FORM 10-K
_______________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________
(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, 1999
[_] 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
-------
COMMNET CELLULAR INC.
---------------------
(Exact name of registrant as specified in its charter)
Colorado 84-0924904
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8350 East Crescent Parkway, Suite 400, Englewood, Colorado 80111
----------------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
303/694-3234
------------
(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 _____
-------
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
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 14, 1999 was $100,844,554.
The number of shares of the registrant's common stock outstanding as of
December 14, 1999 was 22,861,345.
Item 1. Business.
(a) General Development of Business.
-------------------------------
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") and CommNet Cellular License Holding LLC ("CCLHLLC")
subsequently were organized to acquire and hold interests in cellular licenses.
CommNet Paging Inc. ("CPI") subsequently was organized to provide paging
services. CINC and CPI are wholly-owned subsidiaries of CommNet Cellular Inc.
CIFC is a wholly-owned subsidiary of CINC and CCLHLLC is a wholly-owned
subsidiary of CIFC. Unless the context indicates otherwise, the "Company" refers
to CommNet Cellular Inc. and its consolidated subsidiaries.
In addition to historical information, this report includes certain
forward-looking statements regarding events and financial trends which may
affect the Company's future operating results and financial position. Such
statements represent the Company's reasonable judgment on the future and are
subject to risks and uncertainties that could cause the Company's actual results
and financial position to differ materially. Such factors include, but are not
limited to: a change in economic conditions in the Company's markets which
adversely affects the level of demand for wireless services; greater-than-
anticipated competition resulting in price reductions, new product offerings, or
higher customer acquisition costs; better-than-expected customer growth
necessitating increased investment in network capacity; negative economies that
could result if one or more agreements to manage markets are not renewed;
increased cellular fraud; the impact of new business opportunities requiring
significant initial investments; and the impact of deployment of new
technologies on capital spending.
As used herein, the term "RSA" means the Cellular Geographic Service Area
("CGSA") within a Rural Service Area, as defined by the Federal Communication
Commission ("FCC") for which CommNet Cellular Inc. or its affiliates hold the
cellular telephone license issued by the FCC ("the cellular license"), and the
term "MSA" means the CGSA within a Metropolitan Statistical Area, as defined by
the FCC for which the Company or its affiliates hold the cellular license. As
used herein, "pops" means the estimated total 1999 population of an MSA or RSA,
based upon CACI Marketing Systems population estimates. "Net Company pops" means
an MSA's or RSA's pops multiplied by the Company's net ownership interest in an
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 covers virtually all of the pops within the managed
markets. 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 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
3,865,000 net Company pops in 66 markets located in 12 states. These markets
consist of 57 RSA markets having a total of 4,116,000 pops and 9 MSA markets
having a total of 1,227,000 pops, of which the Company's interests represent
3,060,000 and 805,000 net Company pops, respectively. Systems in which the
Company holds an interest constitute one of the largest geographic collection of
contiguous cellular markets in the United States.
The Company was formed to acquire cellular interests through participation
in the licensing process conducted by the FCC. In order to participate in that
process, the Company formed affiliates which originally were
I-1
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 purchased additional interests in many of such affiliates,
as well as in additional cellular properties. The Company currently manages 56
of the 66 markets in which it holds an interest and owns a greater than 50%
interest in 49 of its 56 managed markets. The Company provides capital and
financing to entities holding interests representing approximately 4,471,000
pops, of which 3,853,000 are included in net Company pops and 618,000 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 56
markets (49 RSA and 7 MSA markets) spanning nine states and represents
approximately 4,281,000 pops and 3,576,000 net Company pops. As of September 30,
1999, the RSA and MSA managed markets had 298,568 and 98,326 subscribers,
respectively. The Company expanded radio signal coverage with construction of 19
new cell sites and a 21% increase in channel capacity in fiscal year 1999.
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. In-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.
On February 10, 1998, the Company consummated a recapitalization whereby AV
Acquisition Corp., ("Newco"), a subsidiary of Blackstone CCI Capital Partners
L.P., a Delaware limited partnership (the "Partnership") affiliated with
Blackstone Management Associates II L.L.C., a Delaware limited liability company
("Blackstone"), was merged into the Company (the "Merger") pursuant to an
Agreement and Plan of Merger dated May 27, 1997 (the "Merger Agreement"). At the
effective time of the Merger, each share of Common Stock issued and outstanding
(other than those shares described below) was converted, at the election of the
holder thereof and subject to the terms of the Merger Agreement, into either (a)
the right to receive $36.00 ($7.20 on a post-split basis) in cash or (b) the
right to retain one fully paid and nonassessable share of Common Stock. The
following shares of Common Stock were not subject to conversions pursuant to the
Merger: shares of Common Stock held by the Partnership, and partnerships
affiliated with Blackstone that acquired interests in Newco prior to the
consummation of the Merger, Newco, and any wholly-owned subsidiary of the
Company or any wholly-owned subsidiary of Newco; fractional shares that were
converted to cash; and shares of Common Stock in respect of which dissenters'
rights had been properly exercised. The election to retain Common Stock was
subject to proration so that, following the Merger, 2,943,055 shares
(representing approximately 4% of the issued and outstanding Common Stock) were
retained by existing shareholders of the Company, representing approximately 13%
of the shares of the Company issued and outstanding immediately after the
Merger. The shares of Common Stock owned by the shareholders of Newco
represented approximately 87% of the shares of the Company issued and
outstanding after the Merger, resulting in such shareholders of Newco becoming
the controlling shareholders of the Company.
In addition, on February 10, 1998, the Company repurchased approximately
$176,600,000 of the approximately $176,700,000 aggregate principal amount of its
11 3/4% Senior Subordinated Discount Notes and all of the $80,000,000 aggregate
principal amount of its 11 1/4% Subordinated Notes, and repaid the entire amount
of indebtedness under the CoBank Credit Agreement. The Merger, debt repayment,
and payment of certain costs and expenses of the Merger were funded through
borrowings under a new $760,000,000 senior bank credit facility with the Chase
Manhattan Bank as administrative agent and collateral agent, Chase Manhattan
Bank Delaware as fronting bank, and a consortium of lenders (the "Chase Credit
Agreement").
At a Special Meeting held November 11, 1999, stockholders of CommNet
Cellular Inc. approved and adopted the proposed Agreement and Plan of Merger
dated as of July 18, 1999 among CommNet Cellular Inc.,
I-2
Vodafone AirTouch Plc, and Pacific Telecom Cellular of Colorado, Inc., a wholly
owned subsidiary of Vodafone AirTouch Plc. The Agreement and Plan of Merger
which was included as part of the Proxy Statement previously filed, provides,
among other things, for the merger of Pacific Telecom Cellular of Colorado, Inc.
with and into CommNet Cellular Inc. pursuant to which each share of CommNet
Cellular Inc. common stock, par value $.001 per share, issued and outstanding
immediately prior to the effective time of the merger, other than shares owned
by Vodafone AirTouch Plc or any of its subsidiaries, or by CommNet Cellular
Inc., and Dissenting Shares will be converted into the right to receive $31.00
in cash plus 8% annual interest compounded daily from July 18, 1999 until the
closing of the merger. On December 23, 1999, the FCC adopted an order granting
transfers of licenses sufficient to consummate the merger with Vodafone AirTouch
Plc.
(b) Financial Information About Industry Segments.
---------------------------------------------
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 primary
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.
---------------------------------
The Company's Operations
------------------------
General. Information regarding the Company's net ownership interests in
-------
each cellular licensee and the market subject to such license as of
December 14, 1999 is summarized in the following table.
Net Company
MSA or Interest in 1999 Net Company Pops
RSA Code (1) State Licensee (2) Population (3)(6) (4)
- ------------------ ----------------- --------------- ------------------ ----------------
MSAs:
167 Duluth, MN-WI 16.34% 236,055 38,571
206 Terra Haute, IN 16.67% 167,350 27,897
241*(5) Pueblo, CO 100.00% 136,877 136,877
253*(5) Sioux City, IA 74.50% 134,395 100,124
267*(5) Sioux Falls, SD 100.00% 144,557 144,557
268*(5) Billings, MT 91.63% 126,655 116,054
289*(5) Rapid City, SD 100.00% 109,652 109,652
297*(5) Great Falls, MT 91.63% 79,065 72,447
298*(5) Bismarck, ND 51.00% 92,216 47,030
--------- -------
Total MSA 1,226,822 805,509
RSAs:
348*(5) Colorado 100.00% 48,613 48,613
349*(5) Colorado 61.75% 65,978 40,741
351*(5) Colorado 100.00% 79,864 79,864
352*(5) Colorado 94.74% 37,494 35,522
353*(5) Colorado 100.00% 75,340 75,340
354*(5) Colorado (B1) 69.40% 50,774 35,237
355*(5) Colorado 100.00% 45,900 45,900
356* Colorado (B1) 49.00% 25,698 12,592
389 Idaho 50.00% 73,439 36,720
390 Idaho 33.33% 17,307 5,768
I-3
Net Company
MSA or Interest in 1999 Net Company Pops
RSA Code (1) State Licensee (2) Population (3)(6) (4)
- ---------------- ----------------- ---------------- ------------------- ----------------
392*(5) Idaho (B1) 100.00% 143,655 143,655
393*(5) Idaho 91.64% 300,518 275,395
415 Iowa 10.11% 153,272 15,496
416 (5) Iowa 78.57% 108,135 84,962
417*(5) Iowa 100.00% 156,732 156,732
419* Iowa 44.92% 54,942 24,680
420*(5) Iowa 100.00% 62,862 62,862
424* Iowa 50.00% 66,021 33,011
425* Iowa 13.28% 109,755 14,575
426* Iowa 49.14% 82,673 40,626
427* Iowa 49.17% 101,532 49,923
512 Missouri (B1) 14.70% 56,731 8,339
523*(5) Montana (B1) 91.63% 65,402 59,928
523*(5) Montana (B2) 91.63% 80,232 73,517
524*(5) Montana (B1) 91.63% 31,365 28,740
526*(5) Montana (B1) 91.63% 9,665 8,856
527*(5) Montana 91.63% 193,416 177,227
528*(5) Montana 91.63% 65,613 60,121
529*(5) Montana 91.63% 22,919 21,001
530*(5) Montana 91.63% 90,778 83,180
531*(5) Montana 91.63% 35,232 32,283
532*(5) Montana 91.63% 13,113 12,015
553*(5) New Mexico (B2) 58.36% 119,567 69,779
555 New Mexico 12.25% 97,433 11,936
557 New Mexico 16.33% 62,868 10,216
580*(5) North Dakota 53.36% 102,916 54,916
581*(5) North Dakota 65.06% 58,793 38,251
582 North Dakota 41.45% 89,604 37,141
583* North Dakota 49.00% 58,229 28,532
584*(5) North Dakota 61.75% 45,427 28,051
634*(5) South Dakota 100.00% 32,864 32,684
635*(5) South Dakota 100.00% 18,422 18,422
636*(5) South Dakota 100.00% 52,164 52,164
638*(5) South Dakota (B1) 100.00% 17,088 17,088
638*(5) South Dakota (B2) 100.00% 15,817 15,817
639*(5) South Dakota (B1) 100.00% 45,148 45,148
639*(5) South Dakota (B2) 100.00% 1,499 1,499
640*(5) South Dakota 100.00% 59,848 59,848
641*(5) South Dakota 100.00% 77,441 77,441
642*(5) South Dakota 100.00% 108,796 108,796
675*(5) Utah 100.00% 62,660 62,660
676*(5) Utah 100.00% 121,103 121,103
677*(5) Utah (B3) 100.00% 42,303 42,303
678*(5) Utah 80.00% 28,343 22,674
I-4
Net Company
MSA or Interest in 1999 Net Company Pops
RSA Code (1) State Licensee (2) Population (3)(6) (4)
- ------------------ ------------------------ -------------------- ------------------------ -------------------
718*(5) Wyoming 66.00% 53,058 35,018
719*(5) Wyoming 100.00% 75,819 75,819
720*(5) Wyoming 100.00% 144,455 144,455
--------- ---------
Total RSA 4,116,455 3,059,786
--------- ---------
Total MSA and RSA 5,343,277 3,865,295
========= =========
__________
(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.
(3) Derived from the 1999 CACI Marketing Systems population estimates, and
other sources for markets not managed by the Company.
(4) Net Company Pops represents Net Company Interest in Licensee multiplied by
1999 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 CGSA.
Markets managed by the Company are denoted by an asterisk (*).
I-5
Subscriber Growth Table
- -----------------------
Information regarding subscribers to the MSA and RSA cellular systems
managed by the Company is summarized by the following table:
Number of 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%
- ----------------------------------------------------------------------------------------------------------------
Sept 30, 1995 56 7 49 4,220,975 785,866 (6) 3,435,109 (6) 151,482 42,401 109,081 53.01%
- ----------------------------------------------------------------------------------------------------------------
Sept 30, 1996 55 7 48 4,105,119 792,913 (7) 3,312,206 (7) 211,278 55,896 155,382 39.47%
- ----------------------------------------------------------------------------------------------------------------
Sept 30, 1997 56 7 49 4,228,389 800,187 (8) 3,428,202 (8) 274,745 68,579 206,166 30.04%
- ----------------------------------------------------------------------------------------------------------------
Sept 30, 1998 56 7 49 4,296,165 827,114 (9) 3,469,051 (9) 335,881 79,532 256,349 22.25%
- ----------------------------------------------------------------------------------------------------------------
Dec 31, 1998 56 7 49 4,296,165 827,114 (9) 3,469,051 (9) 358,665 85,029 273,636 6.59%
- ----------------------------------------------------------------------------------------------------------------
Mar 31, 1999 56 7 49 4,296,165 827,114 (9) 3,469,051 (9) 372,544 89,135 283,409 3.87%
- ----------------------------------------------------------------------------------------------------------------
June 30, 1999 56 7 49 4,281,083 823,417 (10) 3,457,666 (10) 387,868 94,496 293,372 4.11%
- ----------------------------------------------------------------------------------------------------------------
Sept 30, 1999 56 7 49 4,281,083 823,417 (10) 3,457,666 (10) 396,894 98,326 298,568 2.33%
- ----------------------------------------------------------------------------------------------------------------
____________
(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.
(7) Derived from 1995 Demographics On-Call population estimates.
(8) Derived from 1996 Demographics On-Call population estimates.
(9) Derived from 1998 Information Decision Systems population estimates.
(10) Derived from 1999 CACI Marketing Systems 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 nine MTSOs are currently required to serve all 56 of the Company's managed
markets. By consolidating and deploying high capacity MTSOs, the Company intends
to achieve further economies of scale. During fiscal 1999, all MTSO facilities
were expanded and upgraded to provide additional capacity for continued growth.
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, call validation 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
telephones as if they were in their home markets. This is a result of the
networking of the MTSOs managed by the Company and MTSOs of other carriers,
especially those operating adjoining markets within the nine-state area. The
Company has achieved a high degree of network reliability through the deployment
I-6
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.
("Nortel"), and interconnection between the Nortel MTSOs has been achieved using
Nortel's proprietary 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 equipment to integrate their systems, substantially
reducing the cost of validating calls and reducing fraud exposure.
The Company also has entered into 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 cellular markets in the United States and Canada. In addition,
the Company has entered into agreements with seven PCS carriers operating or
commencing operations using predominately the 30MHz Blocks A and B. In order to
serve growing PCS carrier in-roaming usage the Company will need to expand
capacity and enhance its switching to accommodate the technology. See "--
Competition--Competition From Other Technologies."
Expansion. The Company has completed the process of "filling in" the
---------
"CGSA" within its managed markets by adding network facilities which increased
the coverage of the radio signal. The Company significantly enhanced hand-held
portable coverage with construction of 19 new cell sites in fiscal year 1999
primarily within pre-existing coverage areas. In addition, the Company analyzed
the quality of existing coverage based upon empirical data gathered using
sophisticated mobile testing equipment. These "drive tests" gave rise to changes
in how certain sites were configured or deployed in the network. For example,
certain sites were "sectorized" to reduce interference and provide additional
capacity facing particular directions. The Company expects to continue such
efforts to improve coverage, especially for low power portable cellular phones,
throughout fiscal year 2000. In addition, the Company expects to add digital
features and functionality to compete for local customers and to technologically
accommodate digital in-roaming. Expansion and optimization 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 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/or 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.
Services and Products. Mobile subscribers in the Company's managed markets
---------------------
have available to them substantially all of the services typically provided by
landline telephone systems, including custom-calling features such as call
forwarding, call waiting, three-way conference calling, voice mail services and,
in most areas, paging. 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 packages cellular equipment with its
cellular service as a way to encourage use of its mobile services, including
replacement of subscriber equipment to retain valuable customers. 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
I-7
within the network and on most current price plans 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.
During the fourth fiscal quarter of 1997, CPI commenced commercial
operations. The CPI network consists of 150 paging transmitters owned and
operated by the Company. To date, the operations of CPI have not been
significant to the Company's consolidated financial statements.
The Company is committed to providing consistently high quality customer
service. The Company maintains a comprehensive customer assistance department
which offers the advantages of expanded customer service hours, specialized
roaming retention, collections 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. In addition, calls are
efficiently processed using sophisticated call center technologies. Inbound
calls are processed through an automatic call distribution system and an
integrated voice response system which route and track calls among customer
service representatives and permit customers to obtain information quickly and
accurately on their own. Outbound welcome, proactive retention and collection
calls are placed to select cross sections of the customer base using a
predictive dialing system. 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. Recently, the centralized
systems that process activations and update customer accounts have been made
accessible by retail store employees. This enables better quality and efficient
face-to-face service. The Company believes this approach provides cost
efficiencies while also addressing the 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.
Marketing. The Company coordinates the marketing strategy for each of 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. In addition, the Company packages services
that include flexible combinations of home areas, included minutes, roaming
pricing and premium features, along with free use of a base model phone,
permissive dialing to complete calls, toll-free calling in the home area code,
free enhanced features such as call forwarding, call waiting and itemized call
listing and others.
The Company believes that a key competitive advantage in marketing its
service is the large geographic area covered by the network. Seamless coverage
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 optional "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 "INLink" and "Follow-Me-Roaming" services
provided by GTE Telecommunication Services, Inc. which permit customers to
receive calls in any market that is part of the INLink or Follow Me Roaming
system without having to dial complicated access codes. The Company also offers
discounted roaming prices and enhanced services in certain markets as a result
of arrangements to link with certain adjacent markets managed by other carriers.
See "The Company's Operations -- Network Construction and Operations." The
Company offers additional services such as toll-free calling across multiple
area codes, use of premium model phones, weekend blocks of usage to its
subscribers for nominal monthly fees. 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.
I-8
Initially, the Company relied to a significant extent on direct sales
representatives and on independent sales agents and intends to increase its
current direct sales force to gain a greater share of the market of high-usage
and group accounts. The Company currently emphasizes a channel of distribution,
which also performs local customer service functions, represented by 82 Company-
owned retail locations strategically located within the network. The retail
distribution channel also includes 48 Wal-Mart(R) kiosks. The Company believes
that development of its own retail distribution channels maximizes customer
additions, generates cost efficiencies in the acquisition of such new
subscribers, and enhances customer service. The Company also employs 43 direct
sales representatives and has exclusive contracts with 334 agents or outlets. 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. An in-house telemarketing
staff contributes significantly to additions to the customer base and also
provides targeted communication to customers to optimize retention.
Subscribers. To date, a substantial majority of the subscribers who use
-----------
cellular service in markets managed by the Company have been business users of
mobile communication services. However, safety and combined personal and
business use are reasons newer customers subscribe. 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, construction
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 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 initial terms 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 MSA affiliate with specifically enumerated
responsibilities relating to the day-to-day business operation of the affiliate.
The affiliate is the general partner in the licensee, and the Company acts as
exclusive management agent for the licensee, although the licensee retains
ultimate control over its cellular system. The MSA management agreement provides
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. The
agreements also provide for reimbursement of reasonable administrative and
overhead expenses. The agreements generally were for an initial term of five
years, were extended for an additional one-year term 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.
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 the Chase Manhattan Bank as administrative agent and
collateral agent, Chase Manhattan Bank Delaware as
I-9
fronting bank, and a consortium of lenders ("Chase") and the Company. As of
September 30, 1999, CIFC had loan agreements outstanding with 22 RSA affiliates,
2 MSA affiliates and CINC and had advanced $180,581,000 thereunder, including
$161,352,000 to entities which are consolidated for financial reporting
purposes. All loans to affiliates from CIFC are secured by a lien upon all
assets of the entity to which funds are advanced. At September 30, 1999, all
loans bore interest at the 90-day LIBOR rate plus a margin (determined based on
the affiliate's leverage ratio), adjusted quarterly (6.08375% at September 30,
1999).
As of September 30, 1999, the Company and CIFC had net advances of
$183,733,000 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 $160,529,000. In addition, the Company had proportionate
obligations of additional debt of its affiliates from other financing sources of
$14,449,000. The assets of the affiliates in which the Company has investments
or advances represent 4,602,000 pops, which include 3,881,000 net Company pops.
Advances related to pops attributable to parties other than the Company total
$23,204,000.
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 initial licensees in each
cellular market was 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.
I-10
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.
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 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.
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. See "Federal Regulation--Recent Legislation."
While most MTSOs process information digitally, most radio transmissions of
cellular telephone calls are done on an analog basis, although most new
construction and the most rapid growth in usage can be attributed to fully
digital technology. It 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. Based on
estimated capacity requirements, the Company does not foresee a need to convert
a significant portion of its network to digital radio transmission technology in
the near term. However, the Company will add digital capacity in certain
strategic markets to more effectively compete for local subscribers and to
capture digital roaming traffic. Capital expenditures will increase modestly
over a number of years to achieve the Company's strategic goals. Additionally,
dual mode handsets capable of using both analog and digital technology will be
available to customers.
I-11
Competition
- -----------
General. Initially, the FCC awarded two cellular 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.
Currently, 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. In addition, the unserved area licensing process allows for
new companies to apply with the FCC for a license to provide cellular service in
areas within the relevant MSA or RSA not served by the Company and for existing
carriers to expand their service. See "Federal Regulation -- Cellular Service
Area." Within the network, the Company has two primary direct cellular
competitors, in addition to a number of stand-alone operators as summarized in
the following table.
Number of Competing Markets
---------------------------
Competitor States (1) MSAs RSAs Total
---------- ---------- ---- --- -----
Western Wireless CO, IA, MT, ND, SD UT, WY 7 30 37
US Cellular ID, IA - 7 7
Nine other carriers CO, IA, NM, UT, WY - 12 12
- -- --
7 49 56
= == ==
(1) States in which the competitor operates a competing cellular licensee.
Competition From Other Technologies. The FCC has licensed, subject to
-----------------------------------
relicensing and changes to the terms under which certain licenses were granted,
commercial personal communications services ("PCS"). PCS is not a specific
technology, but a variety of potential technologies that compete with cellular
telephone systems. The FCC has identified two categories of PCS: broadband and
narrowband. Licenses are awarded by competitive bidding. Auctions for most of
the spectrum blocks have been completed and many systems have commenced
operations in major metropolitan locations.
The FCC has adopted rules to authorize the operation of 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. Because narrowband PCS does not allow real-time, two-way voice
communications, and allows only limited data transfer, it is not clear to what
extent this technology will offer direct competition to cellular.
The FCC also has adopted rules to authorize the operation of new, broadband
PCS systems in the 2 GHz band. Equipment proposed for broadband PCS includes
small, lightweight and wireless telephone handsets; computers that can
communicate over the airwaves wherever they are located; and portable facsimile
machines and other graphic devices. The regulatory plan adopted for broadband
PCS includes an allocation of spectrum, a flexible regulatory structure,
eligibility restrictions and technical and operational rules. In addition, the
FCC revised its cellular rules to state explicitly 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 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 are required to pay the costs associated
with relocating these
I-12
existing microwave users to other portions of the radio spectrum or to
alternative technologies (such as fiber optics), 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 have been
licensed on the basis of the 51 Rand McNally Major Trading Areas ("MTAs"), (ii)
one channel block (Block C) has been allocated 30 MHz of spectrum and has been
licensed on the basis of the 493 Rand McNally Basic Trading Areas ("BTAs"),
(iii) three channel blocks (Blocks D, E and F) have been allocated 10 MHz of
spectrum each and have been licensed on the basis of BTAs. The FCC will allow a
single entity to combine all three 10 MHz blocks or to combine a 30 MHz license
with a 10 MHz license, as long as the entity complies with the spectrum cap
described below. Licensing has thus far been accomplished by spectrum auctions,
but the FCC has adopted partitioning and diseggregation rules that will allow
PCS licensees to assign portions of their coverage area and/or spectrum to other
entities. Restrictions apply to those channel bands (Blocks C & F) which were
set aside for licensing to small businesses and other certain "entrepreneurs."
Subject to certain cross-ownership benchmarks, spectrum aggregation is
permitted in broadband PCS, but until recently was limited to 45 MHz of
attributable Commercial Mobile Radio Service ("CMRS") spectrum per service area
in all sections of the country to prevent any one person or entity from
exercising undue market power. Relevant CMRS spectrum includes broadband PCS,
cellular and certain specialized mobile radio systems ("SMRs") operations, and
attributable interests can include management and joint marketing arrangements,
as well as partitioning. In 1999, the FCC revised the CMRS spectrum cap. Under
the revised spectrum cap, CMRS carriers are limited to 45 MHz of attributable
CMRS spectrum in Metropolitan Statistical Areas, and to 55 MHz of attributable
CMRS spectrum in Rural Service Areas.
Broadband PCS licensees are 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.
PCS carriers currently operate primarily in urban areas of the country and
represent potential new services of in-roaming for the Company's network. It is
estimated that PCS carriers currently compete with the Company in one MSA and
three RSA managed markets.
To date, the Company has experienced little impact from PCS competition,
however, it is uncertain what long-term effect these new personal communications
services may have on the Company. The Company believes that the cost to build
out a PCS network in a representative market of the Company would be three to
four times as expensive as the cost incurred by the Company for the same
coverage. This higher cost is due in part to the fact that PCS channels are
higher in the frequency band than cellular, and the radio signal does not travel
as far. Thus, more transmitter sites are required to cover the same area.
Therefore, the Company believes that PCS will have difficulty competing
effectively with cellular telephone service in the rural marketplace in the near
future, but there can be no assurance that this will be the case. In addition,
technological advances in cellular telephone technology provide essentially the
same services as PCS described above and the FCC revised its rules to authorize
cellular licensees to provide any PCS-type service on their channels without
prior notification to the FCC. The FCC issued operating authority for personal
communications services competitive to the Company's services in markets managed
by the Company. Because of the FCC's buildout requirements (mandating certain
level of population coverage at five and ten year benchmarks), coupled with the
higher construction costs and lower population density in rural areas, it is
likely that many PCS licensees will concentrate buildout efforts in the largest
urban and suburban areas, and may not reach rural areas for several years, if at
all. In many PCS license areas, it is possible to meet all coverage requirements
without serving rural communities.
Potential users of cellular systems may find an increasing number of
current and developing technologies able to meet their communication needs. For
example, SMRs of the type generally used by taxicab and tow truck
I-13
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 historically were subject to limitations that made
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. In addition, 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 facilitates 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. The FCC has
completed spectrum auctions to license these wide-area systems, and at least one
SMR carrier (Nextel) is advertising its service as competition to cellular.
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.
In 1991, and again in late 1998, the FCC auctioned licenses to operate
wide-area systems in the 220 MHz band. However, the narrow bandwidth of these
channels may hinder the ability of licensees to compete effectively with
cellular. The Company has not to date experienced significant competition from
any of the regional or national 220 MHz licenses granted in 1991.
In early 1997, the FCC issued rules designating the 2305-2320 and 2345-2360
MHz bands for new communications services to be called Wireless Communications
Service ("WCS"). The auction for these licenses was completed during fiscal year
1997. Licensees will be allowed to offer any fixed, mobile or radio location
service or satellite Digital Audio Radio Services on a primary basis. On a
secondary basis, amateur radio service and aeronautical telemetry operations
will continue in certain portions of the band. Because of the potential for
interference from grandfathered satellite operations and other technical
constraints, the FCC has indicated that it is unlikely WCS licensees will be
able to effectively provide cellular-like mobile services.
Technological advances in the communications field continue to occur and
make it difficult to predict the extent of additional future competition for
cellular systems. See "The Company's Operations -- Expansion." Although
satellite service, such as Motorola's "Iridium" system, 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. 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. In mid-1998, the FCC auctioned spectrum for Local Multipoint
Distribution Service ("LMDS") operations. Such licensees will likely provide
wireless local loop and video services, primarily on a fixed basis, but may
compete indirectly with cellular. Because LMDS operates in the 29-30 GHz band,
signal propagation is severely limited compared to cellular, and can be blocked
by foilage, rainfall or other obstructions. Therefore, mobile operations on LMDS
channels is unlikely. The primary competitive impact of LMDS would be on fixed
cellular applications.
Pursuant to a directive contained in the Balanced Budget Act of 1997, in
June of 1999 the FCC released a Notice of Proposed Rulemaking soliciting public
comment on an array of licensing and service standards for UHF television
channels 60-62 and 65-67, which have been reallocated for fixed, mobile and
broadcast use. The channels are in the 746-764 MHz and 776-794 MHz bands, and
have good propagation characteristics. It is anticipated that the rules
ultimately adopted will permit the provision of at least fixed and mobile
service.
I-14
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. Subject to limited exceptions, the FCC generally prohibits a single
entity from holding an interest in both licenses in the same market.
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 not to exceed ten years (although a license may be revoked
during its term for cause after formal proceedings by the FCC).
License Renewal. Cellular licenses are granted by the FCC for a term not
---------------
exceeding ten years, and are subject to renewal at the end of that term. The
cellular license expiration dates have passed for all of CommNet's MSAs and for
18 of its RSAs. The remaining 33 RSA licenses expire in the year 2000. The FCC
has established rules and procedures to process cellular renewal applications
filed by existing carriers, as well as any competing applications filed by
renewal challengers. At the end of the ten-year license term, the FCC requires a
license renewal application be submitted for each station authorization. Upon
the FCC's acceptance of the renewal application, the application goes through a
standard thirty-day Public Notice process. Renewal applications for the MSAs and
for the 18 RSAs have been through this Public Notice process, and all 25
applications for renewal have been granted. The Company also anticipates all
remaining RSA applications for renewal will be granted. Once the Public Notice
process is completed, provided there are no challenges, the FCC will grant a new
license for a second ten-year term. If there are challenges to a renewal
application, the FCC's renewal proceeding is initiated. Subject to one exception
discussed below, the renewal proceeding is a two-step hearing process. Under the
two-step procedure, the FCC will conduct a threshold proceeding (the "step-two"
hearing) to determine whether or not the incumbent licensee is entitled to a
license renewal expectancy for its performance during the past license term and
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
I-15
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. 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 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 that are mutually exclusive (overlap of proposed CGSAs) 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.
Unserved area applicants not proposing to expand an existing system, i.e.,
applicants for new cellular systems must propose to serve a minimum of 50
contiguous square miles and must demonstrate their financial qualifications to
construct the proposed system and to operate it for one year (assuming no
revenues). Existing licensees proposing to expand their systems through the
filing of an unserved area application are not subject to the 50 square mile
minimum coverage rule, nor are they required to make a financial qualifications
showing. Mutually exclusive unserved area applications are now processed by
auctions, and existing cellular carriers receive no preference in the 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.
I-16
Alien Ownership Restrictions. The Communications Act prohibits the
----------------------------
issuance of a license to, or the holding of a license by, any corporation 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 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.
The FCC has adopted rules that liberalize foreign investment in U.S.
telecommunications carriers, consistent with the 1997 World Trade Organization
(WTO) Basic Telecom Agreement. Foreign investors can own up to 49 percent of a
carrier in the U.S. market without special authorization. The FCC has also
enhanced its regulatory safeguards to prevent the exercise of foreign market
power in the U.S. telecommunications market.
Recent Legislation. The Telecommunications Act of 1996 (the "Act"), which
------------------
modifies and amends the Communications Act, covers virtually every element of
communications. Congress' main objective was to promote competition and reduce
regulation in order to secure lower prices and higher quality services for
telecommunications consumers and to encourage the rapid deployment of new
telecommunications technologies. A great portion of the Act is aimed at removing
restrictions which prevent local and long distance service providers from
offering competing services in the same territory and redefining compensation
arrangements between CMRS providers, which include cellular carriers such as the
Company, Interexchange Carriers ("IXCs"), Local Exchange Carriers ("LECs") and
Independent Local Exchange Carriers ("ILECs"). The major impact of the Act on
the Company was to reduce the costs paid by the Company to interconnect and
terminate calls on LEC, ILEC and IXC networks. The Act requires such carriers to
base termination charges to CMRS providers on cost and to compensate CMRS
providers for calls they terminate. The Company began to benefit from these
changes in fiscal year 1997. While the FCC's interconnection rules were being
challenged in court, the Company successfully negotiated new interconnection
agreements throughout its operating territory based on interim pricing rules.
Although many of the FCC's rules were struck down by a federal court, the
portion of the rules setting lower interconnection rates for wireless carriers
was upheld. The action of the federal court striking down the FCC's rules was
reversed by the United States Supreme Court, and the case was remanded for
further proceedings. As a result, the Company anticipates maintaining these
favorable rates and, in some cases, possibly negotiating even lower rates in the
future.
The Act mandates CMRS providers pay into the Universal Service Fund
("USF"). The USF is to ensure basic telephone services are available, reasonable
and affordable for all citizens. In addition, the USF will promote access to
high capacity telecommunications services for schools, libraries and rural
health care providers. Customers began seeing a new line item on their bills
from the Company as well as other carriers in general beginning January 1, 1998,
with the revenues passing through to the USF administrator. The rate charged by
the Company was initially .75% of local service revenues. Additionally, states
may create their own funds imposing charges only on intrastate service to
supplement the resources available from the Federal USF. State governments will
be responsible for determining who will be eligible to receive federal or state
USF subsidies. Most states have not finalized their rules, but it is likely that
any CMRS provider which seeks to draw funds from the USF will be subject to
additional regulation by that state.
In November, President Clinton signed into law the Wireless Communications
and Public Safety Act of 1999 providing wireless carriers with immunity from
liability equivalent to what local exchange carriers have with respect to
emergency communications.
I-17
Number Portability. The FCC's Report and Order mandated that by December
------------------
31, 1998 CMRS providers must be capable of routing calls that originate on their
network to wireline customers that have ported their numbers. By November 24,
2002 CMRS providers must allow their own customers to take their numbers to
other carriers. A significant amount of capital will be required to upgrade and
install equipment to ensure compliance of the FCC's rules. On May 14, 1998, the
FCC released its Order establishing federal cost recovery rules for number
portability. All carriers providing service within the area served by a number
portability database must contribute, on a pro rata basis, to the cost of
maintaining the shared database, and each carrier is responsible for recovering
its own number portability costs in any lawful manner.
CALEA. The Communications Assistance for Law Enforcement Act ("CALEA")
-----
requires telecommunications carriers ensure their facilities enable law
enforcement officials, pursuant to authorization, to intercept calls and access
call-identifying locations. In a recent Order, the FCC mandated that, with the
exception of packet-mode communications, all capabilities of the core interim
technical standards be implemented by the CALEA compliance date of June 30,
2000. By March 12, 2001, carriers must meet the FBI's capacity guidelines. The
FCC required that a packet-mode communications capability and the six punchlist
capabilities be implemented by September 30, 2001. A significant amount of
capital will be required to upgrade and install equipment to ensure compliance
of the FCC's rules. The Attorney General, subject to availability of
appropriations, may agree to reimburse wireless providers for a portion of their
costs directly associated with modifications to provide the required capacity.
E-911. The FCC's Order requires CMRS carriers to provide Phase I enhanced
-----
911 service which is the delivery of a ten-digit callback number and
identification of the cell site from where the 911 call originated to the Public
Safety Answering Point ("PSAP") by April 1, 1998 as long as the PSAPs have met
specific criteria. The FCC recently adopted new rules for wireless E-911 Phase
II requirements which must be available by October 1, 2001. The FCC has granted
wireless carriers the option of selecting the most appropriate location
technology by permitting handset-based methods, in addition to network-based
methods, to provide Automatic Location Identification (ALI) or geographic
coordinates of where the call was made. Carriers must report their chosen
technology to the FCC by October 1, 2000. Wireless carriers who employ a Phase
II location technology that requires new, modified, or upgraded handsets may
phase-in deployment of Phase II subject to several requirements. The accuracy
and reliability standards for handset-based "ALI" technology require 50 meters
accuracy for 67% of calls, and 150 meters accuracy for 95% of calls. The
accuracy and reliability for network-based solutions is 100 meters for 67% of
calls, and 300 meters for 95% of calls. The FCC recently released a Public
Notice seeking technical information on measuring the accuracy of E-911 systems
for locating wireless callers. In November 1999, the FCC issued an Order
eliminating cost recovery for wireless carriers as a prerequisite for providing
Phase I and Phase II.
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.
Some 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 FAA
approvals, zoning approvals and requisite state permits varies from market to
market and state to state. Likewise, variations exist in local zoning processes.
There can be no assurance that any state or local regulatory requirements
currently applicable to the systems in which the Company's affiliates have an
interest will not be changed in the future or that regulatory requirements will
not be adopted in those states and localities which currently have none.
I-18
Employees
- ---------
As of December 15, 1999, the Company had 645 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 60,000 square feet) located in Englewood, Colorado.
The Company and its affiliates lease and own locations for retail sales,
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.
On October 1, 1999 the Company gave notice to its stockholders of a special
meeting to be held on November 11, 1999 to consider and vote upon a proposal
(the "Proposal") to approve and adopt an Agreement and Plan of Merger dated as
of July 18, 1999 (the "Vodafone Agreement and Plan of Merger") among CommNet,
Vodafone Airtouch Plc, an English corporation ("Vodafone") and Pacific Telecom
Cellular of Colorado, Inc., a Colorado corporation and wholly owned subsidiary
of Parent ("PTCCI"). The Proxy Statement regarding the Proposal accompanied the
notice of meeting. The Vodafone Agreement and Plan of Merger, among other
things, provides for the merger of PTCCI with and into CommNet (the "Vodafone
Merger") pursuant to which each share of CommNet Cellular Inc. Common Stock, par
value $.001 per share (including each associated Right described in the
accompanying Proxy Statement), issued and outstanding immediately prior to the
effective time of the Vodafone Merger (other than shares owned by Vodafone or
any Subsidiary (as defined in the Proxy Statement) of Vodafone, including PTCCI,
or by CommNet Cellular Inc., and Dissenting Shares (as defined in the Proxy
Statement) are to be converted into the right to receive $31.00 in cash plus 8%
annual interest compounded daily from July 18, 1999 until the closing of the
Vodafone Merger.
The Special Meeting of Stockholders was held on November 11, 1999. At this
meeting, 21,616,802 shares were present in person or represented by proxy
representing more than 94% of the outstanding shares entitled to vote at the
meeting. On the item of business relating to the approval and adoption of the
Agreement and Plan of Merger, the holders of 21,587,944 shares voted in favor of
the resolution approving the Proposal, holders of 23,448 shares voted against
such Proposal, and holders of 5,410 shares abstained from voting on this
resolution. On the basis of this vote it was determined that the Agreement and
Plan of Merger was approved by the stockholders of the Company. There was no
other business to come before the meeting.
On December 23, 1999, the FCC adopted an order granting transfers of
licenses sufficient to consummate the merger with Vodafone.
I-19
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, as adjusted
for the 5 for 1 stock split on May 7, 1998, for each fiscal quarter since
October 1, 1997.
Fiscal Year 1998: High Low
---- ----
First Quarter..................... $ 7.200 $ 6.650
Second Quarter.................... 10.000 7.075
Third Quarter..................... 19.400 8.500
Fourth Quarter.................... 14.625 7.000
Fiscal Year 1999: High Low
---- ---
First Quarter..................... $12.938 $ 6.000
Second Quarter.................... 17.000 12.500
Third Quarter..................... 26.688 15.000
Fourth Quarter.................... 32.500 25.625
As of December 14, 1999, there were 42 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. (Amounts in thousands, except share and per
share data)
Statement of Operations Data (1):
Years ended September 30,
--------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Revenues $ 210,976 $ 171,435 $ 150,867 $ 115,196 $ 89,844
Costs and expenses (net
of amounts allocated
to affiliates):
Operations 109,503 100,905 94,497 76,123 68,929
Corporate 3,484 23,310 (985) 880 1,327
Total depreciation and
amortization 31,814 26,636 22,116 19,750 16,655
----------- ----------- ----------- ----------- -----------
Operating income 66,175 20,584 35,239 18,443 2,933
Equity in net income (loss)
of affiliates 12,852 5,127 (7,589) (1,636) (5,028)
Minority interest in net
income of consolidated
affiliates (5,488) (5,701) (2,964) (1,123) (964)
Gains (losses) on sales of
affiliates 12,336 - 350 (250) 19,471
Amortization of deferred costs (3,329) (2,651) (1,072) (2,090) (940)
Interest expense (58,977) (49,212) (29,464) (28,208) (26,044)
Interest income 2,635 4,876 6,532 10,468 13,046
----------- ----------- ----------- ----------- -----------
Income (loss) before
income taxes and
extraordinary charge 26,204 (26,977) 1,032 (4,396) 2,474
Income tax expense 731 - - - 400
----------- ----------- ----------- ----------- -----------
Income (loss) before
extraordinary charge 25,473 (26,977) 1,032 (4,396) 2,074
Extraordinary charge (3) - (33,500) - - (2,012)
----------- ----------- ----------- ----------- -----------
Net income (loss) 25,473 $ (60,477) $ 1,032 $ (4,396) $ 62
=========== =========== =========== =========== ===========
Income (loss) per common share:
Basic:
Income (loss) before
extraordinary charge $ 1.12 $ (.68) $ .01 $ (.06) $ .03
Extraordinary charge - (.85) - - (.03)
----------- ----------- ----------- ----------- -----------
Net income (loss) $ 1.12 $ (1.53) $ .01 $ (.06) $ -
=========== =========== =========== =========== ===========
Diluted:
Income (loss) before
extraordinary charge $ 1.11 $ (.68) $ .01 $ (.06) $ .03
Extraordinary charge - (.85) - - (.03)
----------- ----------- ----------- ----------- -----------
Net income (loss) $ 1.11 $ (1.53) $ .01 $ (.06) $ -
=========== =========== =========== =========== ===========
Weighted average shares
outstanding 22,707,977 39,397,393 68,835,650 68,636,015 60,767,960
=========== =========== =========== =========== ===========
II-2
Balance Sheet Data (1):
Years ended September 30,
------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Working capital $ 36,023 $ 38,065 $ 15,840 $ 16,246 $ 39,911
Investments in and
advances to affiliates 25,595 33,637 47,211 57,245 56,919
Net property and
equipment 177,068 154,598 143,875 118,099 105,289
Total assets 486,941 384,752 352,916 331,837 325,668
Long-term debt 742,586 682,999 250,852 245,845 246,357
Total liabilities 791,058 720,200 291,016 268,855 267,012
Stockholders' equity
(deficit) (2) (304,117) (335,448) 61,900 62,982 58,656
Supplemental Financial Data:
Years ended September 30,
------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
EBITDA (See "Management's
Discussion and Analysis--
General") $ 97,989 $ 71,069(4) $ 57,355 $ 38,193 $ 19,588
Net cash provided by
operating activities $ 37,736 $ 26,431(5) $ 48,631 $ 20,751 $ 14,068
Differences between EBITDA and net cash provided (used) by operating activities
were primarily cash interest expense and changes in operating assets and
liabilities.
(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,
--------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- -----
Consolidated 50 48 46 46 45
Equity 14 17 18 18 20
Cost 2 17 18 18 18
---- ---- ---- ---- ----
66 82 82 82 83
==== ==== ==== ==== ====
(2) No cash dividends were declared or paid during any period presented.
(3) Extraordinary charge related to the early extinguishment of long-term
debt.
(4) Excludes $23,849,000 of nonrecurring stock-based compensation expense
related to the Merger.
(5) Excludes $13,400,000 of nonrecurring stock-based cash compensation
expense related to the Merger.
II-3
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
General
- -------
The Company generated net income and operating income during fiscal
1999, operating income during1998 and focused on increasing penetration and
subscriber usage. In addition, the Company expects that operating income before
depreciation and amortization ("EBITDA"), which was positive during the fiscal
years ended September 30, 1999 and 1998, 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.
As a consequence of the Merger, results of operations and financial
position were impacted significantly on a one-time basis and on a recurring
basis. In fiscal 1998, one-time charges were recorded as corporate general and
administrative expenses to account for $13,400,000 of options that were settled
in cash on February 10, 1998 and $10,449,000 of noncash expense (and increase to
capital in excess of par value) for old options that were changed on April 2,
1998 triggering a remeasurement. In addition, an extraordinary charge of
$33,500,000 was recorded related to the premiums paid and deferred charges
written off to extinguish $270,427,000 of debt that existed prior to the Merger.
Under a new $760,000,000 debt facility, $680,000,000 was drawn to finance
extinguishment of old debt, the conversion of $475,496,000 of Common Stock and
for transaction costs. This increase in leverage in the capital structure of
the Company caused amortization expense and interest expense to increase
significantly and this trend will continue.
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 cash and short-term investments of the Company and
its consolidated affiliates. 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 Chase Manhattan Bank as administrative agent and
collateral agent, Chase Manhattan Bank Delaware as fronting bank, and a
consortium of lenders ("Chase") and from the Company. At September 30, 1999,
loans bore interest at the 90-day LIBOR rate plus a margin (determined based on
the affiliate's leverage ratio). 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 generally used to
repay borrowings by the affiliates from CIFC and thereafter will be used to make
cash distributions to equity holders, including the Company.
Management believes there exists a seasonality in both service
revenues, which tend to be greater in the third and fourth fiscal quarters, and
operating expenses, which tend to be highest in the first fiscal quarter due to
increased marketing activities and customer growth, which may cause operating
income to vary from quarter to quarter.
Year 2000 Compliance. The Company has prepared an inventory of its
--------------------
critical computer hardware and software systems to determine what reasonable
steps should be taken by the Company in order to assure that these systems do
not experience operating problems as a result of these systems failure to
properly recognize dates in the year 1999 and beyond, that is, to assure that
they are "Y2K compliant."
The Company has adopted a plan to become Y2K compliant which has been
approved by the Board of Directors of the Company (the "Y2K Plan"). The Company
has a standing Y2K Committee composed of senior management and professionals of
the Company that regularly meet to assess Y2K compliance issues. The Y2K Plan
requires that the Y2K Committee identify potential Y2K scenarios and the
implications of each to the operational and financial viability of the Company
and assess the level of effort, expense and impact to make the
II-4
Company Y2K compliant for each potential scenario. Members of the Y2K Committee
have published master lists of scenarios and efforts required for remediation.
Major areas being addressed by the Y2K Committee include: the cellular network;
interconnect arrangements to connect the cellular network with landline systems;
clearinghouse arrangements to allow verification and billing of roaming traffic;
the Company's wide area and local area networks; the Company's internal
communications systems; Company server hardware, software and desktop systems;
billing software and related elements (call detail records, rating, posting);
financial and operational reporting systems; information integration systems;
critical suppliers including financial institutions, payroll/benefits
processing, credit bureaus, benefit plans, building systems, and office
equipment.
Within each area of inquiry the Y2K Committee prioritized and
evaluated each scenario and the remediation effort required to achieve Y2K
compliance and chose whether to either address the scenario through
implementation of full or partial remediation efforts, or not address the
scenario with remediation efforts. For those scenarios addressed, a remediation
schedule was prepared showing when remediation efforts will be undertaken. As
part of the development of remediation efforts the Y2K Committee developed
testing strategies for those remediation efforts and assumptions that were
tested.
For all areas addressed by the Y2K Committee, whether addressed by
remediation efforts or not, the Y2K Committee developed contingency plans in the
event that critical systems, services and/or equipment are not operational on or
after January 1, 2000 based upon the anticipated viability of critical systems,
services and/or equipment on or after January 1, 2000. Also, the Y2K Committee
developed contingency plans in case some elements or assumptions for addressing
the Year 2000 problem may be false or incorrect.
As of the time of this report, the Company has reviewed all material
software license and maintenance agreements with its vendors to determine
whether these vendors have obligations to make their hardware and software Y2K
compliant and has initiated plans with such vendors to remedy any Y2K compliance
problems. Critical suppliers of the Company have been contacted to determine
whether or not they are Y2K compliant and to assess whether these suppliers'
compliance efforts to continue to meet the Company's needs.
The following identifies the current status of these efforts:
The Cellular Network. MTSO software has been upgraded to more current
versions and Y2K software "patches" have been installed in some cases. All
testing of the system is complete. The Company believes that these efforts
should result in a cellular network that will continue to function without
material service affecting outages due to Y2K problems. Notwithstanding the
Company's efforts, network equipment suppliers have been unwilling to give
unqualified warranties that network equipment is Y2K compliant. Vendors and the
Company have committed to having resources available to expeditiously correct
Y2K problems if they arise. Service affecting outages, if prolonged and
widespread, could affect Company revenues. See "--Customer Service Terms and
Conditions" below.
Interconnect and Other Arrangements with Wireline Telephone Service
Vendors. In order to complete calls to/from wireline telephones and cellular
telephones not connected to the same MTSO, and to transmit calls from many
Company cell sites to Company MTSOs, the Company relies on wireline telephone
services from numerous vendors. U S WEST Communications, Inc. ("U S WEST") is
the largest of these vendors. Other smaller telephone companies provide
geographically limited wireline services. The failure of any of these systems
would result in an inability of cellular customers to make or receive calls in
the geographic area affected by the failure. The Company has not received
unconditional warranties from any of these vendors that their systems are Y2K
complaint. The Company has reviewed the Y2K compliance efforts that have been
disclosed by U S WEST and other vendors and believes that efforts by these
vendors should not result in material service outages due to Y2K problems. The
Company has no alternatives to using these vendors and thus must rely on these
vendors' efforts. Service affecting outages, if prolonged and widespread, could
affect Company revenues. See "--Customer Service Terms and Conditions" below.
Company Software, Hardware, and Information Resources. The Company has
evaluated major internal computer systems for potential Y2K problems and has
implemented efforts to provide enhancements. Virtually all
II-5
testing has been completed on these systems. Many of the Company's systems are
interconnected with third party systems (see below). Communication between
internal and third party systems is largely dependent on the wireline systems
discussed above. The Company has substantially completed work with software and
hardware vendors to correct any Y2K problems that were detected. The Company
believes that these efforts should result in internal software, hardware and
information resources that will continue to function without material failures
due to Y2K problems. Significant failures could impair the Company's ability to
provide timely financial and other internal reporting data as a result of having
to rely on backup data and manual methods of record keeping. Productivity of
Company personnel could be adversely affected by having to use alternate means
of communication and alternative office systems and equipment.
Third Party Service Providers. The Company relies on a single billing
vendor to produce bills for its customers. This billing vendor also supplies
billing and customer care software used by the Company internally. Raw billing
information is captured by Company MTSO's. The Company upgraded its billing
software during 1998. The Company uses other vendors to validate and provide for
some of its in and out roaming traffic. The Company uses third party financial
institutions and employee benefit services. The Company has contacted these
third party service providers and believes that these vendors have programs in
place that should result in these vendors being able to continue to function
without material failures due to Y2K problems. However, none of these third
party vendors have given unqualified warranties to the Company that they will be
Y2K compliant. The Company could rely on internal systems to provide monthly
access billing to its customers, but has not developed a means to bill rated
minutes of use and toll to its customers. The result of a billing vendor failure
would be to delay billing of customers by the Company with resultant delays in
receiving payments from Company customers. Failure of roamer service vendors
could result in an inability for some of the Company's customers to roam in
markets that are not directly connected to the Company's cellular network as
well as an inability for customers of unconnected systems to roam in the
Company's markets. Paper-based financial institution and employee benefit
records could be used to continue these services, although at a higher cost to
the Company.
Customer Service Terms and Conditions. The terms and conditions under
which the Company provides cellular and paging services to its customers contain
provisions that limit the Company's liability in the event that there is a
service failure. The terms and conditions provide that the Company is not liable
for any consequential or incidental damages to its customers. They further
provide that no credit will be given for service outages of less than 24 hours
in duration. In addition, they limit damages for failure to provide service to a
credit for the pro rated number of days that service was unavailable. Service
affecting outages have occurred in limited geographic areas on numerous
occasions in the past and the Company has not been found liable to any person
for damages in excess of the limitations imposed by the terms and conditions of
service. The Company believes it is unlikely that an outage occasioned by a
failure attributable to a Y2K problem would lead to a different result. Under
the terms and conditions, if the Company were unable to supply cellular service
to a significant portion of its customer base over a prolonged period of time,
the Company would experience a loss of revenues from the customers affected
which could have a material adverse affect on the Company. The Company has
adopted a policy of not giving any warranties to customers regarding Y2K
compliance.
Litigation. The Company, at this time, does not anticipate any
litigation involving the Company that would arise as a result of Y2K compliance
issues.
Insurance. The Company has investigated specialized Y2K insurance
products and has not, to date, found any such products that provide appropriate
coverage for the Company at acceptable premium levels.
Results of Operations
- ---------------------
Fiscal Year 1999 Compared With Fiscal Year 1998. Service revenues,
-----------------------------------------------
including in-roaming revenues, increased by 23%, or $38,110,000 from
$168,082,000 for the year ended September 30, 1998 to $206,192,000 for the year
ended September 30, 1999. The growth was primarily due to the increase in the
number of subscribers in consolidated markets, offset by lower revenues per
subscriber, and growth of in-roaming usage. In addition to increases in market
penetration, growth resulted from an increase of two newly consolidated markets
during the
II-6
fiscal year. Growth in subscribers offset by lower revenues per subscriber
accounted for 49% of the increase, growth of in-roaming usage accounted for 24%
of the increase, and the increase in the number of consolidated markets
accounted for 27% of the increase. In-roaming revenues increased by 34%, or
$16,849,000, from $49,325,000 for the year ended September 30, 1998 to
$66,174,000 for the year ended September 30, 1999 due to increased coverage in
cellular markets and to industry-wide subscriber increases.
Average monthly revenue per subscriber, including in-roaming,
decreased from $54 for the year ended September 30, 1998 to $53 for the year
ended September 30, 1999, reflecting the benefit of declining prices to the
consumer which is consistent with an overall industry trend. In-roaming revenues
per subscriber per month increased from $16 for the year ended September 30,
1998 to $17 for the year ended September 30, 1999.
Cost of service decreased as a percentage of service revenues from 15%
in fiscal year 1998 to 12% in fiscal year 1999, as revenues derived from the
growing subscriber base outpaced the fixed components of cost of service. The
Company recently renegotiated its contract to provide long distance service at a
lower cost.
Equipment sales increased 43% from $3,353,000 for the year ended
September 30, 1998 to $4,784,000 for the year ended September 30, 1999 due to
increases in sales of accessories. Cost of equipment sales decreased 28% from
$14,971,000 for the year ended September 30, 1998 to $10,774,000 for the year
ended September 30, 1999 due to a $7,326,000 decrease from the change in
accounting for handsets provided to customers, offset by an increase of
$3,129,000 related to increased subscriber additions and upgrades to existing
customers.
General and administrative costs of operations increased 18% from
$34,023,000 during the year ended September 30, 1998 to $40,086,000 during the
year ended September 30, 1999, due to the growth in the customer base. The
majority of these costs were incremental customer billing expenses, and increase
in bad debt expenses. Bad debt expense increased from 1.24% of total revenues
during the year ended September 30, 1998 to 2.95% of total revenues during the
year ended September 30, 1999. General and administrative costs as a percentage
of service revenues decreased from 20% for the year ended September 30, 1998 to
19% for the year ended September 30, 1999.
Marketing and selling costs increased 22% from $27,482,000 for the
year ended September 30, 1998 to $33,430,000 for the year ended September 30,
1999, primarily as a result of increased advertising costs and increased
commission costs as a result of higher subscriber activations. Marketing costs
per gross new subscriber increased 1% from $230 for the year ended September 30,
1998 to $232 for the year ended September 30, 1999.
Depreciation and amortization relating to operations increased 18%
from $25,182,000 for the year ended September 30, 1998 to $29,618,000 for the
year ended September 30, 1999, primarily related to increased property and
equipment balances.
Corporate costs and expenses for the year ended September 30, 1998
were $24,764,000, which represented gross expenses of $33,517,000 less amounts
allocated to nonconsolidated affiliates of $8,753,000. Excluding nonrecurring
transaction costs related to the cash settlement of stock options associated
with the merger of $13,400,000 and the establishment of a new measurement date
for the remaining options requiring recognition of an additional $10,449,000 of
compensation expense, corporate costs and expenses were $915,000. Corporate
costs and expenses for the year ended September 30, 1999 were $5,680,000, which
represented gross expenses of $12,508,000 less amounts allocated to
nonconsolidated affiliates of $6,828,000. The increase was primarily due to
certain costs incurred during the year ended September 30, 1999 related to the
settlement of claims of former executives and legal fees associated with the
purchase of additional interests in certain South Dakota markets, none of which
were allocated to affiliates.
Equity in net income of affiliates for the year ended September 30,
1999 was $12,852,000 compared to equity in net income of $5,127,000 for the year
ended September 30, 1998. The improvement was primarily due to equity income
associated with the sale of certain nonmanaged MSA markets, and increased
profitability of those markets accounted for under the equity method.
II-7
Amortization of deferred costs increased 26% from $2,651,000 for the
year ended September 30, 1998 to $3,329,000 for the year ended September 30,
1999, as a result of increased deferred costs associated with the Chase Credit
Agreement.
Interest expense increased 20% from $49,212,000 for the year ended
September 30, 1998 to $58,977,000 for the year ended September 30, 1999 due to
increased borrowings under the Chase Credit Agreement, offset by lower interest
rates. Cash paid for interest increased 18% from $42,479,000 during the year
ended September 30, 1998 to $50,174,000 during the year ended September 30, 1999
due to increases in payments made under the Chase Credit Agreement.
Interest income decreased 46% from $4,876,000 for the year ended
September 30, 1998 to $2,635,000 for the year ended September 30, 1999. The
decrease was due to lower average cash and cash equivalent balances and lower
notes receivable balances from nonconsolidated affiliates.
At September 30, 1999, the Company had net operating loss ("NOL")
carryforwards for income tax purposes of $169,630,000, compared to $157,593,000
at September 30, 1998. The decrease was due to the utilization of the NOL to
offset current year taxable income.
Fiscal Year 1998 Compared With Fiscal Year 1997. Service revenues,
-----------------------------------------------
including in-roaming revenues, increased by 14%, or $20,818,000, from
$147,264,000 for the year ended September 30, 1997 to $168,082,000 for the year
ended September 30, 1998. The growth was primarily due to the increase in the
number of subscribers in consolidated markets, offset by lower revenues per
subscriber and growth of in-roaming usage. In addition to increases in market
penetration, growth resulted from an increase of two newly consolidated markets
during the fiscal year. Growth in subscribers offset by lower revenues per
subscriber accounted for 46% of the increase, growth of in-roaming usage
accounted for 40% of the increase, and the number of newly consolidated market
accounted for 14% of the increase. In-roaming revenues increased by 24%, or
$9,444,000, from $39,881,000 for the year ended September 30, 1997 to
$49,325,000 for the year ended September 30, 1998 due to increased coverage in
cellular markets and to industry-wide subscriber increases.
Average monthly revenue per subscriber, including in-roaming,
decreased from $60 for the year ended September 30, 1997 to $54 for the year
ended September 30, 1998, reflecting the benefit of declining prices to the
consumer which is consistent with an overall industry trend. In-roaming revenues
per subscriber per month was unchanged at $16.
Cost of service decreased as a percentage of service revenues from 19%
in fiscal year 1997 to 15% in fiscal year 1998, as revenues derived from the
growing subscriber base outpaced the fixed components of cost of service.
Equipment sales decreased 7% from $3,603,000 for the year ended
September 30, 1997 to $3,353,000 for the year ended September 30, 1998 due to
decreases in sales of accessories. Cost of equipment sales increased 19% from
$12,609,000 for the year ended September 30, 1997 to $14,971,000 for the year
ended September 30, 1998. Approximately $6,624,000 and $3,572,000 of the year
ended September 30, 1998 cost of equipment sales relates to equipment provided
to new and existing customers, respectively, which the customers are generally
required to return equipment to the Company if service is terminated. Although
the Company retains ownership of the equipment, it carried such equipment at no
value on its balance sheet.
General and administrative costs of operations increased 12% from
$30,343,000 during the year ended September 30, 1997 to $34,023,000 during the
year ended September 30, 1998, due to the growth in the customer base. The
majority of these costs were incremental customer billing expenses and
consulting expenses, offset by a reduction of bad debt expenses due to more
aggressive collection efforts. Bad debt expense decreased from 2.51% of total
revenues during the year ended September 30, 1997 to 1.22% of total revenues
during the year ended September 30, 1998. General and administrative costs as a
percentage of service revenues decreased from 21% for the year ended September
30, 1997 to 20% for the year ended September 30, 1998.
II-8
Marketing and selling costs increased 17% from $23,437,000 for the
year ended September 30, 1997 to $27,482,000 for the year ended September 30,
1998, primarily as a result of increased advertising costs and increased
commission costs as a result of higher subscriber activations. Marketing costs
per gross new subscriber increased 4% from $221 for the year ended September 30,
1997 to $230 for the year ended September 30, 1998.
Depreciation and amortization relating to operations increased 23%
from $20,461,000 for the year ended September 30, 1997 to $25,182,000 for the
year ended September 30, 1998, primarily related to increased property and
equipment balances.
Corporate costs and expenses for the year ended September 30, 1997
were $670,000, which represented gross expenses of $7,086,000 less amounts
allocated to nonconsolidated affiliates of $6,416,000. Corporate costs and
expenses for the year ended September 30, 1998 were $24,764,000 which
represented gross expenses of $33,517,000 less amounts allocated to
nonconsolidated affiliates of $8,753,000. Excluding nonrecurring transaction
costs related to the cash settlement of stock options associated with the merger
of $13,400,000 and the establishment of a new measurement date for the remaining
options requiring recognition of an additional $10,449,000 of compensation
expense, corporate costs and expenses were $915,000. The increase was due
primarily to a write-off of demonstration subscriber equipment.
Equity in net income of affiliates for the year ended September 30,
1998 was $5,127,000 compared to equity in net loss of $7,589,000 for the year
ended September 30, 1997. The improvement was primarily due to increased
profitability of those markets accounted for under the equity method and the
absence of TVX, Inc. losses in 1998. TVX, Inc., a former affiliate in the
security alarm industry, ceased operations in the third fiscal quarter of 1997.
Amortization of deferred costs increased 147% from $1,072,000 for the
year ended September 30, 1997 to $2,651,000 for the year ended September 30,
1998, as a result of increased deferred costs associated with the Chase Credit
Agreement.
Interest expense increased 67% from $29,464,000 for the year ended
September 30, 1997 to $49,212,000 for the year ended September 30, 1998 due to
increased borrowings under the Chase Credit Agreement, offset by lower interest
rates. Cash paid for interest increased 239% from $12,548,000 during the year
ended September 30, 1997 to $42,479,000 during the year ended September 30,
1998.
Interest income decreased 25% from $6,532,000 for the year ended
September 30, 1997 to $4,876,000 for the year ended September 30, 1998. The
decrease was due to lower average cash and cash equivalent balances and lower
notes receivable balances from nonconsolidated affiliates.
At September 30, 1998, the Company had net operating loss ("NOL")
carryforwards for income tax purposes of $157,593,000, compared to $45,165,000
at September 30, 1997. The increase was due to a current year taxable operating
loss of $112,038,000.
Acquisitions and Sales
- ----------------------
On February 10, 1998, the Company consummated a recapitalization
whereby AV Acquisition Corp., ("Newco"), a subsidiary of Blackstone CCI Capital
Partners L.P., a Delaware limited partnership (the "Partnership") affiliated
with Blackstone Management Associates II L.L.C., a Delaware limited liability
company ("Blackstone"), was merged into the Company (the "Merger") pursuant to
an Agreement and Plan of Merger dated May 27, 1997 (the "Merger Agreement"). At
the effective time of the Merger, each share of Common Stock issued and
outstanding (other than those shares described below) was converted, at the
election of the holder thereof and subject to the terms of the Merger Agreement,
into either (a) the right to receive $36.00 ($7.20 on a post-split basis) in
cash or (b) the right to retain one fully paid and nonassessable share of Common
Stock. The following shares of Common Stock were not subject to conversions
pursuant to the Merger: shares of Common Stock held by the
II-9
Partnership, and partnerships affiliated with Blackstone that acquired interests
in Newco prior to the consummation of the Merger, Newco, and any wholly-owned
subsidiary of the Company or any wholly-owned subsidiary of Newco; fractional
shares that were converted to cash; and shares of Common Stock in respect of
which dissenters' rights had been properly exercised. The election to retain
Common Stock was subject to proration so that, following the Merger, 2,943,055
shares (representing approximately 4% of the issued and outstanding Common
Stock) were retained by existing shareholders of the Company, representing
approximately 13% of the shares of the Company issued and outstanding
immediately after the Merger. The shares of Common Stock owned by the
shareholders of Newco represent approximately 87% of the shares of the Company
issued and outstanding after the Merger, resulting in such shareholders of Newco
becoming the controlling shareholders of the Company.
In addition, on February 10, 1998, the Company repurchased
approximately $176,600,000 of the approximately $176,700,000 aggregate principal
amount of its 11 3/4% Senior Subordinated Discount Notes and all of the
$80,000,000 aggregate principal amount of its 11 1/4% Subordinated Notes, and
repaid the entire amount of indebtedness under the CoBank Credit Agreement. The
Merger, debt repayment, and payment of certain costs and expenses of the Merger
were funded through borrowings under a new $760,000,000 senior bank credit
facility with the Chase Manhattan Bank as administrative agent and collateral
agent, Chase Manhattan Bank Delaware as fronting bank, and a consortium of
lenders (the "Chase Credit Agreement").
In April 1998, the Company purchased an additional 90% interest in one
managed RSA market for $9,000,000 in cash.
In May 1998, the Company purchased an additional 16% interest in one
managed RSA market for $300,000 in cash.
In December 1998, the Company purchased substantially all of the
independent telco interests in three managed RSA markets and one managed MSA
market in South Dakota for approximately $55,766,000. In April 1999, the
Company purchased the remaining independent telco interests for approximately
$2,000,000 in cash.
In July 1999, the Company purchased an additional 51% interest in one
managed Colorado RSA market for 190,360 shares of the Company's stock valued at
approximately $5,270,000.
In September 1999, fifteen nonmanaged RSAs in Kansas in which the
Company held a 3.07% interest entered into a merger agreement with Alltel
Corporation whereby the Company received 213,607 shares of Alltel Corporation
common stock valued at approximately $15,033,000 in exchange for its interest in
the RSAs. Also in September 1999, an affiliate sold its 33.33% interest in two
nonmanaged MSAs for approximately $19,000,000 in cash. The Company is a 33.33%
shareholder in the affiliate.
In November 1999, the Company purchased substantially all of the
remaining independent telco interests in one managed MSA market and two managed
RSA markets for approximately $15,300,000 in cash and assumption and forgiveness
of $7,890,000 of debt.
In June 1999, the Company entered into a definitive agreement to sell
its interests in four managed RSA markets and a portion of its interest in a
fifth managed RSA market in Iowa for approximately $83,300,000 in cash and
repayment of debt totaling approximately $2,229,000. Closing of the transaction
is subject to regulatory and other approvals.
In addition, at a Special Meeting held November 11, 1999, stockholders
of CommNet Cellular Inc. approved and adopted the proposed Agreement and Plan of
Merger dated as of July 18, 1999 among CommNet Cellular Inc., Vodafone AirTouch
Plc, and Pacific Telecom Cellular of Colorado, Inc., a wholly owned subsidiary
of Vodafone AirTouch Plc. The Agreement and Plan of Merger agreement which was
included as part of the Proxy Statement previously filed, provides, among other
things, for the merger of Pacific Telecom Cellular of Colorado, Inc. with and
into CommNet Cellular Inc. pursuant to which each share of CommNet Cellular Inc.
common stock, par value $.001 per share, issued and outstanding immediately
prior to the effective time of the merger, other than
II-10
shares owned by Vodafone AirTouch Plc or any of its subsidiaries, or by CommNet
Cellular Inc., and Dissenting Shares will be converted into the right to receive
$31.00 in cash plus 8% annual interest compounded daily from July 18, 1999 until
the closing of the merger. On December 23, 1999, the FCC adopted on order
granting transfers of licenses sufficient to consummate the merger with Vodafone
AirTouch Plc.
Changes in Financial Condition
- ------------------------------
Fiscal Year 1999. Net cash provided by operating activities was
----------------
$37,736,000 during the year ended September 30, 1999. This was due to cash
provided in generating the net income after adjustments to reconcile net cash
provided by operating activities of $40,127,000 and by cash used to fund changes
in working capital of $2,391,000.
Net cash used by investing activities was $105,564,000 for the year ended
September 30, 1999. This was due primarily to $52,372,000 required to fund the
purchase of property and equipment and investment in cellular system equipment,
$2,297,000 to fund the purchase of other assets, $57,766,000 to purchase
additional interests in affiliates and $15,325,000 placed into escrow for the
pending transaction, offset by a decrease of $22,196,000 to investments in and
advances to affiliates from CIFC note repayments.
Net cash provided by financing activities was $53,544,000 for the year
ended September 30, 1999. This was primarily due to net proceeds from secured
bank financing of $57,937,000, offset by distributions to minority interests of
$4,310,000.
Fiscal Year 1998. Net cash provided by operating activities was
----------------
$13,031,000 during the year ended September 30, 1998. This was due to cash
provided in generating the net loss after adjustments to reconcile net cash
provided by operating activities of $16,238,000 and by cash used to fund changes
in working capital of $3,207,000.
Net cash used by investing activities was $17,958,000 for the year ended
September 30, 1998. This was due primarily to $28,437,000 required to fund the
purchase of property and equipment and investment in cellular system equipment
and $9,300,000 to purchase additional interests in affiliates, offset by a
decrease of $21,451,000 to investments in and advances to affiliates from CIFC
note repayments.
Net cash provided by financing activities was $16,948,000 for the year
ended September 30, 1998. This was primarily due to net increases as a result of
the merger of $21,539,000, offset by distributions to minority interests of
$4,433,000.
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 distributions,
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
financing through February 10, 1998 was a loan facility with CoBank (the "CoBank
Credit Agreement"), pursuant to which CoBank had agreed to lend up to
$165,000,000 to CIFC.
On September 18, 1997, CIFC and the Company entered into a senior bank
credit facility with The Chase Manhattan Bank as administrative agent and
collateral agent, Chase Manhattan Bank Delaware, as fronting bank, and the other
lenders named therein (the "Chase Credit Agreement"). The Chase Credit Agreement
provides for aggregate credit commitments of up to $760,000,000 comprised of
term loans of $680,000,000 and a revolving credit facility of $80,000,000. All
obligations of CIFC and the guarantors under the Chase Credit Agreement and the
guarantees are secured by first priority security interests in substantially all
tangible and intangible assets, trademarks, tradenames and equipment of CIFC and
the guarantors. In addition, the Chase Credit Agreement is secured by a first
priority security interest in substantially all of the assets held by the
Company and certain of its wholly-owned subsidiaries, to the extent the Company
and such subsidiaries have the legal ability to pledge such
II-11
assets. The Chase Credit Agreement includes limitations on dividends and
distributions on capital stock and other significant operating and financial
restrictions and covenants, including limits on the ability of the Company and
its subsidiaries to incur or prepay indebtedness, create liens, enter into
leases or transactions with affiliates, sell assets, engage in mergers or
acquisitions, make investments, and redeem or repurchase capital stock or debt.
On February 10, 1998, in connection with the closing of the Merger (see
"Acquisitions and Sales"), CIFC and the Company drew down the $680,000,000 term
loans under the Chase Credit Agreement which was used, in part, to pay off
outstanding amounts under the CoBank Credit Agreement, to repurchase the
majority of the Company's 11 3/4% Senior Subordinated Notes and all of the
Company's 11 1/4% Subordinated Notes, to pay the cash portion of the Merger
consideration to holders of the Company's Common Stock, and to fund costs
associated with the Merger. On December 2, 1998, CIFC and the Company borrowed
$42,000,000 under the revolving credit facility of the Chase Credit Agreement to
use, with existing cash, to purchase affiliate interests in South Dakota (see
"Acquisitions"). On July 15, 1999, CIFC and the Company borrowed $17,000,000
under the revolving credit facility of the Chase Credit Agreement to fund escrow
accounts for the anticipated purchase of affiliate interests in Colorado (see
"Acquisitions"). Advances made under to Chase Credit Agreement will be used,
when necessary, to fund capital and operating requirements of the Company and to
fund loans made by CIFC to the affiliates. The Chase Credit Agreement provides
for aggregate credit commitments of up to $760,000,000 at interest rates that
vary from 0.75% to 2.50% over prime for variable rate loans or 1.75% to 3.50%
over LIBOR for fixed rate loans at September 30, 1999. Additionally, in
accordance with the terms of the Chase Credit Agreement, CIFC has entered into
various interest rate protection agreements to reduce the risk of interest rate
fluctuations.
The Company's budgeted capital requirements consist primarily of (i) parent
company capital expenditures, working capital and debt service and (ii) the
capital expenditures, working capital, other operating and debt service
requirements of the affiliates. In addition to budgeted capital requirements,
the Company has acquired additional cellular properties.
As of September 30, 1999, the Company had unused commitments under the
Chase Credit Agreement of $21,000,000 in the form of revolving loans. In
addition to the liquidity provided by the Chase Credit Agreement, at September
30, 1999, the Company, on a consolidated basis, had available $11,869,000 of
cash and cash equivalents and $15,033,000 in trading securities (which were
liquidated into $15,600,000 in October 1999).
Capital expenditures in managed markets, reflected as additions to
investments in and advances to affiliates, and additions to property and
equipment and investment in cellular system equipment, for the year ended
September 30, 1999 were $53,880,000. These expenditures were primarily for 19
new cell sites, switch upgrades, increased channel capacity, paging
infrastructure and corporate assets. The Company expects capital expenditures
for fiscal year 2000 to be comparable to fiscal 1999 to optimize coverage,
upgrade switching capacity, increase channel capacity and for digital upgrades.
Currently, the Company's near-term debt service requirements consist
primarily of interest payments on the indebtedness incurred under the Chase
Credit Agreement. The Company anticipates its cash paid for interest under the
Chase Credit Agreement for fiscal year 2000 will be approximately $79,000,000.
The first principal payment for the Chase term loans is due December 31, 1999.
Additional borrowings under the Chase Credit Agreement may be required if cash
from operating activities is not sufficient to fund cash interest expense. See
"The Credit Agreements" below.
The Company believes operating cash flow, existing cash balances and
borrowing availability under the Chase 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
II-12
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.
CIFC and the Company are currently in compliance with all covenants and
anticipate they will continue to meet the requirements of the Chase Credit
Agreement. Approval may be required from the participants in the Chase Credit
Agreement for waivers or other amendments to the Chase Credit Agreement
requested by CIFC or the Company.
Recently Issued Accounting Standards
- ------------------------------------
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting Comprehensive
Income." SFAS 130 requires companies to disclose comprehensive income and its
components. SFAS 130 had no material impact on the Company's financial
statements upon adoption in fiscal 1999. In June 1998, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 133
("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities."
SFAS 133 requires derivatives to be carried at fair value. Management does not
expect SFAS 133 to have a significant impact on the Company's financial
statements.
II-13
Supplemental Information:
SELECTED COMBINED AND PROPORTIONATE
OPERATING RESULTS OF CELLULAR LICENSEES
(Amounts in thousands, except statistical data)
The following unaudited 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 in a GAAP operating statement.
Years ended September 30,
----------------------------------------------------------------------------------------
1999 1998 1999 1998 1999 1998
---------------------------- ------------------------------- -------------------------
Combined (1) Financed Proportionate (2) Company Proportionate(3)
---------------------------- ------------------------------- -------------------------
Managed Markets
Revenues:
Cellular service $157,064 $139,515 $148,907 $125,896 $129,215 $106,212
In-roaming 72,104 56,463 67,660 51,222 60,849 44,611
Equipment sales 5,004 3,512 4,753 3,222 4,174 2,786
-------- -------- -------- -------- -------- --------
Total revenues 234,172 199,490 221,320 180,340 194,238 153,609
Costs and expenses
involving cash:
Cost of sales:
Cellular service
(including in-roaming) 23,953 25,176 22,758 23,277 19,873 19,623
Equipment sales 11,387 16,972 10,813 15,376 9,480 13,098
General and administrative (4) 46,568 39,550 48,636 38,710 41,635 31,750
Marketing and selling 36,624 31,030 34,566 28,216 30,075 23,718
-------- -------- -------- -------- -------- --------
Total cash costs and
expenses 118,532 112,728 116,773 105,579 101,063 88,189
-------- -------- -------- -------- -------- --------
EBITDA $115,640 $ 86,762 $104,547 $ 74,761 $ 93,175 $ 65,420
======== ======== ======== ======== ======== ========
Capital expenditures $ 53,880 $ 23,396 $ 52,517 $ 19,590 $ 48,710 $ 16,009
Subscriber count 396,894 335,881 374,170 301,727 324,013 254,676
Total markets 56 56 56 56 56 56
Nonmanaged Markets
Revenues:
Cellular service $113,802 $103,561 $ 16,209 $ 13,507 $ 11,674 $ 9,968
In-roaming 37,691 28,231 9,971 7,411 6,540 5,098
Equipment sales 8,560 7,958 664 580 564 474
-------- -------- -------- -------- -------- --------
Total revenues 160,053 139,750 26,844 21,498 18,778 15,540
Costs and expenses
involving cash:
Cost of sales:
Cellular service 29,427 28,970 5,302 4,153 3,586 2,973
Equipment sales 10,578 12,020 1,065 936 771 719
General and administrative 44,061 25,844 6,377 4,658 4,481 3,215
Marketing and selling 19,430 20,816 4,050 3,783 2,930 2,934
-------- -------- -------- -------- -------- --------
Total cash costs
and expenses 103,496 87,650 16,794 13,530 11,768 9,841
-------- -------- -------- -------- -------- --------
EBITDA $ 56,557 $ 52,100 $ 10,050 $ 7,968 $ 7,010 $ 5,699
======== ======== ======== ======== ======== ========
Capital expenditures $ 24,276 $ 14,621 $ 2,426 $ 1,630 $ 1,667 $ 1,317
Subscriber count 282,348 254,022 50,564 37,436 34,489 27,722
Total markets 10 26 10 26 10 26
II-14
Years ended September 30,
-------------------------
1999 1998
-------------------------
Reconciliation From Company Proportionate EBITDA to Consolidated Net Income (Loss):
Total proportionate EBITDA (managed and nonmanaged markets) $100,185 $ 71,119
Depreciation and amortization (24,895) (21,928)
Interest expense (11,763) (13,505)
Equity in nonlicensee affiliates 4,658 (1,374)
Minority interests 1,436 1,167
Intercompany interest 11,355 12,841
Depreciation and amortization not owned by affiliates (3,722) (2,043)
Unallocated corporate expenses (6,573) (5,363)
Stock-based compensation expense - (23,849)
Gain (loss) on sales of affiliates 12,336 -
Interest expense (net) and other (57,544) (44,042)
Extraordinary charge - (33,500)
-------- --------
Consolidated net income (loss) $ 25,473 $(60,477)
======== ========
_______________
(1) Includes 100% of the operating activity of all licensees, regardless of the
Company's ownership interest. This is essentially equivalent to
consolidating all licensees regardless of ownership percentage.
(2) Includes that percentage of a licensee's operating results which equals the
Company's ownership interest as well as the ownership interest held by
affiliates of the Company that are financed by CIFC.
(3) Includes only that percentage of a licensee's operating results which
corresponds to the Company's ownership interest. This is essentially
equivalent to a pro rata consolidation.
(4) Includes certain corporate costs and expenses for Financed and Company
Proportionate.
II-15
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-16
Independent Auditors' Report
----------------------------
The Board of Directors and Stockholders
CommNet Cellular Inc.
We have audited the accompanying consolidated balance sheets of CommNet Cellular
Inc. and subsidiaries as of September 30, 1999 and 1998, and the related
consolidated statements of operations, stockholders' equity (deficit), and cash
flows for the years then ended. Our audits also included the financial
statement schedules as of and for the years ended September 30, 1999 and 1998
listed in the Index at Item 14 (a)(2). 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 referred to above present
fairly, in all material respects, the consolidated financial position of CommNet
Cellular Inc. and subsidiaries as of September 30, 1999 and 1998, and the
consolidated results of their operations and their cash flows for the year then
ended, in conformity with generally accepted accounting principles. Also, in
our opinion, such related financial statement schedules, when considered in
relation to the basic consolidated financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Denver, Colorado
December 23, 1999
II-17
Report of Independent Auditors
------------------------------
The Board of Directors and Stockholders
CommNet Cellular Inc.
We have audited the accompanying consolidated statements of operations,
stockholders' equity, and cash flows of CommNet Cellular Inc. for the year ended
September 30, 1997. Our audit also included the financial statement schedules
listed in the Index at Item 14 (a)(2) for the year ended September 30, 1997.
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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements listed in the accompanying
index to financial statements (Item 14 (a)(1)) present fairly, in all material
respects, the consolidated results of the operations of CommNet Cellular Inc.
and its cash flows for the year ended September 30, 1997, 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 for the year ended September 30, 1997.
ERNST & YOUNG LLP
Denver, Colorado
December 5, 1997
II-18
COMMNET CELLULAR INC.
CONSOLIDATED BALANCE SHEETS
September 30, 1999 and 1998
(Amounts in thousands, except share data)
ASSETS (Note 4) 1999 1998
- ------ ---- ----
Current assets:
Cash and cash equivalents $ 11,869 $ 26,153
Trading securities 15,033 -
Accounts receivable, net of allowance for
doubtful accounts of $5,694 and $2,487 in
1999 and 1998, respectively 37,665 28,051
Current portion of advances to affiliates 2,617 3,438
Prepaid expenses and other 1,827 1,682
Inventory 5,224 4,564
-------- --------
Total current assets 74,235 63,888
Investment in and advances to affiliates (Notes 2 and 3) 25,595 33,637
Investment in cellular system equipment 7,774 3,816
Property and equipment, at cost:
Cellular system equipment 213,648 185,851
Land, buildings and improvements 38,508 35,280
Furniture and equipment 35,066 23,155
-------- --------
287,222 244,286
Less accumulated depreciation 110,154 89,688
-------- --------
Net property and equipment 177,068 154,598
Other assets, less accumulated amortization of
$42,232 and $37,295 in 1999 and 1998,
respectively (Note 2):
FCC licenses and filing rights 162,981 100,380
Deferred loan costs and other 23,963 28,433
Cash in escrow (Note 2) 15,325 -
-------- --------
Total other assets 202,269 128,813
-------- --------
$486,941 $384,752
======== ========
See accompanying notes.
II-19
COMMNET CELLULAR INC.
CONSOLIDATED BALANCE SHEETS (continued)
September 30, 1999 and 1998
(Amounts in thousands, except share data)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) 1999 1998
- ---------------------------------------------- ---- ----
Current liabilities:
Accounts payable - trade $ 2,669 $ 4,954
Accounts payable - property and equipment purchases 1,991 3,675
Accrued commissions 1,281 953
Accrued interconnect costs 2,016 1,741
Accrued operating taxes 5,688 3,891
Other accrued liabilities 6,926 8,188
Interest payable 11,250 2,421
Current portion of long-term debt (Note 4) 6,391 -
--------- ---------
Total current liabilities 38,212 25,823
Long-term debt:
Secured bank financing (Note 4) 733,700 680,000
Note payable and other long-term debt (Note 4) 8,886 2,916
11 3/4% senior subordinated discount notes (Note 5) - 83
Minority interests 10,260 11,378
Commitments and contingencies (Note 6)
Stockholders' equity (deficit)
(Notes 2, 4, 8, 9, and 10):
Preferred Stock, $.01 par value; 1,000,000 shares
authorized; no shares issued - -
Common Stock, $.001 par value; 40,000,000 shares
authorized; 22,856,345 and 22,662,985 shares issued
at September 30, 1999 and 1998, respectively 5 5
Capital in excess of par value 312,634 307,271
Deferred compensation to employees (2,166) (2,661)
Accumulated deficit (614,590) (640,063)
--------- ---------
Total stockholders' equity (deficit) (304,117) (335,448)
--------- ---------
$ 486,941 $ 384,752
========= =========
See accompanying notes.
II-20
COMMNET CELLULAR INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended September 30, 1999, 1998 and 1997
(Amounts in thousands, except share and per share data)
1999 1998 1997
---- ---- ----
Revenues:
Service $140,018 $118,757 $107,383
In-roaming 66,174 49,325 39,881
Equipment sales 4,784 3,353 3,603
-------- -------- --------
210,976 171,435 150,867
Costs and expenses:
Operations:
Cost of service 25,213 24,429 28,108
Cost of equipment sales 10,774 14,971 12,609
General and administrative 40,086 34,023 30,343
Marketing and selling 33,430 27,482 23,437
Depreciation and amortization 29,618 25,182 20,461
Corporate:
General and administrative (Note 8) 10,312 32,063 5,431
Depreciation and amortization 2,196 1,454 1,655
Less amounts allocated to
nonconsolidated affiliates (6,828) (8,753) (6,416)
-------- -------- --------
144,801 150,851 115,628
-------- -------- --------
Operating income 66,175 20,584 35,239
Equity in net income (loss) of affiliates (Note 3) 12,852 5,127 (7,589)
Minority interest in net income of
consolidated affiliates (5,488) (5,701) (2,964)
Gains on sales of affiliates and other (Note 2) 12,336 - 350
Amortization of deferred costs (3,329) (2,651) (1,072)
Interest expense (58,977) (49,212) (29,464)
Interest income (Note 3) 2,635 4,876 6,532
-------- -------- --------
Income (loss) before income taxes and
extraordinary charge 26,204 (26,977) 1,032
Income tax expense (Note 7) 731 - -
-------- -------- --------
Income (loss) before extraordinary charge 25,473 (26,977) 1,032
Extraordinary charge related to early
extinguishment of long-term debt (Note 5) - (33,500) -
-------- -------- --------
Net income (loss) $ 25,473 $(60,477) $ 1,032
======== ======== ========
See accompanying notes
II-21
COMMNET CELLULAR INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (continued)
Years ended September 30, 1999, 1998 and 1997
(Amounts in thousands, except share and per share data)
1999 1998 1997
---- ---- ----
Income (loss) per common share:
Basic:
Income (loss) before extraordinary charge $ 1.12 $ (0.68) $ .01
Extraordinary charge - (0.85) -
----------- ----------- -----------
Net income (loss) $ 1.12 $ (1.53) $ .01
=========== =========== ===========
Diluted:
Income (loss) before extraordinary charge $ 1.11 $ (0.68) $ .01
Extraordinary charge - (0.85) -
----------- ----------- -----------
Net income (loss) $ 1.11 $ (1.53) $ .01
=========== =========== ===========
Weighted average common shares outstanding 22,707,977 39,397,393 68,835,650
=========== =========== ===========
See accompanying notes
II-22
COMMNET CELLULAR INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Years ended September 30, 1997, 1998 and 1999
(Amounts in thousands, except share data)
Deferred
Compensation
Capital in Related to
Common Stock Excess of Employee Accumulated
Shares Amount Par Value Options Deficit
----------- ------- ----------- ------------- ------------
Balance at September 30, 1996 69,298,700 $ 14 $168,103 $ - $ (105,135)
Exercise of options 53,750 - 221 - -
Issuance of Common Stock -
ESOP (Note 9) 83,605 - 598 - -
Common Stock repurchased (510,000) - (2,933) - -
Net income - - - - 1,032
----------- ------ -------- ------------ -----------
Balance at September 30, 1997 68,926,055 14 165,989 - (104,103)
Exercise of options 82,220 - 352 - -
New shares issued in connection
with the Merger (Note 12) 19,695,835 4 141,806 - -
Conversion of shares to cash in
connection with the Merger (66,041,125) (13) - - (475,483)
Stock offering costs - - (13,986) - -
Stock-based compensation (Note 8) - - 13,110 (2,661) -
Net loss - - - - (60,477)
----------- ------ -------- ------------ -----------
Balance at September 30, 1998 22,662,985 5 307,271 (2,661) (640,063)
Issuance of Common Stock -
Acquisition (Note 2) 190,360 - 5,270 - -
Issuance of Common Stock -
Directors (Note 10) 3,000 - 93 - -
Stock-based compensation (Note 8) - - - 495 -
Net income - - - - 25,473
----------- ------ -------- ------------ -----------
Balance at September 30, 1999 22,856,345 $ 5 $312,634 $ (2,166) $ (614,590)
=========== ====== ======== ============ ===========
See accompanying notes.
II-23
COMMNET CELLULAR INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended September 30, 1999, 1998 and 1997
(Amounts in thousands)
1999 1998 1997
---- ---- ----
Operating activities:
Net income (loss) $ 25,473 $(60,477) $ 1,032
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities:
Extraordinary charge related to early
extinguishment of long-term debt - 33,500 -
Minority interests 5,488 5,701 2,964
Compensation expense related
to ESOP and option grants - - 598
Common Stock grants to nonemployee
Directors 93 - -
Depreciation 27,087 23,930 19,266
Amortization 8,056 5,357 3,922
Equity in net loss (income) of affiliates (12,852) (5,127) 7,589
Gains on sales of affiliates
and other (12,336) - (350)
Interest expense on 11 3/4%
senior discount notes 1 6,614 17,170
Stock-based compensation expense 495 10,449 -
CoBank patronage income - - (99)
Accrued interest on advances to
affiliates (1,378) (3,709) (5,833)
Change in operating assets and liabilities,
net of effects from consolidating acquired
interests (Note 2):
Accounts receivable (8,859) (1,948) (5,453)
Inventory (654) (1,350) (508)
Prepaid expenses and other (145) (278) (101)
Accounts payable and
accrued liabilities (1,510) 250 8,688
Interest payable 8,777 119 (254)
-------- -------- -------
Net cash provided by operating activities 37,736 13,031 48,631
See accompanying notes.
II-24
COMMNET CELLULAR INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Years ended September 30, 1999, 1998 and 1997
(Amounts in thousands)
1999 1998 1997
---- ---- ----
Investing activities:
Reductions in investments in and
advances to affiliates, net $ 22,196 $ 21,451 $ 8,480
Additions to property and equipment
and investment in cellular system
equipment (52,372) (28,437) (37,363)
Reductions in (additions to) other assets (2,297) (1,672) (1,335)
Proceeds from sales of interests in
affiliates (Note 2) - - 829
Escrow deposit for purchase
of interests in affiliates (15,325) - -
Purchase of interests in affiliates, net
of cash acquired and net of assets
and liabilities recorded due to
consolidation (Note 2) (57,766) (9,300) (924)
-------- -------- --------
Net cash used by investing activities (105,564) (17,958) (30,313)
See accompanying notes.
II-25
COMMNET CELLULAR INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Years ended September 30, 1999, 1998 and 1997
(Amounts in thousands)
1999 1998 1997
---- ---- ----
Financing activities:
Proceeds from secured bank financing $ 94,300 $ 695,000 $ 43,336
Payments of secured bank financing (36,363) (24,765) (57,763)
Payment of 11 3/4% senior subordinated
discount notes (83) (165,662) -
Payment of 11 1/4% subordinated notes - (80,000) -
Extraordinary charge related to early
extinguishment of long-term debt - (29,015) -
Loan fees and offering costs related
to long-term debt - (26,699) -
Reductions of obligation under capital leases - (158) (301)
Distributions to minority interest (4,310) (4,433) (2,349)
Capital contributions from minority interest - - 4,111
Issuance of Common Stock, net of
offering costs - 128,176 221
Repurchases of Common Stock - - (2,933)
Conversion of Common Stock in connection
with the Merger - (475,496) -
---------- ---------- -----------
Net cash provided (used) by financing
activities 53,544 16,948 (15,678)
---------- ---------- -----------
Net increase (decrease) in cash and
cash equivalents (14,284) 12,021 2,640
Cash and cash equivalents at beginning
of year 26,153 14,132 11,492
---------- ---------- -----------
Cash and cash equivalents at end of year $ 11,869 $ 26,153 $ 14,132
========== ========== ===========
See accompanying notes.
II-26
COMMNET CELLULAR INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Years ended September 30, 1999, 1998 and 1997
(Amounts in thousands)
Supplemental schedule of additional cash flow information and noncash
activities:
1999 1998 1997
---- ---- ----
Cash paid for interest $50,147 $42,479 $12,548
Purchase of cellular system equipment
through accounts payable 1,991 3,675 8,228
Purchases of interests in affiliate by
issuance of Common Stock (Note 2) 5,270 - -
Receipt of Alltel common stock from sales
of interests in affiliates (Note 2) 15,033 - -
See accompanying notes.
II-27
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 entities in which the Company has greater than a 50% interest are
consolidated. All entities in which the Company has a 50% or less but 20% or
greater interest are accounted for under the equity method. All entities in
which the Company has less than a 20% interest are accounted for under the cost
method.
The Company and its affiliates owned interests in the following markets as
of September 30, 1999:
Net Company
MSA or Interest in
RSA Code (1) State Licensee (2)
------------ --------------- ------------
MSAs: 141 Duluth, MN - WI 16.34%
185 Terre Haute, IN 16.67%
241 Pueblo, CO 73.99%
253 Sioux City, IA 74.50%
267 Sioux Falls, SD 100.00%
268 Billings, MT 91.63%
289 Rapid City, SD 100.00%
297 Great Falls, MT 91.63%
298 Bismarck, ND 51.00%
II-28
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 100.00%
349 Colorado 61.75%
351 Colorado 61.75%
352 Colorado 66.00%
353 Colorado 100.00%
354 Colorado (B1) 69.40%
355 Colorado 100.00%
356 Colorado (B1) 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 78.57%
417 Iowa 100.00%
419 Iowa 44.92%
420 Iowa 100.00%
424 Iowa 50.00%
425 Iowa 13.28%
426 Iowa 49.14%
427 Iowa 49.17%
512 Missouri (B1) 14.70%
523 Montana (B1) 91.63%
523 Montana (B2) 91.63%
524 Montana (B1) 91.63%
526 Montana (B1) 91.63%
II-29
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 91.63%
528 Montana 91.63%
529 Montana 91.63%
530 Montana 91.63%
531 Montana 91.63%
532 Montana 91.63%
553 New Mexico (B2) 58.36%
555 New Mexico 12.25%
557 New Mexico 16.33%
580 North Dakota 53.36%
581 North Dakota 65.06%
582 North Dakota 41.45%
583 North Dakota 49.00%
584 North Dakota 61.75%
634 South Dakota 100.00%
635 South Dakota 100.00%
636 South Dakota 100.00%
638 South Dakota (B1) 100.00%
638 South Dakota (B2) 100.00%
639 South Dakota (B1) 100.00%
639 South Dakota (B2) 100.00%
640 South Dakota 100.00%
641 South Dakota 100.00%
642 South Dakota 100.00%
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") rankings are 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-30
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 are recognized by the Company only when other
stockholders or partners provide funding to the affiliates or the underlying
affiliate has attained a positive accumulated earnings position.
For those affiliates which do not have other stockholders or partners which
provide funding to the affiliates and the underlying affiliate has not attained
a positive accumulated earnings position, the Company records all operating
losses, recognizing that the minority interests have no funding obligation. The
Company also recognizes all operating income from these affiliates until the
underlying affiliate has attained a positive accumulated earnings position.
Use of estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
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 accounts for short-term investments under the provisions of
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" ("SFAS No. 115"). The Company holds
no appreciated short-term investments as of September 30, 1999 or 1998. The
Company's trading securities were received on September 30, 1999 and were
recorded at fair value as of that date.
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. The Company's provision for
doubtful accounts receivable was approximately $5,694,000, $2,487,000 and
$3,789,000 for the years ended September 30, 1999, 1998 and 1997, 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-31
COMMNET CELLULAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of significant accounting policies (continued)
------------------------------------------
Long-lived assets
The Company follows the provisions of SFAS 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 reviews long-
lived assets impairment periodically based on projected future cash flows. As
of September 30, 1999 and 1998, management believes that there was not any
impairment of the Company's long-lived assets or any other such identifiable
assets.
Deferred debt issuance costs
Deferred debt issuance costs relate to the offerings of senior notes and to
loan agreements (see Notes 4 and 5). These costs are being amortized over the
respective terms of the 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 and is amortized over 40 years from the date of acquisition.
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.
Cost of equipment sold
The Company has a customer service program whereby a handset is provided to
the customer and returned to the Company at the end of the service agreement.
Prior to the second fiscal quarter of 1999, the cost of providing the handset to
the customer was included in cost of equipment sales, with no corresponding
recognition of equipment revenue, as any revenue related to the program was
recognized in cellular service revenue. During the quarter ended March 31,
1999, the Company changed its accounting for these handsets, whereby the cost of
the handsets is included in property and equipment and depreciated over a period
of 30 months. The Company believes this change better matches the cost of the
handset with the related revenue stream and is consistent with predominant
industry practice. The change has been accounted for as a change in estimate.
The effect of this change was an increase in net income for the year ended
September 30, 1999 of $6,977,000, or $.31 per common share.
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 2.5-5
II-32
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.
The Company incurs certain indirect costs related to cell site
construction. As a result, the Company capitalized $2,794,000, $1,975,000 and
$2,870,000 for the years ended September 30, 1999, 1998 and 1997, respectively,
which is included in property and equipment, and investment in cellular system
equipment. In addition, the Company allocated $266,000, $303,000 and $749,000
to nonconsolidated affiliates for the years ended September 30, 1999, 1998 and
1997, respectively.
Advertising
The Company expenses advertising costs as incurred. Advertising expense
was approximately $7,797,000, $7,109,000 and $4,453,000 for the years ended
September 30, 1999, 1998 and 1997, respectively.
Income taxes
A current or deferred income tax asset or liability is recognized for
temporary differences which exist due to recognition of certain income and
expense items for financial reporting purposes in periods different than for tax
reporting purposes.
Earnings per common share
The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings per Share," ("SFAS No. 128") in fiscal 1998. SFAS No. 128 requires
retroactive restatement of earnings per share data for all years presented. In
accordance with SFAS No. 128, the increase in weighted average common shares -
assuming dilution is due to the application of the treasury share method for
outstanding stock options. The application of the treasury share method
resulted in an additional 115,338, 1,486,000, and 8,116,000 weighted average
shares for 1999, 1998 and 1997 respectively.
The Company split its Common Stock 5 for 1, with shareholders receiving
four additional shares for each share owned as of April 20, 1998, the record
date for the split. The payment date was May 7, 1998. Accordingly, all share
and earnings per share information has been restated to give effect to the
split. Prior year issued shares are restated as if the stock split occurred
prior to September 30, 1996, although the Company's Articles of Incorporation
would not have permitted such an action.
Related party transactions
As a result of the Merger (See Note 12), the Company entered into a
monitoring agreement with its majority shareholder, effective February 10, 1998
requiring a $500,000 annual payment and reimbursement of expenses. During the
year ended September 30, 1999 and 1998, the Company incurred $535,000 and
$362,000, respectively, of expense under the agreement. In addition, certain
members of management have entered into an agreement with the majority
shareholder whereby they will receive consideration upon the attainment of
certain financial measures as defined in the agreement.
II-33
COMMNET CELLULAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of significant accounting policies (continued)
------------------------------------------
During the year ended September 30, 1998, the Company paid $1,104,000 to a
minority shareholder for consulting services. No such expenses were incurred
during the years ended September 30, 1999 and 1997.
Certain reclassifications
Certain reclassifications have been made to the 1998 financial statements
to conform with the 1999 financial statement presentation.
2. Business acquisitions and dispositions
--------------------------------------
1997
In January 1997, the Company purchased an additional 15% in one previously
nonmanaged RSA for approximately $876,000 in cash. The Company assumed
management of this market upon consummation of the transaction.
In April 1997, the Company sold a 10% interest in one of its managed MSA
markets to a partner in such market for approximately $436,000 in cash, pursuant
to an option granted at the time of the Company's purchase of such market. In
June 1997 the Company sold an additional 9% interest in this market to the same
partner for approximately $393,000 in cash.
1998
In April 1998, the Company purchased an additional 90% interest in one
managed RSA market for $9,000,000 in cash.
In May 1998, the Company purchased an additional 16% interest in one
managed RSA market for $300,000 in cash.
1999
In December 1998, the Company purchased substantially all of the
independent telco interests in three managed RSA markets and one managed MSA
market in South Dakota for approximately $55,766,000. In April 1999, the
Company purchased the remaining independent telco interests for approximately
$2,000,000 in cash.
In July 1999, the Company purchased an additional 51% interest in one
managed Colorado RSA market for 190,360 shares of the Company's stock valued at
approximately $5,270,000.
In September 1999, fifteen nonmanaged RSAs in Kansas in which the Company
holds a 3.07% interest entered into a merger agreement with Alltel Corporation
whereby the Company received 213,607 shares of Alltel Corporation common stock
valued at approximately $15,033,000 in exchange for its interest in the RSAs.
II-34
COMMNET CELLULAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Business acquisitions and dispositions (continued)
--------------------------------------------------
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:
Years ended September 30,
-------------------------------------------
1999 1998 1997
----- ---- -----
(Amounts in thousands, except per share data)
Revenues $213,706 $185,820 $158,585
Equity in net income (loss) of affiliates 12,550 3,377 (8,204)
Income (loss) before extraordinary charge 25,787 (21,972) 1,936
Net income (loss) 25,787 (55,472) 1,936
Basic net income (loss) per common share 1.13 (1.41) .03
Diluted net income (loss) per common share 1.12 (1.41) .03
Subsequent to September 30, 1999, the Company purchased substantially all
of the remaining independent telco interests in one managed MSA market and two
managed RSA markets in Colorado for approximately $15,300,000 in cash, which was
held in escrow at September 30, 1999, and assumption and forgiveness of
$7,890,000 of debt.
In June 1999, the Company entered into a definitive agreement to sell its
interests in four managed RSA markets and a portion of its interest in a fifth
managed RSA market in Iowa for approximately $83,300,000 in cash and repayment
of debt totaling approximately $2,229,000. Closing of the transaction is
subject to regulatory and other approvals. The transaction is expected to
result in a gain on sale of $63,000,000. These interests contributed $3,070,000
to the Company's net income in the year ended September 30, 1998.
3. Investment in and advances to affiliates
----------------------------------------
Investment in and advances to the Company's nonconsolidated affiliates
consisted of the following:
September 30,
-------------
1999 1998
---- ----
(Amounts in thousands)
Investment $ 6,696 $ 15,704
Equity in net income (loss) - cumulative 4,204 (10,031)
Advances and other 17,312 31,402
------- --------
$28,212 $ 37,075
======= ========
II-35
COMMNET CELLULAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Investment in and advances to affiliates (continued)
----------------------------------------------------
The combined financial position of the nonconsolidated affiliates is as
follows:
September 30,
-------------------
1999 1998
---- ----
(Amounts in thousands)
Current assets $ 24,283 $ 9,782
Investment in affiliated limited partnerships 7,859 8,973
Property and equipment, net of accumulated
depreciation 15,835 16,917
Other assets 509 2,031
-------- --------
Total assets $ 48,486 $ 37,703
======== ========
Due to CommNet Cellular Inc. $ 889 $ 854
Due to Cellular, Inc. Financial Corporation 11,567 23,210
Other liabilities 2,489 5,382
Minority interests 1,237 1,020
Owners' equity 32,304 7,237
-------- --------
Total liabilities and owners' equity $ 48,486 $ 37,703
======== ========
Combined operations of these nonconsolidated affiliates are summarized as follows:
Years ended September 30,
-------------------------
1999 1998 1997
-------- -------- --------
(Amounts in thousands)
Revenues $ 25,812 $ 29,571 $ 28,539
Operating costs (20,831) (21,653) (33,729)
Minority interests (776) (663) (486)
Equity in income of affiliates 5,210 4,077 2,445
Gain on sale of affiliate 18,040 - -
-------- -------- --------
Net income (loss) $ 27,455 $ 11,332 $ (3,231)
======== ======== ========
Interest income on advances to affiliates was $2,022,000, $3,709,000 and
$5,833,000 for the years ended September 30, 1999, 1998 and 1997, respectively.
Certain advances to affiliates bear interest at the prime rate of Norwest
Bank (8.25% at September 30, 1999 and 1998, and 8.50% at September 30, 1997)
plus 2%. These advances to and receivables from affiliates are temporary in
nature, and are generally refinanced under loan agreements with Cellular Inc.
Financial Corporation ("CIFC"), a wholly-owned subsidiary of the Company. The
CIFC loans generally bear interest at the 90-day LIBOR rate plus a margin
(determined based upon the affiliates' leverage ratio) and are to be repaid from
income derived from the operation of the cellular system or income derived from
the affiliates' interest in the licensee providing cellular service.
II-36
COMMNET CELLULAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Secured bank financing and note payable
---------------------------------------
On September 18, 1997, the Company and CIFC entered into a secured
financing agreement with The Chase Manhattan Bank as administrative agent and
collateral agent, Chase Manhattan Bank Delaware as rating bank, and the other
lenders named therein (the "Chase Credit Agreement") which provides for
aggregate credit commitments of up to $760 million. All obligations of CIFC and
the Company's wholly-owned subsidiaries (the "guarantors") under the Chase
Credit Agreement are secured by first priority security interests in
substantially all tangible and intangible assets, trademarks, tradenames and
equipment of CIFC and the guarantors. CIFC's assets totaled approximately
$253,591,000 and $294,235,000 at September 30, 1999 and 1998, respectively. In
addition, the Chase Credit Agreement is secured by a first priority security
interest in substantially all of the assets held by CommNet Cellular Inc. and
certain of its wholly-owned subsidiaries, to the extent CommNet Cellular Inc.
and such subsidiaries have the legal ability to pledge such assets. The Chase
Credit Agreement includes limitations on dividends and distributions on common
stock and other significant operating and financial restrictions and covenants,
including limits on the ability of the Company and its subsidiaries to incur or
prepay indebtedness, create liens, enter into leases or transactions with
affiliates, sell assets, engage in mergers or acquisitions, make investments,
and redeem or repurchase common stock or debt.
Of the $760 million available under the Chase Credit Agreement, $680
million is comprised of term loans and $80 million is a revolver. On February
10, 1998 the entire term loan facility was borrowed by CIFC and remained
outstanding at September 30, 1998 and 1999. Quarterly amortized principal
payments on the term loans begin December 31, 1999 with the final principal
payment due September 30, 2007.
As mandated by the Chase Credit Agreement, the Company has fixed the
interest rates on $408,000,000 of the borrowings through interest rate
protection agreements in the form of one interest rate collar and two interest
rate swaps with Chase. These agreements effectively reduce the interest rate
exposure of the Company, and are accounted for as effective interest rate
hedges.
At September 30, 1999 and 1998, respectively, CIFC had borrowed
$739,000,000 and $680,000,000 under the Chase Credit Agreement, of which
$5,300,000 and $-0- were classified as current in 1999 and 1998, respectively.
At September 30, 1999 and 1998, interest was fixed and payable at LIBOR plus
margins of 1.75% to 3.50% and 2.00% to 3.50%, respectively, at an average rate
of 7.69% and 8.53%, respectively. Interest rate margins are determined for $200
million of the term loans and revolving loans based on the Company's leverage
ratio and are set at three levels for the remaining $480 million of term loans.
A commitment fee is payable by CIFC under the Chase Credit Agreement on the
average daily unborrowed commitment. At September 30, 1999, the commitment fee
was .375% per annum.
Four consolidated affiliates of the Company have entered into financing
arrangements with First Union National Bank (formally CoreStates Bank, N.A.) and
CoBank, ACB to refinance prior indebtedness, finance working capital and capital
expenditures and fund distributions to its partners. At September 30, 1999 the
loan commitments under the four third-party loans were $13,200,000. The
outstanding amounts under the four third-party loans at September 30, 1999 and
1998 were $9,977,000 and $2,916,000, respectively, at interest rates ranging
from 6.875% to 7.311% at September 30, 1999 and 7.00% at September 30, 1998.
The loans are collateralized by real estate and all equity interests.
Aggregate maturities of the secured bank financing and note payable for
each of the next five years ending September 30 are as follows: 2000 -
$6,391,000; 2001 - $23,643,000; 2002 - $36,606,000; 2003 - $41,730,000; 2004 -
$53,036,000; 2005 and thereafter - $587,571,000.
II-37
COMMNET CELLULAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Senior and subordinated debt
----------------------------
In September 1993, the Company completed an offering of $176,651,000
aggregate principal amount of 11 3/4% Senior Subordinated Discount Notes Due
2003. The notes were issued at a substantial discount from their principal
amount resulting in gross proceeds to the Company of approximately $100,000,000.
After deducting offering costs, net proceeds were $96,740,000. The notes were
general unsecured obligations of the Company and were subordinate in right of
payment to all Senior Debt of the Company. From September 1993 through August
1998 interest accreted into the principal balance. Commencing September 1,
1998, interest accrued until maturity on the notes at the rate of 11 3/4% per
annum. Interest on the discount notes was payable semi-annually on March 1 and
September 1, commencing March 1, 1999.
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 were
subordinate to all existing and future Senior Debt of the Company. Interest on
the notes accrued from the original date of issuance at the rate of 11 1/4% per
annum. Interest was payable in cash semi-annually on each January 1 and July 1.
On February 10, 1998, the Company repurchased approximately $176,600,000 of
the approximately $176,700,000 aggregate principal amount of its 11 3/4% Senior
Subordinated Discount Notes and all of the $80,000,000 aggregate principal
amount of its 11 1/4% Subordinated Notes in connection with the Merger (See
Note 12). As a result of the extinguishments, the Company recorded a
$33,500,000 extraordinary charge during the fiscal year ended September 30, 1998
primarily as a result of prepayment call premiums.
6. Commitments and contingencies
-----------------------------
The Company leases office space and equipment under agreements which
provide for rental payments. Certain of these lease agreements contain renewal
option clauses. Rent expense was $6,446,000, $6,368,000 and $5,266,000 for the
years ended September 30, 1999, 1998 and 1997, respectively.
The aggregate annual rental commitment as of September 30, 1999 is as
follows (amounts in thousands):
2000 $ 4,429
2001 3,278
2002 2,679
2003 1,718
2004 714
Future years 3,984
-------
$16,802
=======
II-38
COMMNET CELLULAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Commitments and contingencies (continued)
-----------------------------
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, all full-time
employees are permitted to contribute up to 15% of gross compensation, subject
to certain limitations into the retirement plan and the Company will match at
the minimum 25% of each employee's contribution up to 6% of the employee's
eligible compensation. During the years ended September 30, 1999, 1998 and 1997,
the Company contributed $215,000, $223,000, and $189,000 respectively as
matching contributions.
On January 31, 1996, the Company entered into two Option to Sell Agreements
as part of the New Mexico 1 RSA transaction pursuant to which the minority
owners in that market can require the Company to purchase their interests at a
price based upon a multiple of EBITDA. If the transaction occurs after January
1, 2001, the minimum purchase price will be $10,000,000, plus any capital
contributed by the minority owners subsequent to October 1, 1995.
II-39
COMMNET CELLULAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Income taxes
------------
At September 30, 1999, the Company had cumulative NOL carryforwards of
$169,630,000 for income tax purposes and tax credit carryforwards of $942,000.
On February 10, 1998, the company experienced an ownership change as defined
under IRC (S)382. Accordingly, the pre-change NOL of $92,551,000 will be limited
in utilization to $10,775,000 per year plus any adjustments necessary under IRC
(S)382. If not offset against taxable income, the tax loss carryforwards will
expire between 2001 and 2019 and the tax credit carryforwards, if not offset
against regular taxes, will expire between 2008 and 2019. The Company recognized
an income tax benefit of $8,185,000 in 1999 due to the utilization of net
operating loss carryforwards. There was no tax provision for the years ended
September 30, 1998 and 1997 as a result of 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, 1999
and 1998, 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,
-----------------------
1999 1998
---------- ----------
(Amounts in thousands)
Deferred tax assets:
Net operating loss carryforwards $ 64,459 $ 59,886
Tax credit carryforwards 942 942
Intangible asset differences 5,923 6,912
Inventory adjustments 425 249
Accrued liabilities 841 412
Other, net 344 324
Other capitalized costs, net 7,106 10,901
-------- --------
Total deferred tax assets 80,040 79,626
-------- --------
Deferred tax liabilities:
Difference in license costs 24,428 23,952
Equity method investments 12,212 5,599
Fixed asset differences 9,139 8,137
-------- --------
Total deferred tax liabilities 45,779 37,688
-------- --------
Net deferred tax asset 34,261 41,938
Valuation allowance (34,261) (41,938)
-------- --------
Net deferred taxes $ - $ -
======== ========
II-40
COMMNET CELLULAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. 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:
Years ended September 30,
-------------------------
1998 1998 1997
------ ------ ------
(Amounts in thousands)
Income tax at federal statutory rate of 35% $8,916 $(20,964) $ 361
Benefit of tax losses not recognized - 20,964 -
Benefit due to utilization of regular tax
NOL carryforwards (8,185) - (361)
------ ------ ------
Total income tax expense $ 731 $ - $ -
====== ====== ======
8. Common Stock options
--------------------
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 were
reserved for issuance pursuant to Options, Stock Appreciation Rights, Stock
Bonuses or Phantom Stock Rights. In February 1993, the Company's shareholders
approved 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 commencing
October 1, 1993. In February 1995, the Company's shareholders approved 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
8. Common Stock options (continued)
--------------------
An analysis of options related to the Company's benefit plans is as
follows:
Weighted
Omnibus Stock Average
And Amended Exercise Exercise
Incentive Plan Plan Price Range Price
-------------- ---- ----------- -----
Outstanding options at
September 30, 1996 8,006,875 $0.84 - $5.125 $4.524
Granted 1,476,250 $ 5.875 $5.875
Forfeitures (44,375)
Exercised (53,750) $2.60 - $5.125 $4.854
----------
Outstanding options at
September 30, 1997 9,385,000 $0.84 - $5.875 $4.742
Granted -
Forfeitures -
Exercised (82,220) $0.84 - $5.875
Transfer to amended plan (4,835,225) 4,835,225
Options canceled per Merger (4,359,805) (3,237,275)
---------- ----------
Options outstanding at
September 30, 1998 107,750 1,597,950 $0.84 - $3.162 $ 1.42
Granted - -
Forfeitures - -
Exercised - -
Options outstanding at
September 30, 1999 107,750 1,597,950 $0.84 - $3.162 $ 1.42
========== ==========
Options available for grant at
September 30, 1999 - -
========== ==========
In September 1995, the Company granted options to purchase 300,000 shares
of Common Stock to a former officer at an exercise price of $6.075. These
options were exercisable over a period of four years from the date of grant. In
June 1996, options to purchase 150,000 of these shares were canceled. The
remaining 150,000 shares were canceled per the Merger agreement.
II-42
COMMNET CELLULAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. Common Stock options (continued)
--------------------
On October 1, 1996, the Company granted options to purchase 4,500 shares of
Common Stock to three key agents, under the Key Agent Stock Option Plan, at a
price of $5.775. These 4,500 shares were canceled per the Merger.
Stock-based compensation
The Company applies Accounting Principles Board Opinion No. 25 ("APB 25"),
"Accounting for Stock Issued to Employees" and related interpretations in
accounting for its plan. Under APB 25, no compensation expense is recognized
for options granted to employees which are at or above market value.
During the year ended September 30, 1998, the Company and certain option
holders negotiated certain changes to the terms of option agreements affecting
most, but not all of the outstanding options. A portion of the vested value of
the options were paid in cash based on the price of common shares on the date of
Merger and, pursuant to APB 25, $13,400,000 of compensation expense was recorded
in February 1998. In addition, options outstanding that were not paid in cash
on the date of the Merger were changed such that the expiration date of options
was extended from ten years after date of grant to February 5, 2008. However,
any appreciation in the value of an option due to increases in the value of
Common Stock over $36 ($7.20 on a post-split basis) per share (the value of a
share of Common Stock on February 10, 1998, the date of the Merger) became
subjected to vesting over six years, with a limit on vesting of 75% of such
appreciation until a liquidation event as defined in the replacement stock
option agreements. In addition, the number of options and exercise prices were
reduced such that the value of unexercised options on February 10, 1998 remained
constant and the number of shares subject to all options held by participants
bore the same relationship to the total number of shares of common stock
outstanding on a fully-diluted basis after the Merger. These changes created a
new measurement date for options in a transaction not involving cash, resulting
in recognition of $12,652,000 of compensation recorded as capital in excess of
par value and $10,400,000 recorded in 1998 as compensation expense. The excess
$2,252,000 of compensation has been recorded as a component of equity and will
be recognized as compensation expense ratably over the vesting period.
Had compensation cost for the Company's stock-based compensation plans been
determined based on the fair value at the grant dates for awards under those
plans consistent with the method of Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation," ("SFAS 123") the Company's
pro forma net income and earnings per share would have been as follows:
1999 1998 1997
------- --------- --------
Pro forma net income (loss) $14,643 $(60,101) $(9,798)
Pro forma basic and diluted
income (loss) per share $ 0.64 $ (1.53) $ (.14)
Pro forma information regarding net income (loss) and income (loss) per
share is required by Statement No. 123, and has been determined as if the
Company had accounted for its employees stock options under the fair value
method of that Statement. The fair value for these options was estimated at the
date of grant using a Black-Scholes option pricing model with the following
weighted average assumptions for 1998 and 1997, respectively: risk-free
interest rates of 4.67% and 6.10%; dividend yields of 0%; volatility factors of
the expected market price of the Company's Common Stock of .41 and .36; and a
weighted average expected life of the option of six years for 1998 and eight
years for 1997. The weighted average fair value of options granted during the
years ended September 30, 1998 and 1997 was $28.90 and $15.68, respectively.
There were no option grants during the year ended September 30, 1999.
II-43
COMMNET CELLULAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. Common Stock options (continued)
--------------------
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
9. 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 withdrawal under certain circumstances. Each employee's account vests
ratably over a period of five years. Contributions totaling approximately
$598,000 (83,605 shares) were made to the ESOP for the year ended September 30,
1997. Shares are deemed issued for accounting purposes in the year that ESOP
contribution expense is recognized. In connection with the Merger, the ESOP was
terminated in 1998.
10. 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 -hundredth of a share of
Series A Preferred Stock, at a price of $9 per 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 25% 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 25% 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-44
COMMNET CELLULAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Stockholders' equity (continued)
--------------------
In August 1996, the Company announced a program to repurchase, from time to
time, up to $20,000,000 of its outstanding Common Stock using available
liquidity to fund the repurchases. At September 30, 1997, the Company had
repurchased 747,500 shares at prices ranging from $5.55 - $5.825 per share for
an aggregate price of $4,310,938. The program was discontinued during fiscal
1997.
In March 1997, the Company entered into a Retirement and Consulting
Agreement with an executive officer, whereby upon retirement from the Company
82,090 shares of restricted stock will be issued. As a result of the agreement,
the Company recorded $458,000 of deferred compensation.
In September 1999, the Company issued 3,000 shares of Common Stock to two
of its nonemployee directors in accordance with an agreement and recognized
$93,000 of expense.
11. 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.
SFAS No. 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 due to borrowings
carrying a variable interest rate.
Long and short-term debt: The carrying amounts of the secured bank
------------------------
financing and note payable borrowings approximate their fair value as all
borrowings either carry a variable interest rate or fixed interest rates having
a term of three months or less. 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, 1999 and 1998 are as follows:
Carrying Amount Fair Value
--------------- ----------
1999 1998 1999 1998
---- ---- ---- ----
(Amounts in thousands)
Cash, cash equivalents and cash in escrow $ 27,194 $ 26,153 $ 27,194 $ 26,153
Trading securities 15,033 - 15,033 -
Advances to affiliates and other 17,312 31,402 17,312 31,402
Notes payable 9,977 2,916 9,977 2,916
Secured bank financing 739,000 680,000 739,000 680,000
11 3/4% senior subordinated discount notes - 83 - 88
II-45
COMMNET CELLULAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Blackstone Merger
---------------------
On February 10, 1998, the Company consummated a recapitalization whereby AV
Acquisition Corp., ("Newco"), a subsidiary of Blackstone CCI Capital Partners
L.P., a Delaware limited partnership (the "Partnership") affiliated with
Blackstone Management Associates II L.L.C., a Delaware limited liability company
("Blackstone"), was merged into the Company (the "Merger") pursuant to an
Agreement and Plan of Merger dated May 27, 1997 (the "Blackstone Merger
Agreement"). At the effective time of the Merger, each share of Common Stock
issued and outstanding (other than those shares described below) was converted,
at the election of the holder thereof and subject to the terms of the Blackstone
Merger Agreement, into either (a) the right to receive $36.00 ($7.20 on a post-
split basis) in cash or (b) the right to retain one fully paid and nonassessable
share of Common Stock. The following shares of Common Stock were not subject to
conversions pursuant to the Merger: shares of Common Stock held by the
Partnership, and partnerships affiliated with Blackstone that acquired interests
in Newco prior to the consummation of the Merger, Newco, and any wholly-owned
subsidiary of the Company or any wholly-owned subsidiary of Newco; fractional
shares that were converted to cash; and shares of Common Stock in respect of
which dissenters' rights had been properly exercised. The election to retain
Common Stock was subject to proration so that, following the Merger, 2,943,055
shares (representing approximately 4% of the issued and outstanding Common
Stock) were retained by existing shareholders of the Company, representing
approximately 13% of the shares of the Company issued and outstanding
immediately after the Merger. The shares of Common Stock owned by the
shareholders of Newco represent approximately 87% of the shares of the Company
issued and outstanding after the Merger, resulting in such shareholders of Newco
becoming the controlling shareholders of the Company.
13. The Vodafone Airtouch PLC Merger
--------------------------------
On July 18, 1999, the Company entered into an Agreement and Plan of Merger
(the Agreement and Plan of Merger) with Vodafone AirTouch PLC (Vodafone) and
Pacific Telecom Cellular of Colorado, Inc. (PTCCI) whereby PTCCI would merge
with and into CommNet Cellular Inc. and the owner of each outstanding share of
the Company's common stock would receive $31.00 per share plus interest at the
rate of 8% from the date of Agreement and Plan of Merger until closing. Upon
completion of the transaction, Vodafone will own all the outstanding shares of
the Company. The merger is subject to certain conditions, including approval
from the Federal Communications Commission. In connection with the execution
and delivery of the Agreement and Plan of Merger and the transactions
contemplated thereby, Vodafone and BCP CommNet L.P. ("BCP"), the owner of
approximately 86% of the Company's common stock, have entered into a Voting
Agreement, dated as of July 18, 1999, pursuant to which BCP has agreed to vote
all the shares of the Company's common stock owned by it in favor of the merger
upon the terms and subject to the conditions set forth in the Voting Agreement.
The Agreement and Plan of Merger and Voting Agreement have been filed with the
Securities and Exchange Commission, as exhibits to the Company's Form 8-K on
July 21, 1999. On December 23, 1999, the FCC adopted an order granting transfers
of licenses sufficient to consummate the merger with Vodafone.
II-46
COMMNET CELLULAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. Quarterly financial data (unaudited)
------------------------------------
Quarterly financial data and per share data are presented below (amounts in
thousands, except for per share data):
First Second Third Fourth
Quarterly Financial Data Quarter Quarter Quarter Quarter
------------------------ ------- ------- ------- -------
1999
Revenues $47,234 $ 43,771 $ 53,930 $66,041
Operating income 8,150 7,868 20,580 29,577
Net income (loss) (5,717) (6,264) 5,373 32,081
Basic net income (loss) per share $ (0.25) $ (0.28) $ 0.24 $ 1.41
Diluted net income (loss) per share $ (0.25) $ (0.28) $ 0.24 $ 1.40
--------------------------------------------------------------------------------------------
1998
Revenues $39,344 $ 34,499 $ 42,780 $54,812
Operating income (loss) 8,270 (11,211) 2,141 21,384
Income (loss) before
extraordinary charge 1,000 (21,304) (12,958) 6,285
Net income (loss) 1,000 (54,804) (12,958) 6,285
Basic and diluted income
(loss) per share:
Income (loss) before
extraordinary charge $ 0.01 $ (0.49) $ (0.57) $ 0.28
Basic and diluted net
income (loss) $ 0.01 $ (1.27) $ (0.57) $ 0.28
II-47
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 71 Chairman of the Board, Chief Executive Officer and Director
Daniel P. Dwyer 40 President, Chief Operating Officer and Director
Timothy C. Morrisey 46 Executive Vice President - Sales Operations
Andrew J. Gardner 45 Executive Vice President, Treasurer and Chief Financial Officer
David S. Lynn 42 Executive Vice President - Network Operations
James C. Everson 49 Vice President, Secretary and General Counsel
Mark T. Gallogly (2) 42 Director
Lawrence H. Guffey (2) 31 Director
Simon P. Lonergan (1) 31 Director
William J. Ryan (1)(2) 67 Director
John P. Scully (1)(2) 53 Director
Peter F. Wallace 24 Director
__________
(1) Member Audit Committee.
(2) Member Compensation Committee.
Arnold C. Pohs has been Chairman of the Board of the Company since
February 1991, Chief Executive Officer since August 1989 and a director since
September 1985. Mr. Pohs served as President of the Company from August 1989
until December 1998 and 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 is Chairman Emeritus of the Board of Directors of the
Cellular Telecommunications Industry Association and currently serves as a
director and a member of the Executive Committee of the CTIA Board. He is a
member of the board and past Chairman of the CTIA Foundation for Wireless
Telecommunications.
Daniel P. Dwyer has been President and Chief Operating Officer of the
Company since December 1998 and a director of the Company since March 1990. Mr.
Dwyer was Executive Vice President of the Company from November 1992 to December
1998, Chief Financial Officer from August 1988 to December 1998 and Treasurer
III-1
from August 1987 to December 1998. 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. 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.
Timothy C. Morrisey was named Executive Vice President - Sales
Operations of the Company in November 1996. He was Senior Vice President-Sales
Operations from February 1995 until November 1996 and General Sales Manager of
the Company's Midwest Region from July 1993 until February 1995.
Andrew J. Gardner was named Executive Vice President, Treasurer and
Chief Financial Officer of the Company in December 1998. Mr. Gardner was Senior
Vice President from July 1994 to December 1998 and Controller from November 1992
to December 1998. He was Vice President from November 1992 to July 1994 and
Assistant Vice President - Accounting and Tax from July 1990 to October 1992.
David S. Lynn was named Executive Vice President - Network Operations
of the Company in December 1998. Mr. Lynn was Senior Vice President - Network
Operations of the Company from July 1994 to December 1998. 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.
James C. Everson was named General Counsel and Secretary of the
Company in March 1998. He was Vice President - Legal Affairs from March 1996 to
March 1998 and has been legal counsel to the Company since March 1992.
Mark T. Gallogly was designated a director of the Company in February
1998. Mr. Gallogly is a member of the limited liability company which acts as
the general partner of the general partner of BCP CommNet L.P. He is a Senior
Managing Director of The Blackstone Group L.P. and has been with Blackstone
since 1989. Mr. Gallogly is a member of the boards of directors of Centennial
Cellular Corp. and Livewire Media.
Lawrence H. Guffey was designated a director of the Company in
February 1998. Mr. Guffey is a member of the limited liability company which
acts as the general partner of the general partner of BCP CommNet L.P. He is
Managing Director of The Blackstone Group L.P., with which he has been
associated since 1991. He is a member of the boards of directors of Centennial
Cellular Corp. and Livewire Media.
Simon P. Lonergan was designated a director of the Company in February
1998. Mr. Lonergan is a Principal of The Blackstone Group L.P., which he joined
in 1996. Prior to joining Blackstone, Mr. Lonergan was an Associate at Bain
Capital, Inc. and a Consultant at Bain and Co. He currently serves on the
Advisory Committee of Graham Packaging Company.
William J. Ryan was designated a director of the Company in May 1998.
Mr. Ryan was previously CEO of Price Communications Wireless, a subsidiary of
Price Communications Corporation ("Price"). From 1995 to October 1997, Mr. Ryan
was President & CEO of Palmer Wireless, Inc. Prior thereto, he was President &
CEO of Palmer Communications Incorporated. Mr. Ryan is currently Trustee, Naples
Community Hospital; Vice Chairman, Naples Philharmonic Center for the Arts;
Director, Florida Council on Economic Education; Member CATV Pioneers, Broadcast
Pioneers, and the International Radio & Television Society.
John P. Scully was designated a director of the Company in May 1998.
From May 1992 until April 1998, Mr. Scully was Vice President External Relations
& Colorado for U S WEST Communications. In March 1997, external relations
responsibilities were added. Mr. Scully serves on the boards of the Greater
Denver Chamber of Commerce (past chairman), the Metro Denver Board of Governors,
the Public Education and Business Coalition
III-2
(past chairman), the Denver Center for the Performing Arts, the State Board of
Agriculture, the Urban League of Metro Denver and the National Exchange Carrier
Association.
Peter F. Wallace was designated a director of the Company in December
1998. Mr. Wallace has been associated with The Blackstone Group L.P. since 1997.
Prior to joining Blackstone Mr. Wallace studied at Harvard University. He is a
member of the boards of directors of Volume Services, Inc. and Service America
Corporation.
Item 11. Executive Compensation.
Board Compensation.
Board members other than John P. Scully and William J. Ryan are not
paid for service on the Board. Messrs. Ryan and Scully are paid an annual
retainer of $15,000 plus $1,000 for special meetings and will receive a stock
grant annually of 1,500 shares of the common stock of the Company.
III-3
SUMMARY COMPENSATION TABLE
The following table sets forth the compensation received by the named
Executive Officers for each of the three years ended September 30, 1999.
Long-Term
Annual Compensation Compensation
------------------- ------------
Name and Principal Position Year Salary ($) Bonus ($) All Others ($)(1) Options (#) All Others ($)(2)
--------------------------- ---- ---------- --------- ----------------- ------------ -----------------
Arnold C. Pohs................... 1999 500,000 260,607 5,139 - -
Chairman of the Board and 1998 450,000 242,811 3,703 - 7,088
Chief Executive Officer 1997 400,000 234,944 10,778 - 9,750
Daniel P. Dwyer.................. 1999 400,000 208,486 2,842 - -
President and Chief Operating 1998 350,000 151,082 8,006 - 7,088
Officer 1997 300,000 140,966 4,242 - 9,750
Timothy C. Morrisey.............. 1999 200,000 81,794 10,456 - -
Executive Vice President - 1998 175,000 74,141 6,256 - 7,088
Sales Operations 1997 158,000 72,978 11,463 - 9,750
David S. Lynn.................... 1999 180,000 71,136 6,763 - -
Executive Vice President - 1998 165,000 54,537 58 - 7,088
Network Operations 1997 148,000 51,950 - - 9,650
Andrew J. Gardner................ 1999 178,958 70,724 5,727 - -
Executive Vice President 1998 155,000 51,232 58 - 7,088
Treasurer and Chief 1997 138,000 49,075 - - 9,750
Financial Officer
__________
(1) The amounts shown represent premiums paid on supplemental health benefits
for certain named executives.
(2) The amounts shown represent contributions by the Company to defined
contribution plans.
III-4
Change in Control Agreements
- ----------------------------
In July 1993, the Board of Directors approved change in control
agreements with Messrs. Pohs and Dwyer. In November 1995, the Board authorized
comparable agreements with Messrs. Gardner, Lynn and Morrisey, the Company's
Executive Vice President, Treasurer and Chief Financial Officer, Executive Vice
President - Network Operations, and Executive Vice President - Sales Operations,
respectively.. The purpose of these 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.
On February 10, 1998, the date of the Merger, Messrs. Pohs, Dwyer,
Gardner, Lynn and Morrisey executed an amendment to their change in control
agreements. Under the amendment, each officer is entitled to receive certain
severance benefits upon termination or constructive termination of employment
subject to the same conditions as the original agreements, but only if
termination occurs prior to February 10, 2000. In addition, the amendment causes
the agreements to expire on February 10, 2001.
On March 30, 1997, CommNet and Mr. Pohs entered into a Retirement and
Consulting Agreement (the "Consulting Agreement") pursuant to which Mr. Pohs
will receive the following upon his retirement from the Company: (i) a payment
equal in amount to the additional employment contributions and matching
contributions under the CommNet Cellular Inc. Retirement Savings Plan and the
ESOP to which Mr. Pohs would have been entitled had such contributions been
determined without regard to the statutory limits applicable to such
contributions under the Code for the five year period ending on Mr. Pohs'
retirement date; (ii) a payment equal to the present value of five times the
annual premium cost with respect to Mr. Pohs' coverage level and plan option of
the Company's health plan and the Exec-U-Care Medical Reimbursement Insurance;
and (iii) a grant of 82,090 shares of restricted stock under the CommNet
Cellular Inc. Omnibus Stock and Incentive Plan (which shares will vest upon
death, disability, the end of the consulting period described below or a change
of control). The Consulting Agreement also provides that the Company will
retain Mr. Pohs as a consultant for a period of six years following his
retirement in exchange for a consulting fee equal to 50% of Mr. Pohs' final
annualized base salary plus his final year's annualized bonus per year. In the
event of a change in control of the Company, as defined in the Consulting
Agreement, (i) if Mr. Pohs has not yet retired, he may elect to receive the
benefits set forth in his change of control agreement, as described in the two
preceding paragraphs, or to receive the benefits provided for in the Consulting
Agreement, and (ii) if Mr. Pohs has retired, he will be entitled to receive a
lump-sum payment of all consulting fees due for the remaining portion of the
consulting arrangement, and all restrictions on the shares granted pursuant to
the Consulting Agreement will lapse.
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-5
1999 AGGREGATED OPTION EXERCISES
AND YEAR-END OPTION VALUES
The following table provides information on the value of unexercised
options at September 30, 1999.
Value of Unexercised
Number of Unexercised Options at In-the-Money Options
Fiscal Year End at Fiscal Year End
------------------------------------ ---------------------------------
Name Vested Unvested (1) Vested Unvested
---- ------- -------- ------ --------
Arnold C. Pohs 933,150 - $6,211,000 $21,829,000
Daniel P. Dwyer 328,370 - 2,131,000 7,682,000
Timothy C. Morrisey 59,150 - 343,000 1,383,000
David S. Lynn 90,740 - 565,000 2,096,000
Andrew J. Gardner 48,760 - 307,000 1,140,000
(1) The option shares are 100% vested up to $36 ($7.20 on a post-split basis)
per option. Any additional appreciation above $36 ($7.20 on a post-split
basis) is subject to a six-year vesting schedule.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
At December 14, 1999, there were 22,861,345 shares of Common Stock of
the Company issued and outstanding. As of such date options to purchase
1,700,700 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 as of the filing date of this report 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-6
Name and Address of Amount and Nature of Percent of
Beneficial Owner Beneficial Ownership Class
---------------- -------------------- -----
Arnold C. Pohs 1,015,240 (1) 4.25%
8350 East Crescent Parkway
Englewood, Colorado 80111
Daniel P. Dwyer 328,370 (2) 1.42%
8350 East Crescent Parkway
Englewood, Colorado 80111
William J. Ryan 6,500 .02%
8111 Bay Colony Drive
Naples, Florida 34108
John P. Scully 1,500 .00%
2828 Terry Lake Road
Fort Collins, CO 80523
BCP CommNet L.P. 19,695,835 86.17%
c/o The Blackstone Group
345 Park Avenue, 31/st/ Floor
New York, New York 10154
All executive officers and directors 1,556,825 (3) 6.38%
(13 persons - stock, options and
restricted stock)
__________
(1) Includes options to purchase 933,150 shares of Common Stock and restricted
stock to be granted subject to a retirement agreement of 82,090 shares.
(2) Includes options to purchase 328,370 shares of Common Stock.
(3) Includes options to purchase 1,466,735 shares of Common Stock and 82,090
shares of restricted stock.
Item 13. Certain Relationships and Related Transactions.
None.
III-6
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a)(1) Financial Statements
--------------------
1. Independent Auditors' Report - Deloitte & Touche LLP
2. Report of Independent Auditors - Ernst & Young LLP
3. Consolidated Balance Sheets, September 30, 1999 and 1998
4. Consolidated Statements of Operations, Years ended September 30,
1999, 1998 and 1997
5. Consolidated Statements of Stockholders' Equity (Deficit), Years
ended September 30, 1999, 1998 and 1997
6. Consolidated Statements of Cash Flows, Years ended September 30,
1999, 1998 and 1997
7. 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.
IV-1
(a)(3) Exhibits (continued)
--------
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.
4.5 Amendment Three to Rights Agreement between the Company and the
Rights Agent.
Incorporated herein by reference to Exhibit 4.5 to the Company's
annual report on Form 10-K for the fiscal year ended September 30,
1996.
4.6 Rights Agreement Amendment dated as of July 18, 1999 between CommNet
Cellular Inc. and State Street Bank and Trust Company. Incorporated
herein by reference to Exhibit 4.1 to the Company's report on
Form 8-K dated July 21, 1999.
10.1 Lease Agreement dated August 8, 1995 between the Company and TCD
North, Inc.
Incorporated herein by reference to Exhibit 10.1 to the Company's
annual report on Form 10-K for the fiscal year ended September 30,
1995.
10.2 Amended and Restated Employee Stock Ownership Plan and Trust.
Incorporated herein by reference to Exhibit 10.1 to the Company's
quarterly report on Form 10-Q for the quarter ended June 30, 1996.
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.
10.6 Form of change in control agreement between the Company and its
senior management.
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,
1995.
10.7 Retirement and Consulting Agreement.
Incorporated herein by reference to Exhibit 10.1 to the Company's
quarterly report on Form 10-Q for the quarter ended March 31, 1996.
IV-2
(a)(3) Exhibits (continued)
--------
10.8 Agreement and Plan of Merger dated May 27, 1997 between the Company
and AV Acquisition Corp.
Incorporated herein by reference to Exhibit 2.1 to the Company's
report on Form 8-K dated May 29, 1997.
10.9 Credit Agreement among the Company and CIFC and The Lenders Party
Hereto and The Chase Manhattan Bank, as Administrative Agent, and
Chase Manhattan Bank Delaware, as Fronting Bank dated September 18,
1997.
Incorporated herein by reference to Exhibit 99.1 to the Company's
report on Form 8-K dated November 24, 1997.
10.10 Agreement and Plan of Merger dated as of July 18, 1999 between
Vodafone Airtouch Plc, Pacific Telecom Cellular of Colorado, Inc.
and CommNet Cellular Inc. Incorporated herein by reference to
Exhibit 2.1 to the Company's report on Form 8-K dated July 21, 1999.
10.11 Voting Agreement dated as of July 21, 1999 between Vodafone Airtouch
Plc and BCP CommNet Cellular L.P. Incorporated herein by reference
to Exhibit 10.1 to the Company's report on Form 8-K dated July 21,
1999.
*21.1 Subsidiaries of the Company.
*23.1 Consent of Independent Auditors - Deloitte & Touche LLP.
*23.2 Consent of Independent Auditors - Ernst & Young LLP.
__________
* Filed herewith
(b) Reports on Form 8-K during the quarter ended September 30, 1999:
Date of Report Items Reported Financial Statements Filed
-------------- -------------- --------------------------
July 21, 1999 Item 5, 7 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/ Daniel P. Dwyer
-------------------------
Daniel P. Dwyer, President
Date: December 29, 1999
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/ Daniel P. Dwyer President, Chief Operating Officer and December 29, 1999
- ----------------------------
Daniel P. Dwyer Director
/s/ Andrew J. Gardner Executive Vice President, Treasurer, Chief December 29, 1999
- ---------------------------- Financial Officer and Director
Andrew J. Gardner
/s/ Randy L. Lazzell Vice President and Controller (Principal December 29, 1999
- ---------------------------- Accounting Officer)
Randy L. Lazzell
/s/ Mark T. Gallogly Director December 29, 1999
- ----------------------------
Mark T. Gallogly
/s/ Lawrence H. Guffey Director December 29, 1999
- ----------------------------
Lawrence H. Guffey
/s/ Peter M. Wallace Director December 29, 1999
- ----------------------------
Peter M. Wallace
/s/ Simon P. Lonergan Director December 29, 1999
- ----------------------------
Simon P. Lonergan
/s/ William J. Ryan Director December 29, 1999
- ----------------------------
William J. Ryan
/s/ John P. Scully Director December 29, 1999
- ----------------------------
John P. Scully
IV-4
COMMNET CELLULAR INC.
SCHEDULE I
Condensed Financial Information of Registrant
(Amounts in thousands)
CONDENSED BALANCE SHEETS
- ------------------------
September 30,
--------------------------
1999 1998
---- ----
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 11,316 $ 25,253
Trading securities 15,033 -
Accounts receivable 6 4
Inventory and other 7,025 6,632
--------- ---------
Total current assets 33,380 31,889
Property, plant and equipment 66,232 55,177
Less allowance for depreciation 27,606 23,776
--------- ---------
38,626 31,401
OTHER ASSETS
Investment in and advances to
subsidiaries and affiliates 14,773 8,389
Other 21,398 5,330
--------- ---------
36,171 13,719
--------- ---------
$ 108,177 $ 77,009
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES $ 14,286 $ 14,366
LONG-TERM DEBT - 83
INVESTMENT IN CIFC 398,008 398,008
STOCKHOLDERS' EQUITY
Common stock 5 5
Other stockholders' equity (304,122) (335,453)
--------- ---------
(304,117) (335,448)
--------- ---------
$ 108,177 $ 77,009
========= =========
COMMNET CELLULAR INC.
SCHEDULE I
Condensed Financial Information of Registrant
(continued)
(Amounts in thousands)
CONDENSED STATEMENTS OF OPERATIONS
- ----------------------------------
Years ended September 30,
--------------------------------
1999 1998 1997
---- ---- ----
COST AND EXPENSES
General and administrative $ 56,926 $ 72,032 $ 35,820
Depreciation and amortization 8,573 8,394 7,217
Less amounts allocated to subsidiaries
and affiliates (59,819) (55,662) (42,526)
-------- -------- --------
NET LOSS BEFORE EQUITY IN
NET INCOME OF SUBSIDIARIES AND
AFFILIATES, GAINS ON SALES OF AFFILIATES
AND INTEREST INCOME AND EXPENSE (5,680) (24,764) (511)
Equity in net income (loss) of
subsidiaries and affiliates 15,952 2,172 12,814
Gains on sales of affiliates 12,336 - 350
Interest expense 1,319 (10,507) (26,170)
Interest income 1,546 6,122 14,549
-------- -------- --------
NET INCOME (LOSS) BEFORE
EXTRAORDINARY CHARGE $ 25,473 $(26,977) $ 1,032
Extraordinary charge related to early
extinguishment of long-term debt - (33,500) -
-------- -------- --------
NET INCOME (LOSS) $ 25,473 $(60,477) $ 1,032
======== ======== ========
COMMNET CELLULAR INC.
SCHEDULE I
Condensed Financial Information of Registrant
(continued)
(Amounts in thousands)
CONDENSED STATEMENTS OF CASH FLOWS
- ----------------------------------
Years ended September 30
----------------------------------
1999 1998 1997
---- ---- ----
CASH PROVIDED (USED) BY
OPERATING ACTIVITIES $ 4,801 $ (11,272) $ 34,611
INVESTING ACTIVITIES
Acquisition of interests in affiliates (57,766) - -
Additions to property and equipment (14,969) (666) (5,792)
Dividends received from subsidiary - 427,715 -
Additions (Reductions) to investment
in affiliates 70,432 73,281 (19,581)
Additions to other assets (16,352) (3,975) (2,437)
Payments received on advances to
affiliate - 148,333 -
-------- --------- --------
CASH PROVIDED (USED) BY INVESTING
ACTIVITIES (18,655) 644,688 (27,810)
FINANCING ACTIVITIES
Reductions to capital lease - (158) (301)
Repurchase of Common Stock - - (2,933)
Issuance of Common Stock, net of
offering costs - 128,176 221
Payment of 11 3/4% senior
subordinated discount notes (83) (165,662) -
Payment of 11 1/4% subordinated notes - (80,000) -
Extraordinary charge related to
extinguishment of long-term debt - (29,015) -
Conversion of Common Stock as a
condition of the Merger - (475,496) -
-------- --------- --------
CASH USED BY FINANCING ACTIVITIES (83) (622,155) (3,013)
-------- --------- --------
INCREASE (DECREASE) IN CASH (13,937) 11,261 (3,788)
BEGINNING OF YEAR CASH AND CASH
EQUIVALENTS 25,253 13,992 10,204
-------- --------- --------
END OF YEAR CASH AND CASH EQUIVALENTS $ 11,316 $ 25,253 $ 13,992
======== ========= ========
COMMNET CELLULAR INC.
SCHEDULE I
Condensed Financial Information of Registrant
(continued)
(Amounts in thousands)
SUPPLEMENTAL SCHEDULE OF NONCASH ACTIVITIES:
Write-off of offering costs included in extraordinary
loss on early extinguishment of long-term debt $ - $4,485 $ -
Purchase of interests in affiliates by issuance of Common Stock 5,270 - -
Receipt of Alltel common stock from sales of interests in
Affiliates 15,033 - -
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. To the extent
dividends received from affiliates exceed the Company's investment, these
amounts are presented as a long-term liability. Parent company only financial
statements should be read in conjunction with the Company's consolidated
financial statements.
Certain amounts for 1998 have been reclassified to conform to the
1999 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:
Fiscal year 1999 $2,487,000 $6,241,000 $ - $3,034,000 $5,694,000
Fiscal year 1998 $2,122,000 $2,088,000 $ - $1,723,000 $2,487,000
Fiscal year 1997 $1,947,000 $3,789,000 $ - $3,614,000 $2,122,000
(1) All deductions are the result of actual write-offs to accounts receivable.