FORM 10-K
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended: September 30, 1995
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[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number: 0-15056
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COMMNET CELLULAR INC.
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(Exact name of registrant as specified in its charter)
Colorado 84-0924904
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5990 Greenwood Plaza Boulevard, Suite 300, Englewood, Colorado 80111
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(Address of principal executive offices)
(Zip Code)
303/694-3234
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.001 per share
(Title of Class)
Preferred Stock Purchase Rights
(Title of Class)
Indicate by check mark whether the registrant (a) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No _____
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant, computed by reference to the last sale price of such stock as of the
close of trading on December 19, 1995 was $268,201,697.
The number of shares of the registrant's common stock outstanding as of
December 19, 1995 was 13,470,354.
PART I
Item 1. Business.
(a) General Development of Business.
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CommNet Cellular Inc. was organized under the laws of Colorado in
1983. Cellular, Inc. Financial Corporation ("CIFC") subsequently was organized
to provide financing to affiliates of the Company. Cellular Inc. Network
Corporation ("CINC") also subsequently was organized to acquire interests in
cellular licenses. CIFC and CINC are wholly-owned subsidiaries of CommNet
Cellular Inc. Unless the context indicates otherwise, the "Company" refers to
CommNet Cellular Inc. and its consolidated subsidiaries.
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
3,315,000 net Company pops in 82 markets located in 14 states. These markets
consist of 72 RSA markets having a total of 5,260,000 pops and 10 MSA markets
having a total of 1,302,000 pops, of which the Company's interests represent
2,681,000 net Company pops and 634,000 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.
As used herein, "pops" means the estimated total 1994 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. 1994 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 96% of the total pops
within the managed markets and the Company intends to increase signal coverage
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.
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 ("telcos") and
no more than 49% by the Company. See "-- Federal Regulation." In exchange for
the Company's 49% interest, the Company offered to sell shares of its Common
Stock to the telcos and agreed to provide financing to the affiliates. 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 82 markets in which it holds an interest and owns a greater
than 50% interest in 44 of its 55 managed markets. The Company currently
finances
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entities holding interests representing approximately 4,292,000 pops, of which
3,315,000 are included in net Company pops and 977,000 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 nine states and
represents approximately 4,206,000 pops and 3,048,000 net Company pops. As of
September 30, 1995, the RSA and MSA managed markets had 109,081 and 42,401
subscribers, respectively. The Company significantly expanded radio signal
coverage with construction of 78 new cell sites in fiscal year 1995.
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
revenues tend to produce higher margins because roaming calls on average are
priced at higher rates than local calls and because there are no associated
sales commission costs.
(b) Financial Information About Industry Segments.
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The Company has only one principal industry being the management,
financing and operation of cellular telephone systems. Information concerning
revenue, operating profit or loss and identifiable assets of the Company's sole
industry segment are set forth in the consolidated financial statements and
related notes included in Part II of this Report.
(c) Narrative Description of Business.
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The Company's Operations
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General. Information regarding the Company's net ownership interests
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in each cellular licensee and the market subject to such license as of December
19, 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."
Net Company
MSA or Interest in 1994 Net Company
RSA Code (1) State Licensee (2) Population (3)(6) Pops (4)
- -------------- ------------------ ---------------- ------------------- -------------
MSAs:
141 Minnesota 8.01% LP 243,518 19,498
185 Indiana 16.67% LP 170,313 28,391
241*(5) Colorado 73.99% GP 127,299 94,189
253*(5) Iowa 74.50% GP 118,105 87,988
267*(5) South Dakota 51.00% GP 133,987 68,333
268*(5) Montana 54.10% GP 122,871 66,473
279 Maine 11.11% GP 102,441 11,380
289*(5) South Dakota 100.00% GP 113,831 113,831
297*(5) Montana 100.00% GP 81,938 81,938
298*(5) North Dakota 70.00% GP 87,835 61,485
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Total MSA 1,302,138 633,506
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Net Company
MSA or Interest in 1994 Net Company
RSA Code (1) State Licensee (2) Population (3)(6) Pops (4)
- -------------- ------------------ ---------------- ------------------- -------------
RSAs:
348* Colorado 10.00% GP 45,211 4,521
349*(5) Colorado 61.75% GP 63,315 39,097
351*(5) Colorado 61.75% GP 65,026 40,154
352*(5) Colorado 66.00% GP 26,890 17,747
353*(5) Colorado 100.00% GP 68,119 68,119
354*(5) Colorado 69.40% GP 45,689 31,708
355* Colorado 49.00% GP 45,026 22,063
356* Colorado 49.00% GP 27,671 13,559
389 Idaho 50.00% LP 66,552 33,276
390 Idaho 33.33% LP 15,911 5,303
392*(5) Idaho (B1) 100.00% LP 136,677 136,677
393*(5) Idaho 91.64% GP 288,252 264,154
415 Iowa 10.11% LP 155,924 15,770
416 Iowa 38.50% LP 108,063 41,603
417*(5) Iowa 100.00% GP 152,917 152,917
419* Iowa 44.92% GP 54,653 24,549
420*(5) Iowa 100.00% GP 63,395 63,395
424 Iowa 17.15% LP 66,706 11,440
425* Iowa 13.28% LP 107,924 14,337
426* Iowa 49.14% GP 85,106 41,820
427* Iowa 49.17% GP 102,917 50,601
428 Kansas 3.07% LP 28,006 860
429 Kansas 3.07% LP 31,188 957
430 Kansas 3.07% LP 52,587 1,614
431 Kansas 3.07% LP 127,201 3,905
432 Kansas 3.07% LP 31,075 954
433 Kansas 3.07% LP 20,183 620
434 Kansas 3.07% LP 81,665 2,507
435 Kansas 3.07% LP 127,567 3,916
436 Kansas 3.07% LP 58,095 1,784
437 Kansas 3.07% LP 105,951 3,253
438 Kansas 3.07% LP 81,692 2,508
439 Kansas 3.07% LP 42,526 1,306
440 Kansas 3.07% LP 28,891 887
441 Kansas 3.07% LP 172,162 5,285
442 Kansas 3.07% LP 155,265 4,767
512 Missouri(B1) 14.70% LP 56,387 8,289
523*(5) Montana (B1) 100.00% GP 68,744 68,744
523*(5) Montana (B2) 98.85% GP 72,353 71,521
524*(5) Montana 79.40% GP 37,972 30,150
526*(5) Montana 100.00% GP 39,999 39,999
527*(5) Montana 100.00% GP 180,555 180,555
528*(5) Montana 80.88% GP 64,321 52,020
529*(5) Montana 74.50% GP 29,807 22,206
530*(5) Montana 80.88% GP 85,945 69,508
531*(5) Montana 100.00% GP 31,508 31,508
532*(5) Montana 100.00% GP 19,628 19,628
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Net Company
MSA or Interest in 1994 Net Company
RSA Code (1) State Licensee (2) Population (3)(6) Pops (4)
- -------------- ------------------ ---------------- ------------------- -------------
553* New Mexico 16.33% LP 251,919 41,143
555 New Mexico 12.25% LP 78,980 9,675
557 New Mexico 16.33% LP 56,850 9,285
580*(5) North Dakota 52.76% GP 101,590 53,599
581* North Dakota 49.00% GP 59,678 29,242
582 North Dakota 41.45% LP 90,940 37,694
583* North Dakota 49.00% GP 65,368 32,030
584*(5) North Dakota 61.75% GP 48,986 30,249
634*(5) South Dakota 100.00% GP 36,122 36,122
635*(5) South Dakota 56.29% GP 22,501 12,666
636*(5) South Dakota 57.50% GP 53,892 30,988
638*(5) South Dakota (B1) 100.00% GP 16,774 16,774
638*(5) South Dakota (B2) 100.00% GP 8,385 8,385
639*(5) South Dakota (B1) 61.75% GP 33,501 20,687
639*(5) South Dakota (B2) 61.75% GP 5,586 3,449
640*(5) South Dakota 64.49% GP 65,711 42,377
641*(5) South Dakota 61.13% GP 71,915 43,962
642* South Dakota 49.00% GP 92,384 45,268
675*(5) Utah 100.00% GP 53,271 53,271
676*(5) Utah 100.00% GP 91,208 91,208
677*(5) Utah (B3) 100.00% GP 38,644 38,644
678*(5) Utah 80.00% GP 23,676 18,941
718*(5) Wyoming 66.00% GP 47,112 31,094
719*(5) Wyoming 100.00% GP 73,641 73,641
720*(5) Wyoming 100.00% GP 148,567 148,567
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Total RSA 5,260,418 2,681,022
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Total MSA and RSA 6,562,556 3,314,528
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(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 net ownership interest of the Company in the licensee for a
cellular telephone system in the respective market. Net ownership of
greater than 50% does not necessarily represent a controlling interest in
such licensee. GP indicates that at least one affiliate of the Company has
a general partner or controlling interest in the licensee; LP indicates
that the affiliate(s) has a limited partner or minority interest.
(3) Derived from the Strategic Marketing, Inc. 1994 population estimates.
(4) Net Company Pops represents net Company interest in licensee multiplied by
1994 population.
(5) 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.
(6) 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.
Markets managed by the Company are denoted by an asterisk (*).
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Subscriber Growth Table
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Information regarding subscribers to the MSA and RSA cellular systems
managed by the Company is summarized by the following table:
Number of Estimated Population
Managed Markets 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%
June 30, 1995 55 7 48 3,904,636 771,660 (5) 3,132,976 (5) 140,237 39,798 100,439 13.04%
Sept. 30, 1995 56 7 49 4,220,975 785,866 (6) 3,435,109 (6) 151,482 42,401 109,081 8.02%
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(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.
(6) Derived from 1994 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 10 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
the network. The Company has widened the area of coverage within the network by
interconnecting MTSOs located in adjoining markets. The Company has
substantially achieved its objective of providing subscribers with "seamless"
coverage throughout the network, which permits 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 is a result of the networking of most
of the MTSOs managed by the Company and in adjoining markets within the nine-
state area. 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 the NTI
MTSOs has been achieved using NTI's internal software and hardware.
The Company implemented the "IS-41" technical interface during fiscal
1995. This technical interface, developed by the cellular industry, allows
carriers that have different types of
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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 has essentially completed the process of
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"filling in" the "cellular geographic service area" or "CGSA" (as defined by the
FCC) within its managed markets by adding network facilities which increased the
coverage of the radio signal. The Company significantly expanded radio signal
coverage with construction of 78 new cell sites in fiscal year 1995. The Company
expects that by September 30, 1996, radio signal coverage will reach
approximately 98% of the population within the managed markets. Expansion of
signal coverage has increased subscribers, enhanced the use of the systems by
existing subscribers, increased roamer traffic due to the larger geographic area
covered by the radio signal and has improved the overall efficiency of the
network. Under the rules and regulations of the FCC, expansion of signal
coverage has preserved the Company's right to provide cellular service in
valuable areas within the network.
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 sold its
interest in ten Nebraska RSA markets not managed by the Company for
approximately $24,300,000 in cash. The transaction resulted in an after-tax gain
to the Company of approximately $19,600,000 in July 1995. The interest purchased
from the Company was acquired at a cost of over $200 per pop after taking into
account debt assumed or refinanced. Proceeds from the transaction are 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. ASMC, which launched its satellite in April 1995, anticipates its
service will be available some time during fiscal year 1996. 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
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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
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and, in most cases, voice mail 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.
The Company 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 and adjoining areas 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.
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 39% equity interest in TVX, Inc.
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Marketing. The Company coordinates the marketing strategy for each of
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its managed markets. The Company markets cellular telephone service 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. 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 carriers. See "Business -- 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. 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.
Historically, the Company has relied to a significant extent on direct
sales representatives and on independent sales agents. The Company is currently
emphasizing a new channel of distribution represented by 21 Company-owned retail
stores located within the network, which will be supplemented by 11 additional
Company-owned retail stores scheduled to open during fiscal 1996. The retail
distribution channel also includes 21 current and 26 planned Wal-Mart(R) kiosks
staffed by Company personnel. The Company believes that development of retail
distribution channels owned or staffed by the Company will increase customer
additions, generate cost efficiencies in the acquisition of such new
subscribers, and enhance customer service. (Over half of the current customer
base lives within commuting distance to a Company-owned retail store.) The
Company also maintains 113 direct sales representatives and 899 agents or
outlets, including 59 Corporate Radio Shack and 14 (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.
Subscribers. To date, a substantial majority of the subscribers who
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use cellular service in markets managed by the Company 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 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.
Management Agreements. Management agreements applicable to the
---------------------
Company's managed RSA markets generally appoint the Company as exclusive
management agent of the licensee with
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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 were 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 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. Compensation to date under these agreements has not
been material. The agreements also provide for reimbursement for reasonable
administrative and overhead expenses. 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.
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 telcos and no more than 49% by the
Company. In exchange for the Company's 49% interest, the Company offered to sell
shares of its Common Stock and agreed to provide financing to the affiliates for
certain 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 September 30, 1995,
CIFC had entered into loan agreements with 49 RSA affiliates, 5 MSA affiliates
and CINC and had advanced $229,893,000 thereunder, including $149,676,000 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 September 30, 1995, the Company had outstanding
interim advances of $128,166,000 to affiliates, which advances bear interest at
2% over the prime rate.
As of September 30, 1995, the Company and CIFC had advanced a total of
$358,059,000 to RSA and MSA affiliates. Based on its proportionate ownership
interests in these affiliates, the Company's share of total affiliate loans and
advances was $293,251,000. The assets of the affiliates
I-9
in which the Company has investments or advances represent 4,292,000 pops, which
include 3,315,000 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 radii 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 assigned 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.
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.
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 cells sufficiently far apart can use the same
frequencies in the same market without interfering with one another.
I-10
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. Digital transmission
technologies are expected to 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 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 spectrum with which to pursue data applications, which may enhance
revenues.
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
transmissions 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
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FCC awarded only two licenses in each market, although certain markets have been
subdivided as a result of voluntary settlements. Each licensee has the exclusive
use of a defined frequency band within its market.
I-11
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 addition to a number of
stand-alone operators.
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, specialized mobile radio
systems ("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 personal communications services
("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 and at least one
system has commenced operations in a major metropolitan location.
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
I-12
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 within a specified time frame.
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 has been
licensed on the basis of 51 Major Trading Areas ("MTAs"), (ii) one channel block
(Block C) has been allocated 30 MHz of spectrum and will be licensed on the
basis of 493 Basic Trading Areas ("BTA's"), (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 BTAs. The FCC has proposed to allow a single entity to combine all
three 10 Mhz blocks, but has not yet adopted this rule. In a separate proceeding
dealing with spectrum auctions and consistent with a directive contained in the
1993 spectrum legislation, the FCC granted licensing preferences on the Block C
and F spectrum allocations for small businesses, rural telephone companies and
minority/woman-owned businesses. However, the FCC recently withdrew the
licensing preferences granted to minority/woman-owned businesses in light of a
U.S. Supreme Court decision on affirmative action.
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, subject to the outcome of pending litigation
described below, 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 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 area.
Generally, with respect to PCS areas in which there is ten percent or more
cumulative 1990 census population overlap between the cellular and PCS areas,
the cellular carrier will be eligible to hold only one 10 MHz BTA license in
addition to its cellular interest with an opportunity to obtain an additional
5mhz after the year 2000. The ownership attribution benchmark for cellular
interests has been set at 20% (40% for rural telcos). Therefore, for eligibility
purposes, cellular licensees are defined as entities which have an attributable
ownership interest of 20% or more in a cellular system (40% for rural telcos).
The validity of these FCC regulations is now in doubt due to a recent decision
by the US Court of Appeals for the Sixth Circuit which held that the FCC had not
developed an adequate record to justify the cellular PCS cross-ownership
restriction. Further rulemakings and litigation are likely before the final
rules are established.
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 those currently
applied to cellular licensees.
I-13
Of the 140 MHz of spectrum allocated for broadband PCS, the remaining
20 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 effect these new personal communications services
may have on the Company. The Company believes that PCS is unlikely to compete
effectively with cellular telephone service in the rural marketplace, but there
can be no assurance that this will be the case. The Company also believes that
technological advances in cellular telephone technology in conjunction with
buildout of the cellular systems existing 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
managed by the Company. 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 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 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 comprised of 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, 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 licenses in the same market.
I-14
RSAs were divided along county lines and consisted 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 licenses in each RSA were filed simultaneously. 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. 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
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. In all markets, at least one cell site must
---------------------
have been placed into commercial service within 18 months after the award of the
initial construction permit. Under FCC rules, the authorized service area for a
cellular licensee in a market is referred to as the CGSA. 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 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. Cellular licensees do not need to obtain FCC authority prior to
increasing the CGSA within their 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 licensee's CGSA (an "unserved area application").
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 in which: the five-year fill-in
period had already expired or would expire on or before
I-15
March 15, 1993; no applications for initial authorizations were filed; or
authorizations were surrendered or canceled for failure to meet the 18-month
construction deadline or other reasons. For all other markets, Phase I
applications were 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. During this period, the FCC will not accept any other
applications for unserved areas in a 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
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.
Phase I applicants for unserved areas not contiguous to 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 and
Phase II applicants 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.
Unserved area cellular carriers (both Phase I and Phase II) are
allowed one year within which to complete construction of their systems.
Unserved area cellular carriers are not permitted a five-year fill-in period. If
an unserved area cellular carrier forfeits its authorization for failure to
construct, the area which thereby reverts 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,
------------------
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
I-16
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, will 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
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.
Equal Access Proposal. In 1994, the FCC issued a notice proposing to
---------------------
extend "equal access" obligations to all providers of cellular telephone
service. Such a proposal would require cellular operators to provide customers
with the capability of directly accessing the long-distance provider of their
choice. To date, the FCC has rendered no final decision on the proposal. The
Company does not expect that an order to extend "equal access" would have a
material effect on its business, but there can be no assurance that this will be
the case.
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 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 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. 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
I-17
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 December 15, 1995, the Company had 439 full-time employees. The
Company engages the services of independent contractors on an as-needed basis.
Item 2. Properties.
In addition to the direct and attributable interests in cellular
licensees discussed in this Report, the Company leases its principal executive
offices (consisting of approximately 49,900 square feet) located in Englewood,
Colorado. In January 1996, the Company plans to relocate its principal executive
offices within Englewood, Colorado, and occupy approximately 60,000 square feet.
The Company and its affiliates lease and own locations for inventory storage,
microwave, cell site and switching equipment and administrative offices.
Item 3. 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.
Item 4. Submission of Matters to a Vote of Security Holders.
There were no matters submitted to a vote of security holders during
the quarter ended September 30, 1995.
I-18
PART II
Item 5. Market for Registrant's Common Stock and Related Security Holder
Matters.
The common stock of the Company ("Common Stock") is traded on the
Nasdaq National Market under the symbol "CELS." The following table sets forth
the range of high and low closing sale prices of the Common Stock for each
fiscal quarter since October 1, 1993 as reported by Nasdaq.
Fiscal Year 1994: High Low
---- ---
First Quarter...................... $21 1/2 $ 16 7/8
Second Quarter..................... 21 16 3/4
Third Quarter...................... 18 15 3/8
Fourth Quarter..................... 25 3/4 17 7/8
Fiscal Year 1995: High Low
---- ---
First Quarter...................... $29 1/4 $ 22 1/4
Second Quarter..................... 28 1/2 22 3/4
Third Quarter...................... 28 3/4 24 9/16
Fourth Quarter..................... 30 1/2 27 1/4
As of December 15, 1995, there were 430 holders of record of the Common
Stock.
The Company has not paid cash dividends on the Common Stock and does
not anticipate that any cash dividends will be paid on the Common Stock in the
foreseeable future. Furthermore, certain financing agreements to which the
Company is a party contain provisions which restrict the payment by the Company
of dividends or distributions on the Common Stock (other than dividends or
distributions payable in shares of Common Stock).
II-1
Item 6. Selected Financial Data.
Statement of Operations Data (1):
Years ended September 30,
-----------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
Revenues $ 89,844,119 $ 61,360,051 $ 33,689,311 $ 14,906,349 $ 4,908,170
Costs and expenses (net
of amounts allocated
to affiliates):
Cellular operations 68,928,742 50,855,637 30,288,634 18,138,532 11,940,438
Corporate 1,327,164 406,638 (1,119,298) 997,157 (592,798)
Total depreciation
and amortization 17,595,148 12,650,855 19,950,508 14,114,817 8,569,325
Write-down of
investment in
cellular system
equipment - 3,116,256 - - -
------------ --------------- --------------- --------------- -------------
Operating income (loss) 1,993,065 (5,669,335) (15,430,533) (18,344,157) (15,008,795)
Equity in net loss of
affiliates (5,028,219) (5,092,484) (6,339,145) (8,851,753) (10,931,161)
Minority interest in net income
of consolidated affiliates (963,956) (543,607) - - -
Gains on sales of affiliates 19,471,476 3,911,943 7,821,424 14,339,063 -
Interest expense (26,043,802) (21,338,505) (16,427,796) (14,800,908) (11,245,394)
Interest income 13,045,660 12,080,836 10,701,511 10,616,024 8,484,298
------------ --------------- --------------- --------------- -------------
Income (loss) before income
taxes and extraordinary charge 2,474,224 (16,651,152) (19,674,539) (17,041,731) (28,701,052)
Income tax expense 400,000 100,000 - - -
------------ --------------- --------------- --------------- -------------
Income (loss) before
extraordinary charge 2,074,224 (16,751,152) (19,674,539) (17,041,731) (28,701,052)
Extraordinary charge (2,012,257) - (2,991,673) - -
------------ --------------- --------------- --------------- -------------
Net income (loss) $ 61,967 $(16,751,152) $(22,666,212) $(17,041,731) $(28,701,052)
------------ --------------- --------------- --------------- -------------
Income (loss) per common
share before extraordinary
charge $ .17 $ (1.45) $ (2.30) $ (2.44) $ (6.00)
Extraordinary charge (.16) - (.35) - -
Net income (loss) per
common share $ .01 $ (1.45) $ (2.65) $ (2.44) $ (6.00)
------------ --------------- --------------- --------------- -------------
Weighted average
shares outstanding 12,153,592 11,577,191 8,551,785 6,984,541 4,780,674
------------ --------------- --------------- --------------- -------------
Balance Sheet Data (1):
Years ended September 30,
-------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
Working capital $ 39,910,831 $ 25,524,500 $ 63,560,591 $ 29,477,995 $ 15,317,636
Investments in and
advances to affiliates 56,918,738 61,908,761 55,892,372 52,019,577 50,745,576
Net property and equipment 105,289,475 79,917,727 53,460,296 44,209,682 33,555,291
Total assets 325,667,956 282,637,586 269,523,889 208,363,573 181,972,276
Long-term debt 246,356,587 243,913,168 259,676,224 189,430,430 183,208,596
Total liabilities 267,012,294 266,731,119 278,945,660 204,123,685 204,059,999
Stockholders' equity
(deficit) (2) 58,655,662 15,906,467 (9,421,771) 4,239,888 (22,087,723)
II-2
Item 6. Selected Financial Data (Continued).
(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.
September 30,
--------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
Consolidated 45 42 36 28 22
Equity 20 35 38 37 47
Cost 18 18 6 18 18
---- ---- ---- ---- ----
83 95 80 83 87
---- ---- ---- ---- ----
(2) No cash dividends were declared or paid during any period presented.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
General
- -------
The Company generated operating income during fiscal 1995 as the focus
shifted from construction and initial operation of cellular systems to
increasing penetration and subscriber usage. In addition, the Company expects
that operating income before depreciation and amortization ("EBITDA"), which was
positive during the fiscal year ended September 30, 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 45 markets, 42 of which were consolidated for the
entire period, are included in the consolidated results for the fiscal year
ended September 30, 1995. The results of operations of 42 markets, 36 of which
were consolidated for the entire period, are included in the consolidated
results for the fiscal year ended September 30, 1994. The increase in the number
of markets included in consolidated results is due to acquisitions consummated
subsequent to September 30, 1994. Consolidated results of operations also
include the operations of Cellular, Inc. Financial Corporation ("CIFC"), the
Company's wholly-owned financing subsidiary, 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 fiscal year ended September 30, 1995, 20 markets were accounted
for under the equity method, compared to 35 such markets for the fiscal year
ended September 30, 1994. Markets in which the Company's interest is
II-3
less than 20% are accounted for under the cost method. Eighteen markets were
accounted for under the cost method for both fiscal years ended September 30,
1995 and September 30, 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 CIFC's average borrowing
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 generate
positive cash flow, the cash is used to repay borrowings by the affiliates from
CIFC and thereafter will be used to make cash distributions to equity holders,
including the Company.
Results of Operations
- ---------------------
Fiscal Year 1995 Compared With Fiscal Year 1994. Cellular service
-----------------------------------------------
revenues, including in-roaming revenues, increased 56% from $52,586,000 for the
year ended September 30, 1994 to $81,939,000 for the year ended September 30,
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
year from 36 during the year ended September 30, 1994 to 42 during the year
ended September 30, 1995. Growth in subscribers accounted for 88% of the
increase, and the number of consolidated markets accounted for 12% of the
increase. In-roaming revenues increased by 58%, or $7,710,000, from
$13,375,000 for the year ended September 30, 1994 to $21,085,000 for the year
ended September 30, 1995 due to increased coverage in cellular markets.
In-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,
Average monthly revenue per subscriber, including in-roaming revenues,
decreased from $74 for the year ended September 30, 1994 to $68 for the year
ended September 30, 1995, reflecting the benefit of declining prices to the
consumer that is consistent with an overall industry trend. However, in-roaming
revenues per subscriber were essentially flat reflecting the larger scale
benefit of the Company's cell site expansion program.
Cost of cellular service increased as a percentage of service revenues
from 18% in fiscal year 1994 to 20% in fiscal year 1995, primarily due to an
increase in costs related to interconnect service. The Company expects that cost
of cellular service will not increase as a percentage of service revenues in
fiscal 1996.
Equipment sales decreased 10% from $8,774,000 in fiscal year 1994 to
$7,905,000 in fiscal year 1995, reflecting declining equipment pricing due to
competitive factors. Cost of equipment sales increased 23% from $8,835,000 in
fiscal year 1994 to $10,902,000 in fiscal year 1995. The large loss on
equipment sales was due to equipment promotions during most of 1995 to stimulate
subscriber growth. The Company expects to continue such promotions; however,
reductions in other components of acquisition costs per new subscriber, such as
advertising, may occur.
General and administrative costs of cellular operations increased 21%
from $16,768,000 in fiscal year 1994 to $20,224,000 in fiscal year 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, customer
service support staff and bad debts. General and administrative costs as a
percentage of service revenues decreased from 32% in fiscal year 1994 to 25% in
fiscal year 1995.
II-4
The decrease was primarily due to revenues increasing at a faster rate than
incremental general and administrative costs.
Marketing and selling costs increased 37% from $15,786,000 in fiscal
year 1994 to $21,642,000 in fiscal year 1995, primarily as a result of the
number of subscribers added in consolidated markets. The majority of these costs
were incremental sales commissions and advertising costs. Marketing costs per
net new subscriber decreased 8% from $568 in fiscal year 1994 to $523 in fiscal
year 1995, as a result of increased net subscriber additions which outpaced
increases in costs incurred. The Company is continuing to expand its retail
presence to capitalize on retail trade while driving down commission costs.
Depreciation and amortization relating to cellular operations increased
47% from $10,541,000 in fiscal year 1994 to $15,454,000 in fiscal year 1995,
primarily related to increased fixed asset balances.
Corporate costs and expenses in fiscal year 1994, exclusive of write-
downs of property and equipment, were $2,516,000, which represented gross
expenses of $9,054,000 less amounts allocated to nonconsolidated affiliates of
$6,538,000. Corporate costs and expenses in fiscal year 1995 were $3,468,000,
which represented gross expenses of $9,533,000 less amounts allocated to
nonconsolidated affiliates of $6,065,000.
Equity in net loss of affiliates decreased 1% from $5,092,000 in fiscal
year 1994 to $5,028,000 in fiscal year 1995. The decrease was principally
attributable to decreasing losses in markets being accounted for under the
equity method at September 30, 1995, compared to September 30, 1994, 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. However, the reduction in the number of
markets accounted for under the equity method is not expected to result in a
prorata reduction to equity in net loss of affiliates in fiscal 1996. The 20
markets that continue to be accounted for under the equity method have
historically generated worse operating results, primarily due to higher debt
service requirements than the three markets that were consolidated and the
markets that were sold in fiscal 1995.
Interest expense increased 22% from $21,339,000 in fiscal year 1994 to
$26,044,000 in fiscal year 1995 due to higher accreted discount note and average
secured bank financing balances. Cash paid for interest increased 25% from
$9,731,000 in fiscal year 1994 to $12,209,000 in fiscal year 1995, due to higher
average secured bank financing balances.
Interest income increased 8% from $12,081,000 in fiscal year 1994 to
$13,046,000 in fiscal year 1995, due to higher yields on cash and cash
equivalents and available-for-sale securities, and due to higher rates charged
on nonconsolidated affiliates' notes.
During fiscal year 1995, the Company recognized gains on sales of
affiliates of $19,471,000 primarily as a result of the sale of its interest in
Nebwest Cellular, Inc., which held an interest in Nebraska Cellular Telephone
Corporation, the licensee for the ten wireline RSA markets in the state of
Nebraska. See "Acquisitions and Sales." 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.
At September 30, 1995, the Company had net operating loss ("NOL")
carryforwards for income tax purposes of $40,503,000, compared to $54,725,000 at
September 30, 1994. This decrease
II-5
resulted from a change in the tax treatment of sales commissions and the
utilization of NOL carryforwards to offset current year taxable income.
Fiscal Year 1994 Compared With Fiscal Year 1993. Cellular service
-----------------------------------------------
revenues, including in-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 entire fiscal year from 36 during the year
ended September 30, 1993 to 42 during the year ended 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 cellular service decreased as a percentage of service revenues
from 21% in fiscal year 1993 to 18% in fiscal year 1994. This decrease was due
to service revenues derived from the growing subscriber base outpacing the fixed
components of cost of service.
Equipment sales 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 subscriber 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 was primarily due to
revenues increasing at a faster rate than incremental general and administrative
costs.
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 was
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
II-6
economically perpetual. Commencing October 1, 1993, the net book value of
acquired license costs at September 30, 1993 was 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.
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 was 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 was a result of the issuance in
August 1993 of the Company's 11 3/4% Senior Discount Notes Due 2003. 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. During fiscal year 1993, the Company recognized gains on sales
of affiliates of $7,821,000 primarily related to the multimarket exchanges with
US 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 NOL carryforwards for income tax
purposes of $54,725,000, compared to $46,578,000 at September 30, 1993.
II-7
Acquisitions and Sales
- ----------------------
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 July 1995, the
Company sold its entire 61.50% interest in Nebwest Cellular, Inc. which owned
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 resulted in a gain after tax of approximately $19,600,000.
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 11 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.
In May and June 1995, the Company acquired additional interests ranging
from 17% to 51% in two managed markets and two nonmanaged markets for an
aggregate of 138,168 shares of the Company's Common Stock.
In August and September 1995, the Company acquired additional interests
ranging from 3% to 26% in two managed markets for 3,592 shares of the Company's
Common Stock and $38,279 in cash.
In November 1995, the Company purchased additional interests ranging
from 18% to 19% in three managed markets for 28,283 shares of the Company's
Common Stock.
Subsequent to fiscal year end, the Company entered into a series of
agreements pursuant to which the Company agreed to acquire interests in one MSA
and RSA market in exchange for its entire interest in one RSA market plus cash,
Common Stock and forgiveness of certain obligations, all of which aggregate
approximately $988,000.
The Company has also entered into agreements to purchase additional
interests ranging from 43% to 44% in two managed RSA markets. The aggregate
--
purchase price of $ 2,209,000 is payable by the issuance of shares of the
-----------
Company's Common Stock.
The Company continues to pursue acquisitions to the extent they enhance
or extend its network or increase shareholder value, although there can be no
assurance any such acquisition will be consummated.
Changes in Financial Condition
- ------------------------------
Fiscal Year 1995. Net cash provided by operating activities was
----------------
$14,068,000 during the year ended September 30, 1995. This was primarily due to
the increase in EBITDA of $9,490,000 and decreases in working capital of
$5,222,000. Working capital decreases are primarily the result of a reduction in
inventory. However, working capital increases will likely require cash in future
periods as growth in the subscriber base continues.
II-8
Net cash provided by investing activities was $7,028,000 for the year
ended September 30, 1995. This was due primarily to $21,427,000 provided from
the net sale of securities and $23,654,000 provided from the net sales of
affiliates, offset by $31,796,000 of cash required to fund the purchase of
property and equipment related to the Company's expansion efforts, and
$6,017,000 related to nonconsolidated affiliates reflected as additions to
investments in and advances to affiliates.
Net cash provided by financing activities was $17,840,000 for the year
ended September 30, 1995. These proceeds are comprised of $77,400,000 from the
issuance of subordinated notes, offset by $41,852,000 used to redeem the
Company's convertible subordinated debentures and an overall $15,277,000
decrease in incremental secured bank financing.
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 $3,797,000 in accounts receivable and an
increase of $4,363,000 in inventory and other current assets.
Net cash used by investing activities was $49,864,000 for the year
ended September 30, 1994. This was due primarily to $36,821,000 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 included $11,149,000 of incremental
secured bank financing and $1,479,000 of cash from the issuance of Common Stock
upon exercise of options.
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 Agreement, pursuant to which CoBank, ACB, as agent for a
syndicate of lenders ("CoBank") has agreed to lend up to $165,000,000
($130,000,000 at September 30, 1994) (the "credit facility") to CIFC. Of the
$165,000,000, $140,000,000 may be reloaned by CIFC to the Company's affiliates
for the construction, operation and expansion of cellular telephone systems
including up to $5,000,000 for the construction and operation of a paging
network. The remaining $25,000,000 is reserved for acquisitions by CINC. Of the
$140,000,000, $80,000,000 ($57,100,000 at September 30, 1994) is available to be
borrowed by CIFC to be repaid to the parent company and used for general
corporate purposes, including capital expenditures, debt service and
acquisitions. The Credit Agreement restricts 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
II-9
acquisition of additional cellular properties, and to the extent the Company
consummates future acquisitions, additional capital may be required.
As of September 30, 1995, the Company had unused commitments under the
Credit Agreement of $128,737,000, of which approximately $60,225,000 was
available to be repaid to the parent company for general corporate purposes. In
addition to the liquidity provided by the Credit Agreement, at September 30,
1995 the Company, on a consolidated basis, had available $41,018,000 of cash and
cash equivalents. In July 1995, the Company issued $80,000,000 of 11 1/4%
Subordinated Notes due 2005 ("Notes"). Proceeds received by the Company after
fees and commissions were $77,400,000. The Company then called its 6 3/4%
Convertible Subordinated Debentures ("Debentures") for redemption. Of the
$74,747,000 aggregate principal amount of the Debentures outstanding,
$41,852,000 were redeemed using proceeds from the issuance of the Notes, and the
balance of $32,895,000 were converted into 1,190,673 shares of the Company's
Common Stock, providing net cash of $34,297,000. Also in July 1995, the Company
sold its Nebraska RSA interests for approximately $24,300,000 in cash. See
"Acquisitions and Sales." Of these proceeds, $19,100,000 were used to repay
borrowings from CoBank, and are available to fund parent company capital
expenditures, debt service requirements and acquisitions, if any.
On a consolidated basis, the Company's capital expenditures for the
twelve months ended September 30, 1995 were $31,919,000. The Company plans to
make parent company capital expenditures and fund working capital and
acquisition requirements for fiscal year 1996 of $34,889,000, 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 $45,363,000 for fiscal 1996, to fund working capital
requirements, channel expansion and additional cell sites.
The Company's near-term debt service requirements will consist
primarily of interest payments on the indebtedness incurred under the Credit
Agreement 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.
The Company anticipates its cash interest expense for fiscal year 1996 will be
$14,638,000. Revolving loan indebtedness outstanding under the Credit Agreement
will be converted to term loan indebtedness at December 31, 1996 and will be
amortized over the next four years. See "The Credit Agreement" below.
Conversion of the Company's 6 3/4% Convertible Subordinated Debentures
and a portion of its 8.75% Convertible Senior Subordinated Notes occurred during
fiscal year 1995. Had these conversions occurred at the beginning of that fiscal
year, earnings per share would have increased from $.01 to $.14.
The Company believes operating cash flow, existing cash balances, and
borrowing availability under the Credit Agreement, will be sufficient to meet
all future anticipated capital requirements of the parent company and its
affiliates and 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 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
II-10
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.
The Credit Agreement. Pursuant to the Credit Agreement, CoBank has
--------------------
agreed to loan up to $165,000,000 to CIFC to be reloaned by CIFC to affiliates
of the Company for the construction, operation and expansion of cellular
telephone systems including $25,000,000 to fund the acquisitions of additional
cellular systems, subject to certain conditions. As of September 30, 1995,
approximately $60,225,000 was available under the Credit Agreement to be
borrowed from CoBank by CIFC and repaid to the parent company for general
corporate purposes. As of September 30, 1995, the outstanding balance under the
Credit Agreement was approximately $36,210,000. The Credit Agreement provides,
at the Company's option, for interest at 1.00% over prime (9.75% at September
30, 1995) or 2.50% over LIBOR (8.53% at September 30, 1995). The Credit
Agreement is a revolving loan which converts to a four-year term loan on
December 31, 1996. The loan is 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 fixed interest rates on approximately $35,090,000 of its
long-term debt payable to CoBank at an average rate of 10.9% which matures
during 1996. 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 (8.75% at September 30, 1995). The weighted average interest rate of
borrowings under the Credit Agreement, after giving effect to the swap, was
10.68% at September 30, 1995.
The Credit Agreement prohibits the payment of cash dividends, limits
the use of borrowings, prohibits any other senior borrowings, restricts
expenditures for certain investments, requires positive working capital and
requires the maintenance of certain liquidity, capitalization, debt, debt
service and cash interest ratios. The requirements of the Credit Agreement 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 Agreement. Approval may be required from the
syndicate for waivers or other amendments to the Credit Agreement requested by
CIFC or the Company.
II-11
Supplemental Information:
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
ordinarily 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.
Years ended September 30,
--------------------------------------------------------------------------------------
1995 1994 1995 1994 1995 1994
---------------------------- ---------------------------- --------------------------
Combined (1) Financed Proportionate (2) Company Proportionate (3)
---------------------------- ---------------------------- --------------------------
MANAGED MARKETS
Revenues:
Cellular service $74,142,761 $51,019,112 $69,140,038 $46,701,818 $53,867,619 $35,851,984
In-roaming 26,362,647 17,333,820 24,761,059 15,826,592 19,038,939 11,795,775
Equipment sales 4,683,217 5,082,082 4,334,289 4,661,880 3,347,504 3,501,916
------------ ----------- ----------- ----------- ----------- -----------
Total revenues 105,188,625 73,435,014 98,235,386 67,190,290 76,254,062 51,149,675
Costs and expenses involving cash:
Cost of sales:
Cellular service (including
in-roaming) 19,871,337 11,871,044 18,813,360 11,077,524 14,192,390 8,015,495
Equipment sales 8,325,392 5,330,514 7,723,603 4,879,149 5,906,530 3,665,013
General and administrative 24,658,751 21,777,015 23,090,196 20,026,263 17,984,622 15,189,078
Marketing and selling 26,386,599 20,160,573 24,642,430 18,447,497 19,096 875 14,078,272
------------ ----------- ----------- ----------- ----------- -----------
Total cash costs and
expenses 79,242,079 59,139,146 74,269,589 54,430,433 57,180,417 40,947,858
------------ ----------- ----------- ----------- ----------- -----------
EBITDA $25,946,546 $14,295,868 $23,965,797 $12,759,857 $19,073,645 $10,201,817
============ =========== =========== =========== =========== ===========
Capital expenditures $35,797,471 $42,575,703 $32,388,249 $41,735,232 $25,567,382 $34,227,936
Subscriber count 151,482 99,002 139,773 90,163 108,255 68,378
Total markets 56 55 56 55 56 55
NONMANAGED MARKETS
Revenues:
Cellular service (including
in-roaming) $86,148,033 $51,913,569 $17,858,383 $15,063,941 $ 9,928,218 $ 7,557,907
Equipment sales 8,432,963 3,129,756 1,378,457 933,368 868,769 493,465
------------ ----------- ----------- ----------- ----------- -----------
Total revenues 94,580,996 55,043,325 19,236,840 15,997,309 10,796,987 8,051,372
Costs and expenses
involving cash:
Cost of sales:
Cellular service 25,060,634 17,184,198 5,583,536 5,121,737 3,033,825 2,509,440
Equipment sales 8,047,571 1,865,154 1,345,072 660,441 818,404 340,680
General and administrative 16,373,889 13,007,116 3,819,171 3,914,072 2,119,443 2,030,094
Marketing and selling 22,972,033 13,203,205 5,119,486 3,814,477 2,867,660 1,875,793
------------ ----------- ----------- ----------- ----------- -----------
Total cash costs
and expenses 72,454,127 45,259,673 15,867,265 13,510,727 8,839,332 6,756,007
------------ ----------- ----------- ----------- ----------- -----------
EBITDA $22,126,869 $ 9,783,652 $ 3,369,575 $ 2,486,582 $ 1,957,655 $ 1,295,365
============ =========== =========== =========== =========== ===========
Capital expenditures $35,174,267 $18,343,851 $ 9,545,666 $ 5,605,325 $ 5,539,806 $ 2,753,255
Subscriber count 174,930 78,984 32,208 22,845 19,126 11,198
Total markets 27 40 27 40 27 40
II-12
Years ended September 30,
-----------------------------
1995 1994
-----------------------------
Reconciliation From Company Proportionate EBITDA to
Consolidated Reporting
Total proportionate EBITDA (managed and nonmanaged markets) $ 20,941,990 $ 11,497,182
Proportionate depreciation and amortization (13,285,237) (8,976,825)
Proportionate interest expense (9,230,944) (7,137,597)
Proportionate write-down of cellular system equipment - (2,513,136)
Equity in nonlicensee affiliates (5,079,493) (4,361,848)
Minority interests (578,810) (1,310,177)
Intercompany interest 6,819,980 5,021,225
Amortization of license costs not owned by affiliates (2,276,247) (1,892,465)
Unallocated corporate expenses (3,468,189) (2,516,017)
Gains on sales of affiliates 19,471,476 3,911,943
Interest expense (net) and other (13,252,559) (8,473,437)
------------ ------------
Consolidated net income (loss) $ 61,967 $(16,751,152)
============ ============
_______________
(1) Includes 100% of the operating activity of all licensees, regardless of the
Company's owner-ship 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.
II-13
The following table presents "Financed Proportionate" operating results
and other cash activity of the cellular licensees in which the Company holds an
interest, as well as incremental cash activity of the Company. Financed
Proportionate activity represents cash flows that are allocable to the Company
which, when received, will be used to pay the Company's obligations to CoBank.
Years ended September 30,
------------------------------
1995 1994
------------------------------
Revenues:
Cellular service (including in-roaming) $111,759,480 $ 77,592,351
Equipment sales 5,712,746 5,595,248
------------ ------------
Total revenues 117,472,226 83,187,599
Cash costs and expenses:
Cost of sales:
Cellular service (including in-roaming) 24,396,896 16,199,261
Equipment sales 9,068,675 5,539,590
General and administrative 26,909,367 23,940,335
Marketing and selling 29,761,916 22,261,974
------------ ------------
Total operating expenses 90,136,854 67,941,160
------------ ------------
EBITDA 27,335,372 15,246,439
Cash interest expense (net) (12,208,671) (9,731,301 )
Capital expenditures, including corporate (49,344,471) (54,764,909 )
Changes in operating assets and liabilities and other 1,132,971 (4,297,204)
------------ ------------
Cash used by financed cellular licensee affiliates (33,084,799) (53,546,975)
Acquisition activity involving cash 23,653,579 (4,954,672 )
Nonlicensee cash corporate expenses (2,485,779) (1,545,251 )
Changes to long-term debt and equity 29,654,555 16,573,567
------------ ------------
Change in cash and short-term investments $ 17,737,556 $(43,473,331)
============ ============
II-14
Item 8. Financial Statements and Supplementary Data.
The consolidated financial statements of the Company are filed under
this item, beginning on page II-17. The consolidated financial statement
schedules required under Regulation S-X are filed pursuant to Item 14 of this
report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
II-15
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. as of September 30, 1995 and 1994, 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, 1995. Our audits also included
the financial statement schedules listed in the Index at Item 14 (a). These
financial statements and schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedules 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 listed in the accompanying
index to financial statements (Item 14 (a)) present fairly, in all material
respects, the consolidated financial position of CommNet Cellular Inc. at
September 30, 1995 and 1994, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended September 30,
1995, in conformity with generally accepted accounting principles. Also, in our
opinion, the related financial statement schedules, when considered in relation
to the basic financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
ERNST & YOUNG LLP
Denver, Colorado
December 1, 1995, except for Note 14,
as to which the date is December 7, 1995
II-16
COMMNET CELLULAR INC.
CONSOLIDATED BALANCE SHEETS
September 30, 1995 and 1994
ASSETS (Note 5) 1995 1994
- ------ ---- ----
Current assets:
Cash and cash equivalents $ 41,017,845 $ 2,081,591
Available-for-sale securities (Note 3) - 21,198,698
Accounts receivable, net of allowance for doubtful
accounts of $1,957,810 and $2,677,124 in
1995 and 1994, respectively 13,673,168 13,591,217
Inventory and other 2,931,155 7,316,770
------------- -------------
Total current assets 57,622,168 44,188,276
Investment in and advances to affiliates (Notes
2 and 4) 56,918,738 61,908,761
Investment in cellular system equipment 5,426,686 9,732,075
Property and equipment, at cost (Note 7):
Cellular system equipment 107,433,095 79,215,294
Land, buildings and improvements 23,183,361 17,361,917
Furniture and equipment 18,636,304 14,796,494
------------- -------------
149,252,760 111,373,705
Less accumulated depreciation 43,963,285 31,455,978
------------- -------------
Net property and equipment 105,289,475 79,917,727
Other assets, less accumulated amortization
of $28,616,576 and $25,979,913 in 1995 and
1994, respectively:
FCC licenses and filing rights (Note 2) 92,349,639 80,458,461
Deferred loan costs and other 8,061,250 6,432,286
------------- -------------
Total other assets 100,410,889 86,890,747
------------- -------------
$325,667,956 $ 282,637,586
============= =============
See accompanying notes.
II-17
COMMNET CELLULAR INC.
CONSOLIDATED BALANCE SHEETS (continued)
September 30, 1995 and 1994
LIABILITIES AND STOCKHOLDERS' EQUITY 1995 1994
- ------------------------------------ ---- ----
Current liabilities:
Accounts payable $ 9,266,607 $ 10,327,933
Accrued liabilities 4,861,608 4,325,914
Accrued interest 3,264,934 2,331,034
Current portion of long-term debt - 1,090,870
Obligation under capital leases due within
one year 318,188 588,025
------------- -------------
Total current liabilities 17,711,337 18,663,776
Long-term debt:
Secured bank financing (Note 5) 36,262,558 50,448,361
Obligation under capital leases due after one year
(Note 7) 449,230 785,082
11 3/4% senior subordinated discount
notes (Note 6) 126,644,799 112,979,725
11 1/4% subordinated notes (Note 6) 80,000,000 -
6 3/4% convertible subordinated debentures (Note 6) - 74,750,000
8.75% convertible subordinated notes (Note 6) 3,000,000 4,950,000
Minority interests 2,944,370 4,154,175
Commitments (Note 8)
Stockholders' equity
(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; 13,442,967 and 11,739,108 shares
issued at September 30, 1995
and 1994, respectively 13,443 11,739
Capital in excess of par value 159,381,589 117,146,376
Unrealized losses on available-for-sale
securities - (450,311)
Accumulated deficit (100,739,370) (100,801,337)
------------- -------------
Total stockholders' equity 58,655,662 15,906,467
------------- -------------
$ 325,667,956 $ 282,637,586
============= =============
See accompanying notes.
II-18
COMMNET CELLULAR INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended September 30, 1995, 1994 and 1993
1995 1994 1993
------------- ------------- -------------
Revenues:
Cellular service $ 60,853,410 $ 39,211,428 $ 21,750,092
In-roaming 21,085,374 13,374,711 7,110,438
Equipment sales 7,905,335 8,773,912 4,828,781
------------- ------------- -------------
89,844,119 61,360,051 33,689,311
Costs and expenses:
Cellular operations:
Cost of cellular service 16,161,808 9,467,025 6,100,229
Cost of equipment sales 10,901,651 8,834,865 5,218,012
General and administrative 20,223,526 16,767,717 10,505,106
Marketing and selling 21,641,757 15,786,030 8,465,287
Depreciation and amortization 15,454,123 10,541,476 17,581,946
Write-down of property and equipment - 2,864,589 -
Corporate:
General and administrative 7,392,125 6,944,193 7,122,454
Depreciation and amortization 2,141,025 2,109,379 2,368,562
Write-down of property and equipment - 251,667 -
Less amounts allocated to nonconsolidated
affiliates (6,064,961) (6,537,555) (8,241,752)
------------- ------------- ------------
87,851,054 67,029,386 49,119,844
------------- ------------- -------------
Operating income (loss) 1,993,065 (5,669,335) (15,430,533)
Equity in net loss of affiliates (Note 4) (5,028,219) (5,092,484) (6,339,145)
Minority interest in net income of
consolidated affiliates (963,956) (543,607) -
Gains on sales of affiliates and other (Note 2) 19,471,476 3,911,943 7,821,424
Interest expense (26,043,802) (21,338,505) (16,427,796)
Interest income (Note 4) 13,045,660 12,080,836 10,701,511
------------- ------------- ------------
Income (loss) before income taxes and
extraordinary charge 2,474,224 (16,651,152) (19,674,539)
Income tax expense 400,000 100,000 -
------------- ------------- ------------
Income (loss) before extraordinary charge 2,074,224 (16,751,152) (19,674,539)
Extraordinary charge related to early
extinguishment of long-term debt
(Notes 5 and 6) (2,012,257) - (2,991,673)
============= ============= ============
Net income (loss) $ 61,967 $ (16,751,152) $(22,666,212)
============= ============= ============
Income (loss) per common share:
Income (loss) before extraordinary charge $ .17 $ (1.45) $ (2.30)
Extraordinary charge (.16) - (.35)
------------- ------------- ------------
Net income (loss) per common share $ .01 $ (1.45) $ (2.65)
============= ============= ============
Weighted average shares outstanding 12,153,592 11,577,191 8,551,785
============= ============= ============
See accompanying notes.
II-19
COMMNET CELLULAR INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Years ended September 30, 1993, 1994 and 1995
Capital in
Common Stock Excess of Unrealized Accumulated
Shares Amount Par Value Gains (Losses) Deficit
------------------------------- ------------ -------------- -------------
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 (Note 6) 2,529,194 2,529 37,808,921 - -
Unrealized losses (Note 3) - - - (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 101,875 102 815,192 - -
Debenture conversion (Note 6) 1,320,785 1,321 34,088,451 - -
Issuance of Common
Stock - acquisitions (Note 2) 262,178 262 6,779,980 - -
Issuance of Common
Stock - ESOP (Note 11) 19,021 19 551,590 - -
Reversal of unrealized
losses (Note 3) - - - 450,311 -
Net income - - - - 61,967
------------- ------------- ------------ -------------- -------------
Balance at
September 30, 1995 13,442,967 $13,443 $159,381,589 $ - $(100,739,370)
============= ============= ============ ============== =============
See accompanying notes.
II-20
COMMNET CELLULAR INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended September 30, 1995, 1994 and 1993
1995 1994 1993
---- ---- ----
Operating activities:
Net income (loss) $ 61,967 $(16,751,152) $(22,666,212)
Adjustments to reconcile net income (loss)
to net cash used by operating activities:
Extraordinary charge related to early
extinguishment of long-term debt 2,012,257 - 2,991,673
Minority interests 963,956 543,607 -
Compensation expense related
to ESOP and option grants 551,609 477,990 554,648
Depreciation and amortization 17,595,148 12,650,855 19,950,508
Equity in net loss of affiliates 5,028,219 5,092,484 6,339,145
Gains on sales of affiliates and other (19,471,476) (3,911,943) (7,821,424)
Interest expense on 11 3/4%
senior discount notes 13,665,074 12,133,155 846,205
CoBank patronage income (534,690) (814,837) (719,005)
Accrued interest on advances to affiliates (11,247,128) (11,380,231) (9,542,484)
Write-down of property and equipment - 3,116,256 -
Write-down of short-term investments - 743,511 -
Loss on sale of short-term investments 221,598 - -
Change in operating assets and liabilities,
net of effects from consolidating acquired
interests (Note 2):
Accounts receivable 927,342 (3,797,083) (3,954,727)
Inventory and other 4,386,710 (4,363,083) (789,336)
Accounts payable and accrued liabilities (1,026,349) (245,557) 2,602,049
Accrued interest 933,900 (663,529) 126,982
---------- ---------- ----------
Net cash provided (used) by operating activities 14,068,137 (7,169,557) (12,081,978)
See accompanying notes.
II-21
COMMNET CELLULAR INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Years ended September 30, 1995, 1994 and 1993
1995 1994 1993
---- ---- ----
Investing activities:
Purchases of available-for-sale securities $ (82,109) $(16,788,067) $(28,994,122)
Sales of available-for-sale securities 21,509,520 15,488,406 21,692,323
Additions to investments in and
advances to affiliates (6,016,550) (6,789,273) (9,274,470)
Reductions in (additions to) investment in
cellular system equipment 4,305,389 (5,365,713) 98,370
Additions to property and equipment (36,101,726) (31,455,008) (7,547,311)
Additions to other assets (239,896) - (1,057,834)
Proceeds from sales of interests in
affiliates (Note 2) 26,140,199 9,037,328 7,334,198
Purchase of interests in affiliates, net
of cash acquired and net of assets
and liabilities recorded due to
consolidation (Note 2) (2,486,620) (13,992,000) (12,082,316)
------------- ------------- ------------
Net cash provided (used) by investing
activities 7,028,207 (49,864,327) (29,831,162)
See accompanying notes.
II-22
COMMNET CELLULAR INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Years ended September 30, 1995, 1994 and 1993
1995 1994 1993
---- ---- ----
Financing activities:
Proceeds from secured bank financing $ 23,366,240 $ 13,779,086 $ 38,566,144
Payments of secured bank financing (38,642,913) (2,629,888) (74,195,558)
Extraordinary charge related to early
extinguishment of long-term debt (1,130,004) - (2,991,673)
Loan fees and offering costs related
to long-term debt (1,511,018) - -
Additions (reductions) of obligation
under capital leases (605,689) 826,807 (163,989)
Issuance of senior discount notes - - 96,739,604
Issuance of convertible subordinated
notes - - 4,705,000
Issuance of subordinated notes 77,400,000 - -
Redemption of convertible subordinated
debentures (41,852,000) - -
Issuance of Common Stock, net of
offering costs 815,294 1,478,709 378,716
------------- ------------- --------------
Net cash provided by financing activities 17,839,910 13,454,714 63,038,244
------------- ------------- --------------
Net increase (decrease) in cash and
cash equivalents 38,936,254 (43,579,170) 21,125,104
------------- ------------- --------------
Cash and cash equivalents at beginning
of year 2,081,591 45,660,761 24,535,657
------------- ------------- --------------
Cash and cash equivalents at end of year $ 41,017,845 $ 2,081,591 $ 45,660,761
============= ============= ==============
See accompanying notes.
II-23
COMMNET CELLULAR INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Years ended September 30, 1995, 1994 and 1993
Supplemental schedule of additional cash flow information and noncash
activities:
1995 1994 1993
---- ---- ----
Cash paid during the year for interest $12,208,671 $ 9,731,301 $15,454,609
Purchase of cellular system equipment
through accounts payable 4,234,597 4,112,406 1,158,791
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 6,780,242 2,761,552 6,532,467
Conversion of convertible subordinated
debentures to Common Stock 34,089,772 37,811,450 2,127,819
Additions to deferred loan costs related
to 11 3/4% senior discount notes and
8.75% convertible subordinated
notes - - 3,505,761
Additions to deferred loan costs related
to 11 1/4% subordinated notes 2,600,000 - -
Write-off of offering costs included in
extraordinary loss on early extinguish-
ment of long-term debt 882,253 - -
See accompanying notes.
II-24
COMMNET CELLULAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of significant accounting policies
------------------------------------------
Organization and basis of presentation
CommNet 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, 1995:
Net Company
MSA or Interest in
RSA Code (1) State Licensee (2)
------------ ------------------------- ------------
MSAs: 141 Minnesota 8.01%
185 Indiana 16.67%
241 Colorado 73.99%
253 Iowa 74.50%
267 South Dakota 51.00%
268 Montana 54.10%
279 Maine 11.11%
289 South Dakota 100.00%
297 Montana 100.00%
298 North Dakota 70.00%
II-25
COMMNET CELLULAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of significant accounting policies (continued)
------------------------------------------
Organization and basis of presentation (continued)
Net Company
MSA or Interest in
RSA Code (1) State Licensee (2)
------------ ------------------------- ------------
RSAs: 348 Colorado 10.00%
349 Colorado 61.75%
351 Colorado 61.75%
352 Colorado 66.00%
353 Colorado 100.00%
354 Colorado 69.40%
355 Colorado 49.00%
356 Colorado 49.00%
389 Idaho 50.00%
390 Idaho 33.33%
392 Idaho (B1) 100.00%
393 Idaho 91.64%
415 Iowa 10.11%
416 Iowa 38.50%
417 Iowa 100.00%
419 Iowa 44.92%
420 Iowa 100.00%
424 Iowa 17.15%
425 Iowa 13.28%
426 Iowa 49.14%
427 Iowa 49.17%
428 Kansas 3.07%
429 Kansas 3.07%
430 Kansas 3.07%
431 Kansas 3.07%
432 Kansas 3.07%
433 Kansas 3.07%
434 Kansas 3.07%
435 Kansas 3.07%
436 Kansas 3.07%
437 Kansas 3.07%
438 Kansas 3.07%
439 Kansas 3.07%
440 Kansas 3.07%
441 Kansas 3.07%
442 Kansas 3.07%
512 Missouri (B1) 14.70%
523 Montana (B1) 100.00%
523 Montana (B2) 98.76%
524 Montana 61.75%
525 Montana 69.40%
526 Montana 100.00%
II-26
COMMNET CELLULAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of significant accounting policies (continued)
------------------------------------------
Organization and basis of presentation (continued)
Net Company
MSA or Interest in
RSA Code (1) State Licensee (2)
------------ ------------------------- ------------
527 Montana 100.00%
528 Montana 61.75%
529 Montana 74.50%
530 Montana 61.75%
531 Montana 100.00%
532 Montana 100.00%
553 New Mexico 16.33%
555 New Mexico 12.25%
557 New Mexico 16.33%
580 North Dakota 52.76%
581 North Dakota 49.00%
582 North Dakota 41.45%
583 North Dakota 49.00%
584 North Dakota 61.75%
634 South Dakota 100.00%
635 South Dakota 56.29%
636 South Dakota 57.50%
638 South Dakota(B1) 100.00%
638 South Dakota(B2) 100.00%
639 South Dakota(B1) 61.75%
639 South Dakota(B2) 61.75%
640 South Dakota 64.49%
641 South Dakota 61.13%
642 South Dakota 49.00%
675 Utah 100.00%
676 Utah 100.00%
677 Utah (B3) 100.00%
678 Utah 80.00%
718 Wyoming 66.00%
719 Wyoming 100.00%
720 Wyoming 100.00%
(1) Metropolitan Statistical Area ("MSA") ranking is based on population
as established by the FCC. Rural Service Areas ("RSAs") have been
numbered by the FCC alphabetically by state.
(2) Represents the net ownership interest held by the Company in the
licensee for the respective market.
II-27
COMMNET CELLULAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 interests, 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.
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 that 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. The Company holds
no short-term investments at September 30, 1995.
Accounts receivable
The Company performs credit evaluations of its customers' financial
condition prior to initial activation 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.
The Company's provision for doubtful accounts receivable was approximately
$5,096,000, $3,372,000 and $1,077,000 for the years ended September 30, 1995,
1994 and 1993, respectively.
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.
II-28
COMMNET CELLULAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of significant accounting policies (continued)
------------------------------------------
During the year ended September 30, 1994, the Company replaced and upgraded
certain cellular system equipment. As a result, the Company realized a loss of
$3,116,000 representing the excess of net book over realizable value.
Property and equipment
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for
----------------------------------------------------------
Long-Lived Assets to be Disposed of, which requires impairment losses to be
- -----------------------------------
recorded on long-lived assets used in operations when indicators of impairment
are present. The Company is required to adopt Statement 121 in the first
quarter of fiscal year 1997 and, based on current circumstances, does not
believe the effect of adoption will be material.
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 years ended September 30, 1995 and
1994 of approximately $10,645,000 and $11,024,000, or $.88 and $.95 per common
share, respectively.
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
II-29
COMMNET CELLULAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of significant accounting policies (continued)
------------------------------------------
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.
The Company incurs certain overhead costs related to expansion. As a
result, the Company capitalized $2,536,000 and $3,991,000 for the years ended
September 30, 1995 and 1994, respectively, which is included in property and
equipment, and investment in cellular system equipment. In addition, the
Company allocated $816,000 and $713,000 to nonconsolidated affiliates for the
years ended September 30, 1995 and 1994, respectively. Overhead costs
capitalized and allocated to nonconsolidated affiliates were not material for
the year ended September 30, 1993.
Advertising
The Company expenses advertising costs as incurred. Advertising expense
was approximately $2,624,000, $2,370,000 and $1,275,000 for the years ended
September 30, 1995, 1994 and 1993, respectively.
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").
Earnings per common share
Net income (loss) per common share is based on the weighted average number
of common shares outstanding during the periods. Common Stock equivalents
consist of employee stock options. The difference between earnings per common
share and primary earnings per share is insignificant. 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.
Certain reclassifications
Certain reclassifications have been made to the 1994 and 1993 financial
statements to conform with the 1995 financial statement presentation.
II-30
COMMNET CELLULAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Business acquisitions and dispositions
--------------------------------------
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 a 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. 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 provided
for the sale by the Company of its interest in two additional affiliates which
held interests in nonmanaged RSA markets. The sale of one interest was
II-31
COMMNET CELLULAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Business acquisitions and dispositions (continued)
--------------------------------------
consummated in December 1993. The Company transferred the second interest to a
partner in that market pursuant to a judgment in January 1995.
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.
1995
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
II-32
COMMNET CELLULAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Business acquisitions and dispositions (continued)
--------------------------------------
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 July
1995, the Company sold its 61.50% interest in Nebwest Cellular, Inc. which owned
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 resulted in a gain after tax of approximately $19,600,000.
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.
In May and June 1995, the Company acquired additional interests ranging
from 17% to 51% in two managed markets and two nonmanaged markets for an
aggregate of 138,168 shares of the Company's Common Stock.
In August and September 1995, the Company acquired additional interests
ranging from 3% to 26% in two managed markets for 3,592 shares of the Company's
Common Stock and approximately $38,000 in cash.
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 and dispositions had occurred at the beginning of the
respective period in which the acquisition or disposition occurred, as well as
at the beginning of the immediately preceding period:
Year ended September 30,
----------------------------------------------
1995 1994 1993
---- ---- ----
Revenues $92,154,465 $67,287,028 $41,241,051
Equity in net loss of affiliates (5,169,526) (3,887,630) (4,854,046)
Income (loss) before extraordinary
charge 887,151 1,096,656 (17,028,171)
Net income (loss) (1,125,106) 1,096,656 (20,019,844)
Net income (loss) per common share (.09) .09 (2.25)
In November 1995, the Company purchased additional interests ranging from
18% to 19% in three managed markets for 28,283 shares of the Company's Common
Stock.
II-33
COMMNET CELLULAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 at September
30, 1994:
Available-for-Sale Securities
----------------------------------------------------------------
Gross Gross Estimated
Unrealized Unrealized Fair
Cost Gains Losses Value
------------- ------------- ------------- -------------
U.S. treasury securities $ 9,182,412 $ - $ 242,151 $ 8,940,261
and obligations of U.S.
government agencies
U.S. government treasuries 11,500,000 - 184,098 11,315,902
and agencies funds
U.S. corporate bonds 966,597 - 24,062 942,535
------------- ------------- ------------- -------------
$21,649,009 $ - $ 450,311 $21,198,698
============= ============= ============= =============
The gross realized loss on sales of available-for-sale securities totaled
$222,000 and $744,000 for the years ended September 30, 1995 and 1994,
respectively. The net adjustment to unrealized holding losses on available-for-
sale securities included as a separate component of shareholders' equity totaled
$450,000 as of September 30, 1994. The Company had no available-for-sale
securities at September 30, 1995, and accordingly, there was no unrealized
holding gain (loss).
4. Investment in and advances to affiliates
----------------------------------------
Investment in and advances to the Company's nonconsolidated affiliates
consisted of the following:
September 30,
-------------
1995 1994
---- ----
Investment $13,144,941 $12,605,395
Equity in loss - cumulative (23,399,231) (24,049,632)
Advances and other 67,173,028 73,352,998
----------- -----------
$56,918,738 $61,908,761
=========== ===========
II-34
COMMNET CELLULAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Investment in and advances to affiliates (continued)
----------------------------------------
The combined financial position of the nonconsolidated affiliates is as
follows:
September 30,
-------------
1995 1994
---- ----
Current assets $ 2,928,727 $ 8,597,246
Investment in affiliated limited partnerships 13,188,571 10,446,767
Property and equipment, net of accumulated
depreciation 14,268,552 33,162,750
Other assets 2,599,814 4,079,497
------------ ------------
Total assets $ 32,985,664 $ 56,286,260
============ ============
Due to CommNet Cellular Inc. $ 8,592,946 $ 11,981,737
Due to Cellular, Inc. Financial Corporation 54,410,718 55,428,739
Other liabilities 5,783,090 21,389,471
Minority interests 565,259 859,823
Stockholders' deficit (36,366,349) (33,373,510)
------------ ------------
Total liabilities and stockholders' deficit $ 32,985,664 $ 56,286,260
============ ============
Combined operations of these nonconsolidated affiliates are summarized as
follows:
Year ended September 30,
------------------------
1995 1994 1993
---- ---- ----
Revenues $ 14,260,074 $ 42,160,218 $ 27,121,816
Operating costs (23,345,038) (50,519,584) (36,205,918)
Minority interests (3,572) 7,333 324,259
Equity in income (loss) of
affiliates (4,110) 369,495 (660,397)
------------ ------------ ------------
Net loss $ (9,092,646) $ (7,982,538) $ (9,420,240)
============ ============ ============
Interest income from affiliates on advances was $11,247,128, $11,380,231
and $9,542,484 for the years ended September 30, 1995, 1994 and 1993,
respectively.
Certain advances to affiliates bear interest at the prime rate of Norwest
Bank (8.75% at September 30, 1995, 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 CIFC.
The CIFC loans bear interest at 1% over CIFC's average cost of borrowing from
CoBank and 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.
II-35
COMMNET CELLULAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Secured bank financing
----------------------
Secured bank financing consists of the following:
September 30,
-------------
1995 1994
---- ----
Secured bank financing due December 31, 2000,
interest only payable quarterly through December 31,
1996, thereafter quarterly principal and interest
payments payable through maturity $36,262,558 $47,516,124
Secured bank financing (MSA switch loans) - 2,476,577
Secured bank financing (RSA switch loans) - 1,546,530
----------- -----------
36,262,558 51,539,231
Less current portion - (1,090,870)
----------- -----------
Totals $36,262,558 $50,448,361
=========== ===========
The bank credit agreement is between CIFC and CoBank. Under the terms of
this agreement, CoBank has agreed to loan to CIFC a maximum of $165,000,000
($130,000,000 at September 30, 1994) to be reloaned by CIFC to affiliates of the
Company for the construction, operation and expansion of cellular telephone
systems, including $25,000,000 for the acquisition of cellular systems.
Interest is payable at either the prime rate plus 1.00% for variable rate loans
(9.75% and 8.75% at September 30, 1995 and 1994, respectively) or LIBOR (London
InterBank Offered Rate) plus 2.50% for fixed rate loans (8.53% and 6.02% at the
six-month rate at September 30, 1995 and 1994, respectively). CIFC continues to
maintain fixed interest rates on $35,090,000 of loans terminating in 1996 at an
average rate of 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 approximately $242,275,000 and $197,100,000 at
September 30, 1995 and 1994, 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
II-36
COMMNET CELLULAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Secured bank financing (continued)
----------------------
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 (8.75% and 7.75% at September 30, 1995 and 1994,
respectively.)
The Credit Agreement prohibits the payment of cash dividends, prohibits any
other senior borrowings, limits the use of borrowings, restricts expenditures
for certain acquisitions and investments, requires positive working capital and
requires the maintenance of certain liquidity, capitalization, debt, debt
service and cash interest ratios. The requirements of the Credit Agreement 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 Agreement. CoBank acts as agent for a
syndicate of lenders whose approval may be required for waivers or other
amendments to the Credit Agreement 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: 1996 - $0; 1997 - $2,715,769;
1998 - $6,336,795; 1999 - $9,052,564; 2000 - $11,768,333; 2001 - $6,389,097.
6. Senior and subordinated debt
----------------------------
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 were 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. During the first fiscal quarter of 1995, $3,000 of the debentures
were converted into 108 shares of the Company's Common Stock. In July 1995, the
Company called all outstanding 6 3/4% debentures for redemption. As a result,
$32,895,000 of the debentures were converted into 1,190,673 shares of the
Company's Common Stock, and $41,852,000 were redeemed for cash. The Company
redeemed the debentures at a price of 102.7% resulting in a premium of
$1,130,004. In addition, the Company wrote off $882,253 in offering costs
previously capitalized. As a result of the redemption, the Company recognized
an extraordinary charge related to early extinguishment of long-term debt of
$2,012,257. The Company also charged $758,228 of offering costs against capital
in excess of par value as a result of the conversion.
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 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.
II-37
COMMNET CELLULAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Senior and subordinated debt (continued)
----------------------------
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 note holders may convert the notes into
shares of the Company's Common Stock at the price of $15.00 per share. In
September 1995, $1,950,000 of the debentures were converted into 130,004 shares
of the Company's Common Stock. Had this conversion and the conversion of the 6
3/4% Convertible Subordinated Debentures occurred at the beginning of the year,
earnings per share would have increased from $.01 to $.14.
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 approximately $96,740,000. 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 commencing
September 1, 1998, 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.
In July 1995, the Company completed an offering of $80,000,000 in aggregate
principal amount of 11 1/4% Subordinated Notes due 2005. The notes are
subordinated to all existing and future Senior Debt of the Company. Interest on
the notes accrues from the original date of issuance at the rate of 11 1/4% per
annum. Interest is payable in cash semi-annually on each January 1 and July 1,
commencing January 1, 1996. The notes mature on July 1, 2005 and are redeemable
in whole or in part from time to time, at the option of the Company, at any time
on or after July 1, 2000 at the redemption prices of 106% if redeemed in 2000
decreasing to 101.5% of the principal amount in 2003. The note holders may
require the Company to repurchase the notes, in whole or in part, in certain
instances constituting a change of control of the Company at a price equal to
101% of the principal amount,.
The Company has reserved the appropriate number of shares for any
conversions prior to redemption on the convertible debt issue.
II-38
COMMNET CELLULAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Capital leases
--------------
The Company leases assets, primarily computer equipment, under capital
leases of $2,466,711 (less accumulated depreciation of $1,435,942) at September
30, 1995.
Future minimum lease payments under capital leases at September 30, 1995
are as follows:
1996 $ 346,946
1997 285,979
1998 179,991
----------
812,916
Less amount representing interest
and sales tax 45,498
----------
767,418
Obligation under capital leases due
within one year 318,188
----------
$ 449,230
==========
8. Commitments
-----------
The Company leases office space and equipment under agreements which
provide for rental payments based on lapse of time. Rent expense was
$2,410,083, $1,366,169 and $1,135,849 for the years ended September 30, 1995,
1994 and 1993, respectively.
The aggregate annual rental commitment as of September 30, 1995 is as
follows:
1996 $2,229,396
1997 2,453,988
1998 2,309,567
1999 2,103,014
2000 1,833,207
Future years 5,717,412
-----------
$16,646,584
===========
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 $101,711, $77,871 and
$55,920 for the years ended September 30, 1995, 1994 and 1993, respectively.
II-39
COMMNET CELLULAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. Income taxes
------------
The adoption of SFAS No. 109 as of October 1, 1993 had no cumulative effect
on net loss, and has no effect on operating income (loss) and net income (loss)
for the years ended September 30, 1995 and 1994. As permitted under SFAS No.
109, financial statements of years prior to adoption have not been restated.
At September 30, 1995, the Company had cumulative net operating loss
("NOL") carryforwards of $40,503,000 for income tax purposes. If not offset
against taxable income, the tax loss carryforwards will expire between 2001 and
2010. Prior NOLs have been restated to reflect the impact of entities
consolidated in 1995 that incurred NOLs prior to becoming part of the
consolidated reporting group. The income tax provisions of $400,000 and
$100,000 for the years ended September 30, 1995 and 1994, respectively, are
attributable to gains on sales of investments and consist solely of a current
federal Alternative Minimum Tax ("AMT") component. 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 September 30, 1995
and 1994, 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 are as follows:
September 30,
-------------
1995 1994
---- ----
Deferred tax assets:
Equity method investments $ 2,793,000 $ 2,953,000
Intangible asset differences 8,808,000 8,621,000
Inventory adjustments 269,000 456,000
Accrued liabilities 232,000 700,000
Interest expense on 11 3/4% senior
subordinated discount notes 10,125,000 4,932,000
Other - net 270,000 537,000
Other capitalized costs - net 2,977,000 -
Net operating loss carryforwards 15,391,000 20,796,000
AMT credit carryforwards 400,000 100,000
----------- -----------
Total deferred tax assets 41,265,000 39,095,000
----------- -----------
Deferred tax liabilities:
Difference in license costs 27,787,000 21,573,000
Fixed asset differences 4,680,000 3,599,000
----------- -----------
Total deferred tax liabilities 32,467,000 25,172,000
----------- -----------
Net deferred tax asset 8,798,000 13,923,000
Valuation allowance (8,798,000) (13,923,000)
----------- -----------
Net deferred taxes $ - $ -
----------- -----------
II-40
COMMNET CELLULAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. Income taxes (continued)
------------
The following table reconciles the amount which would be provided by
applying the 35% federal statutory rate to income before income tax expense to
the federal income taxes actually provided:
September 30,
---------------------------
1995 1994
---------------------------
Income tax at federal statutory rate $865,978 $ -
of 35%
Benefit due to utilization of regular tax
NOLs (865,978) -
AMT arising from NOL carryforwards 400,000 100,000
limitation
---------------------------
Total income tax expense $400,000 $ 100,000
===========================
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. All options
outstanding under this plan were exercised during 1995.
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.
In February 1995, the Company's shareholders approved an increase of an
additional 750,000 shares of the Company's Common Stock to be reserved for
issuance under this plan.
II-41
COMMNET CELLULAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 Exercise
Option Plan Incentive Plan Price Range
-------------- -------------- ------------
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
--------- ---------
Granted - 692,000 $23.00 - $25.63
Forfeitures (10,000) (19,125)
Exercised (79,000) (7,875) $ 7.00 - $19.50
--------- ---------
Outstanding options at
September 30, 1995 - 1,209,625 $11.75 - $25.63
Options available for grant
at September 30, 1995 - 860,863
--------- ---------
Options exercisable at
September 30, 1995 - 229,251
--------- ---------
Subsequent to September 30, 1995, the Company granted options to purchase
529,000 shares of Common Stock to officers and employees of the Company at an
exercise price of $25.5625 pursuant to the Company's Omnibus Stock and Incentive
Plan.
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 became exercisable at various intervals
through November 1995 and expire on June 30, 1996. During the fiscal years
ended September 30, 1995, 1994 and 1993, options to purchase 15,000, 101,250 and
25,000 shares were exercised, respectively. As of September 30, 1995, none of
the options were exercisable. Subsequent to year end, all remaining options
were exercised. In September 1995, the Company granted an option to purchase
60,000 shares of Common Stock to one former officer at an exercise price of
$30.375. The options become exercisable over a period of four years from the
date of grant.
II-42
COMMNET CELLULAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
$552,000 (19,021 shares), $478,000 (20,953 shares) and $297,000 (17,232 shares)
were made to the ESOP for the years ended September 30, 1995, 1994 and 1993,
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").
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.
II-43
COMMNET CELLULAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. 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 carrying amounts of the Company's advances to
----------------------
and receivables from affiliates approximate their fair value.
Long and short-term debt: The carrying amounts of the Company's variable
------------------------
rate borrowings under its credit agreement 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.
The carrying amounts and fair values of the Company's financial instruments
at September 30, 1995 are as follows:
Carrying Amount Fair Value
--------------- ----------
Cash and cash equivalents $ 41,017,845 $ 41,017,845
Advances to affiliates and other 67,173,028 67,173,028
Secured bank financing:
Variable rate loans 1,119,976 1,119,976
Fixed rate loans 35,142,582 33,252,673
11 3/4% senior discount notes 126,644,799 141,320,800
11 1/4% subordinated notes 80,000,000 84,000,000
14. Subsequent Events
-----------------
On December 7, 1995, the Company called for redemption all outstanding
8.75% Convertible Senior Subordinated Notes with a carrying amount of $3,000,000
at the price of 105 15/32%.
II-44
COMMNET CELLULAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. Quarterly Financial Data (unaudited)
------------------------------------
Quarterly financial data and per share data are presented below:
First Second Third Fourth
Quarterly Financial Data Quarter Quarter Quarter Quarter
------------------------ ------- ------- ------- -------
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)
--------------------------------------------------------------------------------------
1995
Revenues $19,275,463 $19,064,299 $24,177,919 $27,326,438
Operating income (loss) (1,821,384) (1,592,474) 1,539,530 3,867,393
Income (loss) before
extraordinary charge (6,437,679) (5,836,693) (3,545,719) 17,894,315
Net income (loss) (6,437,679) (5,836,693) (3,545,719) 15,882,058
Income (loss) per share:
Income (loss) before extra-
ordinary charge $ (0.55) $ (0.49) $ (0.29) $ 1.38
Net income (loss) (0.55) (0.49) (0.29) 1.22
As described in Note 2, the Company sold its interest in Nebwest Cellular,
Inc. during the fourth fiscal quarter of 1995, resulting in a gain after tax of
approximately $19,600,000. In addition, as discussed in Note 6, during the
fourth fiscal quarter of 1995, the Company experienced an extraordinary charge
related to the early extinguishment of long-term debt of approximately
$2,012,000.
II-45
PART III
Item 10. Directors and Executive Officers of the Registrant.
The following table sets forth certain information regarding the
executive officers and directors of the Company:
Name Age Position
---- --- --------
Arnold C. Pohs 67 Chairman of the Board, President, Chief Executive
Officer and Director
Daniel P. Dwyer (1) 36 Executive Vice President, Treasurer, Chief Financial
Officer and Director
Andrew J. Gardner 41 Senior Vice President and Controller
Homer Hoe 46 Executive Vice President and Chief Information Officer
Timothy C. Morrisey 42 Senior Vice President - Sales Operations
David S. Lynn 38 Senior Vice President - Network Operations
Amy M. Shapiro 42 Senior Vice President, Secretary and General Counsel
John E. Hayes, Jr. (1) (2) 58 Director
Robert J. Paden (2) 40 Director
David E. Simmons (1) (2) 38 Director
____________
(1) Member Audit Committee.
(2) Member Compensation Committee.
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. Mr. Simmons is a member of
Class II with a term expiring at the 1995 Annual Meeting; Messrs. Dwyer and
Hayes are members of Class III with terms expiring at the 1996 Annual Meeting of
Stockholders (to be held in February 1997); and Messrs. Pohs and Paden are
members of Class I with terms expiring at the 1997 Annual Meeting (to be held in
February 1998).
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 2nd Vice
Chairman and a member of the Executive Committee of the Board of Directors of
the Cellular Telecommunications Industry Association, as Chairman and a director
of the Cellular Foundation
III-1
for Wireless Telecommunications, a non-profit industry association, 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.
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.
Timothy C. Morrisey 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. Morrisey was President and General Manager
of the Washington D.C. and Baltimore cellular operations for Southwestern Bell
Mobile Systems.
Amy M. Shapiro was named Senior Vice President of the Company in
November 1995. She was Vice President of the Company from November 1992 to
November 1995 and has been 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
III-2
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.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
- --------------------------------------------------------------------
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's executive officers and directors to file initial reports of ownership
and reports of changes in ownership with the Securities and Exchange Commission.
Executive officers and directors are required by SEC regulations to furnish the
Company with copies of all Section 16(a) forms they file. Based solely on a
review of the copies of such forms furnished to the Company and written
representations from the Company's executive officers and directors, the Company
notes that one officer, Timothy C. Morrisey, inadvertently failed to file on a
timely basis an initial report indicting beneficial ownership of Common Stock of
the Company.
Item 11. Executive Compensation.
REPORT OF COMPENSATION COMMITTEE
General. The Compensation Committee of the Board of Directors is
-------
responsible for establishing the executive compensation program for the Company.
The Committee monitors and recommends changes in the compensation levels of
executive management and administers the Company's incentive compensation
programs as well as determining the grants under the Company's Employee Stock
Ownership Plan. All of the Committee members are outside, non-employee directors
of the Company. The Company has periodically employed the services of a
nationally recognized executive compensation consulting firm to assist the
Company in compensation matters.
Compensation Philosophy. The Company's compensation program is
-----------------------
designed to attract and retain high quality executive management, to give
management incentives that motivate superior performance on behalf of the
Company and to align the interests of management with those of the Company's
shareholders. The Committee believes that the Company's base salaries should
approximate the average of base salaries paid to executives with similar
responsibilities in similar cellular companies. Executive compensation should
also be correlated to the Company's performance and shareholder return.
The companies used for compensation comparison purposes are not all of
the same companies contained in the Nasdaq telecommunications industry group
comparison of total shareholder return in the Stockholder Performance Return
Graph. The companies used for compensation purposes are those companies which
are similarly sized and are in the cellular industry.
III-3
Components of Compensation.
--------------------------
Salary: The salary of the Chief Executive Officer and the other
------
executive officers of the Company are based on a subjective evaluation of an
individual officer's responsibility and a comparison of salaries for similar
positions in comparable companies.
During 1995, the salary increases for the executive officers, other
than Arnold C. Pohs, the Chief Executive, ranged between 8% and 11%. Mr. Pohs'
base salary was increased by 20%. The basis for Mr. Pohs' salary increase was
twofold. First, the increase recognizes the performance of the Company in terms
of operating cash flow achievements. Second, Mr. Pohs' salary was adjusted after
an evaluation of comparative industry information to approximate the Company's
compensation objective of paying at the average.
Short-Term Incentive Plan Bonuses: The Company maintains an annual
---------------------------------
bonus plan which is based on meeting certain operational targets. The bonus
opportunities are established based on the average opportunities provided to
executives in similar positions at similar companies.
Actual annual bonuses for the executive officers were determined based
on the Company's performance relative to corporate operating targets and on each
individual's performance relative to officer specific individual goals. The
weightings of corporate and individual performance vary by position and
responsibilities and range from a weighting of 70% corporate/30% individual to
90% corporate/10% individual, which is the weighting applied to Mr. Pohs' award.
The corporate operating targets were based on the following measures
which represent the key business indicators of performance within the cellular
industry: Net managed market subscriber additions (20%), managed market
acquisition cost per net new subscriber (15%), consolidated service revenues
(20%), consolidated EBITDA (30%) and consolidated service revenue as a
percentage of total consolidated property, plant and equipment (15%).
During fiscal 1995, the Company's weighted average performance results
were 100.6% of the operating targets as described above and bonuses were paid
accordingly after a subjective evaluation of individual performance The
corporate performance results represent excellent performance against aggressive
operating plan targets.
Mr. Pohs' award was 40% of base salary and was based 90% on the
weighted performance results of 100.6% of the operating targets and 10% on
individual performance. The Committee determined that the individual portion of
Mr. Pohs' award should be based on a maximum individual performance rating.
Specifically, the Committee considered the following: the Company added 52,480
managed market customers, a 53% increase, bringing the total to 151,482 at
September 30, 1995, and consolidated EBITDA increased to $19.6 million which
represented a 94% increase over the $10.1 million reported in the prior fiscal
year.
Long-Term Incentive Compensation: The Company provides long-term
--------------------------------
incentive compensation to its executives through stock option grants under the
Omnibus Stock and Incentive Plan which are intended to align the interest of
executives with those of shareholders. This plan was approved by the Company's
shareholders by proxy vote during fiscal 1991 and amended during fiscal 1993 and
1995.
Subsequent to the 1995 fiscal year-end, stock options were granted to
the Company's executives as set forth in the "Option Grants Table." All options
are granted at an exercise price equal to the market price of the Company's
Common Stock at the date of grant and vest over a period of four years. The
shares owned by the named executives and their respective option positions were
considered in determining such option grants.
In November 1995, Mr. Pohs received an option to purchase 200,000
shares of Common Stock at an exercise price equal to the fair market value of
the stock on the date of grant. The size
III-4
of the award was determined based on a subjective evaluation of Mr. Pohs'
performance, as discussed earlier, and on a study by an independent compensation
consulting firm of dilution levels of comparable companies. After the stock
option grant, the Company's stock option dilution levels are within the range of
dilution levels found at comparable companies.
As of the date of this report, Mr. Pohs owns 85,944 shares of the
Company's Common Stock and, with the recent grant, holds options to purchase an
additional 640,000 shares. The committee believes that the equity interests held
by the named executives represent a significant incentive to continue to
increase shareholder value.
Policy with Respect to the $1 Million Limit. Section 162(m) of the
-------------------------------------------
Internal Revenue Code generally limits to $1,000,000 the tax deductible
compensation paid to the Chief Executive Officer and the four highest-paid
executive officers who are employed as executive officers on the last day of the
year. However, the limitation does not apply to performance-based compensation
provided certain conditions are satisfied.
Section 162(m) and proposed regulation thereunder do not affect the
Company's compensation payments for fiscal 1995 or compensation expected to be
paid in fiscal 1996. However, the Committee will continue to monitor the impact
of the new Code requirements and will adopt a policy as appropriate.
David E. Simmons John E. Hayes, Jr. Robert J. Paden
III-5
STOCKHOLDER PERFORMANCE RETURN GRAPH
The following graph compares the yearly percentage change in the
cumulative total shareholder return on the Company's Common Stock with that of
the cumulative total return of the Nasdaq Stock Market - US Index ("NASDAQ STOCK
MRKT - US") and the Nasdaq Telecommunications Index ("NASDAQ TELECOM") for the
five-year period ended on September 30, 1995. The information below is based on
an investment of $100, on September 30, 1990, in the Company's Common Stock, the
NASDAQ STOCK MRKT - US and the NASDAQ TELECOM, with dividends reinvested.
[GRAPH APPEARS HERE]
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN*
AMONG COMMNET CELLULAR INC., THE NASDAQ STOCK MARKET--US INDEX
AND THE NASDAQ TELECOMMUNICATIONS INDEX
COMMNET NASDAQ
Measurement period CELLULAR STOCK NASDAQ
(Fiscal Year Covered) INC. MARKET--US TELECOMMUNICATIONS
Measurement PT -
9/30/95
FYE 9/30/90 $ 100.00 $ 100.00 $ 100.00
FYE 9/30/91 $ 163.00 $ 157.00 $ 140.00
FYE 9/30/92 $ 152.00 $ 176.00 $ 153.00
FYE 9/30/93 $ 216.00 $ 231.00 $ 270.00
FYE 9/30/94 $ 285.00 $ 233.00 $ 250.00
FYE 9/30/95 $ 363.00 $ 321.00 $ 288.00
- ------------
* $100 INVESTED ON 09/30/90 IN STOCK OR INDEX--INCLUDING REINVESTMENT OF
DIVIDENDS. FISCAL YEAR ENDING SEPTEMBER 30.
III-6
SUMMARY COMPENSATION TABLE
The following table sets forth the compensation received by the named
Executive Officers for each of the three years ended September 30, 1995.
Long-Term
---------
Annual Compensation CompensationSalary
------------------- ------------------
Name and Principal Position Year Salary ($) Bonus ($) All Others Options (#) All Others
- --------------------------- ---- ---------- --------- ----------------- ----------- ----------
($)(1) ($)(1)
------ ------
Arnold C. Pohs .............. 1995 300,000 126,455 323,361 200,000 8,625
Chairman of the Board, 1994 250,000 112,601 - 250,000 13,980
President and Chief 1993 210,000 85,352 - 100,000 9,987
Executive Officer
Daniel P. Dwyer.............. 1995 200,000 66,203 511,547 100,000 8,625
Executive Vice President, 1994 180,000 58,974 - 125,000 13,070
Treasurer and Chief 1993 144,000 44,512 - 50,000 7,815
Financial Officer
Homer Hoe.................... 1995 170,000 55,253 2,206 35,000 975
Executive Vice President 1994 - - - - -
and Chief Information 1993 - - - - -
Officer
David S. Lynn................ 1995 120,000 33,095 168,425 20,000 8,625
Senior Vice President - 1994 108,000 28,755 - 20,000 7,637
Network Operations 1993 94,500 22,433 - 15,000 5,070
Amy M. Shapiro............... 1995 108,000 29,914 92,500 20,000 7,783
Vice President, Secretary 1994 100,000 25,184 - 30,000 7,050
and General Counsel 1993 94,500 20,070 - 15,000 5,096
___________
(1) The amounts shown represent compensation related to the difference at date
of exercise between the market price and the exercise price of options
exercised during the year. Additionally, this amount includes premiums paid
on supplemental health benefits for certain named executives.
(2) The amounts shown represent contributions by the Company to defined
contribution plans.
III-7
1995 OPTION GRANTS
The following table provides information on option grants for fiscal
1995 to the named Executive Officers.
Potential Realizable Value
at Assumed Rates of
Stock Price Appreciation
Individual Grants for Option Term (2)
------------------------------------------- ------------------------------------
Percent of
Total Options
Granted to Exercise
Granted Employees in Price Expiration
Name (#) (1) Fiscal Year ($/Share) Date 5% 10%
---- ------- ----------- --------- ---- -- ---
Arnold C. Pohs 200,000 37.81% 25.5625 11/08/05 $3,215,224 $8,148,008
Daniel P. Dwyer 100,000 18.90% 25.5625 11/08/05 1,607,612 4,070,004
Homer Hoe 35,000 6.62% 25.5625 11/08/05 562,664 1,425,901
David S. Lynn 20,000 3.78% 25.5625 11/08/05 321,522 814,801
Amy M. Shapiro 20,000 3.78% 25.5625 11/08/05 321,522 814,801
(1) Indicates number of shares as to which options were granted on November 8,
1995 pursuant to the Company's Omnibus Stock and Incentive Plan. Options
become exercisable in four equal annual installments commencing November 8,
1996.
(2) These are hypothetical values using assumed growth as prescribed by the
SEC. The assumed annual rates of appreciation of 5% and 10% over the ten
year term of the options would result in the price of the Company's stock
increasing to $41.64 and $66.30, respectively.
III-8
Change in Control Agreements
- ----------------------------
In July 1993, the Board of Directors approved change in control
agreements (the "Agreements") with Messrs. Pohs and Dwyer. In October 1994, the
Board authorized a comparable agreement with Mr. Hoe, the Company's Chief
Information Officer. In November 1995, the Board authorized comparable
agreements with Messrs. Gardner, Lynn and Morrisey, the Company's Senior Vice
President and Controller, Senior Vice President - Network Operations, and Senior
Vice President - Sales Operations, respectively, and Ms. Shapiro, the Company's
Senior Vice President and General Counsel. The purpose of the Agreements is to
reinforce and encourage the officers to maintain objectivity and a high level of
attention to their duties without distraction from the possibility of a change
in control of the Company. These Agreements provide that in the event of a
change in control of the Company, as that term is defined in the Agreements,
each officer is entitled to receive certain severance benefits upon the
subsequent termination or constructive termination of employment, unless
such termination is due to death, disability or voluntary retirement; unless the
termination is by the Company for cause (as defined in the Agreements) or is by
the officer for other than good reason (as defined in the Agreements).
The severance benefits include the payment of the officer's full base
salary through the date of termination. The severance benefits also include a
lump sum payment equal to 2.99 times the sum of (a) the officer's annual base
salary in effect immediately prior to the circumstances giving rise to
termination, and (b) the actual bonus earned by the officer in the year prior to
the year in which termination occurs. In addition, each officer will be provided
with life and health benefits and a continuation of all other employee benefits
for 12 months following the date of termination. In addition, the officers will
be fully vested in all benefit plans to the extent not otherwise entitled to
100% of all contributions made by the Company on their behalf.
In the event any payment or benefit to be received by an officer
pursuant to the Agreements would be subject to the federal excise tax, the
amount of the benefits payable under the Agreement will be increased such that
the net amount retained by the officer after deduction of any excise tax on such
payment and any federal, state and local tax and excise tax upon such additional
payment shall be equal to the full severance benefits contemplated by the
Agreement.
III-9
1995 AGGREGATED OPTION EXERCISES
AND YEAR-END OPTION VALUES
The following table provides information on the value of unexercised
options at September 30, 1995. Options to purchase 67,500 shares were exercised
by the named Executive Officers during fiscal 1995.
Number of Unexercised Value of Unexercised
Options at In-the-Money Options
Fiscal Year End (#)(1) at Fiscal Year End
------------------------------- ----------------------------
Name Vested Unvested Vested Unvested
---- ------ -------- ------ --------
Arnold C. Pohs 80,000 360,000 $1,088,750 $2,102,500
Daniel P. Dwyer 64,375 183,125 954,219 1,099,531
Homer Hoe - 25,000 - 84,375
David S. Lynn 13,875 39,625 192,047 306,516
Amy M. Shapiro 16,875 50,625 230,156 352,969
_________
(1) Does not reflect options granted on November 8, 1995 for fiscal 1995.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
At December 19, 1995, there were 13,470,354 shares of Common Stock of
the Company issued and outstanding. As of such date options to purchase
1,710,875 shares were outstanding. Each holder of Common Stock, but not
unexercised options, is entitled to one vote per share on each matter which may
be presented at a meeting of stockholders. Cumulative voting is not allowed. The
Company's Common Stock is traded on the Nasdaq National Market under the symbol
CELS.
The following table sets forth information regarding ownership of the
Company's Common Stock at December 19, 1995 by each person who is known by
management of the Company to own beneficially more than 5% of the Common Stock,
by each director of the Company and by all directors and executive officers of
the Company as a group. Shares issuable on exercise of options are deemed to be
outstanding for the purpose of computing the percentage ownership of persons
beneficially owning such options, but have not been deemed to be outstanding for
the purpose of computing the percentage ownership of any other person. Insofar
as is known to the Company, the persons indicated below have sole voting and
investment power with respect to the shares indicated as owned by them except as
otherwise stated in the notes to the table.
III-10
Name and Address of Amount and Nature of Percent of
Beneficial Ownership Beneficial Owner Class
-------------------- ---------------- -----
Arnold C. Pohs 277,739(1) 2.03%
5990 Greenwood Plaza Blvd.
Englewood, Colorado 80111
Daniel P. Dwyer 148,315(2) 1.09%
5990 Greenwood Plaza Blvd.
Englewood, Colorado 80111
John E. Hayes, Jr. 7,500 .06%
818 Kansas Avenue
Topeka, Kansas 66612
Main Street Partners, L.P. 2,075,800(3) 15.41%
3637 Fall Creek Highway
Granbury, Texas 76049
Janus Capital Corporation 1,581,325(4) 11.74%
100 Filmore Street
Denver, Colorado 80206
The Equitable Companies Inc. 1,189,900(5) 8.83%
787 Seventh Avenue
New York, New York 10019
All executive officers and 543,803(6) 3.92%
directors (10 persons)
_____________
(1) Includes options to purchase 187,500 shares of Common Stock.
(2) Includes options to purchase 120,000 shares of Common Stock.
(3) A Schedule 13D, dated April 4, 1995, was filed on behalf of Main Street
Partners, L.P., MS Advisory Partners, L.P., MS Advisory Partners
(Overseas), L.P., San Francisco Partners II, L.P., SF Advisory Partners,
L.P., SF Advisory Corp., SF Advisory Corp. II, The Phoebe Snow Foundation,
John H. Scully, William E. Oberndorf, William J. Patterson and
Glenn B. Solomon.
(4) A Schedule 13G, dated November 9, 1995, filed on behalf of Janus Capital
Corporation, Janus Venture Fund and Thomas H. Bailey reflects that such
group has shared voting and shared disposition power over such shares.
(5) A Schedule 13G, dated February 28, 1995, filed on behalf of five French
mutual insurance companies, AXA Assurance I.A.R.D. Mutuelle, AXA Assurances
Vie Mutuelle, Alpha Assurances I.A.R.D. Mutuelle, Alpha Assurances Vie
Mutuelle and Uni Europe Assurance Mutuelle, as a group, AXA, The Equitable
Companies Incorporated and their subsidiaries reflects that such group has
sole voting power over 1,104,900 shares of Common Stock of the Company. No
information is given in respect of voting power over the remaining
shares.
III-11
(6) Includes options to purchase 395,500 shares of Common Stock held by
directors and executive officers of the Company.
Item 13. Certain Relationships and Related Transactions.
None.
III-12
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a)(1) Financial Statements
--------------------
1. Report of Independent Auditors
2. Consolidated Balance Sheets, September 30, 1995 and 1994
3. Consolidated Statements of Operations, Years ended September
30, 1995, 1994 and 1993
4. Consolidated Statements of Stockholders' Equity (Deficit),
Years ended September 30, 1993, 1994 and 1995
5. Consolidated Statements of Cash Flows, Years ended September
30, 1995, 1994 and 1993
6. Notes to Consolidated Financial Statements
(a)(2) Financial Statement Schedules
-----------------------------
Schedule I. Condensed Financial Information of Registrant
Schedule II. Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes thereto.
(a)(3) Exhibits
--------
3.1 Amended and First Restated Articles of Incorporation, as
amended, of the Company. Incorporated herein by reference to
Exhibit 3.1 to the Company's annual report on Form 10-K for the
fiscal year ended September 30, 1994.
3.2 Bylaws, as amended, of the Company.
Incorporated herein by reference to Exhibit 3.2 to the
Company's registration statement on Form S-18, SEC File No. 33-
2700.
4.1 Specimen certificate representing Common Stock.
Incorporated herein by reference to Exhibit 4.1 to the
Company's registration statement on Form S-18, SEC File No. 33-
2700.
4.2 Indenture between the Company and State Street Bank and Trust
Company, as Trustee, relating to the 11 3/4% Senior
Subordinated Discount Notes. Incorporated herein by reference
to Exhibit 4.1 to the Company's registration statement on Form
S-3, SEC File No. 33-66492.
IV-1
(a)(3) Exhibits (continued)
--------
4.3 Indenture between the Company and America Bank N.A., as
Trustee, relating to the 11 1/4% Subordinated Notes.
Incorporated herein by reference to Exhibit 4.1 to the
Company's registration statement on Form S-3, SEC File No. 33-
60393.
4.4 Rights Agreement between the Company and State Street Bank and
Trust Company, as Rights Agent.
Incorporated herein by reference to Exhibit 2 to the Company's
registration statement on Form 8-A dated December 19, 1990.
*10.1 Lease Agreement dated August 8, 1995 between the Company and
TCD North, Inc.
10.2 Employee Stock Ownership Plan and Trust.
Incorporated herein by reference to Exhibit 10.9 to the
Company's annual report on Form 10-K for the fiscal year ended
September 30, 1989.
10.3 Short-Term Incentive Plan.
Incorporated herein by reference to Exhibit 10.6 to Company's
annual report on Form 10-K for the fiscal year ended September
30, 1990.
10.4 Omnibus Stock and Incentive Plan.
Incorporated herein by reference to Exhibit 10.7 to the
Company's annual report on Form 10-K for the fiscal year ended
September 30, 1991.
*10.5 Consolidated Loan Agreement between CoBank and CIFC.
*10.6 Third Amended and Restated Guaranty of the Company to CoBank.
*10.7 Form of change in control agreement between the Company and its
senior management.
10.8 Letter agreement relating to the purchase of a limited
partnership interest in Joplin Cellular Telephone Company, L.P.
dated December 9, 1993.
Incorporated herein by reference to Exhibit 10.3 to the
Company's quarterly report on Form 10-Q for the quarter ended
December 31, 1993.
10.9 Stock purchase agreement - Contel Cellular of South Dakota,
Inc. dated December 30, 1993.
Incorporated herein by reference to Exhibit 10.4 to the
Company's quarterly report on Form 10-Q for the quarter ended
December 31, 1993.
10.10 Purchase and sale agreement among the Company, Contel Cellular,
Inc. and GTE Mobilnet, Inc. dated December 30, 1993.
Incorporated herein by reference to Exhibit 10.5 to the
Company's quarterly report on Form 10-Q for the quarter ended
December 31, 1993.
IV-2
(a)(3) Exhibits (continued)
--------
*11.1 Computation of net income (loss) per common share.
*12.1 Computation of ratio of earnings to fixed charges.
*21.1 Subsidiaries of the Company.
*23.1 Consent of Independent Auditors.
_____________
* Filed herewith
(b) Reports on Form 8-K during the quarter ended September 30,
----------------------------------------------------------
1995.
----
None.
IV-3
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
COMMNET CELLULAR INC.
By: /s/ Arnold C. Pohs
----------------------------
Arnold C. Pohs, President
Date: December , 1995
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons in the capacities and
on the date indicated.
Signature Title Date
--------- ----- ----
/s/ Arnold C. Pohs President, Chief Executive Officer and December , 1995
- --------------------------
Arnold C. Pohs Director
/s/ Daniel P. Dwyer Executive Vice President, Treasurer, December , 1995
- --------------------------
Daniel P. Dwyer Chief Financial Officer and Director
/s/ Andrew J. Gardner Senior Vice President and Controller December , 1995
- --------------------------
Andrew J. Gardner (Principal Accounting Officer)
/s/ John E. Hayes, Jr. Director December , 1995
- --------------------------
John E. Hayes, Jr.
/s/ Robert J. Paden Director December , 1995
- --------------------------
Robert J. Paden
/s/ David E. Simmons Director December , 1995
- --------------------------
David E. Simmons
IV-4
COMMNET CELLULAR INC.
SCHEDULE I
Condensed Financial Information of Registrant
CONDENSED BALANCE SHEETS
- ------------------------
September 30,
----------------------------------------
1995 1994
---- ----
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 40,178,746 $ -
Short-term investments - 21,198,698
Accounts receivable 12,744 68,340
Inventory and other 2,918,410 7,030,045
------------ ------------
Total current assets 43,109,900 28,297,083
Property, plant and equipment 43,004,365 41,698,978
Less allowance for depreciation 16,208,572 14,081,311
------------ ------------
26,795,793 27,617,667
OTHER ASSETS
Investment in and advances to subsidiaries and affiliates 204,519,099 164,599,421
Other 10,842,421 9,246,650
------------ ------------
215,361,520 173,846,071
------------ ------------
$285,267,213 $229,760,821
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES $ 16,517,522 $ 17,432,691
LONG-TERM DEBT
Subordinated debentures and discount notes 209,644,799 192,679,725
Secured bank financing - 2,956,859
Other 449,230 785,079
------------ ------------
210,094,029 196,421,663
STOCKHOLDERS' EQUITY
Common stock 13,443 11,742
Other stockholders' equity 58,642,219 15,894,725
------------ ------------
58,655,662 15,906,467
------------ ------------
$285,267,213 $229,760,821
============ ============
COMMNET CELLULAR INC.
SCHEDULE I
Condensed Financial Information of Registrant
(continued)
CONDENSED STATEMENTS OF OPERATIONS
- ----------------------------------
Years ended September 30,
---------------------------------------------
1995 1994 1993
---- ---- ----
COST AND EXPENSES
General and administrative $ 29,304,972 $ 21,762,906 $ 15,596,956
Depreciation and amortization 5,740,057 4,521,127 4,638,950
Write-down of property and equipment - 2,441,148 -
Less amounts allocated to subsidiaries
and affiliates (31,576,840) (25,957,497) (21,485,170)
------------ ------------ ------------
NET INCOME (LOSS) BEFORE EQUITY IN
NET LOSS OF SUBSIDIARIES AND
AFFILIATES AND INTEREST INCOME
AND EXPENSE 3,468,189 2,767,684 (1,249,264)
Equity in net loss of subsidiaries and
affiliates (19,057,550) (20,563,867) (24,438,329)
Gains on sales of affiliates 18,580,077 1,245,100 4,592,916
Interest expense (20,465,381) (18,113,128) (9,898,323)
Interest income 17,536,632 17,913,059 8,326,788
------------ ------------ ------------
NET INCOME (LOSS) $ 61,967 $(16,751,152) $(22,666,212)
============ ============ ============
COMMNET CELLULAR INC.
SCHEDULE I
Condensed Financial Information of Registrant
(continued)
CONDENSED STATEMENTS OF CASH FLOWS
- ----------------------------------
Years ended September 30,
------------------------------------------
1995 1994 1993
---- ----- ----
CASH PROVIDED (USED) BY
OPERATING ACTIVITIES $ 6,259,646 $ 1,143,918 $ (666,509)
INVESTING ACTIVITIES
Purchase of short-term investments (82,109) (16,788,067) (28,994,122)
Sale of short-term investments 21,509,520 15,488,406 21,692,323
Additions to property and equipment (1,305,387) (13,284,688) (781,510)
Additions to other assets (16,895,426) (26,478,264) (72,183,846)
------------ ------------ ------------
3,226,598 (41,062,613) (80,267,155)
FINANCING ACTIVITIES
Payment on secured bank financing (4,023,106) (1,071,329) (1,071,329)
Extraordinary charge related to
extinguishment of long-term debt (1,130,004) - -
Offerring costs related to the issuance
of subordinted notes (517,682) - -
Issuance of senior discount notes - - 96,739,604
Issuance of subordinated notes 77,400,000 - -
Redemption of convertible
subordinated debentures (41,852,000) - -
Issuance of convertible subordinated
notes - - 4,705,000
Issuance of common stock 815,294 1,478,709 378,716
------------ ------------ ------------
30,692,502 407,380 100,751,991
------------ ------------ ------------
INCREASE (DECREASE) IN CASH $ 40,178,746 $(39,511,315) $ 19,818,327
============ ============ ============
COMMNET CELLULAR INC.
SCHEDULE I
Condensed Financial Information of Registrant
(continued)
BASIS OF PRESENTATION
- ---------------------
In the accompanying parent company only, CommNet Cellular Inc. (the
"Company") financial statements, the Company's investment in subsidiaries and
affiliates is stated at cost plus equity in undistributed net loss of
subsidiaries and affiliates since date of acquisition. The Company's share of
net loss of its subsidiaries and affiliates is included in the accompanying
condensed statement of operations using the equity method. Parent company only
financial statements should be read in conjunction with the Company's
consolidated financial statements.
The results of operations of 1994 and 1993 have been reclassified to
conform to the 1995 presentation.
COMMNET CELLULAR INC.
SCHEDULE II
Valuation and Qualifying Accounts
Additions
---------------------------
Charged to
Beginning Charged to Other Ending
Description Balance Costs & Expenses Accounts Deductions (1) Balance
----------- ------- ---------------- -------- -------------- -------
Allowance for doubtful
accounts $2,677,124 $5,096,126 $ - $5,815,440 $1,957,810
(1) All deductions are the result of actual write-offs to accounts receivable.
EXHIBIT INDEX
Exhibit Page
No. No.
--- ---
3.1 Amended and First Restated Articles of Incorporation, as amended, of the
Company. Incorporated herein by reference to Exhibit 3.1 to the
Company's annual report on Form 10-K for the fiscal year ended September
30, 1994.
3.2 Bylaws, as amended, of the Company.
Incorporated herein by reference to Exhibit 3.2 to the Company's
registration statement on Form S-18, SEC File No. 33-2700.
4.1 Specimen certificate representing Common Stock.
Incorporated herein by reference to Exhibit 4.1 to the Company's
registration statement on Form S-18, SEC File No. 33-2700.
4.2 Indenture between the Company and State Street Bank and Trust Company,
as Trustee, relating to the 11 3/4% Senior Subordinated Discount Notes.
Incorporated herein by reference to Exhibit 4.1 to the Company's
registration statement on Form S-3, SEC File No. 33-66492.
4.3 Indenture between the Company and America Bank N.A., as Trustee,
relating to the 11 1/4% Subordinated Notes. Incorporated herein by
reference to Exhibit 4.1 to the Company's registration statement on Form
S-3, SEC File No. 33-60393.
4.4 Rights Agreement between the Company and State Street Bank and Trust
Company, as Rights Agent.
Incorporated herein by reference to Exhibit 2 to the Company's
registration statement on Form 8-A dated December 19, 1990.
*10.1 Lease Agreement dated August 8, 1995 between the Company and TCD North,
Inc.
10.2 Employee Stock Ownership Plan and Trust.
Incorporated herein by reference to Exhibit 10.9 to the Company's annual
report on Form 10-K for the fiscal year ended September 30, 1989.
10.3 Short-Term Incentive Plan.
Incorporated herein by reference to Exhibit 10.6 to Company's annual
report on Form 10-K for the fiscal year ended September 30, 1990.
10.4 Omnibus Stock and Incentive Plan.
Incorporated herein by reference to Exhibit 10.7 to the Company's annual
report on Form 10-K for the fiscal year ended September 30, 1991.
*10.5 Consolidated Loan Agreement between CoBank and CIFC.
*10.6 Third Amended and Restated Guaranty of the Company to CoBank.
EXHIBIT INDEX
Exhibit Page
No. No.
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*10.7 Form of change in control agreement between the Company and
its senior management.
10.8 Letter agreement relating to the purchase of a limited
partnership interest in Joplin Cellular Telephone Company,
L.P. dated December 9, 1993.
Incorporated herein by reference to Exhibit 10.3 to the
Company's quarterly report on Form 10-Q for the quarter ended
December 31, 1993.
10.9 Stock purchase agreement - Contel Cellular of South Dakota,
Inc. dated December 30, 1993.
Incorporated herein by reference to Exhibit 10.4 to the
Company's quarterly report on Form 10-Q for the quarter ended
December 31, 1993.
10.10 Purchase and sale agreement among the Company, Contel
Cellular, Inc. and GTE Mobilnet, Inc. dated December 30, 1993.
Incorporated herein by reference to Exhibit 10.5 to the
Company's quarterly report on Form 10-Q for the quarter ended
December 31, 1993.
*11.1 Computation of net income (loss) per common share.
*12.1 Computation of ratio of earnings to fixed charges.
*21.1 Subsidiaries of the Company.
*23.1 Consent of Independent Auditors.
__________
* Filed herewith