<PAGE>
FORM 10-K
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended: September 30, 1996
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number: 0-15056
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COMMNET CELLULAR INC.
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(Exact name of registrant as specified in its charter)
Colorado 84-0924904
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8350 East Crescent Parkway, Suite 400, Englewood, Colorado 80111
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(Address of principal executive offices)
(Zip Code)
303/694-3234
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.001 per share
(Title of Class)
Preferred Stock Purchase Rights
(Title of Class)
Indicate by check mark whether the registrant (a) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant, computed by reference to the last sale price of such stock as of the
close of trading on December 18, 1996 was $264,436,632.
The number of shares of the registrant's common stock outstanding as of
December 18, 1996 was 13,741,378.
<PAGE>
PART I
Item 1. Business.
(a) General Development of Business.
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CommNet Cellular Inc. was organized under the laws of Colorado in 1983.
Cellular, Inc. Financial Corporation ("CIFC") subsequently was organized to
provide financing to affiliates of the Company. Cellular Inc. Network
Corporation ("CINC") also subsequently was organized to acquire interests in
cellular licenses. CIFC and CINC are wholly-owned subsidiaries of CommNet
Cellular Inc. Unless the context indicates otherwise, the "Company" refers to
CommNet Cellular Inc. and its consolidated subsidiaries.
The Company operates, manages and finances cellular telephone systems,
primarily in rural markets in the mountain and plains regions of the United
States. The Company's cellular interests currently represent approximately
3,526,000 net Company pops in 82 markets located in 14 states. These markets
consist of 72 RSA markets having a total of 5,183,000 pops and 10 MSA markets
having a total of 1,295,000 pops, of which the Company's interests represent
2,843,000 net Company pops and 683,000 net Company pops, respectively. Systems
in which the Company holds an interest constitute one of the largest geographic
collection of contiguous cellular markets in the United States.
As used herein, "pops" means the estimated total 1995 population of a
Metropolitan Statistical Area ("MSA") or Rural Service Area ("RSA") as initially
licensed by the Federal Communications Commission ("FCC"), based upon
Demographics On-Call population estimates. "Net Company pops" means an MSA's or
RSA's pops multiplied by the Company's net ownership interest in the entity
licensed by the FCC to operate a cellular telephone system in that MSA or RSA.
An MSA or RSA is referred to herein as a "market," and a market served by a
cellular telephone system that is managed, directly or indirectly, by the
Company is referred to herein as a "managed market." The radio signal from the
Company's managed systems covers virtually all of the pops within the managed
markets. The number of pops does not represent the current number of users of
cellular services and is not necessarily indicative of the number of users of
cellular services in the future. Those corporations and partnerships through
which the Company holds ownership interests in cellular licensees and those
cellular licensees in which the Company holds a direct ownership interest are
referred to herein as "affiliates." Any reference herein to an "affiliate" does
not necessarily imply that the Company exercises, or has the power to exercise,
control over the management and policies of such entity.
The Company was formed to acquire cellular interests through participation
in the licensing process conducted by the FCC. In order to participate in that
process, the Company formed affiliates which originally were owned at least 51%
by one or more independent telephone companies ("telcos") and no more than 49%
by the Company. See "-- Federal Regulation." In exchange for the Company's 49%
interest, the Company offered to sell shares of its Common Stock to the telcos
and agreed to provide financing to the affiliates. The Company subsequently
purchased additional interests in many of such affiliates, as well as in
additional cellular properties. The Company currently manages 55 of the 82
markets in which it holds an interest and owns a greater than 50% interest in 45
of its 55 managed markets. The Company provides capital and financing to
entities holding interests representing approximately 4,335,000 pops, of which
3,526,000 are included in net Company pops and 809,000 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
I-1
<PAGE>
Company. The network currently consists of 55 markets (48 RSA and 7 MSA markets)
spanning nine states and represents approximately 4,105,000 pops and 3,183,000
net Company pops. As of September 30, 1996, the RSA and MSA managed markets had
159,796 and 55,896 subscribers, respectively. The Company significantly expanded
radio signal coverage with construction of 36 new cell sites in fiscal year
1996.
The Company believes that certain demographic characteristics of the rural
marketplace should further facilitate commercial exploitation of the network.
As compared to urban residents, rural residents travel greater distances by
personal vehicle and have access to fewer public telephones along drive routes.
The Company believes that these factors will sustain demand for mobile
telecommunication service in the rural marketplace. These same factors produce
"roaming" revenues that are higher as a percentage of total revenues than would
likely be the case in more densely populated urban areas. In-roaming revenues
tend to produce higher margins because roaming calls on average are priced at
higher rates than local calls and because there are no associated sales
commission costs.
(b) Financial Information About Industry Segments.
---------------------------------------------
The Company has only one principal industry being the management, financing
and operation of cellular telephone systems. Information concerning revenue,
operating profit or loss and identifiable assets of the Company's sole industry
segment are set forth in the consolidated financial statements and related notes
included in Part II of this Report.
(c) Narrative Description of Business.
---------------------------------
The Company's Operations
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General. Information regarding the Company's net ownership interests in
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each cellular licensee and the market subject to such license as of December 18,
1996 is summarized in the following table.
<TABLE>
<CAPTION>
Net Company
MSA or Interest in 1995 Net Company
RSA Code (1)(7) State Licensee (2) Population (3)(6) Pops (4)
- --------------- -------------- ---------------- --------------------- --------------
MSAs:
<S> <C> <C> <C> <C>
141 Minnesota 16.34% 228,599 37,353
185 Indiana 16.67% 169,996 28,338
241*(5) Colorado 73.99% 128,834 95,324
253*(5) Iowa 74.50% 120,090 89,467
267*(5) South Dakota 51.00% 136,948 69,843
268*(5) Montana 77.05% 124,991 96,306
279 Maine 11.11% 103,825 11,534
289*(5) South Dakota 100.00% 111,008 111,008
297*(5) Montana 100.00% 81,860 81,860
298*(5) North Dakota 70.00% 89,182 62,427
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Total MSA 1,295,333 683,460
</TABLE>
I-2
<PAGE>
<TABLE>
<CAPTION>
Net Company
MSA or Interest in 1995 Net Company
RSA Code (1) State Licensee (2) Population (3)(6) Pops (4)
- --------------- --------------- ---------------- --------------------- --------------
<S> <C> <C> <C> <C>
RSAs:
348* Colorado 10.00% 45,735 4,574
349*(5) Colorado 61.75% 61,982 38,274
351*(5) Colorado 61.75% 69,660 43,015
352*(5) Colorado 66.00% 28,096 18,543
353*(5) Colorado 100.00% 70,398 70,398
354*(5) Colorado (B1) 69.40% 45,704 31,719
355* Colorado 49.00% 45,191 22,144
356* Colorado (B1) 49.00% 24,852 12,177
389 Idaho 50.00% 69,570 34,785
390 Idaho 33.33% 16,271 5,423
392*(5) Idaho (B1) 100.00% 138,640 138,640
393*(5) Idaho 91.64% 290,301 266,032
415 Iowa 10.11% 155,123 15,689
416 (5) Iowa 78.57% 108,909 85,570
417*(5) Iowa 100.00% 154,029 154,029
419* Iowa 44.92% 54,713 24,576
420*(5) Iowa 100.00% 63,639 63,639
424 Iowa 35.00% 66,874 23,406
425* Iowa 13.28% 107,540 14,286
426* Iowa 49.14% 84,145 41,347
427* Iowa 49.17% 104,222 51,242
428 Kansas 3.07% 28,100 863
429 Kansas 3.07% 30,793 945
430 Kansas 3.07% 52,838 1,622
431 Kansas 3.07% 139,000 4,267
432 Kansas 3.07% 30,818 946
433 Kansas 3.07% 20,322 624
434 Kansas 3.07% 80,841 2,482
435 Kansas 3.07% 130,085 3,994
436 Kansas 3.07% 58,827 1,806
437 Kansas 3.07% 107,888 3,312
438 Kansas 3.07% 83,409 2,561
439 Kansas 3.07% 43,269 1,328
440 Kansas 3.07% 29,648 910
441 Kansas 3.07% 174,109 5,345
442 Kansas 3.07% 154,451 4,742
512 Missouri (B1) 14.70% 55,832 8,207
523*(5) Montana (B1) 100.00% 71,238 71,238
523*(5) Montana (B2) 98.81% 76,396 75,487
524*(5) Montana (B1) 79.40% 34,534 27,420
526*(5) Montana (B1) 100.00% 21,606 21,606
527*(5) Montana 100.00% 185,108 185,108
528*(5) Montana 80.88% 64,763 52,377
529*(5) Montana 87.25% 29,470 25,713
530*(5) Montana 80.88% 90,681 73,338
531*(5) Montana 100.00% 33,158 33,158
532*(5) Montana 100.00% 20,150 20,150
</TABLE>
I-3
<PAGE>
<TABLE>
<CAPTION>
Net Company
MSA or Interest in 1995 Net Company
RSA Code (1) State Licensee (2) Population (3)(6) Pops (4)
- --------------- --------------- ---------------- --------------------- --------------
<S> <C> <C> <C> <C>
553*(5) New Mexico (B2) 58.36% 112,118 65,432
555 New Mexico 12.25% 85,123 10,428
557 New Mexico 16.33% 58,288 9,519
580*(5) North Dakota 53.36% 102,631 54,763
581* North Dakota 49.00% 60,484 29,637
582 North Dakota 41.45% 90,761 37,620
583* North Dakota 49.00% 64,068 31,393
584*(5) North Dakota 61.75% 49,088 30,312
634*(5) South Dakota 100.00% 36,925 36,925
635*(5) South Dakota 100.00% 22,682 22,682
636*(5) South Dakota 100.00% 53,571 53,571
638*(5) South Dakota (B1) 100.00% 16,390 16,390
638*(5) South Dakota (B2) 100.00% 8,922 8,922
639*(5) South Dakota (B1) 100.00% 36,165 36,165
639*(5) South Dakota (B2) 100.00% 3,250 3,250
640*(5) South Dakota 64.49% 66,695 43,012
641*(5) South Dakota 61.13% 73,708 45,058
642* South Dakota 49.00% 95,097 46,598
675*(5) Utah 100.00% 54,892 54,892
676*(5) Utah 100.00% 101,360 101,360
677*(5) Utah (B3) 100.00% 39,137 39,137
678*(5) Utah 80.00% 27,699 22,159
718*(5) Wyoming 66.00% 49,619 32,749
719*(5) Wyoming 100.00% 75,369 75,369
720*(5) Wyoming 100.00% 146,385 146,385
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Total RSA 5,183,355 2,842,785
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Total MSA and RSA 6,478,688 3,526,245
========= =========
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</TABLE>
(1) MSA ranking is based on population as established by the FCC. RSAs
have been numbered by the FCC alphabetically by state.
(2) Represents the net ownership interest of the Company in the licensee for a
cellular telephone system in the respective market. Net ownership of
greater than 50% does not necessarily represent a controlling interest in
such licensee.
(3) Derived from the Demographics On-Call 1995 population estimates.
(4) Net Company Pops represents Net Company Interest in Licensee multiplied by
1995 population.
(5) The operations of these markets are currently reflected on a consolidated
basis in the Company's consolidated financial statements. The operations
of the other markets in which the Company holds an interest are reflected
in such financial statements on either an equity or a cost basis.
(6) Represents population within the market area initially licensed by the FCC.
The number of pops which are covered by radio signal in a market is
expected to be marginally lower than the market's total pops on a going-
forward basis.
(7) The FCC recently ruled to return the license for the Portland, Maine MSA
(MSA 152) to Portland Cellular Partnership, an affiliate of the Company.
This ruling is the subject of ongoing litigation, and therefore the pops
are not included in the table. Had the market been included, Net Company
Pops would have increased approximately 32,000.
Markets managed by the Company are denoted by an asterisk (*).
I-4
<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%
Sept. 30, 1995 56 7 49 4,220,975 785,866 (6) 3,435,109 (6) 151,482 42,401 109,081 53.01%
Dec. 31, 1995 55 7 48 4,043,143 785,866 (6) 3,257,277 (6) 168,465 46,381 122,084 11.21%
March 31, 1996 55 7 48 4,043,143 785,866 (6) 3,257,277 (6) 180,506 49,084 131,422 7.15%
June 30, 1996 55 7 48 4,105,119 792,913 (7) 3,312,206 (7) 195,386 52,497 142,889 8.24%
Sept. 30, 1996 55 7 48 4,105,119 792,913 (7) 3,312,206 (7) 211,278 55,896 155,382 8.13%
</TABLE>
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(1) Derived from 1988 Donnelley Market Service population estimates.
(2) Derived from 1989 Donnelley Market Service population estimates.
(3) Derived from 1990 Census Report.
(4) Derived from 1992 Donnelley Market Service population estimates.
(5) Derived from 1993 Strategic Marketing Inc. population estimates.
(6) Derived from 1994 Strategic Marketing Inc. population estimates.
(7) Derived from 1995 Demographics On-Call population estimates.
Network Construction and Operations. Construction of cellular telephone
-----------------------------------
systems requires substantial capital investment in land and improvements,
buildings, towers, mobile telephone switching offices ("MTSOs"), cell site
equipment, microwave equipment, engineering and installation. The Company
believes that it has achieved significant economies of scale in constructing the
network. For example, the network uses cellular switching systems capable of
serving multiple markets. As a result of the contiguous nature of the network,
only 10 MTSOs are currently required to serve all 55 of the Company's managed
markets. By consolidating and deploying high capacity MTSOs, the Company
intends to achieve further economies of scale. Economies of scale generated by
the network also have permitted the Company to use one network operations
center, to centralize services such as network design and engineering, traffic
analysis, interconnection, billing, roamer verification, maintenance and support
and to access volume discount purchasing of cellular system equipment.
The network also affords the Company certain technical advantages in the
provision of enhanced services, such as call delivery and call forwarding.
Through the use of single switching facilities serving multiple markets, the
Company has implemented continuous coverage on an intrastate basis throughout
the network. The Company has widened the area of coverage within the network by
interconnecting MTSOs located in adjoining markets. The Company has
substantially achieved its objective of providing subscribers with "seamless"
coverage throughout the network, which permits subscribers, as they travel
through the network, to receive calls and otherwise use their cellular telephone
as if they were in their home market. This is a result of the networking of the
MTSOs managed by the Company and MTSOs of other carriers, especially those
operating adjoining markets within the nine-state area. The Company has
achieved a high degree of network reliability through the deployment of
standardized components and operating procedures, and the introduction of
redundancy in switching and cell site equipment, interconnect facilities and
power supply. Most of the Company's equipment is built by Northern Telecom,
Inc. ("Nortel"), and interconnection between the Nortel MTSOs has been achieved
using Nortel's internal software and hardware.
I-5
<PAGE>
The Company implemented the "IS-41" technical interface during fiscal 1995.
This technical interface, developed by the cellular industry, allows carriers
that have different types of equipment to integrate their systems 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 agreements with other cellular carriers
to enhance the range of markets and quality of service available to cellular
subscribers when traveling outside the network. Pursuant to existing agreements
with other cellular carriers, the Company's subscribers are able to "roam"
throughout most MSA and RSA markets in the United States and Canada.
Expansion. The Company has completed the process of "filling in" the
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"cellular geographic service area" or "CGSA" (as defined by the FCC) within its
managed markets by adding network facilities which increased the coverage of the
radio signal. The Company significantly expanded radio signal coverage with
construction of 36 new cell sites in fiscal year 1996. In addition, the Company
analyzed the quality of existing coverage based upon empirical data gathered
using sophisticated mobile testing equipment. These "drive tests" gave rise to
changes in how certain sites were configured or deployed in the network. For
example, certain sites were "sectorized" to reduce interference and provide
additional capacity facing particular directions. The Company expects to
continue such efforts to improve coverage, especially for low power portable
cellular phones, throughout fiscal year 1997. Expansion and optimization of
signal coverage has increased subscribers, enhanced the use of the systems by
existing subscribers, increased roamer traffic due to the larger geographic area
covered by the radio signal and improved the overall efficiency of the network.
Under the rules and regulations of the FCC, expansion of signal coverage has
preserved the Company's right to provide cellular service in valuable areas
within the network.
The Company continually evaluates acquisitions of cellular properties that
are geographically and 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
partners in the respective partnerships in which the Company holds an interest.
Recent 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.
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 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 packages cellular equipment with its cellular service
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.
I-6
<PAGE>
The network affords the Company the opportunity to offer service over
expanded geographic territories at favorable rates. Customers that subscribe to
a stand-alone cellular system generally are charged premium roaming rates when
using a cellular system outside of their home service area. The Company's
subscribers are able to roam within the network and are afforded "home rate
follows" pricing, whereby subscribers are charged the rate applicable in their
home service area when traveling within the network. In addition, the Company's
simplified retail roaming rate structure allows the customer to roam on certain
adjacent carriers' systems at a preferred rate and minimizes confusion by
consolidating the remainder of the country into a uniform rate. Finally, the
Company offers toll-free calling across single or multiple states to its
subscribers for a nominal monthly fee, due to favorably negotiated interconnect
agreements.
The Company believes that certain attributes of the Company's operating
infrastructure, including existing towers, established distribution channels and
other administrative resources, can be utilized to offer one-way paging service
throughout the managed markets and adjoining areas on a cost-efficient basis.
In fiscal year 1996, the Company filed for paging licenses with the FCC and
pursued an alliance with a national paging company. However, the FCC has
recently delayed the licensing process in an attempt to attract applicants which
would ultimately compete for purchase of licenses at auction. As a result, the
Company was unable to obtain sufficient paging licenses to commence paging
operations. In addition, the national paging company was acquired by another
paging company and began experiencing operating problems, making the proposed
alliance unfeasible. The Company is currently in negotiations with another
national paging company. Many paging sites were constructed in fiscal 1996, and
the Company expects to offer paging services in fiscal 1997, subject to the
receipt of sufficient FCC paging licenses or the successful consummation of an
alliance with a national paging company.
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. In addition, calls are efficiently
processed using sophisticated call center technologies. Inbound calls are
processed through an automatic call distribution system and an integrated voice
response system which route and track calls among customer service
representatives and permit customers to obtain information quickly and
accurately on their own. Outbound calls are placed to select cross sections of
the customer base using a predictive dialing system. The customer assistance
department also supports the administrative functions required to activate a
customer's phone through a high speed, call-in process and to enter the customer
into the informational databases required for customer service and billing. The
Company believes this centralized approach provides cost efficiencies while also
addressing the need for quality control. To ensure that it is delivering a
consistently high level of quality service, the Company monitors customer
satisfaction with its network quality, sales and customer service support,
billing and quality of roaming through regular surveys conducted by an
independent research firm.
In 1992, the Company began investing in TVX, Inc. TVX, Inc. develops and
distributes digital image management systems for the security and surveillance
industry and the transportation management industry. It also is a value-added
reseller of imaging hardware and software with systems engineering capabilities.
The TVX system enables video and still images from remote locations to be
captured, digitized and compressed for storage or immediate transmission over
wired or wireless networks for evaluation by end users. The Company intends to
work closely with TVX, Inc. to market cellular service in conjunction with the
TVX system for use with automated teller machines, public transit systems and at
locations where phone lines are not available or as a backup when phone lines
have been disabled. The Company owns 48% of the Common Stock, 48% of the Series
A Redeemable Preferred Stock and 100% of the Series B Convertible Preferred
Stock of TVX, Inc.
I-7
<PAGE>
Marketing. The Company coordinates the marketing strategy for each of its
---------
managed markets. The Company markets cellular telephone service under the
CommNet Cellular name. The use of a single name over a broad geographic
territory creates strong brand-name recognition and allows the Company to
achieve advertising efficiencies. In addition, the Company packages services
which are marketed under a program called "Fun, Easy and Affordable." Benefits
to customers include free use of a base model phone, permissive dialing to
complete calls, toll-free calling in the home area code, free enhanced features
such as call forwarding, call waiting and itemized call listing and others.
The Company believes that a key competitive advantage in marketing its
service is the large geographic area covered by the network. Seamless coverage
in the network is critical to marketing, as customers are attracted to the
higher percentage of delivered calls that such coverage provides. Furthermore,
the Company's "home rate follows" pricing allows customers to make calls from
anywhere in the network without incurring additional daily fees or surcharges
which usually occur when customers roam outside of their home market.
Additionally, the Company uses the "INLink" and "Follow-Me-Roaming" services
provided by GTE Telecommunication Services, Inc. which permit customers to
receive calls in any market that is part of the INLink or Follow Me Roaming
system without having to dial complicated access codes. The Company also offers
discounted roaming prices, and offers enhanced services, in certain markets as a
result of arrangements to link with certain adjacent markets managed by other
carriers. See "Business -- The Company's Operations -- Network Construction and
Operations." The Company offers additional services such as toll-free calling
across multiple area codes, use of premium model phones, weekend blocks of usage
and others to its subscribers for nominal monthly fees. In a majority of the
Company's managed RSA markets, the Company was the first cellular system
operator to provide service in the market, thereby affording a significant
competitive advantage. Being first to market in the majority of the Company's
managed RSA markets has also allowed the Company to obtain exclusive marketing
agreements with the leading telecommunication retailers in a particular market
and to obtain prime locations for its sales centers.
Initially, the Company relied to a significant extent on direct sales
representatives and on independent sales agents. The Company currently
emphasizes a channel of distribution, which also performs local customer service
functions, represented by 30 Company-owned retail stores located within the
network, which will be supplemented by 28 additional Company-owned retail stores
scheduled to open during fiscal 1997. The retail distribution channel also
includes 47 Wal-Mart/(R)/ kiosks staffed by Company personnel. The Company
believes that development of retail distribution channels owned or staffed by
the Company maximizes customer additions, generates cost efficiencies in the
acquisition of such new subscribers, and enhances customer service. (Over half
of the current customer base lives within commuting distance to a Company-owned
retail store.) The Company also maintains 76 direct sales representatives and
938 agents or outlets, including 59 Radio Shack and 16 /(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. In future periods, the Company expects
to market service through an in-house telemarketing staff. Additionally, the
Company expects to affiliate with more resellers, potentially including large
telecommunications companies, which are expected to package the Company's
service with theirs to compete under new regulatory conditions.
Subscribers. To date, a substantial majority of the subscribers who use
-----------
cellular service in markets managed by the Company have been business users of
mobile communication services. However, safety and combined personal and
business use are reasons newer customers subscribe. This trend is consistent
with the experience of the cellular industry generally, although given the
Company's geographic presence in the mountain and plains states, its customers
have tended to include proportionally more persons in agricultural, construction
and energy industries. The Company believes that certain demographic
characteristics of the rural marketplace will enhance
I-8
<PAGE>
the Company's ability to market cellular service to its primary customer base
within its managed RSA markets. On average, rural residents spend a higher
percentage of their annual household income on transportation and travel a
relatively greater distance by personal vehicle than do urban residents. The
relatively large average distance between public telephones in the rural
marketplace is an additional factor that increases the need for mobile
telecommunication services in that market.
Management Agreements. Management agreements applicable to the Company's
---------------------
managed RSA markets generally appoints the Company as exclusive management agent
of the licensee with specifically enumerated responsibilities relating to the
day-to-day business operation of the licensee, although the licensee retains
ultimate control over its cellular system. Generally, the RSA management
agreements were for an initial term of five years and are automatically renewed
for additional terms unless terminated by notice from either party prior to
expiration of the then current term. The agreements provide for reimbursement
to the Company of expenses incurred on behalf of the licensee.
The Company has entered into management agreements with three MSA
affiliates pursuant to which the Company has been appointed the exclusive
management agent for each such affiliate. The MSA management agreements appoint
the Company as managing agent of the MSA affiliate with specifically enumerated
responsibilities relating to the day-to-day business operation of the affiliate.
The affiliate is the general partner in the licensee, and the Company acts as
exclusive management agent for the licensee, although the licensee retains
ultimate control over its cellular system. The MSA management agreement
provides for compensation to the Company in an amount equal to 10% of the
distributions to the affiliate derived from the affiliate's interest in the
licensee. Compensation to date under this agreement has not been material. The
agreements also provide for reimbursement of reasonable administrative and
overhead expenses. The agreements generally were for an initial term of five
years, were extended for an additional one-year term and are automatically
renewed for one-year terms thereafter unless terminated by notice from either
party prior to expiration of the then current term.
The Company has also entered into a management agreement with CINC, whereby
it manages all systems owned by CINC and in which CINC is the general partner.
History. The Company initially acquired its cellular interests by
-------
participating in the wireline licensing process conducted by the FCC. In order
to participate in that process, the Company formed affiliates which were
originally owned at least 51% by one or more telcos and no more than 49% by the
Company. In exchange for the Company's 49% interest, the Company offered to
sell shares of its Common Stock and agreed to provide financing to the
affiliates for certain capital needs, as well as certain management services.
In addition to obtaining interests in cellular markets through participation in
the FCC licensing process, the Company also has purchased direct interests in
additional markets in order to expand the network.
Financing Arrangements with Affiliates; CIFC. CIFC has entered into loan
--------------------------------------------
agreements with RSA and MSA affiliates to finance or refinance the costs related
to the construction, operation and expansion of cellular telephone systems in
which such affiliates own an interest. The loans are financed with funds
borrowed by CIFC from CoBank, ACB as agent for a syndicate of lenders ("CoBank")
and the Company. As of September 30, 1996, CIFC had loan agreements outstanding
with 40 RSA affiliates, 5 MSA affiliates and CINC and had advanced $264,226,000
thereunder, including $199,133,000 to entities which are consolidated for
financial reporting purposes. All loans to affiliates from CIFC are secured by
a lien upon all assets of the entity to which funds are advanced. At September
30, 1996, loans were charged interest at the average cost of CoBank borrowings.
The loan agreement between CIFC and CoBank and the loan agreements between the
affiliates and CIFC terminate at December 31, 1996 with principal amortization
to begin in 1997. CIFC and CoBank have agreed to modify certain provisions of
the loan agreement, including extending the term, which modifications are
expected to be completed by January 31, 1997. CIFC is
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also in the process of modifying the loan agreements with the affiliates to
extend the term and change the amortization schedule. 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. If such funds are not adequate to meet required principal payments,
additional capital may be required. Amounts paid to CIFC will be applied by CIFC
towards payment of its obligations to CoBank or retained to make future
advances. The Company has made and will continue to make advances to affiliates
on an interim basis. Funds borrowed from CIFC by affiliates are used to repay
the Company for such interim advances. As of September 30, 1996, the Company had
outstanding interim advances of $60,560,000 to nonconsolidated affiliates, which
advances bear interest at 2% over the prime rate.
As of September 30, 1996, the Company and CIFC had advanced a total of
$327,715,000 to RSA and MSA affiliates. Based on its proportionate ownership
interests in these affiliates, the Company's share of total affiliate loans and
advances was $273,288,000. The assets of the affiliates in which the Company
has investments or advances represent 4,359,000 pops, which include 3,526,000
net Company pops. Advances related to pops attributable to parties other than
the Company total $54,427,000.
The Cellular Telephone Industry. Cellular telephone service is a form of
-------------------------------
wireless telecommunication capable of providing high quality, high capacity
service to and from mobile, portable and fixed radio telephones. Cellular
telephone technology is based upon the division of a given market area into a
number of regions, or "cells," which in most cases are contiguous. Each cell
contains a low-power transmitter-receiver at a "base station" or "cell site"
that communicates by radio signal with cellular telephones located in the cell.
The cells are typically designed on a grid, although terrain factors, including
natural and man-made obstructions, signal coverage patterns and capacity
constraints, may result in irregularly shaped cells and overlaps or gaps in
coverage. Cells generally have radii ranging from two miles to more than 25
miles. Cell boundaries are determined by the strength of the signal emitted by
the cell's transmitter-receiver. Each cell site is connected to a MTSO, which,
in turn, is connected to the local landline telephone network.
When a cellular subscriber in a particular cell dials a number, the
cellular telephone sends the call by radio signal to the cell's transmitter-
receiver, which then sends it to the MTSO. The MTSO completes the call by
connecting it with the landline telephone network or another cellular telephone
unit. Incoming calls are received by the MTSO which instructs the appropriate
cell to complete the communications link by radio signal between the cell's
transmitter-receiver and the cellular telephone. By leaving the cellular
telephone on, a signal is emitted so the MTSO can sense in which cell the
cellular telephone is located. The MTSO also records information on system
usage and subscriber statistics.
The FCC has allocated the cellular telephone systems frequencies in the 800
MHz band of the radio spectrum. Each of the two licensees in each cellular
market is assigned 416 frequency pairs. Each conversation on a cellular system
occurs on a pair of radio talking paths, thus providing full duplex (i.e.,
----
simultaneous two-way) service. Two distinguishing features of cellular
telephone systems are: (i) frequency reuse, enabling the simultaneous use of
the same frequency in two or more adequately separated cells, and (ii) call
hand-off, occurring when a deteriorating transmission path between a cell site
and a cellular telephone is rerouted to an adjacent cell site on a different
channel to obtain a stronger signal and maintain the call. A cellular telephone
system's frequency reuse and call hand-off features result in far more efficient
use of available frequencies and enable cellular telephone systems to process
more simultaneous calls and service more users over a greater area than pre-
cellular mobile telephone systems.
Call hand-off in a cellular telephone system is automatic and virtually
unnoticeable to either party to the call. The MTSO and base stations
continuously monitor the signal strength of calls in progress. The signal
strength of the transmission between the cellular telephone and the
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base station declines as the caller moves away from the base station in that
cell. When the signal strength of a call declines to a predetermined threshold
level, the MTSO automatically determines if the signal strength is greater in
another cell and, if so, hands off the cellular telephone to that cell. The
automatic hand-off process within the system takes a fraction of a second.
However, if the cellular telephone leaves the reliable service areas of the
cellular telephone system, the call is disconnected unless an appropriate
technical interface is established with an adjacent system through intersystem
networking arrangements.
Frequency reuse is one of the most significant characteristics of cellular
telephone systems. Each cell in a cellular telephone system is assigned a
specific set of frequencies for use between that cell's base station and
cellular telephones located within the cell, so that the radio signals being
used in one cell do not interfere with those being used in adjacent cells.
Because of the relatively low transmission power of the base stations and
cellular telephones, two cells sufficiently far apart can use the same
frequencies in the same market without interfering with one another.
A cellular telephone system's capacity can be increased in various ways.
Within certain limitations, increasing demand may be met by simply adding
available frequency capacity to cells as required or, by using directional
antennas, dividing a cell into discrete multiple sectors or coverage areas,
thereby facilitating frequency reuse in other cells. Furthermore, an area
within a system may be served by more than one cell through procedures which
utilize available channels in adjacent cells. When all possible channels are in
use, further growth can be accomplished through a process called "cell
splitting." Cell splitting entails dividing a single cell into a number of
smaller cells serviced by lower-power transmitters, thereby increasing the reuse
factor and the number of calls that can be handled in a given area. Digital
transmission technologies are expected to provide cellular licensees with
additional capacity to handle calls on cellular frequencies. As a result of
present technology and assigned spectrum, however, there are limits to the
number of signals that can be transmitted simultaneously in a given area. In
highly populated MSAs, the level of demand for mobile and portable service is
often large in relation to the existing capacity. Because the primary objective
of the cellular licensing process is to address mobile and portable uses,
operators in highly populated MSAs may have capacity constraints which limit
their ability to provide alternate cellular service. The Company does not
anticipate that the provision of mobile and portable services within the network
will require as large a proportion of the systems' available spectrum and,
therefore, the systems will have more spectrum with which to pursue data
applications, which may enhance revenues.
FCC rules require that all cellular telephones be functionally compatible
with cellular telephone systems in all markets within the United States and with
all frequencies allocated for cellular use, so that a cellular telephone may be
used wherever a subscriber is located, subject to appropriate arrangements for
service charges. Changes to cellular telephone numbers or other technical
adjustments to cellular telephones by the manufacturer or local cellular
telephone service businesses may be required, however, to enable the subscriber
to change from one cellular service provider to another within a service area.
Because cellular telephone systems are fully interconnected with the
landline telephone network and long distance networks, subscribers can receive
and originate both local and long-distance calls from their cellular telephones.
Cellular telephone systems operate under interconnection agreements with
various local exchange carriers and interexchange carriers. The interconnection
agreements establish the manner in which the cellular telephone system
integrates with other telecommunications systems. The cellular operator and the
local landline telephone company must cooperate in the interconnection between
the cellular and landline telephone systems to permit cellular subscribers to
call landline subscribers and vice versa. The technical and financial details
of such
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interconnection arrangements are subject to negotiation and vary from system to
system. See "Federal Regulation--Recent Legislation."
While most MTSOs process information digitally, most radio transmissions of
cellular telephone calls are done on an analog basis. 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
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awarded only two licenses in each market, although certain markets have been
subdivided as a result of voluntary settlements. Each licensee has the exclusive
use of a defined frequency band within its market.
The primary competition for the Company's mobile cellular service in any
market comes from the other licensee in such market, which may have
significantly greater resources than the Company and its affiliates.
Competition is principally on the basis of coverage, services and enhancements
offered, technical quality of the system, quality and responsiveness of customer
service and price. Such competition may increase to the extent that licenses
pass from weaker stand-alone operators into the hands of better capitalized and
more experienced cellular operators who may be able to offer consumers certain
network advantages similar to those offered by the Company. Within the network,
the Company has three primary direct competitors, in addition to a number of
stand-alone operators.
Competition From Other Technologies. The FCC is now licensing commercial
-----------------------------------
personal communications services ("PCS"). PCS is not a specific technology, but
a variety of potential technologies that could compete with cellular telephone
systems. The FCC has identified two categories of PCS: broadband and
narrowband. Licenses will be awarded by competitive bidding. Auctions for the
first two spectrum blocks have been completed and several systems have commenced
operations in major metropolitan locations.
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).
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<PAGE>
The FCC has allocated 140 MHz of spectrum in the 2 GHz band for the
provision of licensed and unlicensed broadband PCS. Much of the spectrum
allocated for broadband PCS is already occupied by microwave licensees. As a
general proposition, broadband PCS licensees will be required to pay the costs
associated with relocating these existing microwave users to other portions of
the radio spectrum within a specified time frame.
Of the 140 MHz of spectrum allocated to broadband PCS, 120 MHz has been
allocated for licensed PCS. The 120 MHz of spectrum allocated to licensed PCS
has been divided into six channel blocks, as follows: (i) two channel blocks
(Blocks A and B) have been allocated 30 MHz of spectrum each, and has been
licensed on the basis of 51 Major Trading Areas ("MTAs"), (ii) one channel block
(Block C) has been allocated 30 MHz of spectrum and has been licensed on the
basis of 493 Basic Trading Areas ("BTAs"), (iii) three channel blocks (Blocks D,
E and F) have been allocated 10 MHz of spectrum each and will be licensed on the
basis of BTAs. The FCC will allow a single entity to combine all three 10 MHz
blocks as long as the entity complies with the 45 MHz spectrum cap described
below. Licensing has thus far been accomplished by spectrum auctions, but the
FCC has recently adopted partitioning rules that will allow PCS licensees to
assign portions of their coverage area and/or spectrum to other entities.
Restrictions apply to those channel bands (Blocks C & F) which have been set
aside for licensing to small businesses and other "designated entities."
Subject to certain cross-ownership benchmarks, spectrum aggregation is
permitted in broadband PCS, but is limited to 45 MHz of attributable Commercial
Mobile Radio Service ("CMRS") spectrum per service area to prevent any one
person or entity from exercising undue market power. Relevant CMRS spectrum
includes broadband PCS, cellular and certain specialized mobile radio systems
("SMRs") operations. Because attributable interests can be triggered by
management and joint marketing arrangements, as well as partitioning, and the 45
MHz spectrum cap is a complex rule which is under legal challenge, great care
must be taken in complying with this rule.
Broadband PCS licensees will be subject to minimum construction
requirements. Broadband PCS licenses will be awarded for a period of ten years,
with provisions for a license renewal expectancy similar to those currently
applied to cellular licensees.
It is uncertain what effect these new personal communications services may
have on the Company. A recent study conducted by the Company indicates that the
cost to build out a PCS network in a representative market of the Company would
be three to four times as expensive as the cost incurred by the Company for the
same coverage. Therefore, the Company believes that PCS is unlikely to compete
effectively with cellular telephone service in the rural marketplace in the near
future, but there can be no assurance that this will be the case. The Company
also believes that technological advances in cellular telephone technology in
conjunction with buildout of the cellular systems existing throughout the nation
with cell splitting and microcell technology would provide essentially the same
services as the PCS proposals described above, but there is no assurance that
this will happen. The FCC issued operating authority for personal
communications services competitive to the Company's services in the markets
managed by the Company, but no commercial operations have commenced in areas in
which the Company provides services.
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
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<PAGE>
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.
Technological advances in the communications field continue to occur and
make it difficult to predict the extent of additional future competition for
cellular systems. See "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. Each of these systems
could provide services that compete with those provided by the Company. The FCC
has also authorized Basic Exchange Telecommunications Radio Service to make
basic telephone service more accessible to rural households and businesses.
Federal Regulation
- ------------------
Overview. The construction, operation and acquisition of cellular systems
--------
in the United States are regulated by the FCC pursuant to the Communications Act
and the rules and regulations promulgated thereunder (the "FCC rules"). The FCC
rules govern applications to construct and operate cellular systems, licensing
and administrative appeals and technical standards for the provision of cellular
telephone service. The FCC also regulates coordination of proposed frequency
usage, height and power of base station transmitting facilities and types of
signals emitted by such stations. In addition, the FCC regulates (or forbears
from regulating) certain aspects of the business operations of cellular systems.
It has declined to regulate the price and terms of offerings to the public. See
"-- Recent Legislation."
Initial Regulation. For licensing purposes, the FCC established 734
------------------
discrete geographically defined market areas comprised of 306 MSAs and 428
RSAs. In each market area, the FCC awarded only two licenses authorizing the
use of radio frequencies for cellular telephone service. The allocated cellular
frequencies were divided into two equal 25 MHz blocks. One block of
frequencies, and the associated operating license, was initially reserved for
exclusive use by an entity that was majority-owned and controlled by local
landline telephone companies or their affiliates. The second block of
frequencies initially was reserved for use by entities that did not provide
landline telephone service in the market area. Upon the issuance of a
construction permit, such construction permit could be sold to any qualified
buyer, regardless of telephone company affiliation. The FCC generally prohibits
a single entity from holding an interest in both licenses in the same market.
RSAs were divided along county lines and consisted of one or more
contiguous counties within a single state. The RSAs were numbered
alphabetically by state, rather than on the basis of population. The FCC
applied a licensing policy for RSA markets similar to that utilized in the MSAs.
Applications for both licenses in each RSA were filed simultaneously. The FCC
chose among mutually exclusive applicants for each license through the use of a
lottery.
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Upon favorable review of the lottery winner or settlement entity,
designation of the tentative selectee and following a public comment period, the
FCC issued a construction permit for the cellular telephone system on each
frequency block in a specified market. An operating license was then granted
for an initial term of ten years (although a license may be revoked during its
term for cause after formal proceedings by the FCC).
License Renewal. The FCC has established rules and procedures to process
---------------
cellular renewal applications filed by existing carriers and the competing
applications filed by renewal challengers. Subject to one exception discussed
below, the renewal proceeding is a two-step hearing process. The first step of
the hearing process is to determine whether the existing cellular licensee is
entitled to a renewal expectancy, and otherwise remains basically qualified to
hold a cellular license. Two criteria are evaluated to determine whether the
existing licensee will receive a renewal expectancy. The first criterion is
whether the licensee has provided "substantial" service during its past license
term, defined as service which is sound, favorable and substantially above a
level of mediocre service which minimally might justify renewal. The second
criterion requires that the licensee must have substantially complied with
applicable FCC rules and policies. Under this second criterion, the FCC
determines whether the licensee has demonstrated a pattern of compliance. The
second criterion does not require a perfect record of compliance, but if a
licensee has demonstrated a pattern of noncompliance it will not receive a
renewal expectancy. If the FCC grants the licensee a renewal expectancy during
the first step of the hearing process and the licensee is basically qualified,
its license renewal application will be automatically granted and any competing
applications will be denied. If, however, the FCC denies the licensee's request
for renewal expectancy, the licensee's application will be comparatively
evaluated under specifically enumerated criteria with the applications filed by
competing applicants.
The exception to the two-step renewal hearing process allows a competing
applicant proposing to provide service that far exceeds the service presently
being provided by the incumbent licensee to request a waiver of the two-step
process. If the waiver request is granted, the FCC will hold only a comparative
hearing, i.e., it will not make a threshold determination in the first instance
----
as to whether the incumbent licensee is entitled to a renewal expectancy.
Cellular Service Area. In all markets, at least one cell site must have
---------------------
been placed into commercial service within 18 months after the award of the
initial construction permit. Under FCC rules, the authorized service area for a
cellular licensee in a market is referred to as the CGSA. The CGSA is defined
as the area served by the cellular licensee (as computed by a mathematical
formula based on the height and power of operating cell sites within which the
licensee is entitled to protection from interference on its frequencies). The
CGSA will be smaller than the market if a licensee has not fully built-out its
system, or it may be larger than the market if the licensee serves areas of
adjacent markets. Cellular licensees do not need to obtain FCC authority prior
to increasing the CGSA within their market during the five-year period after the
construction permit is initially granted for the market. However, FCC
notification of construction is still generally required. After the five-year
exclusive period has expired, any entity may apply to serve the unserved areas
of the market that comprise at least 50 contiguous square miles and are outside
of the licensee's CGSA (an "unserved area application").
Unserved area applications are filed in two phases, Phase I and Phase II.
During the first half of 1993, the FCC accepted Phase I unserved area
applications for frequency blocks in all markets in which: the five-year fill-
in period had already expired or would expire on or before March 15, 1993; no
applications for initial authorizations were filed; or authorizations were
surrendered or canceled for failure to meet the 18-month construction deadline
or other reasons. For all other markets, Phase I applications were due on the
31st day following expiration of the five-year fill-in period. All Phase I
applications for a given market are deemed mutually exclusive even if their
proposed CGSAs do not overlap. Once an authorization has been granted to a
Phase I applicant, the permittee has 90 days within which to file an application
requesting FCC authority
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<PAGE>
to make major modifications to its Phase I system. During this period, the FCC
will not accept any other applications for unserved areas in a market during
this period that are mutually exclusive with the Phase I carrier's major
modification application.
Phase II unserved area applications for any remaining area may be filed on
the 121st day after the Phase I authorization has been granted (or if no Phase I
applications are filed, on the first day after Phase I applications for that
market are permitted). In the event mutually exclusive applications are filed
the authorization will be issued by auction. Phase II applications may propose
CGSAs that cover area in more than one market. Phase II applications will be
placed on public notice by the FCC, and all interested and qualified parties
will have an opportunity to apply for the same market area within 30 days of the
public notice.
Phase I applicants for unserved areas not contiguous to licensed systems
must propose to serve a minimum of 50 contiguous square miles and must
demonstrate their financial qualifications to construct the proposed system and
to operate it for one year (assuming no revenues). Existing licensees proposing
to expand their systems through the filing of an unserved area application and
Phase II applicants are not subject to the 50 square mile minimum coverage rule,
nor are they required to make a financial qualifications showing. Under recent
legislation described below, mutually exclusive unserved area applications are
processed by lottery selection procedures (for applications filed prior to July
26, 1993) or by auctions (for applications filed after July 26, 1993), and
existing cellular carriers receive no preference in the lottery selection or
auction process.
Unserved area cellular carriers (both Phase I and Phase II) are allowed one
year within which to complete construction of their systems. Unserved area
cellular carriers are not permitted a five-year fill-in period. If an unserved
area cellular carrier forfeits its authorization for failure to construct, the
area which thereby reverts to "unserved" status may be applied for under Phase
II procedures.
Alien Ownership Restrictions. The Communications Act prohibits the
----------------------------
issuance of a license to, or the holding of a license by, any corporation of
which more than 20% of the capital stock is owned of record or voted by non-U.S.
citizens or their representatives or by a foreign government or a representative
thereof, or by any corporation organized under the laws of a foreign country.
The Communications Act also prohibits the issuance of a license to, or the
holding of a license by, any corporation directly or indirectly controlled by
any other corporation of which more than 25% of the capital stock is owned of
record or voted by non-U.S. citizens or their representatives or by a foreign
government or representative thereof, or by any corporation organized under the
laws of a foreign country, although the FCC has the power in appropriate
circumstances to waive these restrictions. The FCC has interpreted these
restrictions to apply to partnerships and other business entities as well as
corporations, with certain modifications. Failure to comply with these
requirements may result in denial or revocation of licenses. The Articles of
Incorporation of the Company contain prohibitions on foreign ownership or
control of the Company that are substantially similar to those contained in the
Communications Act.
Recent Legislation. The Telecommunications Act of 1996 (the "Act") which
------------------
modifies and amends the Communications Act of 1934, covers virtually every
element of communications. Congress' main objective was to promote competition
and reduce regulation in order to secure lower prices and higher quality
services for telecommunications consumers and to encourage the rapid deployment
of new telecommunications technologies. A great portion of the Act is aimed at
removing restrictions which prevent local and long distance service providers
from offering competing services in the same territory and redefining
compensation arrangements between CMRS providers, which include cellular
carriers such as the Company, Interexchange Carriers ("IXCs"), Local Exchange
Carriers ("LECs") and Independent Local Exchange Carriers ("ILECs"). The major
impact of the Act on the Company will initially be to reduce the costs paid by
the Company to interconnect and terminate calls on LEC, ILEC and IXC networks.
The Act requires
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such carriers to base termination charges to CMRS providers on cost and to
compensate CMRS providers for calls they terminate. This impact has not yet
affected the Company. Legal challenges to the FCC's proceeding to implement
those portions of the Act dealing with interconnection (the "Interconnection
Order") have resulted in an U.S. Court of Appeals stay of part of the
Interconnection Order's pricing rules. The Court recently lifted the stay with
respect to the rules which govern the compensation received by LEC's and
wireless carriers for transporting and terminating each other's traffic.
In addition, the Act mandates CMRS providers pay into the Universal Service
Fund ("USF"). The USF is to ensure basic telephone services are available,
reasonable and affordable for all citizens. In addition, the USF will promote
access to high capacity telecommunications services for schools, libraries and
rural health care providers. The FCC is in the process of promulgating rules
relating to USF; therefore, the impact on the Company is currently unknown.
Additionally, states may create their own funds imposing charges only on
intrastate service to supplement the resources available from USF. State
governments will be responsible for determining who will be eligible to receive
such federal or state subsidies. Most states have not finalized their rules,
but it is likely that the Company will be subject to additional state regulation
should it choose to withdraw from the fund.
In November 1996, the FCC issued a notice of proposed rulemaking to
designate the 2305-2320 and 2345-2360 MHz bands for new communications services
to be called Wireless Communications Service. The proposal responds to a
Congressional directive described in the Omnibus Consolidated Appropriations Act
that was passed at the end of the 104th Congress which requires the FCC to
reallocate these frequency bands in the 2.3 Ghz spectrum to wireless services
and award the licenses through competitive bidding by April 15, 1997. The
notice proposes that licensees would be allowed to offer any fixed, mobile or
radio location service or satellite Digital Audio Radio Services on a primary
basis. On a secondary basis, amateur radio service and aeronautical telemetry
operations will continue in certain portions of the band.
State, Local and Other Regulation
- ---------------------------------
State. Following receipt of an FCC construction permit and prior to the
-----
commencement of commercial service (prior to construction in certain states), a
cellular licensee must also obtain any necessary approvals from the appropriate
regulatory bodies in each of the states in which it will offer cellular service.
Certain state authorities regulate certain service practices of cellular system
operators. While such state regulations may affect the manner in which the
Company's affiliates conduct their business and could adversely affect their
profitability, they should not place the Company's affiliates at a competitive
disadvantage with other service providers in the same markets. The Company has
not experienced and does not presently contemplate any regulatory constraints,
difficulties or delays.
FAA, Zoning and Other Land Use. The location and construction of cellular
------------------------------
transmitter towers and antennas are subject to Federal Aviation Administration
("FAA") regulations and may be subject to federal, state and local environmental
regulation as well as state or local zoning, land use and other regulation.
Before a system can be put into commercial operation, the grantee of a
construction permit must obtain all necessary zoning and building permit
approvals for the cell sites and MTSO locations. The time needed to obtain
zoning approvals and requisite state permits varies from market to market and
state to state. Likewise, variations exist in local zoning processes. There
can be no assurance that any state or local regulatory requirements currently
applicable to the systems in which the Company's affiliates have an interest
will not be changed in the future or that regulatory requirements will not be
adopted in those states and localities which currently have none.
I-17
<PAGE>
Employees
- ---------
As of December 18, 1996, the Company had 523 full-time employees. The
Company engages the services of independent contractors on an as-needed basis.
Item 2. Properties.
In addition to the direct and attributable interests in cellular licensees
discussed in this Report, the Company leases its principal executive offices
(consisting of approximately 60,000 square feet) located in Englewood, Colorado.
The Company and its affiliates lease and own locations for inventory storage,
microwave, cell site and switching equipment and administrative offices.
Item 3. Legal Proceedings.
There are no material, pending legal proceedings to which the Company or
any of its subsidiaries is a party or of which any of their property is the
subject which, if adversely decided, would have a material adverse effect on the
Company.
Item 4. Submission of Matters to a Vote of Security Holders.
There were no matters submitted to a vote of security holders during the
quarter ended September 30, 1996.
I-18
<PAGE>
PART II
Item 5. Market for Registrant's Common Stock and Related Security Holder
Matters.
The common stock of the Company ("Common Stock") is traded on the
Nasdaq National Market under the symbol "CELS." The following table sets
forth the range of high and low closing sale prices of the Common Stock for
each fiscal quarter since October 1, 1994 as reported by Nasdaq.
Fiscal Year 1995: High Low
------- --------
First Quarter..... $29 1/4 $ 22 1/4
Second Quarter.... 28 1/2 22 3/4
Third Quarter..... 28 3/4 24 9/16
Fourth Quarter.... 30 1/2 27 1/4
Fiscal Year 1996: High Low
------- --------
First Quarter..... $29 1/4 $ 24 3/4
Second Quarter.... 29 1/2 25 1/2
Third Quarter..... 35 3/8 28 3/4
Fourth Quarter.... 32 25 3/8
As of December 18, 1996, there were 391 holders of record of the Common
Stock.
The Company has not paid cash dividends on the Common Stock and does
not anticipate that any cash dividends will be paid on the Common Stock in the
foreseeable future. Furthermore, certain financing agreements to which the
Company is a party contain provisions which restrict the payment by the Company
of dividends or distributions on the Common Stock (other than dividends or
distributions payable in shares of Common Stock).
II-1
<PAGE>
Item 6. Selected Financial Data. (Amounts in thousands, except share and per
share data)
Statement of Operations Data (1):
<TABLE>
<CAPTION>
Years ended September 30,
----------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues $ 115,196 $ 89,844 $ 61,360 $ 33,689 $ 14,906
Costs and expenses (net
of amounts allocated
to affiliates):
Cellular operations 76,123 68,929 50,856 30,289 18,138
Corporate 880 1,327 406 (1,119) 997
Total depreciation and
amortization 21,840 17,595 12,650 19,950 14,115
Write-down of invest-
ment in cellular
system equipment - - 3,117 - -
----------- ----------- ----------- ---------- ----------
Operating income (loss) 16,353 1,993 (5,669) (15,431) (18,344)
Equity in net loss of
affiliates (1,636) (5,028) (5,092) (6,339) (8,852)
Minority interest in net
income of consolidated
affiliates (1,123) (964) (544) - -
Gains (losses) on sales of
affiliates (250) 19,471 3,912 7,821 14,339
Interest expense (28,208) (26,044) (21,339) (16,428) (14,801)
Interest income 10,468 13,046 12,081 10,703 10,616
----------- ----------- ----------- ---------- ----------
Income (loss) before
income taxes and
extraordinary charge (4,396) 2,474 (16,651) (19,674) (17,042)
Income tax expense - 400 100 - -
----------- ----------- ----------- ---------- ----------
Income (loss) before
extraordinary charge (4,396) 2,074 (16,751) (19,674) (17,042)
Extraordinary charge - (2,012) - (2,992) -
----------- ----------- ----------- ---------- ----------
Net income (loss) $ (4,396) $ 62 $ (16,751) $ (22,666) $ (17,042)
=========== =========== =========== ========== ==========
Income (loss) per common
share before
extraordinary charge $(.32) $.17 $(1.45) $(2.30) $(2.44)
Extraordinary charge - (.16) - (.35) -
----------- ----------- ----------- ---------- ----------
Net income (loss) per
common share $(.32) $.01 $(1.45) $(2.65) $(2.44)
=========== =========== =========== ========== ==========
Weighted average shares
outstanding 13,727,203 12,153,592 11,577,191 8,551,785 6,984,541
=========== =========== =========== ========== ==========
Balance Sheet Data (1):
Years ended September 30,
----------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Working capital $ 16,246 $ 39,911 $ 25,525 $ 63,561 $ 29,478
Investments in and
advances to affiliates 57,245 56,919 61,909 55,892 52,020
Net property and
equipment 118,099 105,289 79,918 53,460 44,210
Total assets 331,837 325,668 282,638 269,524 208,364
Long-term debt 245,845 246,357 243,913 259,676 189,430
Total liabilities 268,855 267,012 266,731 278,946 204,124
Stockholders' equity
(deficit) (2) 62,982 58,656 15,906 (9,422) 4,240
</TABLE>
II-2
<PAGE>
(1) Markets in which the Company holds a greater than 50% net interest are
reflected on a consolidated basis in the Company's consolidated
financial statements. Markets in which the Company holds a net interest
which is 50% or less but 20% or greater are accounted for under the
equity method. Markets in which the Company holds a less than 20%
interest are accounted for under the cost method. The following table
sets forth the number of markets and relevant accounting methods at the
end of each of the last five fiscal years.
September 30,
----------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Consolidated 46 45 42 36 28
Equity 18 20 35 38 37
Cost 18 18 18 6 18
---- ---- ---- ---- ----
82 83 95 80 83
==== ==== ==== ==== ====
(2) No cash dividends were declared or paid during any period presented.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
General
- -------
The Company generated operating income during fiscal 1996 and 1995 and
focused on increasing penetration and subscriber usage. In addition, the
Company expects that operating income before depreciation and amortization
("EBITDA"), which was positive during the fiscal years ended September 30, 1996
and 1995, will also be positive in future fiscal years (although there can be no
assurance that this will be the case). Certain financial analysts consider
EBITDA a meaningful measure of an entity's ability to meet long-term financial
obligations, and growth in EBITDA a meaningful barometer of future
profitability, especially in a capital-intensive industry such as cellular
telecommunications. However, EBITDA should not be considered in isolation to,
or be construed as having greater significance than, other indicators of an
entity's performance. The results discussed below may not be indicative of
future results.
Consolidated results of operations include the revenues and expenses of
those markets in which the Company holds a greater than 50% interest. The
results of operations of 46 markets, 44 of which were consolidated for the
entire period, are included in the consolidated results for the fiscal year
ended September 30, 1996. The results of operations of 45 markets, 42 of which
were consolidated for the entire period, are included in the consolidated
results for the fiscal year ended September 30, 1995. The increase in the
number of markets included in consolidated results is due to acquisitions
consummated subsequent to September 30, 1995. Consolidated results of
operations also include the operations of Cellular, Inc. Financial Corporation
("CIFC"), the Company's wholly-owned financing subsidiary, as well as the
operations of Cellular Inc. Network Corporation ("CINC"), a wholly-owned
subsidiary through which the Company holds interests in certain cellular
licenses.
Equity in net loss of affiliates includes the Company's share of net
loss in the markets in which the Company's interest is 50% or less but 20% or
greater. For the fiscal year ended September 30, 1996, 18 markets were accounted
for under the equity method, compared to 20 such markets for the fiscal year
ended September 30, 1995. 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 both fiscal years ended September 30, 1996 and
September 30, 1995.
II-3
<PAGE>
Interest income reflects interest income derived from the financing
activities of CIFC and the Company with nonconsolidated affiliates, as well as
interest income derived from cash and short-term investments of the Company and
its consolidated affiliates. CIFC has entered into loan agreements with the
Company's affiliates pursuant to which CIFC makes loans to such entities for the
purpose of financing or refinancing the affiliates' costs of construction and
operation of cellular telephone systems. Such loans are financed with funds
borrowed by CIFC from CoBank, ACB, as agent for a syndicate of lenders
("CoBank") and from the Company. At September 30, 1996, loans bore interest at
the average cost of CIFC borrowings. From time to time, the Company advances
funds on an interim basis to affiliates. These advances typically are refinanced
through CIFC. To the extent that the cellular markets in which the Company holds
an interest generate positive cash flow, the cash is generally used to repay
borrowings by the affiliates from CIFC and thereafter will be used to make cash
distributions to equity holders, including the Company.
Management believes there exists a seasonality in both service revenues,
which tend to increase more rapidly in the third and fourth quarters, and
operating expenses, which tend to be highest in the first quarter due to
increased marketing activities and customer growth, which may cause operating
income to vary from quarter to quarter.
In addition to historical information, this report includes certain
forward-looking statements regarding events and financial trends which may
affect the Company's future operating results and financial position. Such
statements represent the Company's reasonable judgment on the future and are
subject to risks and uncertainties that could cause the Company's actual results
and financial position to differ materially. Such factors include, but are not
limited to: a change in economic conditions in the Company's markets which
adversely affects the level of demand for wireless services; greater-than-
anticipated competition resulting in price reductions, new product offerings, or
higher customer acquisition costs; better-than-expected customer growth
necessitating increased investment in network capacity; negative economies that
could result if one or more agreements to manage markets are not renewed;
increased cellular fraud; the impact of new business opportunities requiring
significant initial investments; and the impact of deployment of new
technologies on capital spending.
Results of Operations
- ---------------------
Fiscal Year 1996 Compared With Fiscal Year 1995. Cellular service
-----------------------------------------------
revenues, including in-roaming revenues, increased 37% from $81,939,000 for the
year ended September 30, 1995 to $112,387,000 for the year ended September 30,
1996. The growth was primarily due to the increase in the number of subscribers
in consolidated markets. In addition to increases in market penetration, growth
resulted from an increase in the number of markets consolidated for the entire
year from 42 during the year ended September 30, 1995 to 44 during the year
ended September 30, 1996. Growth in subscribers accounted for 82% of the
increase, and the number of consolidated markets accounted for 18% of the
increase. In-roaming revenues increased by 40%, or $8,503,000, from $21,085,000
for the year ended September 30, 1995 to $29,588,000 for the year ended
September 30, 1996 due to increased coverage in cellular markets and to
industry-wide subscriber increases. In-roaming revenues are expected to
increase in the future as a result of further industry-wide growth in
subscribers and expansion of the Company's coverage, particularly along highway
corridors; however, roaming rates may decline, consistent with expected industry
trends.
Average monthly revenue per subscriber, including in-roaming revenues,
decreased from $68 for the year ended September 30, 1995 to $63 for the year
ended September 30, 1996, reflecting the benefit of declining prices to the
consumer and lower usage by new subscribers which is consistent with an overall
industry trend. However, in-roaming revenues per subscriber per month decreased
only $1, from $17 to $16, reflecting the larger scale benefit of the Company's
cell site expansion program.
II-4
<PAGE>
Cost of cellular service decreased as a percentage of service revenues from
20% in fiscal year 1995 to 19% in fiscal year 1996, as revenues derived from the
growing subscriber base outpaced the fixed components of cost of service.
Equipment sales decreased 64% from $7,905,000 in fiscal year 1995 to
$2,809,000 in fiscal year 1996 due to the introduction of the Company's new
customer satisfaction and pricing program. The program packages the use of a
handset, airtime and long-distance within one area code for one monthly fee,
which results in no handset revenue. However, certain customers are charged
additional monthly fees, which are classified as service revenues, for use of
higher-end equipment. Such fees are not significant currently but are expected
to increase in the future. After January 1996, sales of accessories accounted
for the majority of the Company's equipment sales. Cost of equipment sales
decreased 3% from $10,902,000 in fiscal year 1995 to $10,588,000 in fiscal year
1996. Approximately $4,850,000 and $1,671,000 of the fiscal year 1996 cost of
equipment sales relates to equipment provided to new and existing customers,
respectively, which the customers are required to return to the Company if
service is terminated. Although the Company retains ownership of the equipment,
it carries such equipment at no value on its balance sheet. The Company expects
negative equipment margins in the future as the Company subsidizes use of
handsets to shift consumer focus to the value of cellular service. However, the
Company expects to implement a refurbishment program during fiscal 1997 whereby
returned handsets would be reconditioned at a nominal cost and placed back in
service.
General and administrative costs of cellular operations increased 14% from
$20,223,000 in fiscal year 1995 to $23,038,000 in fiscal year 1996, 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, offset by reductions to bad debt expense. General and
administrative costs as a percentage of service revenues decreased from 25% in
fiscal year 1995 to 20% in fiscal year 1996. The decrease was primarily due to
revenues increasing at a faster rate than incremental general and administrative
costs.
Marketing and selling costs decreased 3% from $21,642,000 in fiscal year
1995 to $20,920,000 in fiscal year 1996, primarily as a result of reductions in
commission costs offset by increased advertising costs. Marketing costs per net
new subscriber decreased 18% from $523 in fiscal year 1995 to $429 in fiscal
year 1996, as a result of increased net subscriber additions which outpaced
increases in costs incurred. In addition, the Company continues to expand its
retail presence to capitalize on retail trade while driving down commission
costs.
Depreciation and amortization relating to cellular operations increased 17%
from $15,454,000 in fiscal year 1995 to $18,149,000 in fiscal year 1996,
primarily related to increased property and equipment balances.
Corporate costs and expenses in fiscal year 1995 were $3,468,000, which
represented gross expenses of $9,533,000 less amounts allocated to
nonconsolidated affiliates of $6,065,000. Corporate costs and expenses in
fiscal year 1996 were $4,571,000, which represented gross expenses of
$11,037,000 less amounts allocated to nonconsolidated affiliates of $6,466,000.
The increase in corporate costs and expenses was due primarily to acceleration
of depreciation expense related to certain corporate assets, and expenses
related to paging activities which were not allocated to affiliates.
Equity in net loss of affiliates decreased 67% from $5,028,000 in fiscal
year 1995 to $1,636,000 in fiscal year 1996. The decrease was due primarily to
decreased losses in nonconsolidated affiliates. Management expects operating
results of the markets that are accounted for under the equity method to
continue to improve.
II-5
<PAGE>
Interest expense increased 8% from $26,044,000 in fiscal year 1995 to
$28,208,000 in fiscal year 1996 due to the higher interest rate on the 11 1/4%
subordinated notes than on the 6 3/4% convertible subordinated debentures which
were redeemed with the proceeds of the sale of subordinated notes, and the
higher accreted discount note balance. Cash paid for interest increased 15%
from $12,209,000 in fiscal year 1995 to $14,012,000 in fiscal year 1996.
Interest income decreased 20% from $13,046,000 in fiscal year 1995 to
$10,468,000 in fiscal year 1996. The decrease was due to lower nonconsolidated
affiliate notes receivable balances and lower cash and cash equivalent balances.
During fiscal year 1995, the Company recognized gains on sales of
affiliates of $19,471,000 primarily as a result of the sale of its interest in
Nebwest Cellular, Inc., which held an interest in Nebraska Cellular Telephone
Corporation, the licensee for the ten wireline RSA markets in the state of
Nebraska. See "Acquisitions and Sales." No significant sales occurred during
fiscal 1996.
At September 30, 1996, the Company had net operating loss ("NOL")
carryforwards for income tax purposes of $50,808,000, compared to $40,503,000 at
September 30, 1995. The increase resulted from the NOL consolidation of two
affiliated corporations offset by current year taxable income.
Fiscal Year 1995 Compared With Fiscal Year 1994. Cellular service
-----------------------------------------------
revenues, including in-roaming revenues, increased 56% from $52,586,000 for the
year ended September 30, 1994 to $81,939,000 for the year ended September 30,
1995. The growth was primarily due to the increase in the number of subscribers
in consolidated markets. In addition to increases in market penetration, growth
resulted from an increase in the number of markets consolidated for the entire
year from 36 during the year ended September 30, 1994 to 42 during the year
ended September 30, 1995. Growth in subscribers accounted for 88% of the
increase, and the number of consolidated markets accounted for 12% of the
increase. In-roaming revenues increased by 58%, or $7,710,000, from $13,375,000
for the year ended September 30, 1994 to $21,085,000 for the year ended
September 30, 1995 due to increased coverage in cellular markets.
Average monthly revenue per subscriber, including in-roaming revenues,
decreased from $74 for the year ended September 30, 1994 to $68 for the year
ended September 30, 1995, reflecting the benefit of declining prices to the
consumer that is consistent with an overall industry trend. However, in-roaming
revenues per subscriber were essentially flat reflecting the larger scale
benefit of the Company's cell site expansion program.
Cost of cellular service increased as a percentage of service revenues from
18% in fiscal year 1994 to 20% in fiscal year 1995, primarily due to an increase
in costs related to interconnect service.
Equipment sales decreased 10% from $8,774,000 in fiscal year 1994 to
$7,905,000 in fiscal year 1995, reflecting declining equipment pricing due to
competitive factors. Cost of equipment sales increased 23% from $8,835,000 in
fiscal year 1994 to $10,902,000 in fiscal year 1995. The large loss on
equipment sales was due to equipment promotions during most of 1995 to stimulate
subscriber growth.
General and administrative costs of cellular operations increased 21% from
$16,768,000 in fiscal year 1994 to $20,223,000 in fiscal year 1995, due to the
growth in the customer base and the number of consolidated markets. The
majority of these costs were incremental customer billing expense, customer
service support staff and bad debts. General and administrative costs as a
percentage of service revenues decreased from 32% in fiscal year 1994 to 25% in
fiscal year 1995. The decrease was primarily due to revenues increasing at a
faster rate than incremental general and administrative costs.
II-6
<PAGE>
Marketing and selling costs increased 37% from $15,786,000 in fiscal year
1994 to $21,642,000 in fiscal year 1995, primarily as a result of the number of
subscribers added in consolidated markets. The majority of these costs were
incremental sales commissions and advertising costs. Marketing costs per net
new subscriber decreased 8% from $568 in fiscal year 1994 to $523 in fiscal year
1995, as a result of increased net subscriber additions which outpaced increases
in costs incurred.
Depreciation and amortization relating to cellular operations increased 47%
from $10,541,000 in fiscal year 1994 to $15,454,000 in fiscal year 1995,
primarily related to increased fixed asset balances.
Corporate costs and expenses in fiscal year 1994, exclusive of write-downs
of property and equipment, were $2,515,000, which represented gross expenses of
$9,053,000 less amounts allocated to nonconsolidated affiliates of $6,538,000.
Corporate costs and expenses in fiscal year 1995 were $3,468,000, which
represented gross expenses of $9,533,000 less amounts allocated to
nonconsolidated affiliates of $6,065,000.
Equity in net loss of affiliates decreased 1% from $5,092,000 in fiscal
year 1994 to $5,028,000 in fiscal year 1995. The decrease was principally
attributable to decreasing losses in markets being accounted for under the
equity method at September 30, 1995, compared to September 30, 1994, due to the
shift in focus in these markets from construction and initial operation to
increasing penetration and subscriber usage.
Interest expense increased 22% from $21,339,000 in fiscal year 1994 to
$26,044,000 in fiscal year 1995 due to higher accreted discount note and average
secured bank financing balances. Cash paid for interest increased 25% from
$9,731,000 in fiscal year 1994 to $12,209,000 in fiscal year 1995, due to higher
average secured bank financing balances.
Interest income increased 8% from $12,081,000 in fiscal year 1994 to
$13,046,000 in fiscal year 1995, due to higher yields on cash and cash
equivalents and available-for-sale securities, and due to higher rates charged
on nonconsolidated affiliates' notes.
During fiscal year 1995, the Company recognized gains on sales of
affiliates of $19,471,000 primarily as a result of the sale of its interest in
Nebwest Cellular, Inc., which held an interest in Nebraska Cellular Telephone
Corporation, the licensee for the ten wireline RSA markets in the state of
Nebraska. See "Acquisitions and Sales." During fiscal year 1994, the Company
recognized gains on sales of affiliates of $2,905,000, primarily related to the
sale of its limited partnership interest in MSA 239 (Joplin, MO) during the
second quarter of fiscal 1994 ($1,921,000) and a multimarket transaction with
Contel Cellular, Inc. during the third quarter of fiscal 1994 ($841,000). An
additional $907,000 gain was recognized due to the write-off of contingent
liabilities related to stock price guarantees.
At September 30, 1995, the Company had NOL carryforwards for income tax
purposes of $40,503,000, compared to $54,725,000 at September 30, 1994. This
decrease resulted from a change in the tax treatment of sales commissions and
the utilization of NOL carryforwards to offset current year taxable income.
Acquisitions and Sales
- ----------------------
In November 1995, the Company purchased additional interests ranging from
18% to 19% in three managed markets for 28,283 shares of the Company's Common
Stock.
II-7
<PAGE>
In March 1996, the Company purchased additional interests ranging from 43%
to 44% in two managed RSA markets for 79,520 shares of the Company's Common
Stock.
In April 1996, the Company acquired interests in one managed MSA and one
managed RSA market for a net purchase price of $1,011,000, comprised of the
Company's interest in one managed RSA market (transferred in November 1995),
common stock, cash and forgiveness of certain obligations.
Also in April 1996, the Company purchased additional interests ranging from
8% to 38% in one managed and one nonmanaged RSA market and one nonmanaged MSA
market for approximately $392,000 in cash and 44,415 shares of the Company's
Common Stock.
In May 1996, the Company partitioned the New Mexico 1 RSA, sold its
interest in the southern portion of the market and acquired the interest of U S
WEST NewVector Group, Inc. in the northern portion of the market. As a result
of the transaction, the Company paid approximately $1,105,000 in cash and net
Company pops increased 24,289.
In June 1996, the Company purchased an additional 40% interest in one
nonmanaged RSA market for 27,258 shares of the Company's Common Stock and
approximately $790,000 in cash.
In September 1996, the Company acquired 577,812 shares of convertible
preferred stock in TVX, Inc. for approximately $800,000. TVX develops and
markets products for the management of digital video and images, including
visual observation and verification products for the security industry. Prior to
this acquisition, the Company held 1,157,022 shares of Common Stock or 39%
voting interest in TVX, Inc. and 484,756 shares of redeemable convertible
preferred stock with a redemption value of $484,756.
The Company continues to pursue acquisitions to the extent they enhance or
extend its network or increase shareholder value, although there can be no
assurance any such acquisitions will be consummated.
Changes in Financial Condition
- ------------------------------
Fiscal Year 1996. Net cash provided by operating activities was
----------------
$20,751,000 during the year ended September 30, 1996 due primarily to operating
income before depreciation and amortization of $38,193,000, offset by increases
in working capital requirements of $6,700,000.
Net cash used by investing activities was $39,436,000 for the year ended
September 30, 1996. This was due primarily to $32,320,000 required to fund the
purchase of property and equipment and investment in cellular system equipment,
$4,112,000 to fund additional investments in and advances to affiliates, and
$3,676,000 to purchase additional interests in affiliates.
Net cash used by financing activities was $10,841,000 for the year ended
September 30, 1996. This was due primarily to net reductions to long-term debt
and capital leases of $9,412,000, repurchases of Common Stock of $1,378,000 and
distributions to minority interests of $1,029,000, offset by $978,000 of cash
received from the issuance of Common Stock upon exercise of options.
Fiscal Year 1995. Net cash provided by operating activities was
----------------
$14,068,000 during the year ended September 30, 1995. This was primarily due to
the increase in EBITDA of $9,490,000 and decreases in working capital of
$5,222,000. Working capital decreases were primarily the result of a reduction
in inventory.
Net cash provided by investing activities was $7,028,000 for the year ended
September 30, 1995. This was due primarily to $21,428,000 provided from the net
sale of securities and
II-8
<PAGE>
$23,654,000 provided from the net sales of affiliates, offset by $31,797,000 of
cash required to fund the purchase of property and equipment related to the
Company's expansion efforts, and $6,017,000 related to nonconsolidated
affiliates reflected as additions to investments in and advances to affiliates.
Net cash provided by financing activities was $17,840,000 for the year
ended September 30, 1995. These proceeds were comprised of $77,400,000 from the
issuance of subordinated notes, offset by $41,852,000 used to redeem the
Company's convertible subordinated debentures and an overall $15,277,000
decrease in incremental secured bank financing.
Liquidity and Capital Resources
- -------------------------------
General. CommNet Cellular Inc. (referred to herein as the "parent
-------
company") is effectively a holding company and, accordingly, must rely on
distributions, loan repayments and other intercompany cash flows from its
affiliates and subsidiaries to generate the funds necessary to satisfy the
parent company's capital requirements. On a consolidated basis, the Company's
principal source of financing is the loan facility with CoBank (the "Credit
Agreement"), pursuant to which CoBank has agreed to lend up to $165,000,000 to
CIFC. Of the $165,000,000, $140,000,000 may be reloaned by CIFC to the Company's
affiliates for the construction, operation and expansion of cellular telephone
systems including up to $5,000,000 for the construction and operation of a
paging network. The remaining $25,000,000 is reserved for acquisitions by CINC.
Of the $140,000,000, $80,000,000 is available to be borrowed by CIFC to be
repaid to the parent company and used for general corporate purposes, including
capital expenditures, debt service and acquisitions. The Credit Agreement
restricts the ability of the Company's affiliates and subsidiaries, a
substantial number of which are consolidated for financial statement purposes,
to make distributions to the parent company until such affiliates and
subsidiaries have repaid all outstanding debt to CIFC. As a result, a 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 and debt service and (ii) the
capital expenditures, working capital, other operating and debt service
requirements of the affiliates. In addition to budgeted capital requirements,
the Company is constantly evaluating the acquisition of additional cellular
properties, and to the extent the Company consummates future acquisitions,
additional capital may be required.
As of September 30, 1996, the Company had unused commitments under the
Credit Agreement of $140,810,000, of which $64,250,000 was available to be
repaid to the parent company for general corporate purposes. In addition to the
liquidity provided by the Credit Agreement, at September 30, 1996, the Company,
on a consolidated basis, had available $11,492,000 of cash and cash equivalents.
Capital expenditures in managed markets, reflected as additions to
investments in and advances to affiliates, and additions to property and
equipment and investment in cellular system equipment, for the year ended
September 30, 1996 was $33,700,000. These expenditures were primarily for 36
new cell sites, channel expansion, paging sites, call center systems and other
computer equipment. The Company expects capital expenditures for fiscal year
1997 to be $50,000,000 to optimize coverage, upgrade switching capacity,
increased channel capacity and for paging infrastructure.
The Company's near-term debt service requirements will consist primarily of
interest payments on the indebtedness incurred under the Credit Agreement and
interest payments on the 11 1/4% Subordinated Notes due 2005. Interest on the
Company's 11 3/4% Senior Subordinated Discount Notes is payable in cash
commencing March 1, 1999. The Company anticipates its cash
II-9
<PAGE>
interest expense for fiscal year 1997 will be $13,045,000. Revolving loan
indebtedness outstanding under the Credit Agreement currently will convert to
term loan indebtedness at December 31, 1996 to be amortized over the next four
years; however, the Company and CIFC are currently in discussion with CoBank to
modify certain provisions of the Credit Agreement, including the loan term. See
"The Credit Agreement" below.
The Company believes operating cash flow, existing cash balances and
borrowing availability under the Credit Agreement will be sufficient to meet all
future anticipated capital requirements of the parent company and its affiliates
and debt service requirements of the Company at both the parent company level
and on a consolidated basis.
Although the Company believes that the foregoing sources of liquidity will
be sufficient to meet budgeted capital expenditures and debt service
requirements of the parent company and the affiliates, there can be no assurance
that this will be the case. In such event, the Company believes it will be able
to satisfy its capital expenditure and debt service requirements with
unrestricted operating cash flow; however, the Company may be required to reduce
discretionary capital spending. To the extent the Company's cash flow is not
sufficient to satisfy such requirements, the Company will be required to raise
funds through additional financings or asset sales.
The Company continually evaluates the acquisition of cellular properties.
Acquisitions are likely to require capital in addition to the budgeted capital
requirements described above, and such requirements may in turn require the
issuance of additional debt or equity securities. The 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.
In August 1996, the Company announced a program to repurchase, from time to
time, up to $20,000,000 of its outstanding Common Stock using available
liquidity to fund the repurchases. At September 30, 1996, the Company had
repurchased 47,500 shares at prices ranging from $28.875 to $29.125 for an
aggregate price of $1,378,438. Subsequent to year end, the Company repurchased
an additional 102,000 shares at prices ranging from $27.75 to $29 per share,
for an aggregate price of $2,932,500.
The Credit Agreement. Pursuant to the Credit Agreement, CoBank has agreed
--------------------
to loan up to $165,000,000 to CIFC to be reloaned by CIFC to affiliates of the
Company for the construction, operation and expansion of cellular telephone
systems including $25,000,000 to fund the acquisitions of additional cellular
systems, subject to certain conditions. As of September 30, 1996, $64,250,000
was available under the Credit Agreement to be borrowed from CoBank by CIFC and
repaid to the parent company for general corporate purposes. The outstanding
balance under the Credit Agreement was approximately $24,190,000 at September
30, 1996. The Credit Agreement provides, at the Company's option, for interest
at 1.00% over prime (9.25% at September 30, 1996) or 2.50% over LIBOR (8.23% at
September 30, 1996), subject to reduction upon the maintenance of certain debt
to cash flow ratios. The Credit Agreement is a revolving loan which converts to
a four-year term loan on December 31, 1996; however, the Company and CIFC are in
discussion with CoBank to modify certain provisions of the Credit Agreement,
including the loan term, whereby principal payments would commence subsequent to
September 30, 1997. The loan is secured by a first lien upon all of the assets
of CIFC and each of the affiliates to which funds are advanced by CIFC. In
addition, the Company has guaranteed the obligations of CIFC to CoBank and has
granted CoBank a first lien on all of the assets of the Company as security for
such guaranty.
The Credit Agreement prohibits the payment of cash dividends, limits the
use of borrowings, prohibits any other senior borrowings, restricts expenditures
for certain investments, requires positive working capital and requires the
maintenance of certain liquidity, capitalization, debt, debt
II-10
<PAGE>
service and cash interest ratios. The requirements of the Credit Agreement were
established in relation to the anticipated capital and financing needs of the
Company's affiliates and their anticipated results of operations. The Company is
currently in compliance with all covenants and anticipates it will continue to
meet the requirements of the Credit Agreement. Approval may be required from the
syndicate for waivers or other amendments to the Credit Agreement requested by
CIFC or the Company.
II-11
<PAGE>
Supplemental Information:
SELECTED COMBINED AND PROPORTIONATE
OPERATING RESULTS OF CELLULAR LICENSEES
(Amounts in thousands, except statistical data)
The following unaudited table presents operating data for all cellular
licensees in which the Company holds an interest. The "Combined," "Financed
Proportionate" and "Company Proportionate" operating results, which are not
included in the Company's consolidated financial statements, are provided to
assist in understanding the results of the licensees in which the Company holds
an interest. Generally accepted accounting principles ("GAAP") prescribe
inclusion of revenues and expenses for consolidated interests (generally
interests of more than 50%), but not for equity interests (generally interests
of 20% to 50%) or cost interests (generally interests of less than 20%). Equity
accounting ordinarily results in the same net income as consolidation; however,
the net operating results are reflected on one line below operating income.
Operating activity related to interests accounted for under the cost method are
not reflected at all in a GAAP operating statement.
<TABLE>
<CAPTION>
Years ended September 30,
-----------------------------------------------------------------------------------------------
1996 1995 1996 1995 1996 1995
-----------------------------------------------------------------------------------------------
Combined (1) Financed Proportionate (2) Company Proportionate (3)
-------------------- ---------------------------- ---------------------------
<S> <C> <C> <C> <C> <C> <C>
MANAGED MARKETS
Revenues:
Cellular service $ 99,736 $ 74,143 $ 93,066 $ 69,140 $ 74,112 $ 53,868
In-roaming 36,027 26,363 33,732 24,761 27,243 19,039
Equipment sales 3,094 4,683 2,851 4,334 2,341 3,348
-------- -------- -------- -------- -------- --------
Total revenues 138,857 105,189 129,649 98,235 103,696 76,255
Costs and expenses
involving cash:
Cost of sales:
Cellular service
(including in-roaming) 25,967 19,871 24,470 18,813 19,484 14,192
Equipment sales 11,900 8,325 10,868 7,724 8,926 5,907
General and administrative 27,883 24,659 25,859 23,090 20,541 17,985
Marketing and selling 25,608 26,387 23,838 24,642 18,942 19,097
-------- -------- -------- -------- -------- --------
Total cash costs and
expenses 91,358 79,242 85,035 74,269 67,893 57,181
-------- -------- -------- -------- -------- --------
EBITDA $ 47,499 $ 25,947 $ 44,614 $ 23,966 $ 35,803 $ 19,074
======== ======== ======== ======== ======== ========
Capital expenditures $ 33,694 $ 35,797 $ 32,291 $ 32,388 $ 29,064 $ 25,567
Subscriber count 211,278 151,482 196,780 139,773 157,816 108,255
Total markets 55 56 55 56 55 56
NONMANAGED MARKETS
Revenues:
Cellular service
(including in-roaming) $ 92,177 $ 86,148 $ 14,457 $ 17,858 $ 9,607 $ 9,928
Equipment sales 6,889 8,433 689 1,378 531 869
-------- -------- -------- -------- -------- --------
Total revenues 99,066 94,581 15,146 19,236 10,138 10,797
Costs and expenses
involving cash:
Cost of sales:
Cellular service 21,368 25,061 3,941 5,584 2,591 3,034
Equipment sales 7,717 8,048 893 1,345 655 818
General and administrative 17,940 16,374 3,390 3,819 2,152 2,119
Marketing and selling 19,683 22,972 3,017 5,119 2,141 2,868
-------- -------- -------- -------- -------- --------
Total cash costs
and expenses 66,708 72,455 11,241 15,867 7,539 8,839
-------- -------- -------- -------- -------- --------
EBITDA $ 32,358 $ 22,126 $ 3,905 $ 3,369 $ 2,599 $ 1,958
======== ======== ======== ======== ======== ========
Capital expenditures $ 20,071 $ 35,174 $ 2,529 $ 9,546 $ 1,803 $ 5,540
Subscriber count 158,613 174,930 23,241 32,208 17,312 19,126
Total markets 27 27 27 27 27 27
</TABLE>
II-12
<PAGE>
<TABLE>
<CAPTION>
Years ended September 30,
-----------------------------
1996 1995
-----------------------------
Reconciliation From Company
Proportionate EBITDA to Consolidated
Reporting
<S> <C> <C>
Total proportionate EBITDA (managed and
nonmanaged markets) $ 38,402 $ 20,942
Proportionate depreciation and
amortization (15,766) (13,285)
Proportionate interest expense (net)
and other (9,555) (9,231)
Equity in nonlicensee affiliates (4,735) (5,079)
Minority interests 2,423 (579)
Intercompany interest 8,202 6,820
Amortization of license costs not owned
by affiliates (2,605) (2,276)
Unallocated corporate expenses (4,570) (3,468)
(Losses) gains on sales of affiliates (250) 19,471
Interest expense (net) and other (15,942) (13,253)
-------- --------
Consolidated net income (loss) $ (4,396) $ 62
======== ========
</TABLE>
_______________
(1) Includes 100% of the operating activity of all licensees, regardless of the
Company's ownership interest. This is essentially equivalent to
consolidating all licensees regardless of ownership percentage.
(2) Includes that percentage of a licensee's operating results which equals the
Company's ownership interest as well as the ownership interest held by
affiliates of the Company that are financed by CIFC.
(3) Includes only that percentage of a licensee's operating results which
corresponds to the Company's ownership interest. This is essentially
equivalent to a pro rata consolidation.
II-13
<PAGE>
Item 8. Financial Statements and Supplementary Data.
The consolidated financial statements of the Company are filed under
this item, beginning on page II-15. The consolidated financial statement
schedules required under Regulation S-X are filed pursuant to Item 14 of this
report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
II-14
<PAGE>
Report of Independent Auditors
------------------------------
The Board of Directors and Shareholders
CommNet Cellular Inc.
We have audited the accompanying consolidated balance sheets of CommNet Cellular
Inc. as of September 30, 1996 and 1995, and the related consolidated statements
of operations, stockholders' equity (deficit), and cash flows for each of the
three years in the period ended September 30, 1996. Our audits also included
the financial statement schedules listed in the Index at Item 14 (a). These
financial statements and schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements listed in the accompanying
index to financial statements (Item 14 (a)) present fairly, in all material
respects, the consolidated financial position of CommNet Cellular Inc. at
September 30, 1996 and 1995, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended September 30,
1996, in conformity with generally accepted accounting principles. Also, in our
opinion, the related financial statement schedules, when considered in relation
to the basic financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
ERNST & YOUNG LLP
Denver, Colorado
December 6, 1996
II-15
<PAGE>
COMMNET CELLULAR INC.
CONSOLIDATED BALANCE SHEETS
September 30, 1996 and 1995
(Amounts in thousands, except share data)
ASSETS (Note 4) 1996 1995
- ------ ---- ----
Current assets:
Cash and cash equivalents $ 11,492 $ 41,018
Accounts receivable, net of allowance for
doubtful accounts of $1,947 and $1,958 in
1996 and 1995, respectively 19,933 13,673
Inventory and other 3,949 2,931
-------- --------
Total current assets 35,374 57,622
Investment in and advances to affiliates (Notes 2 and 3) 57,245 56,919
Investment in cellular system equipment 11,809 5,427
Property and equipment, at cost:
Cellular system equipment 126,305 107,433
Land, buildings and improvements 25,977 23,183
Furniture and equipment 17,144 18,636
-------- --------
169,426 149,252
Less accumulated depreciation 51,327 43,963
-------- --------
Net property and equipment 118,099 105,289
Other assets, less accumulated amortization of
$33,166 and $28,617 in 1996 and 1995,
respectively:
FCC licenses and filing rights (Note 2) 103,251 92,350
Deferred loan costs and other 6,059 8,061
-------- --------
Total other assets 109,310 100,411
-------- --------
$331,837 $325,668
======== ========
See accompanying notes.
II-16
<PAGE>
COMMNET CELLULAR INC.
CONSOLIDATED BALANCE SHEETS (continued)
September 30, 1996 and 1995
(Amounts in thousands, except share data)
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995
- ------------------------------------ ---- ----
Current liabilities:
Accounts payable $ 7,431 $ 9,266
Accrued liabilities 5,458 4,862
Accrued interest 2,556 3,265
Current portion of secured bank financing and
other long-term debt 3,683 318
--------- ---------
Total current liabilities 19,128 17,711
Long-term debt:
Secured bank financing (Note 4) 20,825 36,263
Note payable and other long-term debt (Note 4) 3,057 449
11 3/4% senior subordinated discount notes (Note 5) 141,963 126,645
11 1/4% subordinated notes (Note 5) 80,000 80,000
8.75% convertible subordinated notes (Note 5) - 3,000
Minority interests 3,882 2,944
Commitments (Note 6)
Stockholders' equity
(Notes 2, 3, 4, 5, 8, 9, and 10):
Preferred Stock, $.01 par value; 1,000,000 shares
authorized; no shares issued - -
Common Stock, $.001 par value; 40,000,000 shares
authorized; 13,859,740 and 13,442,967 shares issued
at September 30, 1996 and 1995, respectively 14 13
Capital in excess of par value 168,103 159,382
Accumulated deficit (105,135) (100,739)
--------- ---------
Total stockholders' equity 62,982 58,656
--------- ---------
$ 331,837 $ 325,668
========= =========
See accompanying notes.
II-17
<PAGE>
COMMNET CELLULAR INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended September 30, 1996, 1995 and 1994
(Amounts in thousands, except share and per share data)
<TABLE>
<CAPTION>
Revenues: 1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cellular service $ 82,799 $ 60,854 $ 39,211
In-roaming 29,588 21,085 13,375
Equipment sales 2,809 7,905 8,774
----------- ----------- -----------
115,196 89,844 61,360
Costs and expenses:
Cellular operations:
Cost of cellular service 21,577 16,162 9,467
Cost of equipment sales (Note 1) 10,588 10,902 8,835
General and administrative 23,038 20,223 16,768
Marketing and selling 20,920 21,642 15,786
Depreciation and amortization 18,149 15,454 10,541
Write-down of property and equipment - - 2,865
Corporate:
General and administrative 7,346 7,392 6,944
Depreciation and amortization 3,691 2,141 2,109
Write-down of property and equipment - - 252
Less amounts allocated to
nonconsolidated affiliates (6,466) (6,065) (6,538)
----------- ----------- -----------
98,843 87,851 67,029
----------- ----------- -----------
Operating income (loss) 16,353 1,993 (5,669)
Equity in net loss of affiliates (Note 3) (1,636) (5,028) (5,092)
Minority interest in net income of
consolidated affiliates (1,123) (964) (544)
Gains (losses) on sales of affiliates and
other (Note 2) (250) 19,471 3,912
Interest expense (28,208) (26,044) (21,339)
Interest income (Note 3) 10,468 13,046 12,081
----------- ----------- -----------
Income (loss) before income taxes and
extraordinary charge (4,396) 2,474 (16,651)
Income tax expense - 400 100
----------- ----------- -----------
Income (loss) before extraordinary charge (4,396) 2,074 (16,751)
Extraordinary charge related to early
extinguishment of long-term debt
(Notes 4 and 5) - (2,012) -
----------- ----------- -----------
Net income (loss) $ (4,396) $ 62 $ (16,751)
----------- ----------- -----------
Income (loss) per common share:
Income (loss) before extraordinary
charge $(.32) $.17 $(1.45)
Extraordinary charge - (.16) -
----------- ----------- -----------
Net income (loss) per common share $(.32) $.01 $(1.45)
=========== =========== ===========
Weighted average shares outstanding 13,727,203 12,153,592 11,577,191
=========== =========== ===========
</TABLE>
See accompanying notes.
II-18
<PAGE>
COMMNET CELLULAR INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended September 30, 1994, 1995 and 1996
(Amounts in thousands, except share data)
<TABLE>
<CAPTION>
Capital in
Common Stock Excess of Unrealized Accumulated
Shares Amount Par Value Gains (Losses) Deficit
--------------------- ----------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Balance at
October 1, 1993 8,911,579 $ 9 $ 74,620 $ - $ (84,050)
Exercise of options 121,250 - 1,479 - -
Issuance of Common
Stock - acquisitions
(Note 2) 156,132 1 2,761 - -
Issuance of Common
Stock - ESOP
(Note 9) 20,953 - 478 - -
Debenture conversion (Note 5) 2,529,194 2 37,809 - -
Unrealized losses - - - (450) -
Net loss - - - - (16,751)
---------- ------ -------- ------------- -----------
Balance at
September 30, 1994 11,739,108 12 117,147 (450) (100,801)
Exercise of options 101,875 - 815 - -
Debenture and note
conversion (Note 5) 1,320,785 1 34,088 - -
Issuance of Common
Stock - acquisitions
(Note 2) 262,178 - 6,780 - -
Issuance of Common
Stock - ESOP
(Note 9) 19,021 - 552 - -
Reversal of unrealized
losses - - - 450 -
Net income - - - - 62
---------- ------ -------- ------------- -----------
Balance at
September 30, 1995 13,442,967 13 159,382 - (100,739)
Exercise of options 48,000 - 978 - -
Note conversion (Note 5) 200,000 1 2,908 - -
Issuance of Common
Stock - acquisitions
(Note 2) 191,786 - 5,506 - -
Issuance of Common
Stock - ESOP
(Note 9) 24,487 - 707 - -
Common Stock repurchased (47,500) - (1,378) - -
Net loss - - - - (4,396)
---------- ------ -------- ------------- -----------
Balance at
September 30, 1996 13,859,740 $14 $168,103 $ - $(105,135)
========== ====== ======== ============= ===========
</TABLE>
See accompanying notes.
II-19
<PAGE>
COMMNET CELLULAR INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended September 30, 1996, 1995 and 1994
(Amounts in thousands)
1996 1995 1994
---- ---- ----
Operating activities:
Net income (loss) $(4,396) $ 62 $(16,751)
Adjustments to reconcile net income (loss)
to net cash used by operating
activities:
Extraordinary charge related to early
extinguishment of long-term debt - 2,012 -
Minority interests 1,123 964 544
Compensation expense related
to ESOP and option grants 707 552 478
Depreciation and amortization 21,840 17,595 12,650
Equity in net loss of affiliates 1,636 5,028 5,092
Losses (gains) on sales of affiliates
and other 250 (19,471) (3,912)
Interest expense on 11 3/4%
senior discount notes 15,318 13,665 12,133
CoBank patronage income (289) (535) (815)
Accrued interest on advances to
affiliates (8,738) (11,247) (11,380)
Write-down of property and
equipment - - 3,117
Write-down of short-term
investments - - 744
Loss on sale of short-term investments - 221 -
Change in operating assets and liabilities,
net of effects from consolidating acquired
interests (Note 2):
Accounts receivable (5,435) 927 (3,797)
Inventory and other (1,018) 4,387 (4,363)
Accounts payable and
accrued liabilities 462 (1,026) (246)
Accrued interest (709) 934 (664)
------- -------- --------
Net cash provided (used) by operating
activities 20,751 14,068 (7,170)
See accompanying notes.
II-20
<PAGE>
COMMNET CELLULAR INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Years ended September 30, 1996, 1995 and 1994
(Amounts in thousands)
1996 1995 1994
---- ---- ----
Investing activities:
Purchases of available-for-sale
securities $ (987) $ (82) $(16,788)
Sales of available-for-sale
securities 987 21,510 15,489
Additions to investments in and
advances to affiliates (4,112) (6,016) (6,789)
Additions to property and equipment
and investment in cellular system
equipment (32,320) (31,797) (36,821)
Reductions in (additions to) other assets 58 (240) -
Proceeds from sales of interests in
affiliates (Note 2) 614 26,140 9,037
Purchase of interests in affiliates, net
of cash acquired and net of assets
and liabilities recorded due to
consolidation (Note 2) (3,676) (2,487) (13,992)
-------- -------- --------
Net cash provided (used) by
investing activities (39,436) 7,028 (49,864)
See accompanying notes.
II-21
<PAGE>
COMMNET CELLULAR INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Years ended September 30, 1996, 1995 and 1994
(Amounts in thousands)
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Financing activities:
Proceeds from secured bank financing $ 16,250 $ 23,366 $ 13,779
Payments of secured bank financing (28,270) (38,643) (2,630)
Extraordinary charge related to early
extinguishment of long-term debt - (1,130) -
Loan fees and offering costs related
to long-term debt - (1,511) -
Additions (reductions) of obligation
under capital leases (308) (605) 827
Additions to notes payable 2,916 - -
Distributions to minority interest (1,029) - -
Issuance of subordinated notes - 77,400 -
Redemption of convertible
subordinated debentures - (41,852) -
Issuance of Common Stock, net of
offering costs 978 815 1,479
Repurchases of Common Stock (1,378) - -
-------- -------- --------
Net cash (used) provided by financing
activities (10,841) 17,840 13,455
-------- -------- --------
Net increase (decrease) in cash and
cash equivalents (29,526) 38,936 (43,579)
Cash and cash equivalents at beginning
of year 41,018 2,082 45,661
-------- -------- --------
Cash and cash equivalents at end of year $ 11,492 $ 41,018 $ 2,082
======== ======== ========
</TABLE>
See accompanying notes.
II-22
<PAGE>
COMMNET CELLULAR INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Years ended September 30, 1996, 1995 and 1994
(Amounts in thousands)
Supplemental schedule of additional cash flow information and noncash
activities:
1996 1995 1994
---- ---- ----
Cash paid during the year for interest $14,012 $12,209 $ 9,731
Purchase of cellular system equipment
through accounts payable 2,116 4,235 4,112
Purchases of interests in affiliates by
issuance of Common Stock 5,506 6,780 2,762
Conversion of convertible subordinated
debentures and notes to Common Stock 2,909 34,090 37,811
Additions to deferred loan costs related
to 11 1/4% subordinated notes - 2,600 -
Write-off of offering costs included in
extraordinary loss on early extinguish-
ment of long-term debt - 882 -
See accompanying notes.
II-23
<PAGE>
COMMNET CELLULAR INC.
NOTES TO CONSOLIDTED FINANCIAL STATEMENTS
1. Summary of significant accounting policies
------------------------------------------
Organization and basis of presentation
CommNet Cellular Inc. and its majority-owned affiliates (the "Company")
operates, manages and finances cellular telephone systems principally in the
mountain and plains regions of the United States. Cellular telephone systems
are capable of providing a wide variety of telecommunication services including
high quality wireless local and long-distance telephone service within a
specified market area through mobile, portable or fixed telephone equipment.
The Federal Communications Commission ("FCC") initially granted only two
licenses in each cellular market area, one to a telephone company with an
exchange presence in the area ("wireline" license), and one to an entity other
than a telephone company ("nonwireline" license).
The Company initially acquired its cellular interests by participating in
the wireline licensing process conducted by the FCC. In order to participate in
that process, the Company formed affiliates which were originally owned at least
51% by one or more independent telephone companies and no more than 49% by the
Company. In addition to obtaining interests in cellular markets through
participation in the FCC licensing process, the Company also has purchased
direct interests in additional markets in order to expand the network.
All affiliate investments in which the Company has greater than a 50%
interest are consolidated. All affiliate investments in which the Company has a
50% or less but 20% or greater interest are accounted for under the equity
method. All affiliate investments in which the Company has less than a 20%
interest are accounted for under the cost method.
The Company and its affiliates participated in the following markets as of
September 30, 1996:
<TABLE>
<CAPTION>
Net Company
MSA or Interest in
RSA Code (1) State Licensee (2)
------------ ------------ ------------
<C> <S> <C>
MSAs: 141 Minnesota 16.34%
185 Indiana 16.67%
241 Colorado 73.99%
253 Iowa 74.50%
267 South Dakota 51.00%
268 Montana 77.05%
279 Maine 11.11%
289 South Dakota 100.00%
297 Montana 100.00%
298 North Dakota 70.00%
</TABLE>
II-24
<PAGE>
COMMNET CELLULAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of significant accounting policies (continued)
------------------------------------------------------
Organization and basis of presentation (continued)
Net Company
MSA or Interest in
RSA Code (1) State Licensee (2)
-------------- ------------- ------------
RSAs: 348 Colorado 10.00%
349 Colorado 61.75%
351 Colorado 61.75%
352 Colorado 66.00%
353 Colorado 100.00%
354 Colorado (B1) 69.40%
355 Colorado 49.00%
356 Colorado (B1) 49.00%
389 Idaho 50.00%
390 Idaho 33.33%
392 Idaho (B1) 100.00%
393 Idaho 91.64%
415 Iowa 10.11%
416 Iowa 78.57%
417 Iowa 100.00%
419 Iowa 44.92%
420 Iowa 100.00%
424 Iowa 35.00%
425 Iowa 13.28%
426 Iowa 49.14%
427 Iowa 49.17%
428 Kansas 3.07%
429 Kansas 3.07%
430 Kansas 3.07%
431 Kansas 3.07%
432 Kansas 3.07%
433 Kansas 3.07%
434 Kansas 3.07%
435 Kansas 3.07%
436 Kansas 3.07%
437 Kansas 3.07%
438 Kansas 3.07%
439 Kansas 3.07%
440 Kansas 3.07%
441 Kansas 3.07%
442 Kansas 3.07%
512 Missouri (B1) 14.70%
523 Montana (B1) 100.00%
523 Montana (B2) 98.81%
524 Montana (B1) 79.40%
526 Montana (B1) 100.00%
II-25
<PAGE>
COMMNET CELLULAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of significant accounting policies (continued)
------------------------------------------------------
Organization and basis of presentation (continued)
<TABLE>
<CAPTION>
Net Company
MSA or Interest in
RSA Code (1) State Licensee (2)
------------ ------------------- ------------
<C> <S> <C>
527 Montana 100.00%
528 Montana 80.88%
529 Montana 87.25%
530 Montana 80.88%
531 Montana 100.00%
532 Montana 100.00%
553 New Mexico (B2) 58.36%
555 New Mexico 12.25%
557 New Mexico 16.33%
580 North Dakota 53.36%
581 North Dakota 49.00%
582 North Dakota 41.45%
583 North Dakota 49.00%
584 North Dakota 61.75%
634 South Dakota 100.00%
635 South Dakota 100.00%
636 South Dakota 100.00%
638 South Dakota (B1) 100.00%
638 South Dakota (B2) 100.00%
639 South Dakota (B1) 100.00%
639 South Dakota (B2) 100.00%
640 South Dakota 64.49%
641 South Dakota 61.13%
642 South Dakota 49.00%
675 Utah 100.00%
676 Utah 100.00%
677 Utah (B3) 100.00%
678 Utah 80.00%
718 Wyoming 66.00%
719 Wyoming 100.00%
720 Wyoming 100.00%
</TABLE>
(1) Metropolitan Statistical Area ("MSA") ranking is based on population as
established by the FCC. Rural Service Areas ("RSAs") have been
numbered by the FCC alphabetically by state.
(2) Represents the net ownership interest held by the Company in the
licensee for the respective market.
II-26
<PAGE>
COMMNET CELLULAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of significant accounting policies (continued)
------------------------------------------
Principles of consolidation
The consolidated financial statements include the accounts of the Company
and its majority-owned affiliates. All significant intercompany transactions
have been eliminated.
Minority interests, occurring only when other stockholders or partners
provide funding to the affiliates, is classified with noncurrent liabilities in
the accompanying balance sheets. For all other majority-owned affiliates, the
Company records all operating losses given that the minority interests have no
funding obligations. At such time as the cumulative net income attributed to
these nonfunding minority interests exceeds the cumulative net losses previously
absorbed, the Company will record a minority interest liability for such
entities.
Use of estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and cash equivalents
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
Accounts receivable
The Company performs credit evaluations of its customers' financial
condition prior to initial activation and generally does not require collateral.
Receivables generally are due within 30 days. Credit losses relating to the
Company's customers consistently have been within management's expectations.
The Company's provision for doubtful accounts receivable was approximately
$1,231,000, $5,096,000 and $3,372,000 for the years ended September 30, 1996,
1995 and 1994, respectively.
Inventory
Inventories are stated at the lower of cost (first-in, first-out) or market
and are comprised of cellular communication equipment and accessories held for
resale to the Company's subscribers.
Investment in cellular system equipment
Investment in cellular system equipment relates to cellular system
equipment under construction or held in inventory at the Company's warehouse
facility.
During the year ended September 30, 1994, the Company replaced and upgraded
certain cellular system equipment. As a result, the Company realized a loss of
$3,117,000 representing the excess of net book over realizable value.
II-27
<PAGE>
COMMNET CELLULAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of significant accounting policies (continued)
------------------------------------------------------
Long-lived assets
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for
----------------------------------------------------------
Long-Lived Assets to be Disposed of, which requires impairment losses to be
- -----------------------------------
recorded on long-lived assets used in operations when indicators of impairment
are present. The Company is required to adopt Statement No. 121 in the first
quarter of fiscal year 1997 and, based on current circumstances, does not
believe the effect of adoption will be material.
Deferred loan costs
Deferred loan costs relate to the offerings of senior notes and to loan
agreements (see Notes 4 and 5). These costs are being amortized over the
respective terms of the notes and loans.
FCC licenses and filing rights
FCC licenses represent the costs of the FCC licenses acquired by
consolidated affiliates. Filing rights represent costs associated with
acquiring the rights to file for cellular telephone licenses. The excess of the
purchase price of affiliate interests acquired over the fair market value of the
related net assets acquired is included as the cost of FCC licenses and filing
rights and is amortized over 40 years from the date of acquisition.
Revenue recognition
Cellular service revenues based upon subscriber usage are recognized at the
time service is provided. Access and special feature cellular service revenues
are recognized when earned. Equipment sales are recognized at the time
equipment is delivered to the subscriber or to an unaffiliated agent.
Cost of equipment sold
During 1996, the Company introduced a new customer service program whereby
a handset is provided to the customer and returned to the Company at the end of
the service agreement. The cost of providing the handset to the customer is
included in cost of equipment sales, with no corresponding recognition of
equipment revenue, as any revenue related to the program is recognized in
cellular service revenue.
Depreciation and amortization
Depreciation of property and equipment is provided principally on the
straight-line method over estimated useful lives as follows:
Years
-----
Cellular system equipment 8-15
Building and improvements 6-10
Furniture and equipment 3-5
II-28
<PAGE>
COMMNET CELLULAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of significant accounting policies (continued)
------------------------------------------
Cost allocations
The Company allocates shared operating costs to its managed affiliates.
Costs which bear an identifiable causal relationship are allocated directly to
the affiliate. Indirect costs are allocated based on a methodology negotiated
with the affiliates and applied consistently to all managed markets. This
methodology allocates functional cost pools on a pro rata basis taking into
consideration total property, plant and equipment, population, subscribers and
other attributes of the managed markets.
The Company incurs certain overhead costs related to expansion. As a
result, the Company capitalized $1,937,000, $2,536,000 and $3,991,000 for the
years ended September 30, 1996, 1995 and 1994, respectively, which is included
in property and equipment, and investment in cellular system equipment. In
addition, the Company allocated $429,000, $816,000 and $713,000 to
nonconsolidated affiliates for the years ended September 30, 1996, 1995 and
1994, respectively.
Advertising
The Company expenses advertising costs as incurred. Advertising expense
was approximately $2,825,000, $2,624,000 and $2,370,000 for the years ended
September 30, 1996, 1995 and 1994, respectively.
Stock-based compensation
In October 1995, the FASB issued Statement No. 123, Accounting and
--------------
Disclosure of Stock-Based Compensation. Statement No. 123 is applicable to
- --------------------------------------
fiscal years beginning after December 15, 1995 and gives the issuer the option
to either follow fair value accounting or to follow Accounting Principles Board
Opinion No. 25 Accounting for Stock Issued to Employees ("APB No. 25") and
----------------------------------------
related interpretations. The Company will comply with the disclosure rules of
Statement No. 123 for fiscal year 1997, and will elect to continue to follow APB
No. 25 and related interpretations in accounting for its employee stock options.
Earnings per common share
Net income (loss) per common share is based on the weighted average number
of common shares outstanding during the periods. Common Stock equivalents
consist of employee stock options. The difference between earnings per common
share and primary earnings per share is insignificant. Fully diluted earnings
per share are not presented because conversion of the convertible subordinated
debentures and notes would be anti-dilutive. The convertible subordinated
debentures and notes are not considered to be Common Stock equivalents.
Certain reclassifications
Certain reclassifications have been made to the 1995 financial statements
to conform with the 1996 financial statement presentation.
II-29
<PAGE>
COMMNET CELLULAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Business acquisitions and dispositions
--------------------------------------
1994
In December 1993, the Company acquired 100% of the stock of a corporation
which owns and operates the Rapid City, South Dakota MSA market and owns general
partnership interests in two partitioned RSA markets (South Dakota 5 (B2) and
South Dakota 6 (B2)) for approximately $10,420,000 in cash plus property valued
at approximately $400,000.
In December 1993, the Company sold its interests in affiliates which held a
44.44% limited partnership interest in the wireline licensee for RSA 608 (Oregon
3) for approximately $2,076,000 in cash. The sale resulted in a gain of
approximately $630,000.
In December 1993, the Company acquired additional interests in two
affiliated corporations for approximately $139,000.
In February 1994, the Company acquired an additional 51% of the stock of an
affiliate which held a 28.6% limited partnership interest in MSA 239 (Joplin,
MO) for 69,051 shares of the Company's Common Stock, then sold the Company's
entire limited partnership interest for $4,494,000 in cash. The sale resulted
in a gain of approximately $1,921,000.
In March 1994, the Company acquired an additional interest in an affiliated
corporation for 2,732 shares of the Company's Common Stock.
In April 1994, the Company acquired three affiliated corporations which
hold limited partnership interests in Utah RSA managed markets for 80,145 shares
of the Company's Common Stock.
In May 1994, the Company sold its interest in an affiliate which held an
8.125% limited partnership interest in three nonmanaged RSA markets for
approximately $2,468,000 in cash. The sale resulted in a gain of approximately
$841,000. Contemporaneously, the Company acquired additional limited
partnership interests in four managed RSA markets for approximately $373,000.
In July 1994, the Company acquired an additional interest in an affiliated
corporation for approximately $199,000 in cash.
In August 1994, the Company acquired an aggregate of 3.07% of the stock of
a corporation which operates cellular systems throughout Kansas from two
unrelated corporations for approximately $3,000,000 in cash.
During fiscal year 1994, the Company recognized a gain of approximately
$907,000 due to the write-off of contingent liabilities related to stock price
guarantees in acquisition agreements.
II-30
<PAGE>
COMMNET CELLULAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Business acquisitions and dispositions (continued)
--------------------------------------
1995
In November 1994, the Company purchased an additional 5.97% interest in
Nebwest Cellular, Inc. for $1,600,000 in cash. Pursuant to the terms of a
shareholder's agreement, the Company subsequently sold a portion of that
interest to the other shareholders on a pro rata basis for approximately
$450,000 in cash. In February 1995, the Company purchased an additional 3.37%
interest in this corporation for 34,688 shares of the Company's Common Stock.
In March 1995, the Company purchased an additional 2.57% interest in this
corporation for 28,638 shares of the Company's Common Stock. In July 1995, the
Company sold its 61.50% interest in Nebwest Cellular, Inc. which owned 25.52% of
Nebraska Cellular Telephone Corporation, the licensee for the ten wireline RSA
markets in the state of Nebraska, for approximately $24,300,000 which resulted
in a gain after tax of approximately $19,600,000.
In January 1995, the Company sold a wholly-owned subsidiary for
approximately $86,000 which resulted in a loss of approximately $297,000.
In January 1995, the Company transferred its 25% interest in one nonmanaged
RSA market to a partner in that market pursuant to a judgment. The Company
received approximately $1,699,000 upon transfer of the interest which resulted
in a gain of approximately $497,000.
In February 1995, the Company purchased additional interests ranging from
2% to 41% in eleven managed and one nonmanaged markets for approximately
$1,259,000 in cash and the issuance of 49,738 shares of the Company's Common
Stock.
In May and June 1995, the Company acquired additional interests ranging
from 17% to 51% in two managed markets and two nonmanaged markets for an
aggregate of 138,168 shares of the Company's Common Stock.
In August and September 1995, the Company acquired additional interests
ranging from 3% to 26% in two managed markets for 3,592 shares of the Company's
Common Stock and approximately $38,000 in cash.
1996
In November 1995, the Company purchased additional interests ranging from
18% to 19% in three managed markets for 28,283 shares of the Company's Common
Stock.
In March 1996, the Company purchased additional interests ranging from 43%
to 44% in two managed RSA markets for 79,520 shares of the Company's Common
Stock.
In April 1996, the Company acquired interests in one managed MSA and one
managed RSA market for a net purchase price of $1,011,000, comprised of the
Company's interest in one managed RSA market (transferred in November 1995),
common stock, cash and forgiveness of certain obligations.
Also in April 1996, the Company purchased additional interests ranging from
8% to 38% in one managed and one nonmanaged RSA markets and one nonmanaged MSA
market for approximately $392,000 in cash and 44,415 shares of the Company's
Common Stock.
II-31
<PAGE>
COMMNET CELLULAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Business acquisitions and dispositions (continued)
--------------------------------------------------
In May 1996, the Company partitioned the New Mexico 1 RSA, sold its
interest in the southern portion of the market and acquired the interest of U S
WEST NewVector Group, Inc. in the northern portion of the market. As a result
of the transaction, the Company paid approximately $1,105,000 in cash, and net
Company pops increased 24,289.
In June 1996, the Company purchased an additional 40% interest in one
nonmanaged RSA market for 27,258 shares of the Company's Common Stock and
approximately $790,000 in cash.
In September 1996, the Company acquired 577,812 shares of convertible
preferred stock in TVX, Inc. for approximately $800,000. TVX develops and
markets products for the management of digital video and images, including
visual observation and verification products for the security industry. Prior to
this acquisition, the Company held 1,157,022 shares of Common Stock or 39%
voting interest in TVX, Inc. and 484,756 shares of redeemable convertible
preferred stock with a redemption value of $484,756.
Each of the above acquisitions was accounted for using the purchase method
of accounting. The applicable results of operations of the acquired interests
have been included in the Company's consolidated statements of operations from
the respective acquisition dates.
The following represents the pro forma results of operations as if the
above noted acquisitions and dispositions had occurred at the beginning of the
respective period in which the acquisition or disposition occurred, as well as
at the beginning of the immediately preceding period:
Years ended September 30,
---------------------------
1996 1995 1994
---------------------------
(Amounts in thousands,
except per share data)
Revenues $118,603 $94,948 $67,287
Equity in net loss of affiliates (1,880) (4,258) (3,888)
Income (loss) before extraordinary
charge (5,594) (399) 1,097
Net income (loss) (5,594) (2,411) 1,097
Net income (loss) per common share (.40) (.19) .09
3. Investment in and advances to affiliates
----------------------------------------
Investment in and advances to the Company's nonconsolidated affiliates
consisted of the following:
September 30,
------------------------
1996 1995
----------- -----------
(Amounts in thousands)
Investment $ 17,620 $ 13,097
Equity in loss - cumulative (20,935) (23,399)
Advances and other 60,560 67,221
-------- --------
$ 57,245 $ 56,919
======== ========
II-32
<PAGE>
COMMNET CELLULAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Investment in and advances to affiliates (continued)
----------------------------------------------------
The combined financial position of the nonconsolidated affiliates is as
follows:
<TABLE>
<CAPTION>
September 30,
-------------
1996 1995
---- ----
(Amounts in thousands)
<S> <C> <C>
Current assets $ 8,938 $ 2,929
Investment in affiliated limited partnerships 8,664 13,189
Property and equipment, net of accumulated
depreciation 16,742 14,268
Other assets 4,356 2,600
-------- --------
Total assets $ 38,700 $ 32,986
======== ========
Due to CommNet Cellular Inc. $ 3,262 $ 8,593
Due to Cellular, Inc. Financial Corporation 46,719 54,411
Other liabilities 14,767 5,783
Minority interests 692 565
Stockholders' deficit (26,740) (36,366)
-------- --------
Total liabilities and stockholders' deficit $ 38,700 $ 32,986
======== ========
</TABLE>
Combined operations of these nonconsolidated affiliates are summarized as
follows:
<TABLE>
<CAPTION>
Years ended September 30,
-------------------------
1996 1995 1994
---- ---- ----
(Amounts in thousands)
<S> <C> <C> <C>
Revenues $ 21,826 $ 14,260 $ 42,160
Operating costs (29,262) (23,345) (50,520)
Minority interests (276) (4) 7
Equity in income (loss) of
affiliates 3,811 (4) 370
-------- -------- --------
Net loss $ (3,901) $ (9,093) $ (7,983)
======== ======== ========
</TABLE>
Interest income from affiliates on advances was $8,738,000, $11,247,000 and
$11,380,000 for the years ended September 30, 1996, 1995 and 1994, respectively.
Certain advances to affiliates bear interest at the prime rate of Norwest
Bank (8.25% at September 30, 1996, 8.75% at September 30, 1995 and 7.75% at
September 30, 1994) plus 2%. These advances to and receivables from affiliates
are temporary. They are generally refinanced under loan agreements with CIFC.
The CIFC loans bear interest at CIFC's average cost of borrowing from CoBank,
ACB as agent for a syndicate of lenders ("CoBank") and will be repaid from
income derived from the operation of the cellular system or income derived from
the affiliates' interest in the partnership providing cellular service.
II-33
<PAGE>
COMMNET CELLULAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Secured bank financing and note payable
---------------------------------------
CIFC has a secured financing agreement with CoBank. The secured bank
financing is due December 31, 2000, with interest only payable quarterly through
December 31, 1996, and thereafter quarterly principal and interest payments
payable through maturity. Amounts outstanding under the agreement were
$24,190,000 and $36,263,000, of which $3,365,000 and $0 are classified as
current, for the years ended September 30, 1996 and 1995, respectively. The
Company and CIFC are currently in discussion with CoBank to modify certain
provisions of the Credit Agreement, including the loan term whereby principal
payments would commence subsequent to September 30, 1997. Under the terms of
the current agreement, CoBank has agreed to loan to CIFC a maximum of
$165,000,000 to be reloaned by CIFC to affiliates of the Company for the
construction, operation and expansion of cellular telephone systems, including
$25,000,000 for the acquisition of cellular systems. Interest is payable at
either the prime rate plus 1.00% for variable rate loans (9.25% and 9.75% at
September 30, 1996 and 1995, respectively) or LIBOR (London InterBank Offered
Rate) plus 2.50% for fixed rate loans (8.23% and 8.53% at the six-month rate at
September 30, 1996 and 1995, respectively). CIFC continues to maintain fixed
interest rates on substantially all loans outstanding for terms ranging from one
to three months at an average rate of 8.09% at September 30, 1996. The loans
are secured by a first lien on all assets of CIFC, as well as all assets of each
of the affiliates to which loans are made by CIFC. CIFC's assets totaled
approximately $276,044,000 and $242,298,000 at September 30, 1996 and 1995,
respectively. In addition, the Company has guaranteed the obligations of CIFC
to CoBank and has granted CoBank a first security interest in all of the assets
of the Company as security for such guaranty. A commitment fee of .5% per annum
is payable by CIFC to CoBank on the average daily unborrowed commitment.
The Credit Agreement prohibits the payment of cash dividends, prohibits any
other senior borrowings, limits the use of borrowings, restricts expenditures
for certain acquisitions and investments, requires positive working capital and
financed proportionate operating cash flow and requires the maintenance of
certain liquidity, capitalization, debt, debt service and cash interest ratios.
The requirements of the Credit Agreement were established in relation to the
anticipated capital and financing needs of the Company's affiliates and their
anticipated results of operations. The Company is currently in compliance with
all covenants and anticipates it will continue to meet the requirements of the
Credit Agreement. CoBank acts as agent for a syndicate of lenders whose
approval may be required for waivers or other amendments to the Credit Agreement
requested by CIFC or the Company.
One affiliate of the Company has entered into a similar financing
arrangement with CoreStates Bank, N.A. to refinance prior indebtedness, finance
working capital and capital expenditures and fund distributions to its partners.
The affiliate may borrow up to $3,500,000 through September 30, 1999 at which
time the loan becomes a reducing revolving loan through September 30, 2001. At
September 30, 1996, the affiliate had borrowed $2,916,000 at an interest rate of
6.94%.
Aggregate maturities of the secured bank financing and note payable for
each of the next five years ending September 30 are as follows: 1997 -
$3,365,000; 1998 - $4,662,000; 1999 - $6,048,000; 2000 - $8,653,000; 2001 -
$4,378,000.
II-34
<PAGE>
COMMNET CELLULAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Senior and subordinated debt
----------------------------
In August 1989, the Company completed a public offering of $74,750,000
aggregate principal amount of 6 3/4% Convertible Subordinated Debentures due
2009. The debentures were convertible at any time prior to maturity, unless
previously redeemed or repurchased, into Common Stock of the Company at a
conversion price of $27 5/8 per share, subject to adjustment under certain
conditions. During the first fiscal quarter of 1995, $3,000 of the debentures
were converted into 108 shares of the Company's Common Stock. In July 1995, the
Company called all outstanding 6 3/4% debentures for redemption. As a result,
$32,895,000 of the debentures were converted into 1,190,673 shares of the
Company's Common Stock, and $41,852,000 were redeemed for cash. The Company
redeemed the debentures at a price of 102.7% resulting in a premium of
$1,130,004. In addition, the Company wrote off $882,253 in offering costs
previously capitalized. As a result of the redemption, the Company recognized
an extraordinary charge related to early extinguishment of long-term debt of
$2,012,257 in the Company's 1995 statement of operations. The Company also
charged $758,228 of offering costs against capital in excess of par value as a
result of the conversion.
In May 1990, the Company completed an offering of $40,000,000 in aggregate
principal amount of 8% Convertible Subordinated Debentures due 2000. The 8%
debentures were convertible at any time prior to maturity, unless previously
redeemed or repurchased, into Common Stock of the Company at a conversion price
of $14.95 per share, subject to adjustment under certain circumstances. On
September 8, 1993, the Company called all outstanding 8% debentures for
redemption. As of September 30, 1993, $2,127,800 of the debentures had been
converted into 142,329 shares of the Company's Common Stock. In October 1993,
the remaining $37,812,200 of 8% debentures were converted into 2,529,194 shares
of the Company's Common Stock, and the Company paid approximately $60,000 to the
remaining holders of the debentures.
In January 1993, the Company completed a private placement of $4,950,000 of
8.75% Convertible Senior Subordinated Notes Due 2001. The notes were general
unsecured obligations of the Company, were subordinate in right of payment to
all Senior Debt of the Company, and were convertible into shares of the
Company's Common Stock at the price of $15.00 per share. In September 1995,
$1,950,000 of the notes were converted into 130,004 shares of the Company's
Common Stock. On December 7, 1995, the Company notified the remaining
noteholders of its intent to call for redemption the balance of the notes
outstanding. In January 1996, the remaining $3,000,000 in notes were converted
into 200,000 shares of the Company's Common Stock. Loss per share would not have
been materially effected had this conversion occurred at the beginning of the
year.
In September 1993, the Company completed an offering of $176,651,000
aggregate principal amount of 11 3/4% Senior Subordinated Discount Notes Due
2003. The notes were issued at a substantial discount from their principal
amount resulting in gross proceeds to the Company of approximately $100,000,000.
After deducting offering costs, net proceeds were $96,740,000. The notes are
general unsecured obligations of the Company and are subordinate in right of
payment to all Senior Debt of the Company. Commencing September 1, 1998,
interest will accrue until maturity on the notes at the rate of 11 3/4% per
annum. Interest on the discount notes is payable semi-annually on March 1 and
September 1, commencing March 1, 1999. The discount notes mature on September
1, 2003 and are redeemable commencing September 1, 1998, in whole at any time or
in part from time to time, at the option of the Company at the redemption prices
(together with accrued interest) of 105.87% if redeemed in 1998 decreasing to
101.46% of the principal amount in 2001. The discount note holders may require
the Company to repurchase the discount notes, in whole or in part, in certain
instances constituting a change of control of the Company.
II-35
<PAGE>
COMMNET CELLULAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Senior and subordinated debt (continued)
----------------------------------------
In July 1995, the Company completed an offering of $80,000,000 in aggregate
principal amount of 11 1/4% Subordinated Notes due 2005. The notes are
subordinate to all existing and future Senior Debt of the Company. Interest on
the notes accrues from the original date of issuance at the rate of 11 1/4% per
annum. Interest is payable in cash semi-annually on each January 1 and July 1.
The notes mature on July 1, 2005 and are redeemable in whole or in part from
time to time, at the option of the Company, at any time on or after July 1, 2000
at the redemption prices of 106% if redeemed in 2000 decreasing to 101.5% of the
principal amount in 2003. The note holders may require the Company to
repurchase the notes, in whole or in part, in certain instances constituting a
change of control of the Company at a price equal to 101% of the principal
amount.
6. Commitments
-----------
The Company leases office space and equipment under agreements which
provide for rental payments based on lapse of time. Certain of these lease
agreements contain renewal option clauses. Rent expense was $3,798,000,
$2,410,000 and $1,366,000 for the years ended September 30, 1996, 1995 and 1994,
respectively.
The aggregate annual rental commitment as of September 30, 1996 is as
follows (amounts in thousands):
1997 $3,356
1998 3,087
1999 2,710
2000 2,365
2001 2,053
Future years 6,981
------
$20,552
=======
On May 15, 1989, the Company adopted a retirement savings plan (pursuant to
Section 401(k) under the Internal Revenue Code) providing for a deferred
compensation and Company matching provision. Under the plan, eligible employees
are permitted to contribute up to 15% of gross compensation, subject to certain
limitations into the retirement plan and the Company will match at the minimum
25% of each employee's contribution up to 3% of the employee's eligible
compensation (6% as of January 1, 1997).
On January 31, 1996, the Company entered into two Option to Sell Agreements
as part of the New Mexico 1 RSA transaction pursuant to which the minority
owners in one managed RSA market can require the Company to purchase their
interests at a price based upon a multiple of EBITDA. If the transaction occurs
after January 1, 2001, the minimum purchase price will be $10,000,000, plus any
capital contributed by the minority owners subsequent to October 1, 1995.
II-36
<PAGE>
COMMNET CELLULAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Commitments (continued)
-----------
The Company has indicated its intent to finance the ongoing operating and
capital requirements of TVX, Inc. through September 30, 1997. The Company
provided $4,369,000 of financing to TVX, Inc. for the year ended September 30,
1996 of which $2,169,000 was utilized for operating purposes. Funding
requirements for the year ended September 30, 1997 could be similar if TVX, Inc.
is unable to obtain alternative financing. There can be no assurance TVX, Inc.
will obtain such financing. As of September 30, 1996, the Company carried its
investment in TVX, Inc. at a value of $4,742,000.
7. Income taxes
------------
At September 30, 1996, the Company had cumulative NOL carryforwards of
$50,808,000 for income tax purposes. If not offset against taxable income, the
tax loss carryforwards will expire between 2001 and 2011. Prior NOLs have been
restated to reflect the impact of adding entities consolidated in 1996 that
incurred NOLs prior to becoming part of the consolidated reporting group. The
income tax provision of $400,000 and $100,000 for the years ended September 30,
1995 and 1994, respectively, was mainly attributable to gains on sales of
investments and consisted solely of a current Federal Alternative Minimum Tax
("AMT") component. There was no income tax provision for the year ended
September 30, 1996. The Company has no liability for regular tax expense due to
tax net operating losses.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. As of September 30, 1996
and 1995, the Company's net deferred tax asset has been fully reserved with a
valuation allowance. Significant components of the Company's deferred tax
assets and liabilities are as follows:
<TABLE>
<CAPTION>
September 30,
----------------------------------
1996 1995
-------------- -------------
<S> <C> <C>
(Amounts in thousands)
Deferred tax assets:
Equity method investments $ 1,576 $ 2,793
Intangible asset differences 8,182 8,808
Inventory adjustments 508 269
Accrued liabilities 298 232
Interest expense on 11 3/4% discount notes 15,946 10,125
Other - net 303 270
Other capitalized costs - net 1,709 2,977
Net operating loss carryforwards 19,307 15,391
Tax credit carryforwards 302 400
--------- ---------
Total deferred tax assets 48,131 41,265
--------- ---------
Deferred tax liabilities:
Difference in license costs 32,455 27,787
Fixed asset differences 4,720 4,680
--------- ---------
Total deferred tax liabilities 37,175 32,467
--------- ---------
Net deferred tax asset 10,956 8,798
Valuation allowance (10,956) (8,798)
--------- ---------
Net deferred taxes $ - $ -
========= =========
</TABLE>
II-37
<PAGE>
COMMNET CELLULAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Income taxes (continued)
------------------------
The following table reconciles the amount which would be provided by
applying the 35% federal statutory rate to income before income tax expense to
the federal income taxes actually provided:
Years ended September 30,
-----------------------------
1996 1995 1994
-----------------------------
(Amounts in thousands)
Income tax at federal statutory rate of
35% $(1,539) $ 866 $(5,828)
Benefit of tax losses not recognized 1,539 - 5,828
Benefit due to utilization of regular
tax
Net Operating Loss (NOL) carryforwards - (866) -
Alternative Minimum Tax (AMT) arising
from the inability to fully utilize
AMT NOL carryforwards - 400 100
-----------------------------
Total income tax expense $ - $ 400 $ 100
=============================
8. Common Stock options
--------------------
In 1987, the Company adopted a Key Employees' Nonqualified Stock Option
Plan whereby employees may be granted options to purchase up to 500,000 shares
of the Company's Common Stock. All outstanding options were granted at an
exercise price which represented at least 100% of the quoted market value of the
Company's Common Stock at the date of grant and were exercisable for a period of
five years from the date of grant. In November 1992, the Company terminated the
Key Employees' Nonqualified Stock Option Plan as to future grants. All options
outstanding under this plan were exercised during 1995.
The Company adopted an Omnibus Stock and Incentive Plan, effective November
1, 1991, pursuant to which 500,000 shares of the Company's Common Stock are
reserved for issuance pursuant to Options, Stock Appreciation Rights, Stock
Bonuses or Phantom Stock Rights. In February 1993, the Company's shareholders
approved an additional 500,000 shares of the Company's Common Stock to be
reserved for issuance pursuant to the Omnibus Stock and Incentive Plan plus 1%
of the number of shares outstanding at the end of each fiscal year commencing
October 1, 1993. In February 1995, the Company's shareholders approved an
additional 750,000 shares of the Company's Common Stock to be reserved for
issuance under this plan.
II-38
<PAGE>
COMMNET CELLULAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. Common Stock options (continued)
--------------------
An analysis of options related to the Company's benefit plans is as
follows:
<TABLE>
<CAPTION>
Key Employees' Omnibus Stock
Nonqual. Stock and Exercise
Option Plan Incentive Plan Price Range
---------------- ------------------ ---------------
<S> <C> <C> <C>
Outstanding options at
September 30, 1994 89,000 544,625 $ 7.00 - $26.00
Granted - 692,000 $23.00 - $25.63
Forfeitures (10,000) (19,125)
Exercised (79,000) (7,875) $ 7.00 - $19.50
-------------- ---------
Outstanding options at
September 30, 1995 - 1,209,625 $11.75 - $25.63
Granted - 529,000 $ 25.56
Forfeitures - (100,500)
Exercised - (36,750) $13.00 - $25.63
-------------- ---------
Outstanding options at
September 30, 1996 - 1,601,375 $11.75 - $25.63
============== =========
Options available for
grant at
September 30, 1996 - 570,715
============== =========
Options exercisable at
September 30, 1996 - 484,750
============== =========
</TABLE>
The weighted average exercise price of the options outstanding at September
30, 1996 was $22.62.
Subsequent to September 30, 1996, the Company granted options to purchase
295,250 shares of Common Stock to officers and employees of the Company at an
exercise price of $29.375 pursuant to the Company's Omnibus Stock and Incentive
Plan.
In addition to the plans described above, in July 1993, the Company granted
options to purchase 152,500 shares of Common Stock to two former officers at
exercise prices ranging from $7.00 - $15.75. As a result, the Company
recognized compensation expense of approximately $370,000. The options became
exercisable at various intervals through November 1995 and, as of September 30,
1996, all of these options had been exercised. During the fiscal years ended
September 30, 1996, 1995 and 1994, options to purchase 11,250, 15,000 and
101,250 shares were exercised, respectively. In September 1995, the Company
granted options to purchase 60,000 shares of Common Stock to a former officer at
an exercise price of $30.375. These options are exercisable over a period of
four years from the date of grant. In June 1996, options to purchase 30,000 of
these shares were canceled. During the fiscal year ended September 30, 1996,
options to purchase 7,500 shares became exercisable and no options were
exercised under this agreement.
II-39
<PAGE>
COMMNET CELLULAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. Employee stock ownership plan
-----------------------------
On October 1, 1988, the Company adopted an Employee Stock Ownership Plan
("ESOP"). The cost of the ESOP is borne by the Company through annual
contributions to a Trustee in amounts determined by the Board of Directors.
Employees are eligible to participate in the ESOP after one year of service.
Shares of Common Stock acquired by the ESOP are to be allocated to each employee
and held until the employee's retirement or death. The employee can also choose
early withdrawal under certain circumstances. Each employee's account vests
ratably over a period of five years. Contributions totaling approximately
$707,000 (24,487 shares), $552,000 (19,021 shares) and $478,000 (20,953 shares)
were made to the ESOP for the years ended September 30, 1996, 1995 and 1994,
respectively. Shares are deemed issued for accounting purposes in the year that
ESOP contribution expense is recognized.
10. Stockholders' equity
--------------------
In December 1990, the Board of Directors declared a dividend distribution
of one right (a "Right") attached to each outstanding share of the Company's
Common Stock at any point in time. Each Right, when exercisable, entitles the
registered holder to purchase from the Company one one-hundredth of a share of
Series A Preferred Stock, at a price of $45 per one one-hundredth of a share,
subject to adjustment (the "Purchase Price").
The Rights will detach from the Common Stock and a "Distribution Date" will
occur upon the earliest of (i) ten days following a public announcement that a
person or group has acquired, or obtained the right to acquire, beneficial
ownership of 25% or more of the outstanding shares of the Company's Common Stock
(the "Stock Acquisition Date"), (ii) ten business days following commencement of
a tender offer or exchange offer that would result in a person or group
beneficially owning 30% or more of the Company's Common Stock, or (iii) ten
business days after the Board of Directors have made a determination that
someone has become the beneficial owner of a substantial amount of the Company's
Common Stock and that such ownership is adverse to the Company's interest.
Should these events occur, each holder of a Right will thereafter have the right
to receive, upon exercise, the Company's Common Stock (or, in certain
circumstances, cash, property or other securities of the Company) having a value
equal to two times the Purchase Price. Similarly, in the event that at any time
following a Stock Acquisition Date, the Company is acquired in a merger or other
business combination transaction in which the Company is not the surviving
corporation or 50% or more of its assets, cash flow or earning power is sold or
transferred, each holder of a Right shall thereafter have the right to receive,
upon exercise, Common Stock of the acquiring entity having a value equal to two
times the Purchase Price. Under certain circumstances, any Rights that are
owned by the acquiring person or the adverse person will be null and void.
In general, the Company may redeem the Rights in whole, but not in part, at
a price of $.01 per Right, at any time until ten days following the acquisition
by a person or group of 25% or more of the Company's outstanding Common Stock or
the declaration by the Board of Directors that a person is an adverse person.
The Rights will expire on December 24, 2000, unless earlier redeemed.
II-40
<PAGE>
COMMNET CELLULAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Stockholders' equity (continued)
--------------------------------
In August 1996, the Company announced a program to repurchase, from time to
time, up to $20,000,000 of its outstanding Common Stock using available
liquidity to fund the repurchases. At September 30, 1996, the Company had
repurchased 47,500 shares at prices ranging from $28.875 to $29.125 per share
for an aggregate price of $1,378,438. Subsequent to year end, the Company
repurchased an additional 102,000 shares at prices ranging from $27.75 to $29.00
per share, for an aggregate price of $2,932,500.
11. Fair values of financial instruments
------------------------------------
FAS Statement No. 107, Disclosures about Fair Value of Financial
-----------------------------------------
Instruments, requires disclosure of fair value information about financial
- -----------
instruments for which it is practicable to estimate that value, whether or not
recognized in the balance sheet. In cases where quoted market prices are not
available, fair values are based on estimates using present value or other
valuation techniques. Statement No. 107 excludes certain financial instruments
and all nonfinancial instruments from its disclosure requirements. Accordingly,
the aggregate fair value amounts do not represent the underlying value of the
Company.
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
Advances to affiliates: The carrying amounts of the Company's advances to
----------------------
and receivables from affiliates approximate their fair value.
Long and short-term debt: The carrying amounts of the secured bank
------------------------
financing and note payable borrowings approximate their fair value as all
borrowings either carry a variable interest rate or fixed interest rates having
a term of three months or less. Other long-term debt is valued based on quoted
market prices.
The carrying amounts and fair values of the Company's financial instruments
at September 30, 1996 are as follows:
<TABLE>
<CAPTION>
Carrying Amount Fair Value
--------------- ----------
(Amounts in thousands)
<S> <C> <C>
Cash and cash equivalents $ 11,492 $ 11,492
Advances to affiliates and other 60,560 60,560
Notes payable 2,916 2,916
Secured bank financing 24,190 24,190
11 1/4% subordinated notes 80,000 84,000
11 3/4% senior subordinated discount notes 141,963 158,103
</TABLE>
II-41
<PAGE>
COMMNET CELLULAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. Quarterly Financial Data (unaudited)
------------------------------------
Quarterly financial data and per share data are presented below (amounts in
thousands, except for per share data):
First Second Third Fourth
Quarterly Financial Data Quarter Quarter Quarter Quarter
- ------------------------ -------- -------- -------- -------
1996
Revenues $25,071 $23,590 $29,765 $36,770
Operating income (loss) 1,536 (41) 4,320 10,538
Net income (loss) (3,354) (4,734) (968) 4,660
Income (loss) per share $ (0.25) $ (0.35) $ (0.07) $ 0.34
---------------------------------------------------------------------
1995
Revenues $19,275 $19,064 $24,178 $27,327
Operating income (loss) (1,821) (1,592) 1,539 3,867
Income (loss) before
extraordinary charge (6,437) (5,837) (3,546) 17,894
Net income (loss) (6,437) (5,837) (3,546) 15,882
Income (loss) per share:
Income (loss) before extra-
ordinary charge $ (0.55) $ (0.49) $ (0.29) $ 1.38
Net income (loss) (0.55) (0.49) (0.29) 1.22
As described in Note 2, the Company sold its interest in Nebwest Cellular,
Inc. during the fourth fiscal quarter of 1995, resulting in a gain after tax of
approximately $19,600,000. In addition, as discussed in Note 6, during the
fourth fiscal quarter of 1995, the Company experienced an extraordinary charge
related to the early extinguishment of long-term debt of approximately
$2,012,000.
II-42
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant.
The following table sets forth certain information regarding the executive
officers and directors of the Company:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Arnold C. Pohs 68 Chairman of the Board, President, Chief
Executive Officer and Director
Daniel P. Dwyer (1) 37 Executive Vice President, Treasurer, Chief
Financial Officer and Director
Andrew J. Gardner 42 Senior Vice President and Controller
Homer Hoe 47 Executive Vice President and Chief
Information Officer
Timothy C. Morrisey 43 Executive Vice President - Sales Operations
David S. Lynn 39 Senior Vice President - Network Operations
Amy M. Shapiro 43 Senior Vice President, Secretary and General
Counsel
John E. Hayes, Jr. (1) (2) 59 Director
Robert J. Paden (2) 41 Director
David E. Simmons (1) (2) 39 Director
</TABLE>
__________
(1) Member Audit Committee.
(2) Member Compensation Committee.
The Company's Articles of Incorporation provide for a classified Board of
Directors consisting of three classes, each class to be as nearly equal in
number as possible. The members of each class are elected to a three-year term
and one class is elected at each annual meeting. Messrs. Dwyer and Hayes are
members of Class III with terms expiring at the 1996 Annual Meeting of
Stockholders (to be held in February 1997); Messrs. Pohs and Paden are members
of Class I with terms expiring at the 1997 Annual Meeting (to be held in
February 1998); and Mr. Simmons is a member of Class II with a term expiring at
the 1998 Annual Meeting (to be held in February 1999).
Arnold C. Pohs has been Chairman of the Board of the Company since February
1991, President and Chief Executive Officer since August 1989 and a director
since September 1985. Mr. Pohs served as Executive Vice President of the Company
from January 1986 through August 1989. Mr. Pohs was designated Chief Operating
Officer of the Company in August 1987, prior to which time he was the Chief
Financial Officer of the Company. Mr. Pohs currently serves as 1st Vice
Chairman and a member of the Executive Committee of the Board of Directors of
the Cellular Telecommunications Industry Association and as Chairman of the
Public Policy Council.
III-1
<PAGE>
He is a director, and former Chairman, of the CTIA Foundation for Wireless
Telecommunications and is also a member of the CEO Council. He also serves as
Chairman of the Board of TVX, Inc.
Daniel P. Dwyer has been Executive Vice President of the Company since
November 1992, a director of the Company since March 1990, and Chief Financial
Officer since August 1988 and Treasurer since August 1987. He was Vice
President - Finance of the Company from November 1989 until November 1992,
Secretary from August 1987 until March 1990, Assistant Secretary from January
1987 until August 1987, Controller from May 1986 until November 1988 and
accounting manager for the Company from March 1986 until May 1986. He is a
Certified Public Accountant and a member of the American Institute of Certified
Public Accountants and the Colorado Society of Certified Public Accountants.
Mr. Dwyer currently serves as a director of TVX, Inc.
Andrew J. Gardner was named Senior Vice President of the Company in July
1994. He was Vice President and Controller from November 1992 to July 1994 and
Assistant Vice President - Accounting and Tax from July 1990 to October 1992.
Homer Hoe was elected Executive Vice President and Chief Information
Officer of the Company in October 1994. From August 1992 until joining the
Company in October 1994, he was a self-employed consultant to the Information
Services industry, and was contracted by the Company as interim CIO from April
to October 1994. From August 1991 to August 1992, Mr. Hoe was Director of
Information Services for Tenneco Minerals, a subsidiary of Tenneco, Inc. From
May 1986 to August 1991, he was employed by Digital Equipment Corporation, most
recently as Senior Consultant, specializing in multi-vendor computer system
integration.
David S. Lynn was named Senior Vice President-Network Operations of the
Company in July 1994. He was Vice President-Network Operations from March 1993
until July 1994, Vice President-Network Development from February 1992 until
March 1993, Assistant Vice President-Finance from June 1990 until February 1992,
Controller from November 1988 until June 1990 and Manager, Financial Reporting
from August 1988 until November 1988.
Timothy C. Morrisey was named Executive Vice President - Sales Operations
of the Company in November 1996. He was Senior Vice President-Sales Operations
from February 1995 until November 1996 and General Sales Manager of the
Company's Midwest Region from July 1993 until February 1995. From February 1990
until joining the Company in July 1993, Mr. Morrisey was President and General
Manager of the Washington D.C. and Baltimore cellular operations for
Southwestern Bell Mobile Systems.
Amy M. Shapiro was named Senior Vice President of the Company in November
1995. She was Vice President of the Company from November 1992 to November 1995
and has been Secretary of the Company since March 1990 and General Counsel since
October 1989.
John E. Hayes, Jr. was elected a director of the Company in October 1990.
Mr. Hayes has served as Chairman of the Board, President and Chief Executive
Officer of Western Resources, Inc. since October 1989. From May 1989 to October
1989, Mr. Hayes was Chairman of the Board of Triad Capital Partners, a venture
capital firm. Mr. Hayes was President and Chief Executive Officer of
Southwestern Bell Telephone Company from September 1986 to January 1989.
Mr. Hayes is a director of the Automobile Club of Missouri, Boatmen's
Bancshares, Inc., American Gas Association, Edison Electric Institute, Security
Benefit Group, the Topeka Community Foundation, Boys Hope, Kansas Wildscape and
Boy Scouts of America and a Trustee of Midwest Research Institute, Menninger
Foundation and Rockhurst College.
Robert J. Paden has been a director of the Company since December 1985.
For the past 13 years, Mr. Paden has been General Manager/Vice President of the
Stanton Telephone Company, Stanton, Nebraska. He is also a board member of the
Nebraska Telephone Association.
III-2
<PAGE>
David E. Simmons has been a director of the Company since August 1987. Mr.
Simmons has served as President of Simmons Family Incorporated, a broadcasting
and communications company, since 1989 and as its Executive Vice President from
1985 to 1989.
Item 11. Executive Compensation.
REPORT OF COMPENSATION COMMITTEE
General. The Compensation Committee of the Board of Directors is
-------
responsible for establishing the executive compensation program for the Company.
The Committee monitors and recommends changes in the compensation levels of
executive management and administers the Company's incentive compensation
programs as well as determining the grants under the Company's Employee Stock
Ownership Plan. All of the Committee members are outside, non-employee
directors of the Company. The Company has periodically retained the services of
a nationally recognized executive compensation consulting firm to assist the
Company in compensation matters.
Compensation Philosophy. The Company's compensation program is designed to
-----------------------
attract and retain high quality executive management, to give management
incentives that motivate superior performance on behalf of the Company and to
align the interests of management with those of the Company's shareholders. The
Committee believes that the Company's base salaries should approximate the
average of base salaries paid to executives with similar responsibilities in
similar cellular companies. Executive compensation should also be correlated to
the Company's performance and shareholder return. In determining executive
compensation, the Committee considers compensation from Company subsidiaries and
affiliates received by executive officers in their capacity as Board members of
such entities.
The companies used for compensation comparison purposes are not all of the
same companies contained in the Nasdaq telecommunications industry group
comparison of total shareholder return in the Stockholder Performance Return
Graph. The companies used for compensation purposes are those companies which
are similarly sized and are in the cellular industry.
Components of Compensation.
--------------------------
Salary: The salary of the Chief Executive Officer and the other executive
------
officers of the Company are based on a subjective evaluation of an individual
officer's responsibility, Company performance and a comparison of salaries for
similar positions in comparable companies.
During 1996 the salary increases for the executive officers, other than
Arnold C. Pohs, the Chief Executive Officer, ranged between 10% and 25%. Mr.
Pohs' base salary was increased by 17%. The basis for Mr. Pohs' salary increase
was twofold. First, the increase recognizes the performance of the Company in
terms of operating cash flow achievements. Second, Mr. Pohs' salary was
adjusted after an evaluation of comparative industry information to approximate
the Company's compensation objective of paying at the average.
Short-Term Incentive Plan Bonuses: The Company maintains an annual bonus
---------------------------------
plan which is based on meeting certain operational targets. The bonus
opportunities are established based on the average opportunities provided to
executives in similar positions at similar companies.
Actual annual bonuses for the executive officers were determined based on
the Company's performance relative to corporate operating targets and on each
individual's performance relative to officer specific individual goals. The
weightings of corporate and individual performance vary by
III-3
<PAGE>
position and responsibilities and range from a weighting of 70% corporate/30%
individual to 90% corporate/10% individual, which is the weighting applied to
Mr. Pohs' award.
The corporate operating targets were based on the following measures which
represent the key business indicators of performance within the cellular
industry: Net managed market subscriber additions (20%), managed market
acquisition cost (including equipment margin) net subscriber addition (25%),
consolidated service revenues (15%), consolidated operating cash flow (30%) and
total consolidated debt as a percentage of financed proportionate cash flow
(10%).
During fiscal 1996, the Company's weighted average performance results were
101.8% of the operating targets as described above and bonuses were paid
accordingly after a subjective evaluation of individual performance The
corporate performance results represent excellent performance against aggressive
operating plan targets.
Mr. Pohs' award was 40% of base salary and was based 90% on the weighted
performance results of 101.8% of the operating targets and 10% on individual
performance. The Committee determined that the individual portion of Mr. Pohs'
award should be based on a maximum individual performance rating. Specifically,
the Committee considered the following: the Company added 60,286 managed market
customers, a 39% increase, bringing the total to 211,278 at September 30, 1996,
and consolidated EBITDA increased to $38.2 million which represented a 95%
increase over the $19.6 million reported in the prior fiscal year.
Long-Term Incentive Compensation: The Company provides long-term incentive
--------------------------------
compensation to its executives through stock option grants under the Omnibus
Stock and Incentive Plan which are intended to align the interest of executives
with those of stockholders. This plan was approved by the Company's
shareholders during fiscal 1991 and was amended in 1993 and 1995.
Subsequent to the 1996 fiscal year-end, stock options were granted to the
Company's executives as set forth in the "Option Grants Table." All options are
granted at an exercise price equal to the market price of the Company's Common
Stock at the date of grant and vest over a period of four years. The size of
option grants to the executives were based on a subjective evaluation of Company
and individual performance and on a study by an independent compensation
consulting firm of dilution levels of comparable companies. After the stock
option grant, the Company's stock option dilution levels are within the range of
dilution levels found at comparable companies. In addition, the shares owned by
the named executives and their respective option positions were considered in
determining such option grants.
In November 1996, Mr. Pohs received an option to purchase 100,000 shares of
Common Stock with an exercise price equal to the fair market value of the stock
on the date of grant. The size of the award was determined based on a
subjective evaluation of Mr. Pohs' performance.
As of the date of this report, Mr. Pohs owns 85,944 shares of the Company's
Common Stock and, with the recent grant, holds options to purchase an additional
740,000 shares. The Committee believes that the equity interests held by the
named executives represent a significant incentive to continue to increase
stockholder value.
Policy with Respect to the $1 Million Limit. Section 162(m) of the
--------------------------------------------
Internal Revenue Code generally limits to $1,000,000 the tax deductible
compensation paid to the Chief Executive Officer and the four highest-paid
executive officers who are employed as executive officers on the last day of the
year. However, the limitation does not apply to performance-based compensation
provided certain conditions are satisfied.
III-4
<PAGE>
None of the Company's compensation payments for fiscal 1996 exceeded the
tax deductibility limit set forth in Section 162(m) nor is it expected that
compensation to be paid in fiscal 1997 will exceed the limit. The committee
will continue to monitor the Company's executive compensation program with the
impact of Section 162(m) and will seek to minimize the impact of Section 162(m)
where appropriate and consistent with the Company's compensation philosophy.
David E. Simmons John E. Hayes, Jr. Robert J. Paden
III-5
<PAGE>
STOCKHOLDER PERFORMANCE RETURN GRAPH
The following graph compares the yearly percentage change in the cumulative
total shareholder return on the Company's Common Stock with that of the
cumulative total return of the Nasdaq Stock Market - US Index ("NASDAQ STOCK
MRKT - US") and the Nasdaq Telecommunications Index ("NASDAQ TELECOM") for the
five-year period ended on September 30, 1996. The information below is based on
an investment of $100, on September 30, 1991, in the Company's Common Stock, the
NASDAQ STOCK MRKT - US and the NASDAQ TELECOM, with dividends reinvested.
[GRAPH APPEARS HERE]
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN*
AMONG COMMNET CELLULAR INC., THE NASDAQ STOCK MARKET-US INDEX
AND THE NASDAQ TELECOMMUNICATIONS INDEX
<TABLE>
<CAPTION>
NASDAQ
Measurement period Commnet NASDAQ Telecommunications
(Fiscal year Covered) Cellular Index Index
- --------------------- -------- ------- -------------------
<S> <C> <C> <C>
Measurement PT -
9/30/91 $100 $100 $100
FYE 9/30/92 $ 93 $112 $109
FYE 9/30/93 $133 $147 $193
FYE 9/30/94 $175 $148 $178
FYE 9/30/95 $223 $204 $213
FYE 9/30/96 $222 $243 $220
</TABLE>
* $100 invested on 9/30/91 in stock or index--including reinvestment of
dividends. Fiscal year ending September 30.
III-6
<PAGE>
SUMMARY COMPENSATION TABLE
The following table sets forth the compensation received by the named
Executive Officers for each of the three years ended September 30, 1996.
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
------------------- ----------------------
Name and Principal Position Year Salary ($) Bonus ($) All Others ($)(1) Options (#) All Others ($)(2)
- ---------------------------------------- ---- ---------- --------- ----------------- ----------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Arnold C. Pohs................ 1996 350,000 149,306 11,473 100,000 10,125
Chairman of the Board, 1995 300,000 126,455 10,861 200,000 8,625
President and Chief 1994 250,000 112,601 - 250,000 13,980
Executive Officer
Daniel P. Dwyer............... 1996 250,000 83,598 2,880 50,000 10,125
Executive Vice 1995 200,000 66,203 3,734 100,000 8,625
President, Treasurer 1994 180,000 58,974 - 125,000 13,070
and Chief Financial
Officer
Homer Hoe..................... 1996 200,000 63,878 2,259 20,000 8,112
Executive Vice President 1995 170,000 55,253 2,206 35,000 975
and Chief Information 1994 - - - - -
Officer
Timothy C. Morrisey........... 1996 132,000 36,753 - 20,000 10,125
Executive Vice President 1995 115,000 23,820 - 20,000 8,625
- Sales Operations 1994 - - - - -
David S. Lynn................. 1996 132,000 35,103 - 20,000 10,125
Senior Vice President - 1995 120,000 33,095 - 20,000 8,625
Network Operations 1994 108,000 28,755 - 20,000 7,637
</TABLE>
__________
(1) The amounts shown represent premiums paid on supplemental health benefits
for certain named executives.
(2) The amounts shown represent contributions by the Company to defined
contribution plans.
III-7
<PAGE>
1996 OPTION GRANTS
The following table provides information on option grants for fiscal 1996
by the Company to its named Executive Officers.
<TABLE>
<CAPTION>
Potential Realizable Value
at Assumed Rates of
Stock Price Appreciation
Individual Grants for Option Term (2)
-------------------------------------------------------- --------------------------
Percent of
Total Options
Granted to Exercise
Granted Employees in Price Expiration
Name (#) (1) Fiscal Year ($/Share) Date 5% 10%
---- ------- ----------- --------- ---- -- ---
<S> <C> <C> <C> <C> <C> <C>
Arnold C. Pohs 100,000 33.87% 29.375 12/11/06 $1,847,378 $4,681,618
Daniel P. Dwyer 50,000 16.93% 29.375 12/11/06 923,689 2,340,809
Homer Hoe 20,000 6.77% 29.375 12/11/06 369,476 936,324
Timothy C. Morrisey 20,000 6.77% 29.375 12/11/06 369,476 936,324
David S. Lynn 20,000 6.77% 29.375 12/11/06 369,476 936,324
</TABLE>
(1) Indicates number of shares as to which options were granted on December 11,
1996 pursuant to the Company's Omnibus Stock and Incentive Plan. Options
become exercisable in four equal annual installments commencing December 11,
1997.
(2) These are hypothetical values using assumed growth as prescribed by the SEC.
The assumed annual rates of appreciation of 5% and 10% over the ten year
term of the options would result in the price of the Company's stock
increasing to $47.85 and $76.19, respectively.
The following table provides information on option grants for fiscal 1996 by
TVX, Inc., a subsidiary of the Company.
<TABLE>
<CAPTION>
Potential Realizable Value
at Assumed Rates of
Stock Price Appreciation
Individual Grants for Option Term (2)
-------------------------------------------------------- --------------------------
Percent of
Total Options
Granted to Exercise
Granted Employees in Price Expiration
Name (#) (1) Fiscal Year ($/Share) Date 5% 10%
---- ------- ----------- --------- ---- -- ---
<S> <C> <C> <C> <C> <C> <C>
Arnold C. Pohs 100,000 29.67% 1.50 9/18/06 $41,442 $94,334
Daniel P. Dwyer 50,000 14.84% 1.50 9/18/06 20,721 47,167
</TABLE>
(1) Indicates number of shares as to which options were granted on September 18,
1996 to purchase shares of TVX, Inc.
(2) These are hypothetical values using assumed growth as prescribed by the SEC.
The assumed annual rates of appreciation of 5% and 10% over the ten year
term of the options would result in the value of the options increasing to
$1.91 and $2.44, respectively.
III-8
<PAGE>
Change in Control Agreements
- ----------------------------
In July 1993, the Board of Directors approved change in control agreements
(the "Agreements") with Messrs. Pohs and Dwyer. In October 1994, the Board
authorized a comparable agreement with Mr. Hoe, the Company's Chief Information
Officer. In November 1995, the Board authorized comparable agreements with
Messrs. Gardner, Lynn and Morrisey, the Company's Senior Vice President and
Controller, Senior Vice President - Network Operations, and Executive Vice
President - Sales Operations, respectively, and Ms. Shapiro, the Company's
Senior Vice President and General Counsel. The purpose of the Agreements is to
reinforce and encourage the officers to maintain objectivity and a high level of
attention to their duties without distraction from the possibility of a change
in control of the Company. These Agreements provide that in the event of a
change in control of the Company, as that term is defined in the Agreements,
each officer is entitled to receive certain severance benefits upon the
subsequent termination or constructive termination of employment, unless such
termination is due to death, disability or voluntary retirement; unless the
termination is by the Company for cause (as defined in the Agreements) or is by
the officer for other than good reason (as defined in the Agreements).
The severance benefits include the payment of the officer's full base
salary through the date of termination. The severance benefits also include a
lump sum payment equal to 2.99 times the sum of (a) the officer's annual base
salary in effect immediately prior to the circumstances giving rise to
termination, and (b) the actual bonus earned by the officer in the year prior to
the year in which termination occurs. In addition, each officer will be
provided with life and health benefits and a continuation of all other employee
benefits for 12 months following the date of termination. In addition, the
officers will be fully vested in all benefit plans to the extent not otherwise
entitled to 100% of all contributions made by the Company on their behalf.
In the event any payment or benefit to be received by an officer pursuant
to the Agreements would be subject to the federal excise tax, the amount of the
benefits payable under the Agreement will be increased such that the net amount
retained by the officer after deduction of any excise tax on such payment and
any federal, state and local tax and excise tax upon such additional payment
shall be equal to the full severance benefits contemplated by the Agreement.
III-9
<PAGE>
1996 AGGREGATED OPTION EXERCISES
AND YEAR-END OPTION VALUES
The following table provides information on the value of unexercised options at
September 30, 1996.
<TABLE>
<CAPTION>
Number of Unexercised Options Value of Unexercised
at In-the-Money Options
Fiscal Year End (#)(1) at Fiscal Year End
------------------------------------------- ------------------------------------
Name Vested Unvested Vested Unvested
---- ------ -------- ------ --------
<S> <C> <C> <C> <C>
Arnold C. Pohs 537,500 (2) 452,500 $2,030,000 (2) $1,978,750
Daniel P. Dwyer 270,000 (2) 227,500 1,470,844 (2) 1,009,219
Homer Hoe 6,250 53,750 20,313 176,876
Timothy C. Morrisey 3,125 28,125 13,984 96,484
David S. Lynn 27,250 46,250 313,281 244,844
- ---------
</TABLE>
(1) Does not reflect options granted on December 11, 1996 for fiscal 1996.
(2) Includes options to purchase 250,000 and 150,000 shares of TVX, Inc. held by
Arnold C. Pohs and Daniel P. Dwyer, respectively. There is currently no
public market for shares of TVX, Inc., accordingly the table reflects an
assumed fair market value per share of $1.50.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
At December 18, 1996, there were 13,741,378 shares of Common Stock of the
Company issued and outstanding. As of such date options to purchase 1,918,500
shares were outstanding. Each holder of Common Stock, but not unexercised
options, is entitled to one vote per share on each matter which may be presented
at a meeting of stockholders. Cumulative voting is not allowed. The Company's
Common Stock is traded on the Nasdaq National Market under the symbol CELS.
The following table sets forth information regarding ownership of the
Company's Common Stock at December 18, 1996 by each person who is known by
management of the Company to own beneficially more than 5% of the Common Stock,
by each director of the Company and by all directors and executive officers of
the Company as a group. Shares issuable on exercise of options are deemed to be
outstanding for the purpose of computing the percentage ownership of persons
beneficially owning such options, but have not been deemed to be outstanding for
the purpose of computing the percentage ownership of any other person. Insofar
as is known to the Company, the persons indicated below have sole voting and
investment power with respect to the shares indicated as owned by them except as
otherwise stated in the notes to the table.
III-10
<PAGE>
<TABLE>
<CAPTION>
Name and Address of Amount and Nature of Percent of
Beneficial Owner Beneficial Ownership Class
---------------- -------------------- -----------
<S> <C> <C>
Arnold C. Pohs 430,551 (1) 3.06%
8350 East Crescent Parkway
Englewood, Colorado 80111
Daniel P. Dwyer 218,627 (2) 1.57%
8350 East Crescent Parkway
Englewood, Colorado 80111
John E. Hayes, Jr. 7,500 .05%
818 Kansas Avenue
Topeka, Kansas 66612
Main Street Partners, L.P. 2,075,800 (3) 15.11%
3637 Fall Creek Highway
Granbury, Texas 76049
Janus Capital Corporation 2,000,100 (4) 14.56%
100 Filmore Street
Denver, Colorado 80206
The Equitable Companies Inc. 1,232,000 (5) 8.97%
787 Seventh Avenue
New York, New York 10019
All executive officers and directors 835,168 (6) 5.78%
(10 persons)
</TABLE>
__________
(1) Includes options to purchase 340,000 shares of Common Stock.
(2) Includes options to purchase 197,500 shares of Common Stock.
(3) A Schedule 13D, dated April 4, 1995, was filed on behalf of Main Street
Partners, L.P., MS Advisory Partners, L.P., MS Advisory Partners (Overseas),
L.P., San Francisco Partners II, L.P., SF Advisory Partners, L.P., SF
Advisory Corp., SF Advisory Corp. II, The Phoebe Snow Foundation, John H.
Scully, William E. Oberndorf, William J. Patterson and Glenn B. Solomon.
(4) A Schedule 13G, dated February 13, 1996, filed on behalf of Janus Capital
Corporation, Janus Venture Fund and Thomas H. Bailey reflects that such
group has shared voting and shared disposition power over such shares.
(5) A Schedule 13G, dated as of December 31, 1995, filed on behalf of five
French mutual insurance companies, AXA Assurance I.A.R.D. Mutuelle, AXA
Assurances Vie Mutuelle, Alpha Assurances I.A.R.D. Mutuelle, Alpha
Assurances Vie Mutuelle and Uni Europe Assurance Mutuelle, as a group,
AXA, The Equitable Companies Incorporated and their subsidiaries reflects
that such group has sole voting power over 1,097,300 shares of Common
Stock of the Company. No information is given in respect of voting power
over the remaining shares.
(6) Includes options to purchase 698,938 shares of Common Stock held by
directors and executive officers of the Company.
Item 13. Certain Relationships and Related Transactions.
None.
III-11
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a)(1) Financial Statements
--------------------
1. Report of Independent Auditors
2. Consolidated Balance Sheets, September 30, 1996 and 1995
3. Consolidated Statements of Operations, Years ended September 30, 1996,
1995 and 1994
4. Consolidated Statements of Stockholders' Equity (Deficit), Years ended
September 30, 1994, 1995 and 1996
5. Consolidated Statements of Cash Flows, Years ended September 30, 1996,
1995 and 1994
6. Notes to Consolidated Financial Statements
(a)(2) Financial Statement Schedules
-----------------------------
Schedule I. Condensed Financial Information of Registrant
Schedule II. Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes thereto.
(a)(3) Exhibits
--------
3.1 Amended and First Restated Articles of Incorporation, as amended, of
the Company.
Incorporated herein by reference to Exhibit 3.1 to the Company's
annual report on Form 10-K for the fiscal year ended September 30,
1994.
3.2 Bylaws, as amended, of the Company.
Incorporated herein by reference to Exhibit 3.2 to the Company's
registration statement on Form S-18, SEC File No. 33-2700.
4.1 Specimen certificate representing Common Stock.
Incorporated herein by reference to Exhibit 4.1 to the Company's
registration statement on Form S-18, SEC File No. 33-2700.
4.2 Indenture between the Company and State Street Bank and Trust Company,
as Trustee, relating to the 11 3/4% Senior Subordinated Discount
Notes.
Incorporated herein by reference to Exhibit 4.1 to the Company's
registration statement on Form S-3, SEC File No. 33-66492.
IV-1
<PAGE>
(a)(3) Exhibits (continued)
--------
4.3 Indenture between the Company and America Bank N.A., as Trustee,
relating to the 11 1/4% Subordinated Notes.
Incorporated herein by reference to Exhibit 4.1 to the Company's
registration statement on Form S-3, SEC File No. 33-60393.
4.4 Rights Agreement between the Company and State Street Bank and Trust
Company, as Rights Agent.
Incorporated herein by reference to Exhibit 2 to the Company's
registration statement on Form 8-A dated December 19, 1990.
*4.5 Amendment Three to Rights Agreement between the Company and the Rights
Agent.
10.1 Lease Agreement dated August 8, 1995 between the Company and TCD
North, Inc.
Incorporated herein by reference to Exhibit 10.1 to the Company's
annual report on Form 10-K for the fiscal year ended September 30,
1995.
10.2 Amended and Restated Employee Stock Ownership Plan and Trust.
Incorporated herein by reference to Exhibit 10.1 to the Company's
quarterly report on Form 10-Q for the quarter ended June 30, 1996.
10.3 Short-Term Incentive Plan.
Incorporated herein by reference to Exhibit 10.6 to Company's annual
report on Form 10-K for the fiscal year ended September 30, 1990.
10.4 Omnibus Stock and Incentive Plan.
Incorporated herein by reference to Exhibit 10.7 to the Company's
annual report on Form 10-K for the fiscal year ended September 30,
1991.
10.5 Consolidated Loan Agreement between CoBank and CIFC.
Incorporated herein by reference to Exhibit 10.5 to the Company's
annual report on Form 10-K for the fiscal year ended September 30,
1995.
10.6 Third Amended and Restated Guaranty of the Company to CoBank.
Incorporated herein by reference to Exhibit 10.6 to the Company's
annual report on Form 10-K for the fiscal year ended September 30,
1995.
10.7 Form of change in control agreement between the Company and its
senior management.
Incorporated herein by reference to Exhibit 10.7 to the Company's
annual report on Form 10-K for the fiscal year ended September 30,
1995.
*12.1 Computation of ratio of earnings to fixed charges.
*21.1 Subsidiaries of the Company.
*23.1 Consent of Independent Auditors.
__________
* Filed herewith
(b) Reports on Form 8-K during the quarter ended September 30, 1996.
----------------------------------------------------------------
None.
IV-2
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
COMMNET CELLULAR INC.
By: /s/ Arnold C. Pohs
-------------------------
Arnold C. Pohs, President
Date: December 30, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities and on
the date indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Arnold C. Pohs President, Chief Executive December 30, 1996
- --------------------------- Officer and Director
Arnold C. Pohs
/s/ Daniel P. Dwyer Executive Vice President, December 30, 1996
- --------------------------- Treasurer, Chief Financial
Daniel P. Dwyer Officer and Director
/s/ Andrew J. Gardner Senior Vice President and December 30, 1996
- --------------------------- Controller (Principal
Andrew J. Gardner Accounting Officer)
/s/ John E. Hayes, Jr. Director December 30, 1996
- ---------------------------
John E. Hayes, Jr.
/s/ Robert J. Paden Director December 30, 1996
- ---------------------------
Robert J. Paden
/s/ David E. Simmons Director December 30, 1996
- ---------------------------
David E. Simmons
</TABLE>
IV-3
<PAGE>
COMMNET CELLULAR INC.
SCHEDULE I
Condensed Financial Information of Registrant
(Amounts in thousands)
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEETS
- ------------------------
September 30,
------------------
1996 1995
---- ----
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 10,204 $ 40,179
Accounts receivable 16 13
Inventory and other 3,933 2,918
-------- --------
Total current assets 14,153 43,110
Property, plant and equipment 48,719 43,004
Less allowance for depreciation 15,308 16,208
-------- --------
33,411 26,796
OTHER ASSETS
Investment in and advances to 241,695 202,775
subsidiaries and affiliates
Other 9,596 10,842
-------- --------
251,291 213,617
-------- --------
$298,855 $283,523
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES $ 13,770 $ 14,774
LONG-TERM DEBT
Subordinated debentures and discount 221,963 209,645
notes
Other 140 449
-------- --------
222,103 210,094
STOCKHOLDERS' EQUITY
Common stock 14 13
Other stockholders' equity 62,968 58,642
-------- --------
62,982 58,655
-------- --------
$298,855 $283,523
======== ========
</TABLE>
<PAGE>
COMMNET CELLULAR INC.
SCHEDULE I
Condensed Financial Information of Registrant
(continued)
(Amounts in thousands)
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF OPERATIONS
- ----------------------------------
Years ended September 30,
-------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
COST AND EXPENSES
General and administrative $ 31,248 $ 28,969 $ 21,763
Depreciation and amortization 8,077 6,076 4,521
Write-down of property and equipment - - 2,441
Less amounts allocated to subsidiaries
and affiliates (40,527) (31,577) (25,957)
-------- -------- --------
NET INCOME (LOSS) BEFORE EQUITY IN
NET LOSS OF SUBSIDIARIES AND
AFFILIATES AND INTEREST INCOME
AND EXPENSE 1,202 (3,468) (2,768)
Equity in net loss of subsidiaries and
affiliates (3,528) (12,122) (15,028)
Gains (loss) on sales of affiliates (250) 18,580 1,245
Interest expense (24,474) (20,465) (18,113)
Interest income 22,654 17,537 17,913
-------- -------- --------
NET INCOME (LOSS) $ (4,396) $ 62 $(16,751)
======== ======== ========
</TABLE>
<PAGE>
COMMNET CELLULAR INC.
SCHEDULE I
Condensed Financial Information of Registrant
(continued)
(Amounts in thousands)
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS
- ----------------------------------
Years ended September 30
-------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
CASH PROVIDED (USED) BY
OPERATING ACTIVITIES $ (495) $ 2,632 $ 1,772
INVESTING ACTIVITIES
Purchase of short-term investments (987) (82) (16,788)
Sale of short-term investments 987 21,509 15,488
Additions to property and equipment (5,715) (1,305) (13,284)
Additions to investment in affiliates (23,518) (11,299) (31,259)
Additions to other assets 461 (1,633) 3,117
-------- -------- --------
(28,772) 7,190 (42,726)
FINANCING ACTIVITIES
Payment on secured bank financing - (4,023) (1,071)
Extraordinary charge related to
extinguishment of long-term debt - (1,130) -
Offering costs related to the issuance
of subordinated notes - (518) -
Additions/Reductions to cap lease (308) (335) 1,035
Issuance of subordinated notes - 77,400 -
Redemption of convertible
subordinated debentures - (41,852) -
Repurchase Common Stock (1,378) - -
Issuance of common stock 978 815 1,479
-------- -------- --------
(708) 30,357 1,443
-------- -------- --------
INCREASE (DECREASE) IN CASH $(29,975) $ 40,179 $(39,511)
======== ======== ========
</TABLE>
<PAGE>
COMMNET CELLULAR INC.
SCHEDULE I
Condensed Financial Information of Registrant
(continued)
BASIS OF PRESENTATION
- ---------------------
In the accompanying parent company only, CommNet Cellular Inc. (the
"Company") financial statements, the Company's investment in subsidiaries and
affiliates is stated at cost plus equity in undistributed net loss of
subsidiaries and affiliates since date of acquisition. The Company's share of
net loss of its subsidiaries and affiliates is included in the accompanying
condensed statement of operations using the equity method. Parent company only
financial statements should be read in conjunction with the Company's
consolidated financial statements.
Certain amounts for 1994 and 1995 have been reclassified to conform to the
1996 presentation.
<PAGE>
COMMNET CELLULAR INC.
SCHEDULE II
Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
Additions
----------------------------
Charged to
Beginning Charged to Other Ending
Description Balance Costs & Expenses Accounts Deductions (1) Balance
----------- ------- ---------------- -------- -------------- -------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful
accounts $1,958,000 $1,231,000 $ - $1,242,000 $1,947,000
</TABLE>
(1) All deductions are the result of actual write-offs to accounts receivable.
<PAGE>
EXHIBIT 4.5
AMENDMENT THREE
TO
RIGHTS AGREEMENT
THIS AMENDMENT THREE TO RIGHTS AGREEMENT is dated as of January 11, 1996,
between CommNet Cellular Inc. (formerly known as Cellular, Inc.), a Colorado
corporation (the "Company"), and State Street Bank and Trust Company (the
"Rights Agent").
WHEREAS, the Company and the Rights Agent are parties to a Rights Agreement
dated as of December 10, 1990 (as amended, the "Rights Agreement"); and
WHEREAS, Section 26 of the Rights Agreement provides that prior to the
earlier of the Distribution Date or the occurrence of an Adverse Person Event,
the Company may, by resolution of the Board of Directors, supplement or amend
the Rights Agreement; and
WHEREAS, neither the Distribution Date nor an Adverse Person Event has
occurred and, the Board of Directors, by resolution, has determined it to be in
the best interest of the Company to amend the Rights Agreement and has directed
the Rights Agent to amend the Rights Agreement;
NOW, THEREFORE, in consideration of the obligation of the parties set forth
in the Rights Agreement, the parties hereby agree as follows:
1. The definition of "acquiring person" in Section 1(a) of the Rights Agreement
is hereby amended in its entirety to read as follows:
"Acquiring person" shall mean any Person who or which, together with all
Affiliates and Associates of such Person, shall be the Beneficial Owner of
25% or more of the shares of Common Stock of the Company then outstanding,
provided that an Acquiring Person shall not include an exempt person.
2. The Rights Agreement, as amended hereby, remains in full force and effect.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment Three to
Rights Agreement to be duly executed and their respective corporate seals to be
affixed and attested, all as of the day and year first above written.
COMMNET CELLULAR INC.
ATTEST: By: /s/ Daniel P. Dwyer
Its: Executive Vice President
By: /s/ Amy M. Shapiro
Name: Amy M. Shapiro
Title: Secretary
[CORPORATE SEAL]
STATE STREET BANK AND TRUST COMPANY
ATTEST: By: /s/ Stephen Cesso
Its: vice president & associate counsel
By: /s/ Patricia Foster
Name: Patricia Foster
Title: Senior Client Administrator
[CORPORATE SEAL]
<PAGE>
COMMNET CELLULAR INC.
EXHIBIT 12.1
Ratio of Earnings to Fixed Charges
(Amounts in thousands)
<TABLE>
<CAPTION>
Years ended September 30,
----------------------------------------------------
1992 1993 1994 1995 1996
----------- --------- --------- ------- --------
<S> <C> <C> <C> <C> <C>
Income (loss) before income
taxes $(17,042) $(22,666) $(16,751) $ 62 $(4,396)
Add:
Interest on indebtedness 14,801 16,428 21,339 26,044 28,208
Portion of rents
representative of the 391 378 455 803 1,266
interest factor -------- -------- -------- ------- -------
Income (loss) as adjusted $ (1,850) $ (5,860) $ 5,043 $26,909 $25,078
======== ======== ======== ======= =======
Fixed charges:
Interest on indebtedness 14,801 16,428 21,339 26,044 28,208
Portion of rents
representative of the 391 378 455 803 1,266
interest factor -------- -------- -------- ------- -------
$ 15,192 $ 16,806 $ 21,794 $26,847 $29,474
======== ======== ======== ======= =======
Excess (deficiency) of
earnings to fixed charges $(17,042) $(22,666) $(16,751) $ 62 $(4,396)
</TABLE>
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES
<TABLE>
<CAPTION>
Jurisdiction of
Organization
------------
<S> <C>
Cellular, Inc. Financial Corporation CO
Cellular Inc. Network Corporation (1) CO
CommNet Paging Inc. CO
TVX, Inc. CO
Pueblo MSA Limited Partnership (1) CO
Platte River Cellular of Colorado Limited Partnership (1) CO
Colorado 4 - Park Limited Partnership (1) CO
Smoky Hill Cellular of Colorado Limited Partnership (1) CO
Colorado 6 - San Miguel Limited Partnership (1) CO
San Miguel Cellular of Colorado Limited Partnership CO
San Miguel Cellular, Inc. CO
Colorado 7 - Saguache Limited Partnership (1) CO
Sioux City MSA Limited Partnership (1) IA
Schaller Cellular, Inc. CO
Idaho 6 - Clark Limited Partnership (1) ID
Teton Cellular of Idaho Limited Partnership CO
Teton Cellular, Inc. ID
North Central Idaho Cellular of Idaho Limited Partnership CO
Sawtooth Cellular of Idaho Limited Partnership CO
Iowa RSA 5 Limited Partnership DE
East Iowa Cellular of Iowa Limited Partnership CO
East Iowa Cellular, Inc. IA
R & D Cellular of Iowa Limited Partnership CO
Terre Haute Cellular, Inc. CO
Chequamegon Cellular, Inc. CO
</TABLE>
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES
(continued)
<TABLE>
<CAPTION>
Jurisdiction of
Organization
------------
<S> <C>
Billings MSA Limited Partnership (1) CO
Billings Cellular, Inc. CO
Mission Cellular of Montana Limited Partnership (1) CO
Montana RSA No. 1 (B2) Limited Partnership (1) MT
Montana 2-Toole Limited Partnership (1) CO
Hi-Line Cellular of Montana Limited Partnership CO
Montana 4-Daniels Limited Partnership (1) CO
Prairie Cellular of Montana Limited Partnership CO
Montana 5-Mineral Limited Partnership (1) CO
Mountain Cellular of Montana Limited Partnership CO
Montana 6-Deer Lodge Limited Partnership (1) CO
Mineral Cellular of Montana Limited partnership CO
Montana 7-Fergus Limited Partnership (1) CO
Central Cellular of Montana Limited Partnership CO
Central Cellular, Inc. MT
Montana 8-Beaver Head Limited Partnership (1) CO
Big Hole Cellular of Montana Limited Partnership CO
Montana 9-Carbon Limited Partnership (1) CO
Big Horn Cellular of Montana Limited Partnership CO
Montana 10-Prairie Limited Partnership (1) CO
Powder River Cellular of Montana Limited Partnership CO
Bismarck MSA Limited Partnership (1) DE
Northern New Mexico Limited Partnership (1) CO
Northwest Dakota Cellular of North Dakota Limited Partnership (1) CO
North Dakota 5-Kidder Limited Partnership (1) CO
Sioux Falls Cellular Limited Partnership (1) DE
South Dakota 7-Sully Limited Partnership (1) CO
</TABLE>
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES
(continued)
<TABLE>
<CAPTION>
Jurisdiction of
Organization
------------
<S> <C>
South Dakota 8-Kingsbury Limited Partnership (1) CO
Utah RSA 6 Limited Partnership (1) DE
Canyonland Cellular of Utah Limited Partnership CO
Wyoming 1-Park Limited Partnership (1) CO
Wyoming 2-Sheridan Limited Partnership (1) CO
Custer Cellular of Wyoming Limited Partnership CO
Custer Cellular, Inc. WY
</TABLE>
____________________
(1) Does business under the trade name CommNet Cellular Inc.
<PAGE>
EXHIBIT 23.1
Consent of Independent Auditors
-------------------------------
We consent to the incorporation by reference in the following registration
statements of CommNet Cellular Inc. and in the related prospectuses of our
report dated December 6, 1996, with respect to the consolidated financial
statements and schedules of CommNet Cellular Inc. included in this Annual Report
(Form 10-K) for the year ended September 30, 1996:
1. Registration Statement on Form S-8 (No. 33-40500) pertaining to the
Employee Stock Ownership Plan.
2. Registration Statement on Form S-8 (No. 33-47755) pertaining to the CommNet
Cellular Inc. Omnibus Stock and Incentive Plan.
3. Registration Statement on Form S-4 (No. 33-54590).
4. Registration Statement on Form S-8 (No. 33-62236) pertaining to the CommNet
Cellular Inc. Omnibus Stock and Incentive Plan.
5. Registration Statement on Form S-8 (No. 33-64737) pertaining to the CommNet
Cellular Inc. Omnibus Stock and Incentive Plan.
6. Registration Statement on Form S-8 (No. 33-64735) pertaining to a Stock
Option Agreement.
7. Registration Statement on Form S-4 (No. 33-64725).
ERNST & YOUNG LLP
Denver, Colorado
December 30, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> SEP-30-1996
<CASH> 11,492
<SECURITIES> 0
<RECEIVABLES> 21,880
<ALLOWANCES> 1,947
<INVENTORY> 3,949
<CURRENT-ASSETS> 35,374
<PP&E> 169,426
<DEPRECIATION> 51,327
<TOTAL-ASSETS> 331,837
<CURRENT-LIABILITIES> 19,128
<BONDS> 245,845
0
0
<COMMON> 168,117
<OTHER-SE> 105,135
<TOTAL-LIABILITY-AND-EQUITY> 331,837
<SALES> 115,196<F1>
<TOTAL-REVENUES> 115,196
<CGS> 32,165
<TOTAL-COSTS> 98,843
<OTHER-EXPENSES> (7,459)
<LOSS-PROVISION> 1,231
<INTEREST-EXPENSE> 28,208
<INCOME-PRETAX> (4,396)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,396)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,396)
<EPS-PRIMARY> 0<F2>
<EPS-DILUTED> 0<F3>
<FN>
<F1>Includes both cellular and equipment revenue.
<F2>Primary EPS is not presented as the difference between basic EPS and primary
EPS is not material.
<F3>Fully diluted EPS is not presented as all CS equivalents are antidilutive.
</FN>
</TABLE>
