e<PAGE>
As filed with the Securities and Exchange Commission on June 28, 1995.
Registration No. 33-58309
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------
AMENDMENT NO. 3
TO
FORM S-3
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
--------------------------
COMMNET CELLULAR INC.
(Exact name of registrant as specified in its charter)
--------------------------
Colorado 84-0924904
(State or other juris- (I.R.S. Employer
diction of incorporation Identification No.)
or organization)
--------------------------
5990 Greenwood Plaza Boulevard
Englewood, Colorado 80111
(303) 694-3234
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
--------------------------
Amy M. Shapiro, Esq.
Vice-President and General Counsel
CommNet Cellular Inc.
5990 Greenwood Plaza Boulevard
Englewood, Colorado 80111
(303) 694-3234
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
--------------------------
Approximate date of commencement of proposed sale to the public: From time to
time after the effective date of this registration statement depending upon
market conditions.
If the only securities being registered on this Form are being offered pursuant
to dividend or interest reinvestment plans, please check the following box. / /
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box: /x/
--------------------------
<PAGE>
330,000 Shares
COMMNET CELLULAR INC.
Common Stock
--------------------------
This Prospectus covers the resale by certain holders (the "Selling
Securityholders") of up to 330,000 shares of common stock, par value $.001 per
share (the "Common Stock"), of CommNet Cellular Inc., a Colorado corporation
(the "Company") which were or are to be issued by the Company to the Selling
Securityholders upon conversion of up to $4,950,000 in aggregate principal
amount of the Company's 8.75% Convertible Subordinated Notes due 2001 (the
"Notes").
The Common Stock is listed on the NASDAQ National Market under the trading
symbol "CELS." On June 27, 1995, the last reported sale price of the Common
Stock was $27.
The Company will not receive any of the proceeds from the sale of the
shares by the Selling Securityholders. Expenses of preparing and filing the
registration statement to which this Prospectus relates and all post-effective
amendments will be borne by the Company.
See "Risk Factors" on pages 4-7 for a discussion of certain factors which
prospective investors should consider prior to an investment in the Common
Stock.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
The date of this Prospectus is June 28, 1995.
<PAGE>
No person is authorized to give any information or to make any
representation other than those contained or incorporated by reference in this
Prospectus and, if given or made, such information or representations must not
be relied upon as having been authorized by the Company or any Selling
Securityholder. Neither the delivery of this Prospectus nor any sale made
hereunder shall, under any circumstances, create any implication that there has
been no change in the information contained herein since the date hereof. This
Prospectus does not constitute an offer to sell or a solicitation of an offer to
buy by anyone in any jurisdiction in which such offer or solicitation is not
authorized or in which the person making such offer or solicitation is not
qualified to do so or to any person to whom it is unlawful to make such offer or
solicitation in such jurisdiction.
----------------------------------------
TABLE OF CONTENTS
Page
----
Available Information. . . . . . . . . . . . . . . . . . . . . . . . . . 2
Incorporation by Reference . . . . . . . . . . . . . . . . . . . . . . . 3
The Company. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4-7
Recent Developments. . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Selected Consolidated Financial Statements . . . . . . . . . . . . . . . 9-10
Management's Discussion and Analysis of Financial Condition and Results
of Operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11-20
Use of Proceeds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Selling Securityholders. . . . . . . . . . . . . . . . . . . . . . . . . 20-21
Plan of Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . 21-22
Legal Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Experts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
----------------------------------------
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and in accordance
therewith files reports and other information with the Securities and Exchange
Commission (the "Commission"). Information as of particular dates concerning
its directors and officers and any material interest of such persons in
transactions with the Company is disclosed in proxy statements distributed to
shareholders and filed with the Commission. Such reports, proxy statements and
other information can be inspected and copied at the offices of the Commission
at 450 Fifth Street, N.W., Washington, D.C. 20549 and at its regional offices
located at Suite 1400, Northwestern Atrium Center, 500 West Madison Street,
Chicago, Illinois 60661-2511 and Room 1400, 75 Park Place, New York, New York
10007. Copies of such material can be obtained from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at
prescribed rates.
The Company has filed with the Commission a registration statement on Form
S-3 (herein, together with all amendments and exhibits, referred to as the
"Registration
2
<PAGE>
Statement") under the Securities Act of 1933, as amended (the "Securities Act"),
with respect to the shares offered hereby. This Prospectus does not contain all
of the information set forth in the Registration Statement, certain parts of
which are omitted in accordance with the rules and regulations of the
Commission.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Commission pursuant to the Exchange
Act are incorporated herein by reference:
1. The Company's Annual Report on Form 10-K for the fiscal year ended
September 30, 1994, as amended by the Form 10-K/A No. 1 dated January
11, 1995, Form 10-K/A No. 2 dated May 25, 1995 and Form 10-K/A
No. 3 dated June 16, 1995.
2. The Company's Quarterly Report Form 10-Q for the fiscal quarter ended
December 31, 1994 as amended by Form 10-Q/A dated May 25, 1995.
3. The Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended March 31, 1995, as amended by Form 10-Q/A dated June 16, 1995.
4. All other documents filed by the Company pursuant to Sections 13(a),
13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this
Prospectus and prior to the termination of the offering of the shares
to which this Prospectus relates.
5. The description of the Company's Common Stock contained in the
Company's Registration Statement on Form 8-A filed October 6, 1986.
6. The description of the Company's Preferred Stock Purchase Rights
contained in the Company's Registration Statement on Form 8-A filed
December 20, 1990.
Any statement contained herein or in a document incorporated or deemed to
be incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any
such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus.
The Company will provide without charge to each person to whom a copy of
this Prospectus is delivered, upon the request of such person, a copy of any or
all documents which are incorporated by reference herein, other than exhibits to
such documents (unless such exhibits are specifically incorporated by reference
into such documents). Such requests should be directed to Stockholder
Relations, CommNet Cellular Inc., 5990 Greenwood Plaza Blvd., Suite 300,
Englewood, Colorado 80111.
3
<PAGE>
THE COMPANY
The Company is engaged in the operation, management and financing of
cellular telephone systems in which its affiliates hold an ownership interest.
The Company was incorporated in Colorado in October 1983 and maintains its
registered office and executive offices at Suite 300, 5990 Greenwood Plaza
Boulevard, Englewood, Colorado 80111. Its telephone number is (303) 694-3234.
References to the Company herein shall be deemed to refer to the Company and its
consolidated subsidiaries, unless the context requires otherwise.
RISK FACTORS
In addition to the other information in this Prospectus and otherwise
incorporated by reference herein, the following factors should be carefully
considered in evaluating the Company and its business before purchasing the
shares offered hereby.
HIGHLY LEVERAGED FINANCIAL POSITION; DEBT SERVICE REQUIREMENTS
The Company is highly leveraged and has substantial debt service
requirements. At March 31, 1995, the Company had outstanding long-term debt of
$263,138,000, compared to stockholders' equity of $7,825,000. Interest expense
was $21,339,000 for fiscal year 1994, $9,731,000 of which was payable on a cash
basis and the balance of which constituted accretion on the Company's 11 3/4%
Senior Subordinated Discount Notes. The Credit Agreements provide for the
reborrowing of any loan repayments made to CoBank until the revolving
commitments under the Credit Agreements terminate in December 1995. Upon such
termination, amounts due under the Credit Agreements are converted into term
loans requiring quarterly cash amortization payments through December 31, 2000.
The Company is currently negotiating with CoBank to extend the termination date
under the Credit Agreements until December 1996, and to reduce the principal
amortization period from five to four years. There can be no assurance that the
extension will be obtained. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
The Company's ability to meet its debt service requirements will require
significant and sustained growth in cash flow by the Company and its affiliates.
Historically, the Company has been able to make required interest payments on
its indebtedness from borrowings under bank loans and from equity and debt
financings. The Company will require continued access to such financing sources
until such time as the Company generates sufficient positive cash flow from
operations to service its debt and, to the extent that the Company's leverage
increases, the Company's access to such financing sources may be curtailed or
made more expensive. There can be no assurance that the Company will experience
the necessary growth in cash flow or will be able to access the financing
sources described above.
OPERATING LOSSES AND NET LOSSES
The Company has experienced operating losses and net losses from inception.
The accumulated deficit was $107,239,016 and $113,075,709 at December 31, 1994
and March 31, 1995, respectively. The Company anticipates that losses will
continue over the next several years. Operating losses in fiscal years 1992,
1993 and 1994 were $18,344,000, $15,431,000 and $5,669,000, respectively
(including depreciation, amortization and write-downs of switch assets related
to an upgrade program of $14,115,000, $19,951,000 and $15,767,000,
respectively), and net losses for the same periods were $17,042,000, $22,666,000
and $16,751,000, respectively. Operating losses for the six months ended March
31, 1995 were $3,414,000 (including depreciation and amortization of
$8,029,000), and net losses for the same period were $12,274,000. There can be
no assurance that future operations will be profitable or generate positive
operating income.
HOLDING COMPANY STRUCTURE
A substantial portion of the Company's assets and operations are investments
in its subsidiaries and affiliates and, to that extent, the Company is
effectively a holding company. The Company must rely on dividends, loan
repayments and other intercompany cash flows from its subsidiaries and
affiliates to generate the funds necessary to meet the Company's debt service
obligations. The Credit Agreements contain restrictions on the ability of any
subsidiary or affiliate of the Company which has borrowed from CIFC to make
distributions to the Company. The Company has guaranteed the obligations of CIFC
to CoBank and has granted a first security interest in all of the assets of the
Company as security for such guaranty. The assets of affiliates which borrow
funds from CIFC are pledged to CIFC, which in turn assigns such pledges to
CoBank. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources." Claims of other
creditors of the Company's subsidiaries and affiliates, including CoBank, tax
authorities, trade creditors and creditors of those affiliates which have
financing sources in
4
<PAGE>
addition to the Company, will generally have priority as to the assets of such
subsidiaries and affiliates over the claims of the Company and the holders of
certain indebtedness of the Company.
RESTRICTIONS UNDER DEBT INSTRUMENTS
The Company's operations and financial performance are subject to covenants
contained in certain agreements related to the Company's indebtedness, including
the Credit Agreements and the indenture governing the 11 3/4% Senior
Subordinated Discount Notes. Among other things, those agreements (i) limit the
Company's ability to incur additional indebtedness, including guarantees, sell
or create liens upon its assets, pay dividends on and make other distributions
with respect to its capital stock and enter into new lines of business and (ii)
require the Company to meet certain financial performance tests and use portions
of the net proceeds from the sale of certain assets and the issuance of debt
securities by the Company to repay obligations under certain agreements. These
restrictions could limit the Company's ability to effect future acquisitions or
financing or otherwise restrict corporate activities.
NATURE OF COMPANY'S OWNERSHIP OF LICENSES
Many of the Company's interests in cellular systems are owned through
affiliates that are partners in limited partnerships which are the licensees for
their respective systems. In those partnerships in which the Company's affiliate
is a limited partner or is one of several general partners, certain decisions,
such as the timing and amount of cash distributions and sale or liquidation of
the partnership, may not be subject to a vote of the limited partners or may
require a greater percentage vote than that owned by the Company's affiliate. In
those partnerships that are not managed by the Company, the Company is dependent
on the managing partner to meet the licensee's obligations under the FCC's rules
and regulations. There can be no assurance that any partnership in which the
Company holds an interest will make decisions on such matters which will be in
the Company's best interest or that other partners' conduct and character will
not adversely affect the continuing qualification of licensees in which the
Company holds an interest.
LIMITED OPERATING HISTORY; NEW INDUSTRY
Cellular operations within the network began in 1988 and, accordingly, the
Company's operating history is limited. Moreover, its operations to date have
concentrated on the acquisition of interests in cellular systems licenses and
licensees and the construction and initial operation of cellular systems. A
substantial majority of the cellular telephone systems in which the Company
holds an interest have been operational for less than five years. While there
are a substantial number of cellular telephone systems operating in the United
States and in other countries, cellular telecommunications is a relatively new
industry with a limited history. Moreover, most of the cellular systems in
which the Company holds an interest are RSA markets, which have an even more
limited operating history than the larger MSA markets. Based on demographic
factors, including population size and density, traffic patterns and other
relevant market characteristics, the Company believes that successful
commercial exploitation of the RSA and MSA markets in which the Company holds
interests can be achieved. However, there can be no assurance that this will be
the case.
5
<PAGE>
COMPETITION; NEW TECHNOLOGIES; OBSOLESCENCE
The FCC licenses two cellular carriers in each market. Competition for
customers between the two systems is principally on the basis of quality,
service and price. The Company's competitors may have financial resources which
are substantially greater than those of the Company and its partners. In
addition, FCC policy requires cellular licensees to provide, on a
nondiscriminatory basis, cellular service to resellers that purchase blocks of
mobile telephone numbers and then resell them to the public. This may create
added competition at the retail level.
Competition also may arise from other technologies, including conventional
mobile telephone services, mobile satellite systems, wireless data services,
paging services and Specialized Mobile Radio ("SMR") systems. The FCC has
recently given approval for the creation of enhanced SMR ("ESMR") systems, which
combine multiple SMR systems in a cellular structure and employ frequency reuse,
like cellular, thereby potentially eliminating much of the current technological
distinction between SMR and cellular.
The FCC has also allocated radio channels for personal communications
services ("PCS"). Among other possible uses, PCS will be capable of providing a
two-way mobile voice and data telephone service that is similar to cellular
service. PCS will be a digital, wireless communications system that will utilize
technology that could allow it to compete effectively with cellular systems,
particularly in densely populated areas. Licenses will be awarded by competitive
bidding. Auctions for the first two spectrum blocks have been completed. Absent
delays caused by any judicial proceedings, PCS systems can be expected to
commence operation in major metropolitan areas as early as the end of calendar
year 1995.
Continuing technological advances in the communications field make it
impossible to predict the extent of additional future competition for cellular
systems, but it is certain that in the future there will be more potential
substitutes for cellular service. There can be no assurance that the Company
will not face significant future competition or that cellular technology will
not eventually become obsolete.
VALUE OF CELLULAR LICENSES DEPENDENT UPON SUCCESS OF OPERATIONS AND INDUSTRY
A substantial portion of the Company's assets consists of interests in
cellular licenses and in entities holding cellular licenses. The value of
cellular licenses will depend significantly upon the success of the operations
of such licensees and the growth of the industry generally. Although a market
for interests in cellular licenses currently exists and the Company believes
that such a market will continue, there can be no assurance that this will be
the case. Even if a market does continue in the future, the values obtainable
for interests in cellular licenses in such a market may be significantly lower
than current values.
REGULATORY CONSIDERATIONS
The licensing, construction, operation, sale and acquisition of cellular
systems are regulated by the FCC. In addition, certain aspects of cellular
operations, such as resale of cellular services, may be subject to public
utility regulation in the state in which the service is provided. The ongoing
operations of the Company may require permits, licenses and other authorization
from regulatory authorities (including but not limited to the FCC) not now held
by the Company. In addition, licensing proceedings and applications for granting
and transferring construction permits and operating licenses have been subject
to substantial delays by the FCC. While the Company expects that it will receive
requisite authorizations and approvals in the ordinary course of business, no
assurance can be given that the applicable regulatory authority will grant such
approvals in a timely manner, if at all. Moreover, changes in regulation, such
as increased price regulation or deregulation of interconnection arrangements,
could adversely affect the Company's financial condition and
6
<PAGE>
operating results. Under the FCC rules, licenses for cellular systems are
generally issued for ten-year terms. Although a licensee may apply for renewal
and, under certain circumstances, may be entitled to a renewal expectancy,
renewal is not automatic. The Company's renewal applications may be subject to
petitions to deny or competing applications. Therefore, no assurance can be
given that any license will be renewed.
RADIOFREQUENCY EMISSION CONCERNS
Media reports have suggested that certain radiofrequency ("RF") emissions
from portable cellular telephones might be linked to cancer. Concerns over RF
emissions may have the effect of discouraging the use of cellular telephones,
which could have an adverse effect upon the Company's business. The FCC has a
rulemaking proceeding pending to update the guidelines and methods it uses for
evaluating RF emissions from radio equipment, including cellular telephones. The
proposal would impose more restrictive standards on RF emissions from lower
power devices such as portable cellular telephones.
DEPENDENCE ON KEY PERSONNEL
The Company's affairs are managed by a small number of key personnel, the
loss of which could have an adverse impact on the Company.
RECENT DEVELOPMENTS
On June 20, 1995, the Company filed a Registration Statement on Form S-3
with the Commission for the registration of a proposed public offering (the
"New Notes Offering") of $80,000,000 aggregate principal amount of the Company's
Subordinated Notes due 2005 (the "New Notes"). The net proceeds from the New
Notes Offering are estimated to be approximately $77,000,000. The Company
intends to use approximately $76,765,000 of such net proceeds to redeem all of
the Company's outstanding 6 3/4% Convertible Subordinated Debentures due 2009
(the "6 3/4% Convertible Subordinated Debentures") at a redemption price of
102.7% of the principal amount thereof. Holders of the 6 3/4% Convertible
Subordinated Debentures have the right, exercisable at any time prior to the
date set for redemption (the "Redemption Date") of such debentures in a notice
from the Company to such holders, to convert such debentures into the Company's
Common Stock at a conversion price of $27.625 per share of Common Stock. The
Company expects that the Redemption Date will be approximately 20 days after
consummation of the New Notes Offering. The last reported sales price of the
Company's Common Stock on the Nasdaq National Market on June 27, 1995 was
$27. To the extent the holders of the 6 3/4% Convertible Subordinated
Debentures exercise their right to convert such debentures into shares of the
Company's Common Stock, the Company will repay up to $28,613,000 of indebtedness
under the Credit Agreements shortly after the consummation of the New Notes
Offering. The Company does not intend immediately to reduce borrowings under the
Credit Agreements below $34,591,000 in order to avoid penalties relating to
early termination of agreements that fix interest rates. However, the Company
will consider further reductions in borrowings under the Credit Agreements as
such agreements fixing interest rates expire. The Company intends to use the
balance of such proceeds for general corporate purposes which may include
additional reductions in indebtedness under the Credit Agreements, capital
expenditures or acquisitions.
7
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of March
31, 1995 and as adjusted to give effect to the New Notes Offering and the
assumed use of proceeds thereof, assuming (i) all of the outstanding 6 3/4%
Convertible Subordinated Debentures are redeemed and (ii) all of the outstanding
6 3/4% Convertible Subordinated Debentures are converted by the holders thereof
into shares of the Company's Common Stock. This table should be read in
conjunction with the Company's consolidated financial statements, related notes
and other financial information included or incorporated by reference in this
Prospectus. There can be no assurance that the New Notes Offering will be
consummated, and, accordingly, no assurance can be given that the 6 3/4%
Convertible Subordinated Debentures will be redeemed or converted into shares
of the Company's Common Stock.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1995
-------------------------------------------------------
ADJUSTED FOR ADJUSTED FOR
ACTUAL REDEMPTION CONVERSION (1)
--------------- ------------------ ------------------
<S> <C> <C> <C>
Cash and available-for-sale securities................. $ 14,408,024 $ 14,642,855 $ 62,794,881
--------------- ------------------ ------------------
--------------- ------------------ ------------------
Short-term debt:
Current portion of long-term debt...................... $ 1,090,870 $ 1,090,870 $ 1,090,870
Obligation under capital leases due within
one year.............................................. 467,798 467,798 467,798
--------------- ------------------ ------------------
Total short-term debt.............................. $ 1,558,668 $ 1,558,668 $ 1,558,668
--------------- ------------------ ------------------
--------------- ------------------ ------------------
Long-term debt:
Secured bank financing............................... $ 63,203,738 $ 63,203,738 $ 34,590,595
Obligation under capital leases...................... 620,138 620,138 620,138
11 3/4% Senior Subordinated Discount Notes (2)....... 119,617,285 119,617,285 119,617,285
% Subordinated Notes due 2005 (3).................. -- 80,000,000 80,000,000
8.75% Convertible Senior Subordinated Notes (2)...... 4,950,000 4,950,000 4,950,000
6 3/4% Convertible Subordinated Debentures (2)....... 74,747,000 -- --
--------------- ------------------ ------------------
Total long-term debt............................... 263,138,161 268,391,161 239,778,018
Stockholders' equity:
Preferred Stock: $.01 par value; 1,000,000 shares
authorized; none issued............................. -- -- --
Common Stock: $.001 par value; 40,000,000 shares
authorized; 11,953,959 shares issued (14,659,733
shares adjusted for conversion)..................... 11,954 11,954 14,660
Capital in excess of par value....................... 120,888,317 120,888,317 194,019,643
Accumulated deficit.................................. (113,075,709) (116,706,846) (113,075,709)
--------------- ------------------ ------------------
Total stockholders' equity......................... 7,824,562 4,193,425(4) 80,958,594(5)
--------------- ------------------ ------------------
Total capitalization............................. $ 270,962,723 $ 272,584,586 $ 320,736,612
--------------- ------------------ ------------------
--------------- ------------------ ------------------
<FN>
- ------------------------
(1) The 6 3/4% Convertible Subordinated Debentures are convertible into shares
of the Company's Common Stock at a conversion price of $27.625 per share of
Common Stock on or prior to the Redemption Date. As of June 27, 1995, the
last reported sales price of the Company's Common Stock on the Nasdaq
National Market was $27.
(2) See Note 6 to the Company's Consolidated Financial Statements incorporated
by reference herein.
(3) See "Recent Developments."
(4) Reflects the write-off of deferred loan costs of $1,612,968 and the payment
of the redemption premium of $2,018,169 related to the 6 3/4% Convertible
Subordinated Debentures.
(5) The change in Common Stock and capital in excess of par value reflects the
conversion of the 6 3/4% Convertible Subordinated Debentures and the
charge of deferred loan costs of $1,612,968.
</TABLE>
8
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data as of and for each of the
five years in the period ended September 30, 1994 are derived from consolidated
financial statements of the Company that have been audited by Ernst & Young LLP,
independent auditors. The selected financial data as of and for the six months
ended March 31, 1994 and 1995 are derived from the unaudited financial
statements of the Company which, in the opinion of the Company, reflect all
adjustments necessary for a fair presentation of the results for the unaudited
periods. Operating results for the six months ended March 31, 1995 are not
necessarily indicative of the results that may be achieved for the fiscal year
ending September 30, 1995. The data should be read in conjunction with the
financial statements and other financial information included or incorporated by
reference in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED SEPTEMBER 30, MARCH 31,
-------------------------------------------------------------------- --------------------------
1990 1991 1992 1993 1994 1994 1995
------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
(1):
Revenues...................... $ 1,024,676 $ 4,908,170 $ 14,906,349 $ 33,689,311 $ 61,360,051 $ 26,455,523 $ 38,339,762
Costs and expenses:
Cellular operations......... 2,419,515 11,940,438 18,138,532 30,288,634 50,855,637 23,741,650 33,235,077
Corporate (net of amounts
allocated to affiliates)... 1,518,498 (592,798) 997,157 (1,119,298) 406,638 466,658 489,175
Depreciation and
amortization............... 1,855,678 8,569,325 14,114,817 19,950,508 12,650,855 5,884,296 8,029,368
Write-down of property and
equipment.................. -- -- -- -- 3,116,256 1,472,902 --
------------ ------------ ------------ ------------ ------------ ------------ ------------
Operating loss................ (4,769,015) (15,008,795) (18,344,157) (15,430,533) (5,669,335) (5,109,983) (3,413,858)
Equity in net loss of
affiliates................... (5,071,980) (10,931,161) (8,851,753) (6,339,145) (5,092,484) (3,586,024) (2,735,777)
Minority interest in equity of
affiliates................... -- -- -- -- (543,607) -- (261,004)
Gains on sales of affiliates
and other.................... -- -- 14,339,063 7,821,424 3,811,943 2,459,004 67,247
Interest expense.............. (6,894,329) (11,245,394) (14,800,908) (16,427,796) (21,338,505) (9,860,292) (11,886,742)
Interest income (2)........... 9,028,813 8,484,298 10,616,024 10,701,511 12,080,836 6,813,532 5,955,762
------------ ------------ ------------ ------------ ------------ ------------ ------------
Loss before extraordinary
charge....................... (7,706,511) (28,701,052) (17,041,731) (19,674,539) (16,751,152) (9,283,763) (12,274,372)
Extraordinary charge.......... -- -- -- (2,991,673) -- -- --
------------ ------------ ------------ ------------ ------------ ------------ ------------
Net income (loss)............. $ (7,706,511) $(28,701,052) $(17,041,731) $(22,666,212) $(16,751,152) $ (9,283,763) $(12,274,372)
------------ ------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------ ------------
OTHER DATA:
EBITDA (3).................... $ (2,913,337) $ (6,439,470) $ (4,229,340) $ 4,519,975 $ 10,097,776 $ 2,247,215 $ 4,615,510
Capital expenditures.......... $ 10,119,823 $ 16,683,753 $ 10,006,787 $ 8,607,732 $ 40,933,127 $ 12,475,110 $ 20,663,454
Cash interest expense......... $ 6,202,185 $ 11,245,394 $ 14,800,908 $ 15,581,591 $ 9,205,350 $ 3,996,380 $ 5,249,182
Net income (loss) per common
share........................ $ (1.68) $ (6.00) $ (2.44) $ (2.65) $ (1.45) $ (0.81) $ (1.04)
Weighted average shares
outstanding.................. 4,594,778 4,780,674 6,984,541 8,551,785 11,577,191 11,414,210 11,792,419
Ratio of earnings to fixed
charges (4).................. -- -- -- -- -- -- --
BALANCE SHEET DATA (AT PERIOD
END) (1):
Working capital............... $ 32,058,078 $ 15,317,636 $ 29,477,995 $ 63,560,591 $ 25,524,500 $ 47,062,957 $ 18,308,376
Investment in and advances to
affiliates................... 39,456,182 50,745,576 52,019,577 55,892,372 61,908,761 56,656,672 57,063,587
Net property and equipment.... 13,923,725 33,555,291 44,209,682 53,460,296 79,917,727 57,462,184 86,254,160
Total assets.................. 149,528,094 181,972,276 208,363,573 269,290,185 281,752,821 268,579,932 290,880,354
Long-term debt................ 131,299,631 183,208,596 189,430,430 259,676,224 243,913,168 227,914,886 263,138,161
Total liabilities............. 143,221,602 204,059,999 204,123,685 278,711,956 265,846,354 246,570,843 283,055,792
Stockholders' equity
(deficit)(5)................. 6,306,492 (22,087,723) 4,239,888 (9,421,771) 15,906,467 22,009,089 7,824,562
<FN>
- ------------------------------
(1) Markets in which the Company holds a greater than 50% net interest are
reflected on a consolidated basis in the Company's consolidated financial
statements. Markets in which the Company holds a net interest which is 50%
or less but 20% or greater are accounted for under the equity method.
Markets in which the Company holds a less than 20% interest are accounted
for under the cost method. The following table sets forth the number of
markets and relevant accounting methods at the end of each of the last five
fiscal years and at March 31, 1994 and 1995.
SEPTEMBER 30, MARCH 31,
-------------------------------- -----------
1990 1991 1992 1993 1994 1994 1995
---- ---- ---- ---- ---- ---- ----
Consolidated........ 4 22 28 36 42 40 44
Equity.............. 63 47 37 38 35 37 31
Cost................ 18 18 18 6 18 6 18
---- ---- ---- ---- ---- ---- ----
Total............. 85 87 83 80 95 83 93
---- ---- ---- ---- ---- ---- ----
---- ---- ---- ---- ---- ---- ----
</TABLE>
9
<PAGE>
<TABLE>
<S> <C>
(2) Primarily represents accrued but unpaid interest on advances to affiliates.
Also includes interest income on cash balances and short-term investments.
(3) "EBITDA" represents, for any relevant period, the sum of operating income
(loss), depreciation or write-downs of property, plant and equipment and
amortization of intangible assets included in operating income (loss).
Certain financial analysts consider EBITDA a meaningful measure of an
entity's ability to meet long-term financial obligations, and growth in
EBITDA a meaningful barometer of future profitability, especially in a
capital-intensive industry such as cellular telecommunications. However,
EBITDA should not be considered in isolation to, or be construed as having
greater significance than, other indicators of an entity's performance. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- General."
(4) The ratio of earnings to fixed charges is determined by dividing the sum of
earnings before extraordinary item and accounting charges, interest
expense, taxes and a portion of rent expense representative of interest by
the sum of interest expense and a portion of rent expense representative of
interest. The ratio of earnings to fixed charges is not meaningful for
periods that result in a deficit. For the years ended September 30, 1990,
1991, 1992, 1993 and 1994 the deficit of earnings to fixed charges was
$7,706,511, $28,701,052, $17,041,731, $22,666,212 and $16,751,152,
respectively, and for the six months ended March 31, 1994 and 1995 the
deficit of earnings to fixed charges was $9,283,763 and $12,274,372,
respectively.
(5) No cash dividends were declared or paid during any of the periods
presented.
</TABLE>
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
consolidated financial statements and other financial information included
elsewhere or incorporated by reference in this Prospectus.
GENERAL
Cellular systems typically experience losses and negative cash flow in their
initial years of operation and, consistent with this pattern, the Company has
incurred losses and negative cash flow since its inception. However, operating
losses have declined recently as the Company's focus has shifted from
construction and initial operation of cellular systems to increasing penetration
and subscriber usage, and the Company expects that EBITDA, which was positive
during the fiscal year ended September 30, 1994 and the six months ended March
31, 1995, will also be positive in future fiscal years (although there can be no
assurance that this will be the case). "EBITDA" represents, for any relevant
period, the sum of operating income (loss), depreciation or write-downs of
property, plant and equipment and amortization of intangible assets included in
operating income (loss). Certain financial analysts consider EBITDA a
meaningful measure of an entity's ability to meet long-term financial
obligations, and growth in EBITDA a meaningful barometer of future
profitability, especially in a capital-intensive industry such as cellular
telecommunications. However, EBITDA should not be considered in isolation to, or
be construed as having greater significance than, other indicators of an
entity's performance. The results discussed below may not be indicative of
future results.
Consolidated results of operations include the revenues and expenses of
those markets in which the Company holds a greater than 50% interest. The
results of operations of 44 markets, 42 of which were consolidated for the
entire period, are included in the consolidated results for the quarter ended
March 31, 1995. The results of operations of 40 markets, 39 of which were
consolidated the entire quarter, are included in the consolidated results for
the quarter ended March 31, 1994. The increase in the number of markets included
in consolidated results is due to acquisitions consummated subsequent to March
31, 1994. Consolidated results of operations also include the operations of CIFC
as well as the operations of Cellular Inc. Network Corporation ("CINC"), a
wholly-owned subsidiary through which the Company holds interests in certain
cellular licenses.
Equity in net loss of affiliates includes the Company's share of net loss in
the markets in which the Company's interest is 50% or less but 20% or greater.
For the quarter ended March 31, 1995, 31 markets were accounted for under the
equity method, compared to 37 such markets for the quarter ended March 31, 1994.
Markets in which the Company's interest is less than 20% are accounted for under
the cost method. Eighteen markets were accounted for under the cost method for
the quarter ended March 31, 1995, compared to six such markets for the quarter
ended March 31, 1994.
Interest income reflects interest income derived from the financing
activities of CIFC and the Company with nonconsolidated affiliates, as well as
interest income derived from the Company's short-term investments. CIFC has
entered into loan agreements with the Company's affiliates pursuant to which
CIFC makes loans to such entities for the purpose of financing or refinancing
the affiliates' costs of construction and operation of cellular telephone
systems. Such loans are financed with funds borrowed by CIFC from CoBank and
from the Company and bear interest at a rate 1% above CoBank's average rate.
From time to time, the Company advances funds on an interim basis to affiliates.
These advances typically are refinanced through CIFC. To the extent that the
cellular markets in which the Company holds an interest mature and generate
positive cash flow, the cash will be used to repay borrowings by the affiliates
from CIFC and thereafter to make cash distributions to equity holders, including
the Company.
11
<PAGE>
RESULTS OF OPERATIONS
SIX MONTHS ENDED MARCH 31, 1995 AND 1994. Cellular service revenues,
including roaming revenues, increased 53% from $21,852,000 for the six months
ended March 31, 1994 to $33,511,000 for the six months ended March 31, 1995. The
growth was primarily due to the increase in the number of subscribers in
consolidated markets. In addition to increases in market penetration, growth
resulted from an increase in the number of markets consolidated for the entire
six months from 36 during the six months ended March 31, 1994 to 42 during the
six months ended March 31, 1995. Growth in subscribers accounted for 90% of the
increase, and the number of consolidated markets accounted for 10% of the
increase. Roaming revenues increased 38% or $2,483,000 from $6,495,000 to
$8,978,000 due to increased coverage in cellular markets. Roaming revenues are
expected to increase in the future as a result of industry-wide growth in
subscribers and the Company's expansion of its coverage, particularly along
highway corridors; however, roaming rates may decline, consistent with expected
industry trends.
Average monthly revenue per subscriber, including roaming revenues,
decreased from $69 for the six months ended March 31, 1994 to $65 for the six
months ended March 31, 1995. The decline primarily reflects the fact that
initial subscribers in a market tend to use more cellular service than those who
subscribe after a system has been in operation for a period of time.
Cost of service increased as a percentage of service revenues from 21% for
the six months ended March 31, 1994 to 23% for the six months ended March 31,
1995, primarily due to an increase in costs related to interconnect service.
Cellular equipment revenues increased 5% from $4,603,000 for the six months
ended March 31, 1994 to $4,829,000 for the six months ended March 31, 1995. The
growth was due to the increase in the number of subscribers added, which
accounted for $176,000, or 78%, of the increase. In addition, growth resulted
from an increase in the number of consolidated markets operated during the six
months which represented $50,000, or 22%, of the increase. Cost of equipment
sales increased 13% from $4,501,000 for the six months ended March 31, 1994 to
$5,072,000 for the six months ended March 31, 1995.
General and administrative costs of cellular operations increased 39% from
$7,486,000 for the six months ended March 31, 1994 to $10,381,000 for the six
months ended March 31, 1995, due to the growth in the customer base and the
number of consolidated markets. The majority of these costs were incremental
customer billing expense and customer service support staff. In addition, the
Company more conservatively estimated uncollectible accounts receivable for the
six months ended March 31, 1995, representing approximately $900,000 of the
increase compared to the six months ended March 31, 1994. General and
administrative costs as a percentage of service revenues decreased from 34% for
the six months ended March 31, 1994 to 31% for the six months ended March 31,
1995. The decrease is primarily due to revenues increasing at a faster rate than
incremental general and administrative costs.
Marketing and selling costs increased 42% from $7,104,000 for the six months
ended March 31, 1994 to $10,088,000 for the six months ended March 31, 1995,
primarily as a result of the number of subscribers added in consolidated
markets. The majority of these costs were incremental sales commissions,
advertising costs and incremental sales staff. Marketing costs per net new
subscriber decreased 10% from $584 for the six months ended March 31, 1994 to
$526 for the six months ended March 31, 1995, as a result of increased net
subscriber additions which outpaced increases in costs incurred. The Company is
continuing to expand its own retail presence to capitalize on retail trade while
driving down commission costs. Results of this expansion are expected by the
fourth fiscal quarter.
Depreciation and amortization relating to cellular operations increased from
$4,786,000 for the six months ended March 31, 1994 to $6,901,000 for the six
months ended March 31, 1995, primarily related to increased fixed asset
balances.
Corporate costs and expenses for the six months ended March 31, 1994 were
$1,565,000, which represented gross expenses of $4,451,000 less amounts
allocated to nonconsolidated affiliates of $2,886,000. Corporate costs and
expenses for the six months ended March 31, 1995 were $1,617,000, which
represented gross expenses of $4,850,000 less amounts allocated to
nonconsolidated affiliates of $3,233,000. The increase in expenses and amounts
allocated to nonconsolidated affiliates reflects an increase in corporate costs
attributed to financing operations and incurred costs relative to equipment
distribution and other corporate functions.
Equity in net loss of affiliates decreased 24% from $3,586,000 for the six
months ended March 31, 1994 to $2,736,000 for the six months ended March 31,
1995. The decrease is principally attributable to decreasing losses in markets
being accounted for under the equity method at March 31, 1995 compared to March
31,
12
<PAGE>
1994 due to increasing penetration and subscriber usage. This has caused a
consistent trend of improved operating results. In addition, equity in net loss
of affiliates has decreased as fewer markets are being accounted for under the
equity method.
Interest expense increased 15% from $11,024,000 for the six months ended
March 31, 1994 to $12,651,000 for the six months ended March 31, 1995 due to
higher accreted discount note and secured bank financing balances. Cash paid for
interest decreased 1% from $5,702,000 for the six months ended March 31, 1994 to
$5,649,000 for the six months ended March 31, 1995.
The CoBank patronage distribution decreased 34% from $1,164,000 in March
1994 to $764,000 in March 1995. The patronage distribution is calculated using
the Company's prior calendar year interest expense compared to total interest
paid to CoBank by all patrons. The decrease is due to a reduction of
approximately $50,000,000 in the Company's debt to CoBank during the fourth
fiscal quarter of 1993 which resulted in lower average debt balances for
patronage dividend purposes during 1994.
Interest income decreased 13% from $6,814,000 for the six months ended March
31, 1994 to $5,956,000 for the six months ended March 31, 1995. The decrease is
primarily related to the increase in the number of markets consolidated for the
six months ended March 31, 1995, compared to the six months ended March 31,
1994. Consolidation caused the interest earned on advances to the related
affiliates to be eliminated as an intercompany transaction. Additionally,
interest income for the six months ended March 31, 1995 declined due to lower
short-term investment balances.
FISCAL YEAR 1994 COMPARED WITH FISCAL YEAR 1993. As of September 30, 1994,
the Company held interests in 84 RSA markets and 10 MSA markets compared to 70
RSA markets and 10 MSA markets as of September 30, 1993. All markets in which
the Company held an interest were operational as of such dates.
Cellular service revenues, including roaming revenues, increased 82% from
$28,861,000 in fiscal year 1993 to $52,586,000 in fiscal year 1994. The growth
was due to the increase in the number of subscribers in consolidated markets. In
addition to increases in market penetration, growth resulted from an increase in
the number of markets consolidated during the fiscal year from 36 at September
30, 1993 to 42 at September 30, 1994. Growth in subscribers accounted for 75% of
the increase and the number of consolidated markets accounted for 25% of the
increase.
Average monthly revenue per subscriber decreased 1% from $75 in fiscal year
1993 to $74 in fiscal year 1994. The decline reflects the fact that initial
subscribers in a market tend to use more cellular service than those who
subscribe after a system has been in operation for a period of time.
Cost of service decreased as a percentage of service revenues from 21% in
fiscal year 1993 to 18% in fiscal year 1994. Cost of service as a percentage of
revenues is expected to continue to decline slightly from this level as revenues
derived from the growing subscriber base continue to outpace the fixed
components of cost of service.
Cellular equipment revenues increased 82% from $4,829,000 in fiscal year
1993 to $8,774,000 in fiscal year 1994. The growth was due to the increase in
the number of subscribers added as compared to the number of subscribers added
during the prior fiscal year, which accounted for $2,923,000, or 74%, of the
increase. In addition, growth resulted from an increase in the number of
consolidated markets operated during the year which represented $1,022,000, or
26%, of the increase. Cost of equipment sales increased 69% from $5,218,000 in
fiscal year 1993 to $8,835,000 in fiscal year 1994. To enhance subscriber
growth, the Company has sold cellular equipment sometimes below cost. The
equipment sales margin improved in fiscal year 1994, as compared to fiscal year
1993, as the Company focused on minimizing equipment discounting.
General and administrative costs of cellular operations increased 60% from
$10,505,000 in fiscal year 1993 to $16,768,000 in fiscal year 1994, due to the
growth in the customer base and the number of consolidated markets. The majority
of these costs were incremental customer billing expense, roaming validation
services and customer service support staff. General and administrative costs as
a percentage of service revenues decreased from 36% in fiscal year 1993 to 32%
in fiscal year 1994. The decrease is primarily due to revenues increasing at a
faster rate than incremental general and administrative costs.
13
<PAGE>
Marketing and selling costs increased 86% from $8,465,000 in fiscal year
1993 to $15,786,000 in fiscal year 1994, primarily as a result of the number of
subscribers added in consolidated markets. The majority of these costs were
incremental sales commissions, advertising costs and incremental sales staff.
Marketing costs per net new subscriber decreased 6% from $606 in fiscal year
1993 to $568 in fiscal year 1994, as a result of subscriber additions which
outpaced increases in costs incurred.
Depreciation and amortization relating to cellular operations decreased 40%
from $17,582,000 in fiscal year 1993 to $10,541,000 in fiscal year 1994,
primarily as a result of the change, effective October 1, 1993, in the Company's
estimate of the useful life of acquired FCC license costs from the remaining
initial ten-year term to 40 years from the date of acquisition. The change is
predicated upon the FCC's establishment of procedures to grant a renewal
expectancy to incumbent cellular licensees virtually assuring that the initial
ten-year term of an FCC license to provide cellular telephone service will be
renewed if a licensee meets broadly defined public service benchmarks. Other
publicly-held cellular telephone companies also treat a cellular license as
economically perpetual. Commencing October 1, 1993, the net book value of
acquired license costs at September 30, 1993 will be amortized over 40 years
less the number of months from the date of the acquisition which gave rise to
such costs. Management believes this treatment complies with accounting
literature given current facts and circumstances and will reevaluate this
estimate as changes in facts and circumstances occur.
During the year ended September 30, 1994, the Company recognized a
$3,116,000 write-down of equipment associated with a program of upgrades to
switching capacity and features, the relocation of certain cell sites to
increase coverage and other nonrecurring events. The program of upgrades to
switching capacity and features will continue into the next fiscal year and will
cause a further write-down of approximately $234,000 when new equipment is
placed into service.
Corporate costs and expenses in fiscal year 1993 were $1,249,000, which
represented gross expenses of $9,491,000 less amounts allocated to
nonconsolidated affiliates of $8,242,000. Corporate costs and expenses in fiscal
year 1994 were $2,516,000, which represented gross expenses of $9,054,000 less
amounts allocated to nonconsolidated affiliates of $6,538,000. The decrease in
expenses and amounts allocated to nonconsolidated affiliates reflects the
decrease in the number of nonconsolidated managed markets as consolidation
caused corporate costs and expenses to be reclassified as cellular costs and
expenses.
Equity in net loss of affiliates decreased 20% from $6,339,000 in fiscal
year 1993 to $5,092,000 in fiscal year 1994. The decrease is principally
attributable to decreasing losses in markets being accounted for under the
equity method at September 30, 1994, compared to September 30, 1993, due to the
shift in focus in these markets from construction and initial operation to
increasing penetration and subscriber usage. This shift has caused a consistent
trend of improved operating results.
Interest expense increased 30% from $16,428,000 in fiscal year 1993 to
$21,339,000 in fiscal year 1994. The increase is a result of the issuance in
August 1993 of the Company's 11 3/4% Senior Subordinated Discount Notes.
However, cash paid for interest decreased 37% from $15,455,000 in fiscal year
1993 to $9,731,000 in fiscal year 1994 as interest accretes during the first
five years of the term of the discount notes.
Interest income increased 13% from $10,702,000 in fiscal year 1993 to
$12,081,000 in fiscal year 1994. The modest increase in interest income was the
result of higher note balances owed to the Company by nonconsolidated
affiliates, offset by lower cash and short-term investment balances,
declining interest rates and the consolidation of six additional markets during
fiscal year 1994. Consolidation caused the interest earned on advances to the
related affiliates to be eliminated as an intercompany transaction.
During fiscal year 1994, the Company recognized a permanent write-down of
certain short-term government bond investments of approximately $744,000 due to
market conditions.
During fiscal year 1994, the Company recognized gains on sales of affiliates
of $2,905,000, primarily related to the sale of its limited partnership interest
in MSA 239 (Joplin, MO) during the second quarter of fiscal 1994 ($1,921,000)
and a multimarket transaction with Contel Cellular, Inc. during the third
quarter of fiscal 1994 ($841,000). An additional $907,000 gain was recognized
due to the write-off of contingent liabilities related to stock price
guarantees. See "Acquisitions and Sales." During fiscal year 1993, the
14
<PAGE>
Company recognized gains on sales of affiliates of $7,821,000 primarily related
to the multimarket exchanges with U S WEST NewVector Group, Inc. ("U S WEST
NewVector") during the second quarter of fiscal 1993 ($3,812,000) and Pacific
Telecom Cellular, Inc. ("PTI") during the fourth quarter of fiscal 1993
($4,889,000).
At September 30, 1994, the Company had net operating loss carryforwards for
income tax purposes of $54,725,000, compared to $46,578,000 at September 30,
1993.
FISCAL YEAR 1993 COMPARED WITH FISCAL YEAR 1992. As of September 30, 1993,
the Company held interests in 70 RSA markets and 10 MSA markets compared to 72
RSA markets and 11 MSA markets as of September 30, 1992. All markets in which
the Company held an interest were operational as of such dates.
Cellular service revenues, including roaming revenues, increased 135% from
$12,302,000 in fiscal year 1992 to $28,861,000 in fiscal year 1993. The growth
was due to the increase in the number of subscribers in consolidated markets. In
addition to increases in market penetration, growth resulted from an increase in
the number of markets consolidated during the fiscal year from 28 at September
30, 1992 to 36 at September 30, 1993. Growth in subscribers accounted for 69% of
the increase and the number of consolidated markets accounted for 31% of the
increase.
Average monthly revenue per subscriber decreased 6% from $80 in fiscal year
1992 to $75 in fiscal year 1993. This decline was consistent with industry
trends and reflects the fact that initial subscribers in a market tend to use
more cellular service than those who subscribe after a system has been in
operation for a period of time.
Cost of service decreased as a percentage of service revenues from 35% in
fiscal year 1992 to 21% in fiscal year 1993.
Cellular equipment revenues increased 85% from $2,605,000 in fiscal year
1992 to $4,829,000 in fiscal year 1993. The growth was due to the increase in
the number of subscribers added as compared to the number of subscribers added
during the prior fiscal year, which accounted for $1,381,000, or 62%, of the
increase. In addition, growth resulted from an increase in the number of
consolidated markets operated during the year which represented $843,000, or
38%, of the increase. Cost of equipment sales increased 57% from $3,320,000 in
fiscal year 1992 to $5,218,000 in fiscal year 1993. The equipment sales margin
improved in fiscal year 1993, as compared to fiscal year 1992, as the Company
focused on minimizing equipment discounting.
General and administrative costs of cellular operations increased 100% from
$5,260,000 in fiscal year 1992 to $10,505,000 in fiscal year 1993, due to the
growth in the customer base and the number of consolidated markets. The majority
of these costs were incremental customer billing expense, roaming validation
services and customer service support staff. General and administrative costs as
a percentage of service revenues decreased from 43% in fiscal year 1992 to 36%
in fiscal year 1993.
Marketing and selling costs increased 62% from $5,236,000 in fiscal year
1992 to $8,465,000 in fiscal year 1993, primarily as a result of the number of
subscribers added in consolidated markets. The majority of these costs were
incremental sales commissions, advertising costs and incremental sales staff.
Marketing costs per net new subscriber decreased 6% from $647 in fiscal year
1992 to $606 in fiscal year 1993.
Depreciation and amortization relating to cellular operations increased 51%
from $11,611,000 in fiscal year 1992 to $17,582,000 in fiscal year 1993,
primarily as a result of amortization of intangible assets related to markets
acquired subsequent to September 30, 1992. The Company amortized intangible
assets related to acquired license rights over the remainder of the initial
ten-year license term which in the case of the majority of additions to license
rights from 1993 acquisitions was less than four years.
Corporate costs and expenses in fiscal year 1992 were $3,501,000, which
represented gross expenses of $12,973,000 less amounts allocated to
nonconsolidated affiliates of $9,472,000. Corporate costs and expenses in fiscal
year 1993 were $1,249,000, which represented gross expenses of $9,491,000 less
amounts allocated to nonconsolidated affiliates of $8,242,000. The decrease in
expenses and amounts allocated to nonconsolidated affiliates reflects the
decrease in the number of nonconsolidated managed markets as consolidation
caused corporate costs and expenses to be reclassified as cellular costs and
expenses.
15
<PAGE>
Equity in net loss of affiliates decreased 28% from $8,852,000 in fiscal
year 1992 to $6,339,000 in fiscal year 1993. The decrease is principally
attributable to decreasing losses in markets being accounted for under the
equity method at September 30, 1993, compared to September 30, 1992, due to the
shift in focus in these markets from construction and initial operation to
increasing penetration and subscriber usage which has caused a consistent trend
of improved operating results.
Interest expense increased 11% from $14,801,000 in fiscal year 1992 to
$16,428,000 in fiscal year 1993. The increase was commensurate with increases in
long-term debt.
Interest income increased 1% from $10,616,000 in fiscal year 1992 to
$10,702,000 in fiscal year 1993. The modest increase in interest income was the
result of higher note balances owed to the Company by nonconsolidated
affiliates, offset by lower cash and short-term investment balances, declining
interest rates and the consolidation of eight additional markets during fiscal
year 1993. Consolidation caused the interest earned on advances to the related
affiliates to be eliminated as an intercompany transaction.
During fiscal year 1993, the Company recognized gains on sales of affiliates
of $7,821,000, primarily related to the multimarket exchanges with U S WEST
NewVector during the second quarter of fiscal 1993 ($3,812,000) and with PTI
during the fourth quarter of fiscal 1993 ($4,889,000). During fiscal year 1992,
the Company recognized gains on sales of affiliates of $14,339,000 of which
$8,711,000 was related to the disposition of the Company's interest in the
Colorado Springs, Colorado wireline cellular system during the first quarter of
fiscal 1992, $4,157,000 was related primarily to an exchange of interests with
US West NewVector during the second quarter of fiscal 1992 and $2,310,000 was
related to the disposition of the Company's interest in one limited partnership
during the third quarter of fiscal year 1992.
At September 30, 1993, the Company had net operating loss carryforwards for
income tax purposes of $46,578,000, compared to $42,202,000 at September 30,
1992.
ACQUISITIONS AND SALES
In December 1993, the Company acquired 100% of the stock of a corporation
which owns and operates the Rapid City, South Dakota MSA market and owns general
partnership interests in two partitioned RSA markets (South Dakota 5 (B2) and
South Dakota 6 (B2)) for approximately $10,420,000 in cash plus property valued
at approximately $400,000.
In December 1993, the Company sold its interests in affiliates which held a
44.44% limited partnership interest in the wireline licensee for RSA 608 (Oregon
3) for approximately $2,076,000 in cash. The sale resulted in a gain of
approximately $630,000.
In December 1993, the Company acquired additional interests in two
affiliated corporations for approximately $139,000.
In February 1994, the Company acquired an additional 51% of the stock of an
affiliate which held a 28.6% limited partnership interest in MSA 239 (Joplin,
MO) for 69,051 shares of the Company's common stock, then sold the limited
partnership interest for $4,494,000 in cash. The sale resulted in a gain of
approximately $1,921,000.
In March 1994, the Company acquired an additional interest in an affiliated
corporation for 2,732 shares of the Company's common stock.
In April 1994, the Company acquired three affiliated corporations which hold
limited partnership interests in Utah RSA markets for 80,145 shares of the
Company's common stock.
In May 1994, the Company sold its interest in an affiliate which held a
8.125% limited partnership interest in three nonmanaged RSA markets for
approximately $2,468,000 in cash. The sale resulted in a gain of approximately
$841,000. Contemporaneously, the Company acquired additional limited partnership
interests in four managed RSA markets for approximately $373,000.
In July 1994, the Company acquired an additional interest in an affiliated
corporation for approximately $199,000 in cash.
16
<PAGE>
In August 1994, the Company acquired an aggregate of 3.07% of the stock of a
corporation which operates cellular systems throughout Kansas from two unrelated
corporations for approximately $3,000,000 in cash.
In November 1994, the Company purchased an additional 5.97% interest in
Nebwest Cellular, Inc. for $1,600,000 in cash. Pursuant to the terms of a
shareholder's agreement, the Company subsequently sold a portion of that
interest to the other shareholders on a pro rata basis for approximately
$450,000 in cash. In February 1995, the Company purchased an additional 3.37%
interest in this corporation for 34,688 shares of the Company's Common Stock. In
March 1995, the Company purchased an additional 2.57% interest in this
corporation for 28,638 shares of the Company's Common Stock.
In January 1995, the Company sold a wholly-owned subsidiary for
approximately $86,000 which resulted in a loss of approximately $297,000.
In January 1995, the Company transferred its 25% interest in one nonmanaged
RSA market to a partner in that market pursuant to a judgment. The judgment is
currently being appealed. The Company received approximately $1,699,000 upon
transfer of the interest which resulted in a gain of approximately $497,000.
In February 1995, the Company purchased additional interests ranging from 2%
to 41% in eleven managed and one nonmanaged markets for approximately $1,259,000
in cash and the issuance of 49,738 shares of the Company's Common Stock.
The Company has entered into an agreement to sell its 61.5% interest in
Nebwest Cellular, Inc. which owns 25.52% of Nebraska Cellular Telephone
Corporation, the licensee for the ten wireline RSA markets in the state of
Nebraska, for approximately $24,300,000 which will result in a gain after tax of
approximately $19,600,000. This transaction is expected to close during July
1995. The interest to be purchased from the Company, as well as interests in the
Nebraska RSA markets to be purchased from other entities, will be acquired at a
cost of over $200 per pop after taking into account debt assumed or refinanced.
In May and June 1995, the Company acquired interests ranging from 17% to
51% in two managed and two nonmanaged markets for an aggregate of 138,168
shares of the Company's Common Stock.
The Company has initiated discussions regarding possible acquisition of
markets or interests in Iowa, Wyoming, North Dakota and Kansas. Such
acquisitions will be pursued to the extent they enhance or extend the Company's
network and increase shareholder value. Accordingly, there can be no assurance
that any such acquisitions will be consummated.
CHANGES IN FINANCIAL CONDITION
SIX MONTHS ENDED MARCH 31, 1995 Net cash provided by operating activities
was $747,000 during the six months ended March 31, 1995. This was primarily due
to an increase to accrued interest of $364,000 and decreases of $129,000 to
accounts receivable and $905,000 to inventory and other current assets.
Additionally, a loss of $222,000 was recognized on the sale of
available-for-sale securities during the first quarter of fiscal year 1995.
Working capital increases will likely require cash in future periods as growth
in the subscriber base continues.
Net cash used by investing activities was $1,672,000 for the six months
ended March 31, 1995. This was due primarily to the sale of available-for-sale
securities which provided $21,427,000, offset by $12,529,000 required to fund
the purchase of property and equipment, $7,515,000 to increase the investment in
cellular system equipment, and $2,427,000 used for additions to investments in
and advances to affiliates.
Net cash provided by financing activities was $13,240,000 for the six months
ended March 31, 1995. These proceeds include $13,409,000 of cash from
incremental secured bank financing and $770,000 of cash from the issuance of
Common Stock upon exercise of options.
17
<PAGE>
FISCAL YEAR 1994. Net cash used by operating activities was $7,170,000
during the year ended September 30, 1994. The rapid increase in subscribers and
revenues caused an increase of $2,912,000 in accounts receivable and an increase
of $4,363,000 in inventory and other current assets. Working capital increases
will likely require cash in future periods as growth in the subscriber base
continues.
Net cash used by investing activities was $49,864,000 for the year ended
September 30, 1994. This was due primarily to $31,455,000 of cash required to
fund the purchase of property and equipment related to the Company's expansion
efforts, including $6,789,000 related to nonconsolidated affiliates reflected as
additions to investments in and advances to affiliates. In addition, the Company
acquired the Rapid City MSA and interests in other managed markets using
$13,992,000, and sold nonmanaged interests providing cash of $9,037,000.
Net cash provided by financing activities was $13,455,000 for the year ended
September 30, 1994. These proceeds include $11,149,000 of incremental secured
bank financing and $1,479,000 of cash from the issuance of Common Stock upon
exercise of options.
FISCAL YEAR 1993. Net cash used by operating activities was $18,579,000
during the year ended September 30, 1993. The rapid increase in subscribers and
revenues caused an increase of $3,721,000 in accounts receivable and an increase
of $789,000 in inventory and other current assets. Working capital increases
will likely require cash in future periods as growth in the subscriber base
continues.
Net cash used by investing activities was $29,831,000 for the year ended
September 30, 1993. This was due primarily to $7,547,000 of cash required to
fund the purchase of property and equipment related to the Company's expansion
efforts, including $9,274,000 related to nonconsolidated affiliates reflected as
additions to investments in and advances to affiliates. In addition, the Company
acquired interests in other managed markets using $12,082,000, and sold
nonmanaged interests providing cash of $7,334,000.
Net cash provided by financing activities was $69,535,000 for the year ended
September 30, 1993. These proceeds include $100,000,000 from the issuance of
senior discount notes, and $4,950,000 of cash from the issuance of convertible
subordinated notes. In addition, the Company paid down a net of $35,629,000 of
secured bank financing.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL. CommNet Cellular Inc. (referred to herein as the "parent company")
is effectively a holding company and, accordingly, must rely on dividends, loan
repayments and other intercompany cash flows from its affiliates and
subsidiaries to generate the funds necessary to satisfy the parent company's
capital requirements. On a consolidated basis, the Company's principal source of
liquidity is the Credit Agreements, pursuant to which CoBank agreed to lend up
to $130,000,000 to CIFC generally to be reloaned by CIFC to the Company's
affiliates for the construction, operation and expansion of cellular telephone
systems. Of the $130,000,000, up to $57,100,000 was available to be borrowed by
CIFC to be loaned to the Company for general corporate purposes, including
capital expenditures, debt service and acquisitions. The Credit Agreements
restrict the ability of the Company's affiliates and subsidiaries, a substantial
number of which are consolidated for financial statement purposes, to make
distributions to the parent company until such affiliates and subsidiaries have
repaid all outstanding debt to CIFC. As a result, a substantial portion of the
Company's consolidated cash flows and cash balances is not available to satisfy
the parent company's capital and debt service requirements.
The Company's budgeted capital requirements consist primarily of (i) parent
company capital expenditures, working capital, debt service and certain
potential acquisitions and (ii) the capital expenditures, working capital, and
other operating and debt service requirements of the affiliates. In addition to
budgeted capital requirements, the Company is constantly evaluating the
acquisition of additional cellular properties, and, to the extent the Company
consummates acquisitions not presently contemplated by the budget, additional
capital will be required.
As of March 31, 1995, the Company had unused commitments under the Credit
Agreements of $65,940,000, of which approximately $43,000,000 was available to
be loaned to the parent company for general corporate
18
<PAGE>
purposes. In addition to the liquidity provided by the Credit Agreements, at
March 31, 1995 the Company, on a consolidated basis, had available $14,408,000
of cash and cash equivalents, of which $14,341,000 is available to fund parent
company capital and debt service requirements. In addition, the Company has
entered into an agreement to sell its Nebraska RSA interests for approximately
$24,300,000 in cash. See "-- Acquisitions and Sales." The Company expects that
substantially all of the net proceeds from such sale will be available to fund
parent company capital expenditures and acquisitions, if any.
On a consolidated basis, the Company's capital expenditures for fiscal year
1994 and the six months ended March 31, 1995 were $40,933,000 and $20,663,000,
respectively. The Company plans to make parent company capital expenditures and
fund working capital and acquisition requirements for the balance of fiscal year
1995 and for fiscal year 1996 of $28,686,000 and $29,182,000, respectively,
primarily for switch capacity and computer system upgrades. Capital
expenditures, working capital, and other operating requirements of the Company's
affiliates are expected to be $30,760,000 and $21,221,000 for the balance of
fiscal 1995 and fiscal 1996, respectively, for working capital requirements,
channel expansion and additional cell sites. The Company's affiliates will
require an additional $15,639,000 during calendar year 1996 for principal
amortization of the Credit Agreements if the extension of the termination of the
Credit Agreements (as described in the following paragraph) is not obtained.
The Company believes operating cash flow, existing cash balances, borrowing
availability under the Credit Agreements and proceeds of the sale of the
Nebraska RSA interests will be sufficient to meet the anticipated capital
requirements of the parent company and the affiliates.
The Company's near-term debt service requirements will consist of interest
payments on the indebtedness incurred under the Credit Agreements, interest
payments on the Notes and interest payments on the New Notes. Interest on the
Company's 11 3/4% Senior Subordinated Discount Notes is payable in cash
commencing March 1, 1999. Following the New Notes Offering and the application
of the net proceeds therefrom (assuming all of the 6 3/4% Convertible
Subordinated Debentures are redeemed), the Company anticipates its cash interest
expense for the balance of fiscal year 1995 and for fiscal year 1996 will be
$9,000,000 and $24,000,000, respectively. Revolving loan indebtedness
outstanding under the Credit Agreements will be converted to term loan
indebtedness at December 31, 1995 and will be amortized over the next five
years. The Company is seeking to extend the termination date of the Credit
Agreements to December 31, 1996. See "The Credit Agreements" below. If the
extension is not obtained, the Company expects that principal amortization of
$15,639,000 in respect of the Credit Agreements will be required during the
course of the calendar year ending December 31, 1996. The Company believes
operating cash flow, existing cash balances, borrowing availability under the
Credit Agreements and the proceeds of the sale of the Nebraska RSA interests
will be sufficient to meet the anticipated debt service requirements of the
Company at both the parent company level and on a consolidated basis.
Although the Company believes that the foregoing sources of liquidity will
be sufficient to meet budgeted capital expenditures and debt service
requirements of the parent company and the affiliates, there can be no assurance
that this will be the case. In particular, there can be no assurance that the
Company will be able to consummate the sale of the Nebraska RSA interests or
extend the termination date of the Credit Agreements. In such event the Company
believes it will be able to satisfy its capital expenditure and debt service
requirements with unrestricted operating cash flow; however, the Company may be
required to reduce discretionary capital spending. To the extent the Company's
cash flow is not sufficient to satisfy such requirements, the Company will be
required to raise funds through additional financings or asset sales.
The Company continually evaluates the acquisition of cellular properties.
Acquisitions are likely to require capital in addition to the budgeted capital
requirements described above, and such requirements may in turn require the
issuance of additional debt or equity securities. The Company's ability to
finance the acquisition of additional cellular properties with debt financing
may be constrained by certain restrictions contained in its existing debt
instruments. In such event, the Company would be required to seek amendments to
such instruments. There can be no assurance that such amendments could be
obtained on terms acceptable to the Company.
THE CREDIT AGREEMENTS. Pursuant to the Credit Agreements, CoBank has agreed
to loan up to $130,000,000 to CIFC to be reloaned by CIFC to affiliates of the
Company for the construction, operation and expansion of cellular telephone
systems. In addition, as of March 31, 1995, approximately $43,000,000 of the
$130,000,000 is available under the Credit Agreements to be borrowed by CIFC and
loaned to the
19
<PAGE>
Company for general corporate purposes. As of March 31, 1995, the
outstanding balance under the Credit Agreements was approximately $64,295,000.
The Credit Agreements provide, at the Company's option, for interest at 1.00%
over prime (10.00% at March 31, 1995) or 2.25% over LIBOR (8.84% at March 31,
1995). The loans are secured by a first lien upon all of the assets of CIFC and
each of the affiliates to which funds are advanced by CIFC. In addition, the
Company has guaranteed the obligations of CIFC to CoBank and has granted CoBank
a first lien on all of the assets of the Company as security for such guaranty.
In accordance with the Company's desire to minimize interest rate
fluctuations and to improve the predictability of costs incurred throughout its
growth stage, CIFC has elected to fix interest rates on approximately
$63,140,000 of its long-term debt payable to CoBank at rates ranging from 8.46%
to 10.90%. Additionally, CIFC has entered into a prime-based interest rate swap
with CoBank as a means of controlling interest rates on $2,500,000 of its
variable rate loans. This swap agreement was entered into on July 1, 1993 for a
three-year period ending July 1, 1996. The swap agreement requires CIFC to pay a
fixed rate of 7.01% over the term of the swap, and CoBank to pay a floating rate
of prime (9.00% at March 31, 1995). The weighted average interest rate of
borrowings under the Credit Agreements, after giving effect to the swap, was
9.94% at May 31, 1995.
The Credit Agreements prohibit the payment of cash dividends, limit the use
of borrowings, prohibit any other senior borrowings, restrict expenditures for
certain investments, require the maintenance of certain minimum levels of net
worth, working capital, cash and operating cash flow and require the maintenance
of certain liquidity, capitalization, debt, debt service and operating cash flow
ratios. The requirements of the Credit Agreements were established in relation
to the anticipated capital and financing needs of the Company's affiliates and
their anticipated results of operations. The Company is currently in compliance
with all covenants and anticipates it will continue to meet the requirements of
the Credit Agreements. CoBank has sold participations in the Credit Agreements
to two other financial institutions whose approval may be required for waivers
or other amendments to the Credit Agreements requested by CIFC or the Company.
CIFC and CoBank are negotiating to increase the facility under the Credit
Agreements from the current $130,000,000 to $165,000,000. Of the increase of
$35,000,000, $10,000,000 will be available for loans to affiliates of the
Company to cover capital, operating and debt service requirements and
$25,000,000 will be available to fund the acquisitions of additional cellular
systems, subject to certain conditions. As a result of this increase request,
CoBank is currently soliciting potential participations in the facility from
commercial banks. The facility will also be amended, among other things, to
extend the termination date of the loans from December 31, 1995 to December 31,
1996, to reduce the principal amortization period from five to four years and to
incorporate new financial covenants. The Company believes that it will be
successful in obtaining the foregoing amendments to the Credit Agreements,
although there can be no assurance that it will be able to do so. The Company
also believes that if necessary it could refinance and replace the Credit
Agreements with a secured bank facility provided by lenders other than CoBank.
However, there can be no assurance that the Company would be able to secure any
such facility.
20
<PAGE>
BUSINESS
GENERAL
CommNet Cellular Inc. was organized under the laws of Colorado in 1983. CIFC
subsequently was organized to provide financing to affiliates of the Company,
and CINC was organized to acquire interests in cellular licenses. CIFC and CINC
are wholly-owned subsidiaries of CommNet Cellular Inc.
The Company operates, manages and finances cellular telephone systems,
primarily in rural markets in the mountain and plains regions of the United
States. The Company's cellular interests currently represent approximately
3,356,000 net Company pops in 93 markets located in 15 states. These markets
consist of 83 RSA markets having a total of 6,152,000 pops and 10 MSA markets
having a total of 1,274,000 pops, of which the Company's interests represent
2,734,000 and 622,000 net Company pops, respectively. Systems in which the
Company holds an interest constitute the largest geographic collection of
contiguous cellular markets in the United States.
The Company was formed to acquire cellular interests through participation
in the licensing process conducted by the FCC. In order to participate in that
process, the Company formed affiliates which originally were owned at least 51%
by one or more independent telephone companies and no more than 49% by the
Company. See "-- Federal Regulation." In exchange for the Company's 49%
interest, the Company agreed to provide financing to affiliates for their
ongoing capital needs, as well as certain management services. The Company
subsequently has purchased additional interests in many of such affiliates, as
well as in additional cellular properties. The Company currently manages 55 of
the 93 markets in which it holds an interest and owns a greater than 50%
interest in 45 of its 55 managed markets. The Company currently finances
entities holding interests representing approximately 4,459,000 pops, of which
3,356,000 are included in net Company pops and 1,103,000 are attributable to
parties other than the Company.
Since completion of the licensing process, the Company has concentrated on
creating an integrated network of contiguous cellular systems comprised of
markets which are managed by the Company. The network currently consists of 55
markets (48 RSA and 7 MSA markets) spanning eight states and represents
approximately 3,905,000 pops and 2,915,000 net Company pops. As of March 31,
1995, the RSA and MSA managed markets had 87,377 and 36,680 subscribers,
respectively. The Company has been significantly expanding radio signal
coverage, with construction of 50 cell sites already complete in fiscal year
1995 and 57 additional cell sites expected to be completed by the end of the
fiscal year. The Company expects that by September 30, 1995 radio signal
coverage will reach 96% of the population within the managed markets and will
reach 98% during fiscal year 1996. No significant expansion of radio signal
coverage within the 55 managed markets is contemplated thereafter.
The Company's integrated network of contiguous cellular systems benefits
from certain technical, operational and marketing efficiencies which have
enabled the Company to produce operating results that compare favorably with
other cellular operators. For example, for the calendar year 1994, the Company's
average monthly revenue per subscriber in managed markets was approximately $68,
compared to an industry average of $64. During the same period, the Company's
acquisition cost per net added subscriber was $520, compared to $625 for the
industry as a whole. In addition, during this same period the Company achieved a
penetration rate of 3.5%, notwithstanding the fact that a substantial majority
of the markets within the network have been operational for less than five years
and are not as mature as more established markets, particularly large MSA
markets with longer operating histories. Finally, the Company has achieved
annual subscriber growth of over 60% in each of the last two fiscal years and
has recorded positive EBITDA for the last eight fiscal quarters. EBITDA should
not be considered in isolation to, or be construed as having greater
significance than, other indicators of an entity's performance. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- General."
The Company believes that certain demographic characteristics of the rural
marketplace should further facilitate commercial exploitation of the network. As
compared to urban residents, rural residents travel
21
<PAGE>
greater distances by personal vehicle and have access to fewer public telephones
along drive routes. The Company believes that these factors will sustain demand
for mobile telecommunication service in the rural marketplace. These same
factors produce roaming revenues that are higher as a percentage of total
revenues than would likely be the case in more densely populated urban areas.
Roaming revenues result in higher margins because roaming calls are priced at
higher rates than local calls without generating associated sales commission
costs. During the 12 months ended March 31, 1995, roaming revenues constituted
30% of the Company's total managed markets service revenues, compared to 13% of
industry service revenues generally for calendar year 1994.
THE COMPANY'S OPERATIONS
GENERAL. Information regarding the Company's interests in each affiliate,
the interest of each affiliate in a cellular licensee and the market subject to
such license as of June 14, 1995, is summarized in the following table. The
table does not reflect transactions that are pending or under negotiation. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Acquisitions and Sales."
<TABLE>
<CAPTION>
AFFILIATE(S)
MSA OR COMPANY INTEREST INTEREST IN 1993 NET COMPANY
RSA CODE (1) STATE IN AFFILIATE(S) (2) LICENSEE (3) POPULATION (4)(5) POPS (6)
- ------------ -------------------- -------------------- -------------------- ------------------ -----------
<S> <C> <C> <C> <C> <C>
MSAs:
141 Minnesota 49.00% 16.34% LP 229,336 18,362
185 Indiana 100.00% 16.67% LP 169,124 28,193
241*(7)(8) Colorado 73.99% 100.00% GP 124,638 92,220
253*(7)(8) Iowa 74.50% 100.00% GP 117,652 87,651
267*(7)(8) South Dakota 100.00% 51.00% GP 131,561 67,096
268*(7)(8) Montana 54.10% 100.00% GP 119,363 64,575
279 Maine 33.33% 33.33% GP 103,417 11,488
289*(7)(8) South Dakota 100.00% 100.00% GP 111,371 111,371
297*(7)(8) Montana 100.00% 100.00% GP 80,098 80,098
298*(7)(8) North Dakota 100.00% 70.00% GP 86,977 60,884
---------- -----------
Total MSA 1,273,537 621,938
RSAs:
348*(8) Colorado 10.00% 100.00% GP 43,672 4,367
349*(7)(8) Colorado 58.60% 100.00% GP 61,659 36,132
351*(7)(8) Colorado 61.75% 100.00% GP 62,916 38,851
352*(7)(8) Colorado 66.00% 100.00% GP 25,783 17,017
353*(7)(8) Colorado 100.00% 100.00% GP 65,251 65,251
354*(7)(8) Colorado 69.40% 100.00% GP 44,328 30,764
355*(8) Colorado 49.00% 100.00% GP 44,194 21,655
356*(8) Colorado 49.00% 100.00% GP 27,259 13,357
389 Idaho 100.00% 50.00% LP 64,671 32,336
390 Idaho 100.00% 33.33% LP 15,485 5,162
392*(7)(8) Idaho (B1) 100.00% 100.00% LP 132,888 132,888
393*(7)(8) Idaho 91.64% 100.00% GP 280,569 257,113
415 Iowa 49.00% 20.64% LP 155,247 15,701
416 Iowa 49.00% 78.57% LP 108,129 41,629
417*(7)(8) Iowa 100.00% 100.00% GP 152,597 152,597
419* Iowa 49.00% 91.67% GP 54,659 24,552
420*(7)(8) Iowa 100.00% 100.00% GP 63,458 63,458
424 Iowa 49.00% 35.00% LP 66,743 11,446
425* Iowa 49.00% 27.11% LP 108,426 14,403
426*(8) Iowa 52.65% 93.33% GP 84,932 41,734
427*(8) Iowa 53.64% 91.66% GP 102,773 50,530
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
AFFILIATE(S)
MSA OR COMPANY INTEREST INTEREST IN 1993 NET COMPANY
RSA CODE (1) STATE IN AFFILIATE(S) (2) LICENSEE (3) POPULATION (4)(5) POPS (6)
- ------------ -------------------- -------------------- -------------------- ------------------ -----------
<S> <C> <C> <C> <C> <C>
428(8) Kansas 100.00% 3.07% LP 28,103 863
429(8) Kansas 100.00% 3.07% LP 31,121 955
430(8) Kansas 100.00% 3.07% LP 52,640 1,616
431(8) Kansas 100.00% 3.07% LP 129,852 3,986
432(8) Kansas 100.00% 3.07% LP 118,599 3,641
433(8) Kansas 100.00% 3.07% LP 20,138 618
434(8) Kansas 100.00% 3.07% LP 81,515 2,503
435(8) Kansas 100.00% 3.07% LP 126,535 3,885
436(8) Kansas 100.00% 3.07% LP 57,937 1,779
437(8) Kansas 100.00% 3.07% LP 104,942 3,222
438(8) Kansas 100.00% 3.07% LP 81,130 2,491
439(8) Kansas 100.00% 3.07% LP 42,198 1,295
440(8) Kansas 100.00% 3.07% LP 29,155 895
441(8) Kansas 100.00% 3.07% LP 171,226 5,257
442(8) Kansas 100.00% 3.07% LP 154,341 4,738
512 Missouri (B1) 49.00% 30.00% LP 76,061 11,181
523*(7)(8) Montana (B1) 100.00% 100.00% GP 66,841 66,841
523*(7)(8) Montana (B2) 100.00% 98.76% GP 70,350 69,478
524*(7)(8) Montana 61.75% 100.00% GP 37,386 23,086
525*(7)(8) Montana 69.40% 100.00% GP 14,877 10,325
526*(7)(8) Montana 100.00% 100.00% GP 39,843 39,843
527*(7)(8) Montana 100.00% 100.00% GP 174,631 174,631
528*(7)(8) Montana 61.75% 100.00% GP 63,009 38,908
529*(7)(8) Montana 74.50% 100.00% GP 28,742 21,413
530*(7)(8) Montana 61.75% 100.00% GP 83,488 51,554
531*(7)(8) Montana 100.00% 100.00% GP 30,990 30,990
532*(7)(8) Montana 100.00% 100.00% GP 19,431 19,431
533 Nebraska 61.50% 25.52% LP 90,016 14,128
534 Nebraska 61.50% 25.52% LP 31,353 4,921
535 Nebraska 61.50% 25.52% LP 115,108 18,066
536 Nebraska 61.50% 25.52% LP 35,803 5,619
537 Nebraska 61.50% 25.52% LP 142,155 22,311
538 Nebraska 61.50% 25.52% LP 105,599 16,574
539 Nebraska 61.50% 25.52% LP 89,125 13,988
540 Nebraska 61.50% 25.52% LP 58,058 9,112
541 Nebraska 61.50% 25.52% LP 81,697 12,822
542 Nebraska 61.50% 25.52% LP 85,250 13,380
553 New Mexico 49.00% 33.33% LP 245,584 40,108
555 New Mexico 49.00% 25.00% LP 76,635 9,388
557 New Mexico 49.00% 33.33% LP 55,076 8,995
580*(7)(8) North Dakota 52.76% 100.00% GP 102,513 54,086
581*(8) North Dakota 49.00% 100.00% GP 60,131 29,464
582 North Dakota 49.00% 84.59% LP 91,629 37,979
583*(8) North Dakota 49.00% 100.00% GP 65,783 32,234
584*(7)(8) North Dakota 61.75% 100.00% GP 49,671 30,672
634*(7)(8) South Dakota 100.00% 100.00% GP 35,624 35,624
635*(7)(8) South Dakota 56.29% 100.00% GP 22,563 12,701
636*(7)(8) South Dakota 57.50% 100.00% GP 53,724 30,891
638*(7)(8) South Dakota (B1) 100.00% 100.00% GP 16,443 16,443
638*(7)(8) South Dakota (B2) 100.00% 100.00% GP 8,220 8,220
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
AFFILIATE(S)
MSA OR COMPANY INTEREST INTEREST IN 1993 NET COMPANY
RSA CODE (1) STATE IN AFFILIATE(S) (2) LICENSEE (3) POPULATION (4)(5) POPS (6)
- ------------ -------------------- -------------------- -------------------- ------------------ -----------
<S> <C> <C> <C> <C> <C>
639*(7)(8) South Dakota (B1) 61.75% 100.00% GP 33,390 20,618
639*(7)(8) South Dakota (B2) 61.75% 100.00% GP 5,568 3,438
640*(7)(8) South Dakota 64.49% 100.00% GP 65,549 42,273
641*(7)(8) South Dakota 61.13% 100.00% GP 71,921 43,965
642*(8) South Dakota 49.00% 100.00% GP 91,706 44,936
675*(7)(8) Utah 100.00% 100.00% GP 51,727 51,727
676*(7)(8) Utah 100.00% 100.00% GP 86,612 86,612
677*(7)(8) Utah (B3) 74.50% 100.00% GP 37,966 28,285
678*(7)(8) Utah 100.00% 80.00% GP 23,840 19,072
718*(7)(8) Wyoming 66.00% 100.00% GP 46,896 30,951
719*(7)(8) Wyoming 100.00% 100.00% GP 72,795 72,795
720*(7)(8) Wyoming 100.00% 100.00% GP 145,382 145,382
---------- -----------
Total RSA 6,151,832 2,734,148
---------- -----------
Total MSA and RSA 7,425,369 3,356,086
---------- -----------
---------- -----------
<FN>
- ------------------------
(1) MSA ranking is based on population as established by the FCC. RSAs have
been numbered by the FCC alphabetically by state.
(2) Represents the composite ownership interest held by the Company in the
respective affiliate(s). Composite ownership by the Company in affiliate(s)
of greater than 50% does not necessarily represent a controlling interest
in any affiliate.
(3) Represents the composite ownership interest of the Company's affiliate(s)
in the licensee for a cellular telephone system in the respective market.
Composite ownership by affiliate(s) in a licensee of greater than 50% does
not necessarily represent a controlling interest in such licensee. GP
indicates that at least one affiliate has a general partner or controlling
interest in the licensee; LP indicates that the affiliate(s) has a limited
partner or minority interest.
(4) Derived from the Strategic Marketing, Inc. 1993 population estimates.
(5) Represents population within the market area initially licensed by the FCC.
The number of pops which are covered by radio signal in a market is
expected to be marginally lower than the market's total pops on a
going-forward basis. See "Certain Definitions."
(6) Net Company Pops represents Company Interest in Affiliate(s) multiplied by
Affiliate(s) Interest in Licensee multiplied by 1993 Population.
(7) The operations of these markets are currently reflected on a consolidated
basis in the Company's consolidated financial statements. The operations of
the other markets in which the Company holds an interest are reflected in
such financial statements on either an equity or a cost basis.
(8) The Company's interest in these markets is held, in whole or in part,
directly in the licensee.
Markets managed by the Company are denoted by an asterisk (*).
</TABLE>
24
<PAGE>
SUBSCRIBER GROWTH TABLE
Information regarding subscribers to the MSA and RSA cellular systems
managed by the Company is summarized by the following table:
<TABLE>
<CAPTION>
NUMBER OF ESTIMATED POPULATION
MANAGED MARKETS OF MANAGED MARKETS NUMBER OF SUBSCRIBERS
------------------- --------------------------------------- ----------------------------- SUBSCRIBER
TOTAL MSA RSA TOTAL MSA RSA TOTAL MSA RSA GROWTH
----- ---- ---- ---------- ----------- ------------ -------- -------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Sept. 30, 1987....... 0 0 0 0 0 0 0 0 0
Sept. 30, 1988....... 4 4 0 504,529 504,529(1) 0 424 424 0
Sept. 30, 1989....... 4 4 0 500,804 500,804(2) 0 1,362 1,362 0 221.23%
Sept. 30, 1990....... 18 4 14 1,687,481 500,804(2) 1,186,677(2) 6,444 3,513 2,931 373.13%
Sept. 30, 1991....... 49 5 44 3,509,779 566,722(3) 2,943,057(3) 17,952 6,387 11,565 178.58%
Sept. 30, 1992....... 49 5 44 3,509,779 566,722(3) 2,943,057(3) 35,884 11,119 24,765 99.89%
Sept. 30, 1993....... 51 6 45 3,665,758 644,526(4) 3,021,232(4) 60,381 17,898 42,483 68.27%
Sept. 30, 1994....... 55 7 48 3,906,063 771,660(5) 3,134,403(5) 99,002 30,711 68,291 63.96%
Dec. 31, 1994........ 55 7 48 3,904,636 771,660(5) 3,132,976(5) 114,918 34,702 80,216 16.08%
March 31, 1995....... 55 7 48 3,904,636 771,660(5) 3,132,976(5) 124,057 36,680 87,377 7.95%
<FN>
- ------------------------
(1) Derived from 1988 Donnelley Market Service population estimates.
(2) Derived from 1989 Donnelley Market Service population estimates.
(3) Derived from 1990 Census Report.
(4) Derived from 1992 Donnelley Market Service population estimates.
(5) Derived from 1993 Strategic Marketing, Inc. population estimates.
</TABLE>
NETWORK CONSTRUCTION AND OPERATIONS. Construction of cellular telephone
systems requires substantial capital investment in land and improvements,
buildings, towers, mobile telephone switching offices ("MTSOs"), cell site
equipment, microwave equipment, engineering and installation. The Company
believes that it has achieved significant economies of scale in constructing the
network. For example, the network uses cellular switching systems capable
of serving multiple markets. As a result of the contiguous nature of the
network, only 12 MTSOs are currently required to serve all 55 of the Company's
managed markets. By consolidating and deploying high capacity MTSOs, the Company
intends to achieve further economies of scale. Economies of scale generated
by the network also have permitted the Company to use one network operations
center, to centralize services such as network design and engineering, traffic
analysis, interconnection, billing, roamer verification, maintenance and
support and to access volume discount purchasing of cellular system equipment.
The network also affords the Company certain technical advantages in the
provision of enhanced services, such as call delivery and call forwarding.
Through the use of single switching facilities serving multiple markets, the
Company has implemented continuous coverage on an intrastate basis throughout
most of the network. The Company has widened the area of coverage within the
network by interconnecting MTSOs located in adjoining markets. The Company's
current objective is to provide subscribers with "seamless" coverage throughout
the network, which will permit subscribers, as they travel through the network,
to receive calls and otherwise use their cellular telephone as if they were in
their home market. This will occur once all of the MTSOs managed by the Company
and in adjoining markets within the eight-state area are networked. The Company
has achieved a high degree of network reliability through the deployment of
standardized components and operating procedures, and the introduction of
redundancy in switching and cell site equipment, interconnect facilities and
power supply. Most of the Company's equipment is built by Northern Telecom, Inc.
("NTI"), and interconnection between MTSOs has been achieved using NTI's
internal software and hardware.
25
<PAGE>
The Company began implementing the "IS-41" technical interface during fiscal
1994. This technical interface, developed by the cellular industry, allows
carriers that have different types of equipment to integrate their systems with
the eventual goals of establishing a national seamless network, substantially
reducing the cost of validating calls and reducing fraud exposure.
The Company also has entered into and is negotiating agreements with other
cellular carriers to enhance the range of markets and quality of service
available to cellular subscribers when traveling outside the network. Pursuant
to existing agreements with other cellular carriers, the Company's subscribers
are able to "roam" throughout most MSA and RSA markets in the United States and
Canada.
EXPANSION. The Company is in the process of "filling in" the "cellular
geographic service area" or "CGSA" (as defined by the FCC) within its managed
markets by adding network facilities to increase the coverage of the radio
signal. The Company has been significantly expanding radio signal coverage, with
construction of 50 cell sites already complete in fiscal year 1995 and 57
additional cell sites expected to be completed by the end of the fiscal year.
The Company expects that by September 30, 1995, radio signal coverage will reach
approximately 96% of the population within the managed markets. Expansion of
signal coverage is expected to add additional subscribers, enhance use of the
systems by existing subscribers, increase roamer traffic due to the larger
geographic area covered by the radio signal and further improve the overall
efficiency of the network. Under the rules and regulations of the FCC, expansion
of signal coverage will also preserve the Company's right to provide cellular
service in potentially valuable areas within the network which are not currently
covered by the Company's radio signal.
The Company continually evaluates acquisitions of cellular properties that
are geographically and operationally compatible with the network. In evaluating
acquisition targets, the Company considers, among other things, demographic
factors, including population size and density, traffic patterns, cell site
coverage, required capital expenditures and the likely ability of the Company to
integrate the target market into the network. In pursuing such acquisitions, the
Company may exchange interests in nonmanaged markets for interests in existing
or new markets that serve to expand the network. Certain acquisitions and
related dispositions may be subject to rights of first refusal held by the
partners in the respective partnerships in which the Company holds an interest.
Recent and pending acquisitions are described in "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Acquisitions and
Sales." The Company also from time to time may sell nonmanaged assets to raise
capital for network expansion. For example, the Company has entered into an
agreement to sell its interest in ten Nebraska RSA markets not managed by the
Company for approximately $24,300,000 in cash. The transaction is expected to
result in an after-tax gain to the Company of approximately $19,600,000 and to
close in July 1995. The interest to be purchased from the Company, as well as
interests in the Nebraska RSA markets to be purchased from other entities, will
be acquired at a cost of over $200 per pop after taking into account debt
assumed or refinanced. Proceeds from the transaction will be available to the
Company to pursue acquisitions of additional managed interests and to fund
parent company capital expenditures.
In an effort to provide comprehensive availability of mobile communications
services to its subscribers, regardless of location throughout North America,
the Company has entered into a distribution agreement with American Mobile
Satellite Corporation ("AMSC"). AMSC holds an FCC construction permit to build
and operate a mobile satellite service which will complement the existing
terrestrial cellular system by providing mobile voice, fax and data
communications in all areas not covered by cellular service. Subscribers will
access AMSC's satellite through a cellular/satellite mobile phone which will
route calls through the cellular network in those areas covered by cellular
service and will process the call via satellite in the absence of cellular
coverage. AMSC, which launched its satellite in April 1995, anticipates its
service will be available some time this year. The agreement with AMSC is
essentially a roaming arrangement that may add incremental value to certain
customers in remote areas, but is not expected to have a material impact on the
Company.
SERVICES AND PRODUCTS. Mobile subscribers in the Company's managed markets
have available to them substantially all of the services typically provided by
landline telephone systems, including custom-calling features such as call
forwarding, call waiting, three-way conference calling and, in most cases, voice
mail
26
<PAGE>
services. Several price plans are presented to prospective customers so that
they may choose the plan that will best fit their expected calling needs. The
plans provide specific charges for custom-calling features and voice mail to
offer value to the customer while enhancing airtime use and revenues for the
Company. The Company also sells cellular equipment at discounted prices as a way
to encourage use of its mobile services. The Company provides warranty and
repair services after the sale through regional equipment service centers, which
provide state-of-the-art test equipment and certified repair technicians. An
ongoing review of equipment and service pricing is maintained to ensure the
Company's competitiveness. Through a centralized procurement and equipment
distribution strategy, the Company obtains the benefits of favorable equipment
costs through bulk purchases. As appropriate, revisions to pricing of service
plans and equipment pricing are made to meet local marketplace demands.
The network affords the Company the opportunity to offer service over
expanded geographic territories at favorable rates. Customers that subscribe to
a stand-alone cellular system generally are charged premium roaming rates when
using a cellular system outside of their home service area. The Company's
subscribers are able to roam within the network and are afforded "home rate
follows" pricing, whereby subscribers are charged the rate applicable in their
home service area when traveling within the network. In addition, the Company's
simplified retail roaming rate structure allows the customer to roam on certain
adjacent carriers' systems at a preferred rate and minimizes confusion by
consolidating the remainder of the country into a uniform rate. Finally, the
Company offers toll-free calling across single or multiple states to its
subscribers for a nominal monthly fee, due to favorably negotiated interconnect
agreements.
Because the licensed radio spectrum available to the Company was designed to
serve densely populated metropolitan areas, demand for "traditional" cellular
service within the network is not expected to use all available spectrum. The
Company expects that this excess capacity may be adapted (at a nominal marginal
cost) for data transmission, monitoring, control transaction processing and
other cellular uses that are well suited for agriculture, energy and other
industries that have widespread operations within the Company's rural
marketplace, such as wireless network systems for mobile office applications,
credit card verifications, telemetry and polling systems. The Company is working
with equipment manufacturers, system integrators and value added resellers to
develop and deploy these systems. The Company also is exploring the potential
uses of packet data systems, an efficient method of multi-point, simultaneous
polling of wireless monitoring devices, to expand the potential market for other
uses of cellular technology.
The Company also believes that certain attributes of the Company's operating
infrastructure, including existing towers, established distribution channels and
other administrative resources, can be utilized to offer one-way paging service
throughout the managed markets on a cost-efficient basis. The Company intends to
commence offering such paging services in fiscal year 1996 subject to the
receipt of sufficient FCC paging licenses to offer economically feasible paging
services.
The Company is committed to providing consistently high quality customer
service. The Company maintains a comprehensive, centralized customer assistance
department which offers the advantages of expanded customer service hours,
specialized roaming and key account representatives and an automated customer
information database that allows for efficiency and accuracy, while decreasing
the time spent on each customer contact. The customer assistance department also
supports the administrative functions required to activate a customer's phone
through a high speed, call-in process and to enter the customer into the
informational databases required for customer service and billing. The Company
believes this centralized approach provides cost efficiencies while also
addressing the critical need for quality control. To ensure that it is
delivering a consistently high level of quality service, the Company monitors
customer satisfaction with its network quality, sales and customer service
support, billing and quality of roaming through regular surveys conducted by an
independent research firm.
27
<PAGE>
In 1992 the Company began investing in TVX, Inc., which holds the
distribution rights for the TVX camera systems in North, Central and South
America. The TVX system provides visual verification of the cause of an alarm at
the time of an incident to distinguish actual emergencies from false alarms. The
TVX camera takes four pictures within five seconds and transmits them to a host
computer via either the cellular or wireline networks. The Company intends to
work closely with TVX, Inc. to market cellular service in conjunction with the
TVX system for use at locations where phone lines are not available or as a
backup when phone lines have been disabled. The Company and Automated Security
Holdings, PLC ("ASH") each hold a 41% equity interest in TVX, Inc.
MARKETING. The Company coordinates the marketing strategy for each of its
managed markets. The Company markets cellular telephone service principally
under the CommNet Cellular name. The use of a single name over a broad
geographic territory creates strong brand-name recognition and allows the
Company to achieve advertising efficiencies.
The Company believes that a key competitive advantage in marketing its
service is the large geographic area covered by the network. The seamless
coverage being developed in the network is critical to marketing, as customers
are attracted to the higher percentage of delivered calls that such coverage
provides. Furthermore, the Company's "home rate follows" pricing allows
customers to make calls from anywhere in the network without incurring
additional daily fees or surcharges which usually occur when customers roam
outside of their home market. Additionally, the Company uses the "Follow Me
Roaming" service provided by GTE Telecommunication Services, Inc. ("GTE") which
permits customers to receive calls in any market that is part of the Follow Me
Roaming system without having to dial complicated access codes. The Company also
offers discounted roaming prices, and expects to be able to offer enhanced
services, in certain markets as a result of arrangements to link with certain
adjacent markets managed by other cellular carriers. See "-- The Company's
Operations -- Network Construction and Operations." In addition, the Company
offers toll-free calling statewide or across multiple states to its subscribers
for a nominal monthly fee. In a majority of the Company's managed RSA markets,
the Company was the first cellular system operator to provide service in the
market, thereby affording a significant competitive advantage.
Historically, the Company has relied to a significant extent on direct sales
representatives and on independent sales agents. The Company is currently
emphasizing development of a new channel of distribution represented by 17
Company-owned retail stores located within the network, which will be
supplemented by 11 additional Company-owned retail stores scheduled to open by
the end of fiscal year 1995. The retail distribution channel is also being
expanded by the addition of 19 Wal-Mart-Registered Trademark- kiosks staffed by
Company personnel. The Company believes that development of retail distribution
channels owned or staffed by the Company will increase customer additions,
enhance customer service and generate cost efficiencies in the acquisition of
new subscribers. The Company also maintains 46 direct sales representatives and
596 agents or outlets, including 52 Radio Shack and eight -C-Sears stores which
have exclusive distribution agreements with the Company. In general, such agents
earn a fixed commission which can vary depending upon the price plan sold when a
customer subscribes to the Company's cellular service and remains a subscriber
for a certain period of time. Being first to market in the majority of the
Company's managed RSA markets has also allowed the Company to obtain exclusive
marketing agreements with the leading telecommunication retailers in a
particular market and to obtain prime locations for its sales centers.
SUBSCRIBERS. To date, a substantial majority of the subscribers who use
cellular service in markets in which the Company holds interests have been
business users of mobile communication services. This trend is consistent with
the experience of the cellular industry generally, although given the Company's
geographic presence in the mountain and plains states, its customers have tended
to include proportionally more persons in the agricultural and energy
industries. The Company believes that certain demographic characteristics of the
rural marketplace will enhance the Company's ability to market cellular service
to its primary customer base within its managed RSA markets. On average, rural
residents spend a higher percentage of their annual household income on
transportation and travel a relatively greater distance by personal vehicle than
do urban residents. The relatively large average distance between public
telephones in the rural marketplace is an additional factor that increases the
need for mobile telecommunication services in that market.
28
<PAGE>
MANAGEMENT AGREEMENTS. Management agreements generally applicable to the
Company's RSA markets appoint the Company as exclusive management agent of the
licensee with specifically enumerated responsibilities relating to the
day-to-day business operation of the licensee, although the licensee retains
ultimate control over its cellular system. Generally, the RSA management
agreements are for an initial term of five years and are automatically renewed
for additional terms unless terminated by notice from either party prior to
expiration of the then current term. The agreements provide for reimbursement to
the Company of expenses incurred on behalf of the affiliate or licensee.
The Company has entered into management agreements with three MSA affiliates
pursuant to which the Company has been appointed the exclusive management agent
for each such affiliate. The MSA management agreements appoint the Company as
managing agent of the respective MSA affiliate with specifically enumerated
responsibilities relating to the day-to-day business operation of the affiliate.
In cases in which the affiliate is the general partner in the licensee, the
Company acts as exclusive management agent for the licensee, although the
licensee retains ultimate control over its cellular system. The MSA management
agreements provide for compensation to the Company in an amount equal to 10% of
the distributions to the affiliate derived from the affiliate's interest in the
licensee, although compensation to date under these agreements has not been
material. The agreements also provide for reimbursement for reasonable
administrative and overhead expenses. In cases in which the affiliate is a
general partner in the licensee, the agreements generally were for an initial
term of two years, were extended for an additional three years and are
automatically renewed for one-year terms thereafter unless terminated by notice
from either party prior to expiration of the then current term. In cases in
which the affiliate is a limited partner in the licensee, the agreements
generally were for an initial term of five years and are automatically renewed
for additional five-year terms unless terminated by notice from either party
prior to expiration of the then current term.
The Company has also entered into a management agreement with CINC, whereby
it manages all systems owned by CINC and in which CINC is the general partner.
HISTORY. The Company initially acquired its cellular interests by
participating in the wireline licensing process conducted by the FCC. In order
to participate in that process, the Company formed affiliates which were
originally owned at least 51% by one or more independent telephone companies and
no more than 49% by the Company. In exchange for the Company's 49% interest, the
Company provided a financing commitment to the affiliates for their capital
needs, as well as certain management services. In addition to obtaining
interests in cellular markets through participation in the FCC licensing
process, the Company also has purchased direct interests in additional markets
in order to expand the network.
FINANCING ARRANGEMENTS WITH AFFILIATES; CIFC. CIFC has entered into loan
agreements with RSA and MSA affiliates to finance or refinance the costs related
to the construction, operation and expansion of cellular telephone systems in
which such affiliates own an interest. The loans are financed with funds
borrowed by CIFC from CoBank and the Company. As of March 31, 1995, CIFC had
entered into loan agreements with 50 RSA affiliates, 5 MSA affiliates and CINC
and had advanced $193,754,000 thereunder, including $104,928,000 to entities
which are consolidated for financial reporting purposes. All loans to affiliates
from CIFC bear interest at 1% over the average cost of CoBank borrowings and are
secured by a lien upon all assets of the entity to which funds are advanced.
Loans from CIFC to affiliates will be repaid from funds generated by operations
of the licensee or distributions to affiliates by licensees in which such
affiliates own an interest. Amounts paid to CIFC will be applied by CIFC towards
payment of its obligations to CoBank and the Company. The repayments allocated
to the Company will be retained by CIFC and used to offset future loans which
would otherwise have been made by the Company. The Company has made and will
continue to make advances to affiliates on an interim basis. Funds borrowed from
CIFC by affiliates are used to repay the Company for such interim advances. As
of March 31, 1995, the Company had outstanding interim advances of $33,537,000
to affiliates, which advances bear interest at 2% over the prime rate.
As of March 31, 1995, the Company and CIFC had advanced a total of
$197,242,000 to RSA and MSA affiliates and to finance switches. Based on its
proportionate ownership interests in these affiliates, the
29
<PAGE>
Company's share of total affiliate and switch loans and advances was
$145,002,000. The assets of the affiliates in which the Company has investments
or advances represent 4,459,000 pops, which include 3,356,000 net Company pops.
THE CELLULAR TELEPHONE INDUSTRY. Cellular telephone service is a form of
wireless telecommunication capable of providing high quality, high capacity
service to and from mobile, portable and fixed radio telephones. Cellular
telephone technology is based upon the division of a given market area into a
number of regions, or "cells," which in most cases are contiguous. Each cell
contains a low-power transmitter-receiver at a "base station" or "cell site"
that communicates by radio signal with cellular telephones located in the cell.
The cells are typically designed on a grid, although terrain factors, including
natural and man-made obstructions, signal coverage patterns and capacity
constraints may result in irregularly shaped cells and overlaps or gaps in
coverage. Cells generally have radiuses ranging from two miles to more than 25
miles. Cell boundaries are determined by the strength of the signal emitted by
the cell's transmitter-receiver. Each cell site is connected to a MTSO, which,
in turn, is connected to the local landline telephone network.
When a cellular subscriber in a particular cell dials a number, the cellular
telephone sends the call by radio signal to the cell's transmitter-receiver,
which then sends it to the MTSO. The MTSO completes the call by connecting it
with the landline telephone network or another cellular telephone unit. Incoming
calls are received by the MTSO, which instructs the appropriate cell to complete
the communications link by radio signal between the cell's transmitter-receiver
and the cellular telephone. By leaving the cellular telephone on, a signal is
emitted so the MTSO can sense in which cell the cellular telephone is located.
The MTSO also records information on system usage and subscriber statistics.
The FCC has allocated the cellular telephone systems frequencies in the 800
MHz band of the radio spectrum. Each of the two licensees in each cellular
market is 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.
Frequency reuse is one of the most significant characteristics of cellular
telephone systems. Each cell in a cellular telephone system is assigned a
specific set of frequencies for use between that cell's base station and
cellular telephones located within the cell, so that the radio signals being
used in one cell do not interfere with those being used in adjacent cells.
Because of the relatively low transmission power of the base stations and
cellular telephones, two or more cells sufficiently far apart can use the same
frequencies in the same market without interfering with one another.
A cellular telephone system's capacity can be increased in various ways.
Within certain limitations, increasing demand may be met by simply adding
available frequency capacity to cells as required or, by using directional
antennas, dividing a cell into discrete multiple sectors or coverage areas,
thereby facilitating frequency reuse in other cells. Furthermore, an area within
a system may be served by more than one cell through procedures which utilize
available channels in adjacent cells. When all possible channels are in use,
further growth can be accomplished through a process called "cell splitting."
Cell splitting entails dividing a single cell into a number of smaller cells
serviced by lower-power transmitters, thereby increasing the reuse factor and
the number of calls that can be handled in a given area. Expected digital
transmission technologies will provide cellular licensees with additional
capacity to handle calls on cellular frequencies. As a result of present
technology and assigned spectrum, however, there are limits to the number of
signals that can be transmitted simultaneously in a given area. In highly
populated MSAs, the level of demand for mobile and portable service is often
large in relation to the existing capacity. Because the primary objective of the
cellular licensing process is to address mobile and portable uses, operators in
highly populated MSAs may have capacity constraints which limit their ability to
provide alternate cellular service. The Company does
30
<PAGE>
not anticipate that the provision of mobile and portable services within the
network will require as large a proportion of the systems' available spectrum
and, therefore, the systems will have more available spectrum with which to
pursue data applications, which may enhance revenues.
Call hand-off in a cellular telephone system is automatic and virtually
unnoticeable to either party to the call. The MTSO and base stations
continuously monitor the signal strength of calls in progress. The signal
strength of the transmission between the cellular telephone and the base station
declines as the caller moves away from the base station in that cell. When the
signal strength of a call declines to a predetermined threshold level, the MTSO
automatically determines if the signal strength is greater in another cell and,
if so, hands off the cellular telephone to that cell. The automatic hand-off
process within the system takes a fraction of a second. However, if the cellular
telephone leaves the reliable service areas of the cellular telephone system,
the call is disconnected unless an appropriate technical interface is
established with an adjacent system through intersystem networking arrangements.
FCC rules require that all cellular telephones be functionally compatible
with cellular telephone systems in all markets within the United States and with
all frequencies allocated for cellular use, so that a cellular telephone may be
used wherever a subscriber is located, subject to appropriate arrangements for
service charges. Changes to cellular telephone numbers or other technical
adjustments to cellular telephones by the manufacturer or local cellular
telephone service businesses may be required, however, to enable the subscriber
to change from one cellular service provider to another within a service area.
Because cellular telephone systems are fully interconnected with the
landline telephone network and long distance networks, subscribers can receive
and originate both local and long-distance calls from their cellular telephones.
Cellular telephone systems operate under interconnection agreements with
various local exchange carriers and interexchange carriers. The interconnection
agreements establish the manner in which the cellular telephone system
integrates with other telecommunications systems. The cellular operator and the
local landline telephone company must cooperate in the interconnection between
the cellular and landline telephone systems, to permit cellular subscribers to
call landline subscribers and vice versa. The technical and financial details of
such interconnection arrangements are subject to negotiation and vary from
system to system.
While most MTSOs process information digitally, most radio transmission of
cellular telephone calls are done on an analog basis. Digital technology offers
advantages, including improved voice quality, larger system capacity, and
perhaps lower incremental costs for additional subscribers. The conversion from
analog to digital radio technology is expected to be an industry-wide process
that will take a number of years. However, based on estimated capacity
requirements, the Company does not foresee a need to convert to digital radio
transmission technology in the near or intermediate term.
COMPETITION
GENERAL. The cellular telephone business is a regulated duopoly. The FCC
awarded only two licenses in each market, although certain markets have been
subdivided as a result of voluntary settlements. One of these licenses initially
was awarded to an entity that was majority owned by local telephone companies or
their affiliates and the other license was awarded to an entity that did not
provide such service. Each licensee has the exclusive use of a defined frequency
band within its market.
The primary competition for the Company's mobile cellular service in any
market comes from the other licensee in such market, which may have
significantly greater resources than the Company and its affiliates. Competition
is principally on the basis of coverage, services and enhancements offered,
technical quality of the system, quality and responsiveness of customer service
and price. Such competition may increase to the extent that licenses pass from
weaker stand-alone operators into the hands of better capitalized and more
experienced cellular operators who may be able to offer consumers certain
network advantages similar to those offered by the Company. Within the network,
the Company has three primary direct competitors, in
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<PAGE>
addition to a number of stand-alone operators. The Company also faces
competition from other communications technologies that now exist, such as SMR
and paging services, and may face competition from technologies introduced in
the future.
COMPETITION FROM OTHER TECHNOLOGIES. Potential users of cellular systems
may find an increasing number of current and developing technologies able to
meet their communication needs. For example, SMRs of the type generally used by
taxicab and tow truck services and other communications services have the
technical capability to handle mobile telephone calls (including interconnection
to the landline telephone network) and may provide competition in certain
markets.
Although SMR operators are currently subject to limitations that make usage
of SMR frequencies more appropriate for short dispatch messages, the FCC has
granted waivers of its rules to permit the construction and operation of low
powered "cellular-like" services using a collection of SMR frequencies ("ESMR")
in a number of markets in the United States. Recent legislation permits
commercial mobile service providers, including SMR providers, to obtain upon
demand physical interconnection with the landline telephone network. Such
interconnection enhances an SMR provider's ability to compete with cellular
operators, including the Company. The FCC has encouraged ESMR activities and has
amended its rules to establish an Expanded Mobile Service Provider ("EMSP")
licensing approach that would facilitate such operations. The new rules grant a
new type of 800 Mhz wide-area license that would permit channels to be
aggregated for operation of systems throughout defined geographic areas. A new
rulemaking is underway to determine what protections will be afforded to
existing SMR licensees that may now be subject to relocation.
One-way paging or beeper services that feature voice message and
data-display as well as tones may be adequate for potential cellular subscribers
who do not need to transmit back to the caller. SMR and paging systems are in
operation in many of the service areas within the network.
The FCC is now licensing commercial PCS. PCS is not a specific technology,
but a variety of potential technologies that could compete with cellular
telephone systems. The FCC has identified two categories of PCS: broadband and
narrowband. In 1993, Congress enacted legislation requiring the FCC to adopt
final rules for licensing broadband and narrowband PCS by February 1994. This
legislation also required the FCC to commence issuing licenses for narrowband
PCS by October 1994 and broadband PCS by December 1994. Licenses will be awarded
by competitive bidding. Auctions for the first two spectrum blocks have been
completed. Absent delays caused by any judicial proceedings, PCS systems can be
expected to commence operation in major metropolitan areas as early as the end
of calendar year 1995. See "Federal Regulation -- Recent Legislation."
The FCC has adopted rules to authorize the operation of new narrowband PCS
systems in the 900 Mhz band. The possible new services using this 900 MHz band
spectrum include advanced voice paging, two-way acknowledgment paging, data
messaging, electronic mail and facsimile transmissions. These services most
likely will be provided using a variety of devices, such as laptop and palmtop
computers and computerized "personal organizers" that allow receipt of office
messages, calendar planning, and document editing from remote locations in some
circumstances.
The FCC also has adopted rules to authorize the operation of new, broadband
PCS systems in the 2 GHz band. Equipment proposed for broadband PCS includes
small, lightweight and wireless telephone handsets; computers that can
communicate over the airwaves wherever they are located; and portable facsimile
machines and other graphic devices. The regulatory plan adopted for broadband
PCS includes an allocation of spectrum, a flexible regulatory structure,
eligibility restrictions and technical and operational rules. In a related
matter in the same proceeding, the FCC revised its cellular rules to explicitly
state that cellular licensees may provide any PCS-type services (including
wireless PBX, data transmission and telepoint services) on their 800 MHz band
cellular channels without prior notification to the FCC (other than the
notification required to report the construction of new cell sites).
The FCC has allocated 140 MHz of spectrum in the 2 GHz band for the
provision of licensed and unlicensed broadband PCS. Much of the spectrum
allocated for broadband PCS is already occupied by microwave licensees. As a
general proposition, broadband PCS licensees will be required to pay the costs
associated with relocating these existing microwave users to other portions of
the radio spectrum.
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Of the 140 MHz of spectrum allocated to broadband PCS, 120 MHz has been
allocated for licensed PCS. The 120 MHz of spectrum allocated to licensed PCS
has been divided into six channel blocks, as follows: i) two channel blocks
(Blocks A and B) have been allocated 30 MHz of spectrum each, and will be
licensed on the basis of 51 Major Trading Areas ("MTAs"), iii) three channel
blocks (Blocks D, E and F) have been allocated 10 MHz of spectrum each and will
be licensed on the basis of 493 Basic Trading Areas ("BTAs"). In a separate
proceeding dealing with spectrum auctions and consistent with a directive
contained in recently-enacted legislation, the FCC has granted licensing
preferences on the Block C and F spectrum allocations for small businesses,
rural telephone companies and minority/woman-owned businesses, although the
validity of such preferences may be subject to legal challenge. The FCC has
recently initiated a rulemaking proceeding to withdraw the licensing preferences
granted to minority/woman-owned businesses in light of uncertainty regarding
the constitutionality of such preferences.
Subject to a five percent cross-ownership benchmark, spectrum aggregation
will be permitted in broadband PCS, but will be limited to 40 MHz of spectrum
per service area to prevent any one person or entity from exercising undue
market power.
As a general rule, cellular licensees will be permitted to participate in
broadband PCS on the 30 MHz frequency block outside of their existing cellular
service areas or in any area where the cellular licensee serves less than ten
percent of the 1990 census population of the PCS service area. Under this
criterion, a cellular licensee will be ineligible to apply for one of the 30 MHz
spectrum blocks if the composite reliable service area contour of its cellular
system embraces ten percent or more of the 1990 census population of the PCS
service area. Generally, with respect to PCS service areas in which there is ten
percent or more cumulative 1990 census population overlap between the cellular
and PCS service areas, the cellular carrier will be eligible to hold only one 10
MHz BTA license in addition to its cellular interest.
The ownership attribution benchmark for cellular interests has been set at
20%. Therefore, for eligibility purposes, cellular licensees are defined as
entities which have an ownership interest of 20% or more in a cellular system.
Broadband PCS licensees will be subject to minimum construction
requirements. Broadband PCS licenses will be awarded for a period of ten years,
with provisions for a license renewal expectancy similar to the rules that
currently apply to cellular licensees.
Of the 160 MHz of spectrum allocated for broadband PCS, the remaining 40 MHz
has been allocated for unlicensed devices. These unlicensed devices will be used
in a variety of contexts, such as office environments, to provide such services
as high and low speed data links between computing devices, cordless telephones
and wireless PBXs. The unlicensed devices will be governed under Part 15 of the
FCC's rules, and will not be subject to auctions.
It is uncertain what the effect on the Company of these new personal
communications services will be. The Company believes that PCS likely will not
compete directly with cellular telephone service in the rural marketplace, but
there can be no assurance that this will be the case. Management of the Company
believes that technological advances in present cellular telephone technology in
conjunction with buildout of the present cellular systems throughout the nation
with cell splitting and microcell technology would provide essentially the same
services as the proposals described above, but there is no assurance that this
will happen. The FCC is expected to issue operating authority for personal
communications services competitive to the Company's services in the markets in
which the Company holds interests in cellular systems. This could result in one
or more additional competitors in each of the Company's markets.
Technological advances in the communications field continue to occur and
make it difficult to predict the extent of additional future competition for
cellular systems. For example, several mobile satellite systems are planning to
initiate service in the 1995 - 1999 time frame, and AMSC has launched its mobile
satellite in April 1995 and anticipates that its service will be available
sometime this year. See "Business -- the Company's Operations -- Expansion."
Although satellite service may offer a customer worldwide coverage, the
substantial investments required to initiate service, as well as significant
technical, political, and regulatory hurdles that need to be overcome may
impede the early growth of this technology. Recent legislation may make
available up to 200 MHz of spectrum for new communications systems. See
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<PAGE>
"Federal Regulation -- Recent Legislation." Each of these systems could provide
services that compete with those provided by the Company. The FCC has also
authorized Basic Exchange Telecommunications Radio Service to make basic
telephone service more accessible to rural households and businesses.
FEDERAL REGULATION
OVERVIEW. The construction, operation and acquisition of cellular systems
in the United States are regulated by the FCC pursuant to the Communications Act
and the rules and regulations promulgated thereunder (the "FCC rules"). The FCC
rules govern applications to construct and operate cellular systems, licensing
and administrative appeals and technical standards for the provision of cellular
telephone service. The FCC also regulates coordination of proposed frequency
usage, height and power of base station transmitting facilities and types of
signals emitted by such stations. In addition, the FCC regulates (or forbears
from regulating) certain aspects of the business operations of cellular systems.
It has declined to regulate the price and terms of offerings to the public.
See "-- Recent Legislation."
INITIAL REGULATION. For licensing purposes, the FCC established 734
discrete geographically defined market areas comprising 306 MSAs and 428 RSAs.
In each market area, the FCC awarded only two licenses authorizing the use of
radio frequencies for cellular telephone service. The allocated cellular
frequencies were divided into two equal 25 MHz blocks. One block of frequencies,
and the associated operating license, was initially reserved for exclusive use
by an entity that was majority owned and controlled by local landline telephone
companies or their affiliates. The second block of frequencies initially was
reserved for use by entities that did not provide landline telephone service in
the market area. Upon the issuance of a construction permit, either wireline or
nonwireline, such construction permit could be sold to any qualified buyer,
regardless of telephone company affiliation. The FCC generally prohibits a
single entity from holding an interest in both the wireline and the nonwireline
licensee in the same market.
RSAs were divided along county lines and consist of one or more contiguous
counties within a single state. The RSAs were numbered alphabetically by state,
rather than on the basis of population. The FCC applied a licensing policy for
RSA markets similar to that utilized in the MSAs. Applications for both the
wireline and nonwireline license in each RSA were filed simultaneously. In RSAs,
the FCC allowed only wireline applicants to form pre-lottery settlement
entities. If a full market wireline settlement was not negotiated, the FCC chose
among mutually exclusive applicants for each license through the use of a
lottery.
Upon favorable review of the lottery winner or settlement entity,
designation of the tentative selectee and following a public comment period, the
FCC issued a construction permit for the cellular telephone system on each
frequency block in a specified market. An operating license was then granted for
an initial term of ten years (although a license may be revoked during its term
for cause after formal proceedings by the FCC).
LICENSE RENEWAL. The FCC has established rules and procedures to process
cellular renewal applications filed by existing carriers and the competing
applications filed by renewal challengers. Subject to one exception discussed
below, the renewal proceeding is a two-step hearing process. The first step of
the hearing process is to determine whether the existing cellular licensee is
entitled to a renewal expectancy, and otherwise remains basically qualified to
hold a cellular license. Two criteria are evaluated to determine whether the
existing licensee will receive a renewal expectancy. The first criterion is
whether the licensee has provided "substantial" service during its past license
term, defined as service which is sound, favorable and substantially above a
level of mediocre service which minimally might justify renewal. The second
criterion requires that the licensee must have substantially complied with
applicable FCC rules and policies and the Communications Act. Under this second
criterion, the FCC determines whether the licensee has demonstrated a pattern of
compliance. The second criterion does not require a perfect record of
compliance, but if a licensee has demonstrated a pattern of noncompliance it
will not receive a renewal expectancy. If the FCC grants the licensee a renewal
expectancy during the first step of the hearing process and the licensee is
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basically qualified, its license renewal application will be automatically
granted and any competing applications will be denied. If however, the FCC
denies the licensee's request for renewal expectancy, the licensee's application
will be comparatively evaluated under specifically enumerated criteria with the
applications filed by competing applicants.
The exception to the two-step renewal hearing process allows a competing
applicant proposing to provide service that far exceeds the service presently
being provided by the incumbent licensee to request a waiver of the two-step
process. If the waiver request is granted, the FCC will hold only a comparative
hearing, I.E., it will not make a threshold determination in the first instance
as to whether the incumbent licensee is entitled to a renewal expectancy.
CELLULAR SERVICE AREA. Under FCC rules, the authorized service area for a
cellular licensee in a market is referred to as the CGSA. In all FCC-designated
markets, at least one cell site must have been placed into commercial service
within 18 months after the award of the construction permit. The CGSA is defined
as the area served by the cellular licensee (as computed by a mathematical
formula based on the height and power of operating cell sites within which the
licensee is entitled to protection from interference on its frequencies). The
CGSA will be smaller than the designated FCC market if a licensee has not fully
built-out its system, or it may be larger than the market if the licensee serves
areas of adjacent markets that are unserved by the adjacent licensee. Cellular
licensees do not need to obtain FCC authority prior to increasing the CGSA
within their FCC-designated market during the five-year period after the
construction permit is initially granted for the market. However, FCC
notification of construction is generally still required. After the five-year
exclusive period has expired, any entity may apply to serve the unserved areas
of the market that comprise at least 50 contiguous square miles and are outside
of the licensees' CGSA (an "unserved area application"). The Company has
selected target expansion areas based upon specific financial criteria and does
not plan to expand in areas where these criteria are not projected to be met.
Unserved area applications are filed in two phases, Phase I and Phase II.
During the first half of 1993, the FCC accepted Phase I unserved area
applications for frequency blocks in all markets where: the five-year fill-in
period had already expired or would expire on or before March 15, 1993; no
applications for initial authorizations were filed; and authorizations were
surrendered, or canceled for failure to meet the 18-month construction deadline
or other reasons. For all other markets, Phase I applications are due on the
31st day following expiration of the five-year fill-in period. All Phase I
applications for a given market are deemed mutually exclusive even if their
proposed CGSAs do not overlap. Once an authorization has been granted to a Phase
I applicant, the permittee has 90 days within which to file an application
requesting FCC authority to make major modifications to its Phase I system. The
FCC will not accept any other applications for unserved areas in the market
during this period that are mutually exclusive with the Phase I carrier's major
modification application.
Phase II unserved area applications for any remaining area may be filed on
the 121st day after the Phase I authorization has been granted (or if no Phase I
applications are filed, on the first day after Phase I applications for that
market are permitted). In the event mutually exclusive applications are filed
the authorization will be issued by auction. Phase II applications may propose
CGSAs that cover area in more than one market. Phase II applications are deemed
to be mutually exclusive only if their CGSAs overlap in such a way that the
grant of one would preclude the grant of the other. Phase II applications will
be placed on public notice by the FCC, and all interested and qualified parties
will have an opportunity to apply for the same market area within 30 days of the
public notice.
Applicants for unserved areas not contiguous with licensed systems must
propose to serve a minimum of 50 contiguous square miles and must demonstrate
their financial qualifications to construct the proposed system and to operate
it for one year (assuming no revenues). Existing licensees proposing to expand
their systems through the filing of an unserved area application are not subject
to the 50 square mile minimum coverage rule, nor are they required to make a
financial qualifications showing. Under recent legislation described below,
mutually exclusive unserved area applications are processed by lottery selection
procedures (for applications filed prior to July 26, 1993) or by auctions (for
applications filed after July 26, 1993), and existing cellular carriers receive
no preference in the lottery selection or auction process.
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<PAGE>
Unserved area cellular carriers (both Phase I and Phase II) are accorded one
year within which to complete construction of their systems. Unserved area
cellular carriers are not accorded a five-year fill-in period. If an unserved
area cellular carrier forfeits its authorization for failure to construct, the
areas which thereby revert to "unserved" status may be applied for under Phase
II procedures.
ALIEN OWNERSHIP RESTRICTIONS. The Communications Act prohibits the issuance
of a license to, or the holding of a license by, any corporation of which any
officer or director is a non-U.S. citizen or of which more than 20% of the
capital stock is owned of record or voted by non-U.S. citizens or their
representatives or by a foreign government or a representative thereof, or by
any corporation organized under the laws of a foreign country. The
Communications Act also prohibits the issuance of a license to, or the holding
of a license by, any corporation directly or indirectly controlled by any other
corporation of which any officer or more than 25% of the directors are non-U.S.
citizens or of which more than 25% of the capital stock is owned of record or
voted by non-U.S. citizens or their representatives or by a foreign government
or representative thereof, or by any corporation organized under the laws of a
foreign country, although the FCC has the power in appropriate circumstances to
waive these restrictions. The FCC has interpreted these restrictions to apply to
partnerships and other business entities as well as corporations, with certain
modifications. Failure to comply with these requirements may result in denial or
revocation of licenses. The Articles of Incorporation of the Company contain
prohibitions on foreign ownership or control of the Company that are
substantially similar to those contained in the Communications Act.
RECENT LEGISLATION. The Omnibus Budget Reconciliation Act of 1993 (the
"Budget Act"), among other things, generally requires the FCC to work with the
Department of Commerce to reallocate at least 200 MHz of spectrum from federal
government use to private commercial use; to issue initial licenses for radio
spectrum for which mutually exclusive applications have been filed for the
purpose of offering commercial communications services to subscribers either by
comparative hearing or competitive bidding (I.E., auctions); to treat as common
carriers PCS licensees as well as providers of commercial mobile services
(including SMR services) that previously were regulated as private carriers; to
issue final rules relating to the licensing of PCS; and to impose regulatory
fees upon virtually all FCC licensees, including cellular licensees, to help
recover the FCC's administrative costs in regulating such entities (the
"Spectrum Legislation").
In devising a methodology for auctions between mutually exclusive
applicants, the Spectrum Legislation directs the FCC, among other things, to
promote the development and rapid deployment of new technologies, products and
services to the public, including those residing in rural areas. Further, the
Spectrum Legislation prohibits the FCC from conducting lotteries to issue
initial licenses for commercial services for which mutually exclusive
applications are filed, unless one or more applications for such license were
accepted for filing prior to July 26, 1993. Thus, all future initial
applications for cellular unserved areas (if deemed to be mutually exclusive)
and all applications for PCS licenses, would be issued by a competitive bidding
process. Competitive bidding will not apply to applications for license renewal
or applications to assign or transfer control of existing licenses.
The Spectrum Legislation also preempts state rate or entry regulation on
commercial mobile services unless a particular state petitions the FCC for
authority to exercise (or continue exercising) such regulatory authority and the
FCC grants the petition. Several states filed such petitions, all of which have
been denied. The Spectrum Legislation also directs the FCC to assess and collect
regulatory fees from virtually all FCC licensees, including cellular carriers.
Under the initial fee schedule, cellular carriers are required to pay an annual
fee of $60.00 per 1,000 subscribers.
STATE, LOCAL AND OTHER REGULATION
STATE. Following receipt of an FCC construction permit and prior to the
commencement of commercial service (prior to construction in certain states), a
cellular licensee must also obtain any necessary approvals from the appropriate
regulatory bodies in each of the states in which it will offer cellular service.
Certain states require cellular system operators to be certified by such state
to serve as common carriers. In addition, certain state authorities regulate
certain service practices of cellular system operators. While such state
regulations may affect the manner in which the Company's affiliates conduct
their business and could
36
<PAGE>
adversely affect their profitability, they should not place the Company's
affiliates at a competitive disadvantage with other service providers in the
same markets. The Company has not experienced and does not presently contemplate
any regulatory constraints, difficulties or delays.
FAA, ZONING AND OTHER LAND USE. The location and construction of cellular
transmitter towers and antennas are subject to Federal Aviation Administration
("FAA") regulations and may be subject to federal, state and local environmental
regulation as well as state or local zoning, land use and other regulation.
Before a system can be put into commercial operation, the grantee of a
construction permit must obtain all necessary zoning and building permit
approvals for the cell sites and MTSO locations and must secure state
certification and tariff approvals, if required. The time needed to obtain
zoning approvals and requisite state permits varies from market to market and
state to state. Likewise, variations exist in local zoning processes. There can
be no assurance that any state or local regulatory requirements currently
applicable to the systems in which the Company's affiliates have an interest
will not be changed in the future or that regulatory requirements will not be
adopted in those states and localities which currently have none.
EMPLOYEES
As of June 15, 1995, the Company had 414 full-time employees. The Company
engages the services of independent contractors on an as-needed basis.
PROPERTIES
In addition to the direct and attributable interests in cellular licensees
discussed in this Prospectus, the Company leases its principal executive offices
(consisting of approximately 49,900 square feet) located in Englewood, Colorado.
The Company and its affiliates lease and own locations for inventory storage,
microwave, cell site and switching equipment and administrative offices.
LEGAL PROCEEDINGS
There are no material, pending legal proceedings to which the Company or any
of its subsidiaries is a party or of which any of their property is the subject
which, if adversely decided, would have a material adverse effect on the
Company.
USE OF PROCEEDS
The Selling Securityholders will receive all of the net proceeds from the
sale of the shares offered hereby. The Company will not receive any of the
proceeds from the sale of such shares.
SELLING SECURITYHOLDERS
The shares covered by this Prospectus are being offered by the Selling
Securityholders identified in the table below. The following table sets forth
certain information as of June 16, 1995, with respect to the Selling
Securityholders and the shares offered hereby:
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<PAGE>
Number Number of Shares
of Shares Offered (1)
Name of Selling Securityholder Owned (1)
- --------------------------------------------------------------------------------
First Interstate Bank of Oregon, as Agent
for Oregon Equity Fund 150,000 150,000
State of Delaware Retirement Plan 33,333 33,333
The Northern Trust as Trustee for Nalco
Chemical Company Retirement Trust 16,666 16,666
Joan B. Spears 1,666 1,666
Rockefeller Brothers Fund 13,333 13,333
Clement C. Moore II 1,666 1,666
Saidye Rosner Bronfman Ava Trust 1,666 1,666
The Turbo Trust 1,666 1,666
Joshua Associates 1,666 1,666
Crocodile Associates 1,666 1,666
Margaret D. Norris Trust 6,666 6,666
Diana Ross IRA 1,666 1,666
SBSF Convertible Securities Fund 40,000 40,000
Louis R. Benzak 1,666 1,666
River Branch Foundation 6,666 6,666
Cape Branch Foundation 5,000 5,000
Hilary Hale Trust 1,666 1,666
Linda Hoag Hale Trust - Pch 1,666 1,666
Zellerbach Family Fund 5,000 5,000
Henry Babson Special Investments 6,666 6,666
Parkland Equity Capital Fund I, L.P. Spe 10,000 10,000
Riverbank Associates 6,666 6,666
Estate of Richard B. Salomon 13,333 13,333
- --------------------
(1) All shares are issuable upon conversion of the Notes.
The preceding table has been prepared based upon information furnished to
the Company by or on behalf of the Selling Securityholders.
Other than as a result of the ownership of the Notes or shares issuable
upon conversion thereof, none of the Selling Securityholders listed above has
had any material relationship with the Company within the past three years.
Because the Selling Securityholders may offer all or some of the shares
pursuant to the offering contemplated by this Prospectus, and because there are
currently no agreements, arrangements or understandings with respect to the sale
of any of the shares that will be held by the Selling Securityholders after
completion of this offering, no estimate can be given as to the number of
shares that will be held by the Selling Securityholders after completion of this
offering. See "Plan of Distribution."
PLAN OF DISTRIBUTION
The Company will receive no proceeds from this offering. The shares
offered hereby may be sold from time to time to purchasers directly by any of
the Selling Securityholders acting as principals for their own account in one or
more transactions at a fixed price, which may be changed, or at varying prices
determined at the time of sale, or at negotiated prices. Such prices will be
determined by the Selling Securityholders. Alternatively, any of the Selling
Securityholders may from time to time offer the shares through underwriters,
dealers or agents who may receive compensation in the form of underwriting
discounts, commissions or concessions from the Selling Securityholders and/or
the purchasers of the shares for whom they may act as agent. Each Selling
Securityholder will be responsible for payment of any and all commissions to
brokers which will be negotiated on an individual basis. To the extent
required, the number of shares to be sold, the names of the Selling
Securityholders, the purchase price, the name of any such agent, dealer or
underwriter and any applicable commissions with respect to a particular offer
will be set forth in an accompanying Prospectus Supplement. The aggregate
proceeds to the Selling Securityholders from the sale of the shares offered by
the Selling Securityholders hereby will be the purchase price of such shares
less any broker's commissions.
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In order to comply with the securities laws of certain states, if
applicable, the shares will be sold in such jurisdictions only through
registered or licensed brokers or dealers. In addition, in certain states the
shares may not be sold unless they have been registered or qualified for sale in
the applicable state or an exemption from the registration or qualification
requirement is available and is complied with.
The Selling Securityholders and any broker-dealers, agents or underwriters
that participate with the Selling Securityholders in the distribution of the
shares may be deemed to be "underwriters" within the meaning of the Securities
Act, in which event any commissions received by such broker-dealers, agents or
underwriters and any profit on the resale of the shares purchased by them may
be deemed to be underwriting commissions or discounts under the Securities Act.
Under applicable rules and regulations under the Exchange Act, any person
engaged in the distribution of the shares offered hereby may not simultaneously
engage in market making activities with respect to the shares for a period of
two business days prior to the commencement of such distribution. In addition,
and without limiting the foregoing, each Selling Securityholder will be subject
to applicable provisions of the Exchange Act and the rules and regulations
thereunder, including, without limitation, Rules 10b-2, 10b-5, 10b-6 and 10b-7,
which provisions may limit the timing of purchases and sales of shares by the
Selling Securityholders.
In addition, any securities covered by this Prospectus which qualify for
sale pursuant to Rule 144 of the Securities Act may be sold under Rule 144
rather than pursuant to this Prospectus. There is no assurance that any Selling
Securityholder will sell any or all of the shares described herein and may
transfer, devise or gift such securities by other means not described herein.
The Company and the Selling Securityholders are obligated to indemnify each
other against certain liabilities arising under the Securities Act.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Amy M. Shapiro, Vice President, Secretary and General Counsel for the
Company. As of June 16, 1995, Ms. Shapiro was the beneficial owner (for
purposes of the Exchange Act) of 22,959 shares of the Company's Common Stock.
EXPERTS
The consolidated financial statements of the Company at September 30, 1994
and 1993 and for each of the three years in the period ended September 30, 1994,
incorporated by reference in CommNet Cellular Inc.'s Annual Report (Form 10-K)
as amended by Form 10-K/A No. 1 filed on January 11, 1995, Form 10-K/A No. 2
filed May 25, 1995 and Form 10-K/A No. 3 filed June 16, 1995, have been audited
by Ernst & Young LLP, independent auditors, as set forth in their report
thereon included therein and incorporated herein by reference. Such
consolidated financial statements are incorporated herein by reference in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses to be paid by the Company in connection with
the distribution of the securities being registered are as follows:
<TABLE>
<S> <C>
Securities and Exchange Commission Fee . . . . . . . . . . . . $ 2,845.78
*Accounting Fees and Expenses . . . . . . . . . . . . . . . . 4,500.00
*Legal Fees and Expenses . . . . . . . . . . . . . . . . . . . --
*Printing Expenses . . . . . . . . . . . . . . . . . . . . . . 500.00
*Miscellaneous Expenses . . . . . . . . . . . . . . . . . . . 2,154.22
----------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . $10,000.00
----------
----------
- --------------------
<FN>
*Estimated
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article IX of the Company's Articles of Incorporation provides in part:
B. The Corporation shall, to the fullest extent permitted by
applicable law, (i) indemnify, and (ii) advance litigation expenses prior to the
final disposition of an action, to any person made or threatened to be made a
party to an action or proceeding, whether criminal, civil, administrative or
investigative, by reason of the fact that he or she is or was a director or
officer of the Corporation or served any other enterprise as a director or
officer at the request of the Corporation and such rights of indemnification and
to advancement of litigation expenses shall also be applicable to the heirs,
executors, administrators and legal representatives of such director or officer.
C. The foregoing provisions of Article IX shall be deemed to be a
contract between the Corporation and each director and officer who serves in
such capacity at any time while this Article IX is in effect, and any repeal or
modification hereof shall not affect the rights or obligations then or therefore
existing or any action, suit or proceeding theretofore or thereafter brought
based in whole or in part upon any such stated facts.
D. The foregoing rights to indemnification and to advancement of
litigation expenses shall not be deemed exclusive of any other rights to which a
director or officer or his or her legal representatives may be entitled apart
from the provisions of this Article IX.
<PAGE>
ITEM 16. EXHIBITS.
The following is a complete list of exhibits filed as a part of this
Registration Statement and which are incorporated herein.
EXHIBIT NO.
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.
*5.1 Opinion of Amy M. Shapiro regarding legality of the securities
covered by this Registration Statement.
23.1 Consent of Amy M. Shapiro, general counsel for the Company
(included in Exhibit 5.1)
**23.2 Consent of Ernst & Young LLP, independent auditors.
--------------------
* Previously filed.
** Filed herewith.
ITEM 17. UNDERTAKINGS.
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the Registration Statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement; and
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the Registration
Statement or any material change to such information in the
Registration Statement.
PROVIDED, HOWEVER, that paragraphs (1)(i) and (1)(ii) do not apply if
the information required to be included in a post-effective amendment by
those paragraphs is contained in periodic reports filed by the registrant
pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of
1934 that are incorporated by reference in the Registration Statement.
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<PAGE>
(2) That, for the purposes of determining any liability under the
Securities Act, each post-effective amendment shall be deemed to be a new
Registration Statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment to
the Registration Statement of any of the securities being registered which
remain unsold at the termination of this offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the Registrant pursuant to the provisions referred to in Item 14 of this Part
II, or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liability (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Englewood, State of Colorado, on June 28, 1995.
COMMNET CELLULAR INC.
By: /s/ Arnold C. Pohs
----------------------------------
Arnold C. Pohs, President
Pursuant to the requirements of the Securities Act of 1933 this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
* Chairman of the Board, President June 28, 1995
- ---------------------- and Chief Executive Officer
Arnold C. Pohs (Principal Executive Officer)
* Executive Vice President, Treasurer, June 28, 1995
- ---------------------- Chief Financial Officer and Director
Daniel P. Dwyer (Principal Financial Officer)
* Senior Vice President and June 28, 1995
- ---------------------- Controller
Andrew J. Gardner (Principal Accounting Officer)
* Director June 28, 1995
- ----------------------
John E. Hayes, Jr.
* Director June 28, 1995
- ----------------------
David E. Simmons
*/s/ Amy M. Shapiro, ATTORNEY-IN-FACT
<PAGE>
EXHIBIT INDEX
Exhibit No. Page No.
- ----------- --------
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.
*5.1 Opinion of Amy M. Shapiro regarding legality of the
securities covered by this Registration Statement.
23.1 Consent of Amy M. Shapiro, general counsel for the
Company (included in Exhibit 5.1)
**23.2 Consent of Ernst & Young LLP, independent auditors.
- --------------------
* Previously filed.
** Filed herewith.
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the references to our firm under the captions "Selected
Consolidated Financial Data" and "Experts" in Amendment No. 3 to the
Registration Statement (Form S-3 No. 33-58309) and related Prospectus of CommNet
Cellular Inc. for the registration of 330,000 shares of its common stock and to
the incorporation by reference therein of our report dated December 2, 1994,
with respect to the consolidated financial statements and schedules of CommNet
Cellular Inc. included in its Annual Report (Form 10-K) for the year ended
September 30, 1994, as amended to date, filed with the Securities and Exchange
Commission.
ERNST & YOUNG LLP
Denver, Colorado
June 28, 1995
