
to directors, officers and controlling persons of the registrant pursuant to
the provision described under Item 15 above, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or
controlling person of such registrant in the successful defense of any
action, suit or proceeding) is asserted against the registrant by such
director, officer or controlling person in connection with the securities
being registered, the registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
II-2
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Englewood, State of Colorado, on June 28, 1995.
CommNet Cellular Inc.
/s/ ARNOLD C. POHS
--------------------------------------
By: Arnold C. Pohs
CHAIRMAN OF THE BOARD,
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
Chairman of the Board,
* President and Chief Executive June 28,
- ------------------------------------------- Officer (Principal Executive 1995
Arnold C. Pohs Officer)
Executive Vice President,
* Treasurer, Chief Financial June 28,
- ------------------------------------------- Officer and Director (Principal 1995
Daniel P. Dwyer Financial Officer)
* Senior Vice President and
- ------------------------------------------- Controller (Principal June 28,
Andrew J. Gardner Accounting Officer) 1995
*
- ------------------------------------------- Director June 28,
John E. Hayes, Jr. 1995
*
- ------------------------------------------- Director June 28,
Robert J. Paden 1995
*
- ------------------------------------------- Director June 28,
David E. Simmons 1995
*/s/ AMY M. SHAPIRO
- -------------------------------------------
ATTORNEY-IN-FACT
II-3
ANNEX A
The map on the inside front cover displays the geographic coverage of the
Company's managed markets as of June 1, 1995 and the proposed geographic
coverage of the Company's managed markets as of August 31, 1995.
The Company's managed markets are located in the states of Idaho, Montana,
Wyoming, Utah, Colorado, North Dakota, South Dakota and Iowa.
INDEX TO EXHIBITS
ITEM 16. EXHIBITS.
EXHIBIT NO.
- -----------
*1.1 Form of Purchase Agreement.
*4.1 Form of Indenture between the Registrant and American Bank National Association, as Trustee, relating
to the Registrant's % Subordinated Notes due 2005.
*4.2 Specimen Certificate for the Registrant's % Subordinated Notes due 2005 (included in Exhibit 4.1).
*5.1 Opinion of Latham & Watkins regarding the legality of the Registrant's % Subordinated Notes due
2005.
**12.1 Statement regarding computation of ratio of earnings to fixed charges.
*23.1 Consent of Independent Auditors.
*23.2 Consent of Latham & Watkins (included in the opinion filed as Exhibit 5.1).
**24.1 Powers of Attorney (see page II-4).
**25.1 Statement of eligibility on Form T-1 of American Bank National Association, as Trustee under the
Indenture relating to the Registrant's % Subordinated Notes due 2005.
<FN>
- ------------------------
*Filed herewith.
**Previously filed and unchanged.