<PAGE>
FORM 10-K
_______________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________
(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended: September 30, 1998
------------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ____________ to ____________
Commission file number: 0-15056
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COMMNET CELLULAR INC.
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(Exact name of registrant as specified in its charter)
Colorado 84-0924904
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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. [ X ]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant, computed by reference to the last sale price of such stock as of the
close of trading on December 14, 1998 was $38,105,760.
The number of shares of the registrant's common stock outstanding as of
December 14, 1998 was 22,662,985.
<PAGE>
PART I
Item 1. Business.
(a) General Development of Business.
-------------------------------
CommNet Cellular Inc. was organized under the laws of Colorado in 1983.
Cellular, Inc. Financial Corporation ("CIFC") subsequently was organized to
provide financing to affiliates of the Company. Cellular Inc. Network
Corporation ("CINC") and CommNet Cellular License Holding LLC ("CCLHLLC")
subsequently were organized to acquire and hold interests in cellular licenses.
CommNet Paging Inc. ("CPI") subsequently was organized to provide paging
services. CINC and CPI are wholly-owned subsidiaries of CommNet Cellular Inc.
CIFC is a wholly-owned subsidiary of CINC and CCLHLLC is a wholly-owned
subsidiary of CIFC. Unless the context indicates otherwise, the "Company"
refers to CommNet Cellular Inc. and its consolidated subsidiaries.
In addition to historical information, this report includes certain
forward-looking statements regarding events and financial trends which may
affect the Company's future operating results and financial position. Such
statements represent the Company's reasonable judgment on the future and are
subject to risks and uncertainties that could cause the Company's actual results
and financial position to differ materially. Such factors include, but are not
limited to: a change in economic conditions in the Company's markets which
adversely affects the level of demand for wireless services; greater-than-
anticipated competition resulting in price reductions, new product offerings, or
higher customer acquisition costs; better-than-expected customer growth
necessitating increased investment in network capacity; negative economies that
could result if one or more agreements to manage markets are not renewed;
increased cellular fraud; the impact of new business opportunities requiring
significant initial investments; and the impact of deployment of new
technologies on capital spending.
As used herein, the term "RSA" means the Cellular Geographic Service Area
("CGSA") within a Rural Service Area, as defined by the Federal Communication
Commission ("FCC") for which CommNet Cellular Inc. or its affiliates hold the
cellular telephone license issued by the FCC ("the cellular license"), and the
term "MSA" means the CGSA within a Metropolitan Statistical Area, as defined by
the FCC for which the Company or its affiliates hold the cellular license. As
used herein, "pops" means the estimated total 1998 population of an MSA or RSA
CGSA, based upon Information Decision Systems population estimates. "Net
Company pops" means an MSA's or RSA's pops multiplied by the Company's net
ownership interest in an entity licensed by the FCC to operate a cellular
telephone system in that MSA or RSA. An MSA or RSA is referred to herein as a
"market," and a market served by a cellular telephone system that is managed,
directly or indirectly, by the Company is referred to herein as a "managed
market." The radio signal from the Company's managed systems covers virtually
all of the pops within the managed markets. The number of pops does not
represent the current number of users of cellular services and is not
necessarily indicative of the number of users of cellular services in the
future. Those corporations and partnerships through which the Company holds
ownership interests in cellular licensees and those cellular licensees in which
the Company holds a direct ownership interest are referred to herein as
"affiliates." Any reference herein to an "affiliate" does not necessarily imply
that the Company exercises, or has the power to exercise, control over the
management and policies of such entity.
The Company operates, manages and finances cellular telephone systems,
primarily in rural markets in the mountain and plains regions of the United
States. The Company's cellular interests currently represent approximately
3,881,000 net Company pops in 83 markets located in 14 states. These markets
consist of 72 RSA markets having a total of 5,268,000 pops and 11 MSA markets
having a total of 1,626,000 pops, of which the Company's interests represent
3,075,000 net Company pops and 806,000 net Company pops, respectively. Systems
in which the Company holds an interest constitute one of the largest geographic
collection of contiguous cellular markets in the United States.
The Company was formed to acquire cellular interests through participation
in the licensing process conducted by the FCC. In order to participate in that
process, the Company formed affiliates which originally were owned at least 51%
by one or more independent telephone companies ("telcos") and no more than 49%
by the
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Company. See "-- Federal Regulation." In exchange for the Company's 49%
interest, the Company offered to sell shares of its Common Stock to the telcos
and agreed to provide financing to the affiliates. The Company subsequently
purchased additional interests in many of such affiliates, as well as in
additional cellular properties. The Company currently manages 56 of the 83
markets in which it holds an interest and owns a greater than 50% interest in 49
of its 56 managed markets. The Company provides capital and financing to
entities holding interests representing approximately 4,602,000 pops, of which
3,881,000 are included in net Company pops and 721,000 are attributable to
parties other than the Company.
Since completion of the licensing process, the Company has concentrated on
creating an integrated network of contiguous cellular systems comprised of
markets which are managed by the Company. The network currently consists of 56
markets (49 RSA and 7 MSA markets) spanning nine states and represents
approximately 4,296,000 pops and 3,515,000 net Company pops. As of September
30, 1998, the RSA and MSA managed markets had 256,349 and 79,532 subscribers,
respectively. The Company expanded radio signal coverage with construction of
34 new cell sites in fiscal year 1998.
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. Future in-roaming revenue growth will be contingent upon the
Company's ability to attract and serve customers of new wireless companies, not
necessarily in markets owned or operated by the Company in rural areas, but in
densely populated adjacent markets where there may be as many as eight wireless
providers, including possibly six PCS operators. See "--Network Construction
and Operations."
On February 10, 1998, the Company consummated a recapitalization whereby AV
Acquisition Corp., ("Newco"), a subsidiary of Blackstone CCI Capital Partners
L.P., a Delaware limited partnership (the "Partnership") affiliated with
Blackstone Management Associates II L.L.C., a Delaware limited liability company
("Blackstone"), was merged into the Company (the "Merger") pursuant to an
Agreement and Plan of Merger dated May 27, 1997 (the "Merger Agreement"). At
the effective time of the Merger, each share of Common Stock issued and
outstanding (other than those shares described below) was converted, at the
election of the holder thereof and subject to the terms of the Merger Agreement,
into either (a) the right to receive $36.00 in cash or (b) the right to retain
one fully paid and nonassessable share of Common Stock. The following shares of
Common Stock were not subject to conversions pursuant to the Merger: shares of
Common Stock held by the Partnership, and partnerships affiliated with
Blackstone that acquired interests in Newco prior to the consummation of the
Merger, Newco, and any wholly-owned subsidiary of the Company or any wholly-
owned subsidiary of Newco; fractional shares that were converted to cash; and
shares of Common Stock in respect of which dissenters' rights had been properly
exercised. The election to retain Common Stock was subject to proration so
that, following the Merger, 2,943,055 shares (representing approximately 4% of
the issued and outstanding Common Stock) were retained by existing shareholders
of the Company, representing approximately 13% of the shares of the Company
issued and outstanding immediately after the Merger. The shares of Common Stock
owned by the shareholders of Newco represent approximately 87% of the shares of
the Company issued and outstanding after the Merger, resulting in such
shareholders of Newco becoming the controlling shareholders of the Company.
In addition, on February 10, 1998, the Company repurchased approximately
$176,600,000 of the approximately $176,700,000 aggregate principal amount of its
11 3/4% Senior Subordinated Discount Notes and all of the $80,000,000 aggregate
principal amount of its 11 1/4% Subordinated Notes, and repaid the entire
amount of indebtedness under the CoBank Credit Agreement. The Merger, debt
repayment, and payment of certain costs and expenses of the Merger were funded
through borrowings under a new $760,000,000 senior bank credit facility with the
Chase Manhattan Bank as administrative agent and collateral agent, Chase
Manhattan Bank Delaware as fronting bank, and a consortium of lenders (the
"Chase Credit Agreement").
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(b) Financial Information About Industry Segments.
---------------------------------------------
The Company has only one principal industry being the management, financing
and operation of cellular telephone systems. Information concerning revenue,
operating profit or loss and identifiable assets of the Company's primary
industry segment are set forth in the consolidated financial statements and
related notes included in Part II of this Report.
(c) Narrative Description of Business.
---------------------------------
The Company's Operations
------------------------
General. Information regarding the Company's net ownership interests in
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each cellular licensee and the market subject to such license as of December 14,
1998 is summarized in the following table.
<TABLE>
<CAPTION>
Net Company
MSA or Interest in 1998 Net Company
RSA Code (1) State Licensee (2) Population (3)(6) Pops (4)
- --------------- ---------------------- ----------------- -------------------- ----------------
<S> <C> <C> <C> <C>
MSAs:
152 Portland, ME 11.11% 284,147 31,566
167 Duluth, MN-WI 16.34% 240,234 39,254
206 Terra Haute, IN 16.67% 170,755 28,465
241*(5) Pueblo, CO 73.99% 133,797 98,996
253*(5) Sioux City, IA 74.50% 136,731 101,865
267*(5) Sioux Falls, SD 100.00% (7) 142,073 142,073
268*(5) Billings, MT 91.63% 129,371 118,543
283 Lewiston-Auburn, ME 11.11% 103,721 11,523
289*(5) Rapid City, SD 100.00% 110,926 110,926
297*(5) Great Falls, MT 91.63% 82,324 75,433
298*(5) Bismarck, ND 51.00% 91,892 46,865
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Total MSA 1,625,971 805,509
RSAs:
348* Colorado 100.00% 48,029 48,029
349*(5) Colorado 61.75% 66,939 41,335
351*(5) Colorado 61.75% 78,325 48,366
352*(5) Colorado 66.00% 36,101 23,827
353*(5) Colorado 100.00% 76,122 76,122
354*(5) Colorado (B1) 69.40% 49,823 34,577
355* Colorado 49.00% 46,379 22,726
356* Colorado (B1) 49.00% 25,782 12,633
389 Idaho 50.00% 71,284 35,642
390 Idaho 33.33% 17,602 5,867
392*(5) Idaho (B1) 100.00% 144,267 144,267
393*(5) Idaho 91.64% 300,443 275,326
415 Iowa 10.11% 155,178 15,688
416 (5) Iowa 78.57% 109,023 85,659
417*(5) Iowa 100.00% 156,442 156,442
419* Iowa 44.92% 54,811 24,621
420*(5) Iowa 100.00% 63,038 63,038
424* Iowa 50.00% 66,643 33,322
425* Iowa 13.28% 110,868 14,723
</TABLE>
I-3
<PAGE>
<TABLE>
<CAPTION>
Net Company
MSA or Interest in 1998 Net Company
RSA Code (1) State Licensee (2) Population (3)(6) Pops (4)
- --------------- ---------------------- ----------------- -------------------- ----------------
<S> <C> <C> <C> <C>
426* Iowa 49.14% 83,090 40,830
427* Iowa 49.17% 102,942 50,617
428 Kansas 4.11% 27,741 1,140
429 Kansas 4.11% 30,523 1,254
430 Kansas 4.11% 53,026 2,179
431 Kansas 4.11% 137,928 5,669
432 Kansas 4.11% 32,861 1,351
433 Kansas 4.11% 20,123 827
434 Kansas 4.11% 80,524 3,310
435 Kansas 4.11% 131,254 5,395
436 Kansas 4.11% 58,858 2,419
437 Kansas 4.11% 109,008 4,480
438 Kansas 4.11% 84,143 3,458
439 Kansas 4.11% 43,831 1,801
440 Kansas 4.11% 29,677 1,220
441 Kansas 4.11% 175,260 7,203
442 Kansas 4.11% 155,007 6,371
512 Missouri (B1) 14.70% 35,343 5,195
523*(5) Montana (B1) 91.63% 66,810 61,218
523*(5) Montana (B2) 91.63% 82,182 75,303
524*(5) Montana (B1) 91.63% 32,203 29,508
526*(5) Montana (B1) 91.63% 9,897 9,069
527*(5) Montana 91.63% 196,567 180,114
528*(5) Montana 91.63% 65,707 60,207
529*(5) Montana 91.63% 23,502 21,535
530*(5) Montana 91.63% 91,862 84,173
531*(5) Montana 91.63% 35,676 32,690
532*(5) Montana 91.63% 13,526 12,394
553*(5) New Mexico (B2) 58.36% 117,311 68,463
555 New Mexico 12.25% 89,939 11,018
557 New Mexico 16.33% 59,835 9,771
580*(5) North Dakota 53.36% 105,910 56,514
581*(5) North Dakota 66.00% 59,961 39,011
582 North Dakota 41.45% 90,709 37,599
583* North Dakota 49.00% 58,607 28,717
584*(5) North Dakota 61.75% 46,240 28,553
634*(5) South Dakota 100.00% 33,484 33,484
635*(5) South Dakota 100.00% 18,830 18,830
636*(5) South Dakota 100.00% 53,417 53,417
638*(5) South Dakota (B1) 100.00% 17,205 17,205
638*(5) South Dakota (B2) 100.00% 15,882 15,882
639*(5) South Dakota (B1) 100.00% 46,573 46,573
639*(5) South Dakota (B2) 100.00% 1,511 1,511
640*(5) South Dakota 88.16% (8) 60,553 53,384
641*(5) South Dakota 100.00% (7) 79,882 79,882
642*(5) South Dakota 100.00% (7) 104,802 104,802
675*(5) Utah 100.00% 59,833 59,833
676*(5) Utah 100.00% 116,678 116,678
677*(5) Utah (B3) 100.00% 41,233 41,233
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Net Company
MSA or Interest in 1998 Net Company
RSA Code (1) State Licensee (2) Population (3)(6) Pops (4)
- --------------- ---------------------- ----------------- -------------------- ----------------
<S> <C> <C> <C>
678*(5) Utah 80.00% 27,499 21,999
718*(5) Wyoming 66.00% 52,841 34,875
719*(5) Wyoming 100.00% 76,569 76,569
720*(5) Wyoming 100.00% 146,254 146,254
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Total RSA 5,267,728 3,075,197
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Total MSA and RSA 6,893,699 3,880,706
========= =========
</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 1998 Information Decision Systems database for markets
managed by the Company, and other sources for markets not managed by the
Company.
(4) Net Company Pops represents Net Company Interest in Licensee multiplied by
1998 population.
(5) The operations of these markets are currently reflected on a consolidated
basis in the Company's consolidated financial statements. The operations
of the other markets in which the Company holds an interest are reflected
in such financial statements on either an equity or a cost basis.
(6) Represents population within the CGSA.
(7) CINC purchased interests owned by other persons resulting in the Company
and its affiliates owning 100% of the interest in these markets on December
2, 1998.
(8) CINC purchased interests owned by other persons resulting in the Company
and its affiliates owning 88.16% of the interest in this market on December
2, 1998.
Markets managed by the Company are denoted by an asterisk (*).
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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) 424 424 0 0
- ----------------------------------------------------------------------------------------------------------------------------
Sept 30, 1989 4 4 0 500,804 500,804(2) 1,362 1,362 0 0 221.23%
- ----------------------------------------------------------------------------------------------------------------------------
Sept 30, 1990 18 4 14 1,687,481 500,804(2) 1,186,677(2) 444 3,513 2,931 373.13%
- ----------------------------------------------------------------------------------------------------------------------------
Sept 30, 1991 49 5 44 3,509,779 566,722(3) 2,943,057(3) 17,952 6,387 11,565 178.58%
- ----------------------------------------------------------------------------------------------------------------------------
Sept 30, 1992 49 5 44 3,509,779 566,722(3) 2,943,057(3) 35,884 11,119 24,765 99.89%
- ----------------------------------------------------------------------------------------------------------------------------
Sept 30, 1993 51 6 45 3,665,758 644,526(4) 3,021,232(4) 60,381 17,898 42,483 68.27%
- ----------------------------------------------------------------------------------------------------------------------------
Sept 30, 1994 55 7 48 3,906,063 771,660(5) 3,134,403(5) 99,002 30,711 68,291 63.96%
- ----------------------------------------------------------------------------------------------------------------------------
Sept 30, 1995 56 7 49 4,220,975 785,866(6) 3,435,109(6) 151,482 42,401 109,081 53.01%
- ----------------------------------------------------------------------------------------------------------------------------
Sept 30, 1996 55 7 48 4,105,119 792,913(7) 3,312,206(7) 211,278 55,896 155,382 8.13%
- ----------------------------------------------------------------------------------------------------------------------------
Sept 30, 1997 56 7 49 4,228,389 798,807(8) 3,428,202(8) 274,745 68,579 206,166 6.79%
- ----------------------------------------------------------------------------------------------------------------------------
Dec 31, 1997 56 7 49 4,228,389 800,187(8) 3,428,202(8) 289,841 71,293 218,548 5.49%
- ----------------------------------------------------------------------------------------------------------------------------
Mar 31, 1998 56 7 49 4,228,389 800,187(8) 3,428,202(8) 307,109 74,952 232,157 5.96%
- ----------------------------------------------------------------------------------------------------------------------------
June 30, 1998 56 7 49 4,239,524 812,529(9) 3,426,995(9) 320,476 76,914 243,562 4.35%
- ----------------------------------------------------------------------------------------------------------------------------
Sept 30, 1998 56 7 49 4,296,165 827,114(10) 3,469,051(10) 335,881 79,532 256,349 4.81%
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
____________
(1) Derived from 1988 Donnelley Market Service population estimates.
(2) Derived from 1989 Donnelley Market Service population estimates.
(3) Derived from 1990 Census Report.
(4) Derived from 1992 Donnelley Market Service population estimates.
(5) Derived from 1993 Strategic Marketing Inc. population estimates.
(6) Derived from 1994 Strategic Marketing Inc. population estimates.
(7) Derived from 1995 Demographics On-Call population estimates.
(8) Derived from 1996 Demographics On-Call population estimates.
(9) Derived from 1997 Information Decision Systems population estimates.
(10) Derived from 1998 Information Decision Systems population estimates.
Network Construction and Operations. Construction of cellular telephone
-----------------------------------
systems requires substantial capital investment in land and improvements,
buildings, towers, mobile telephone switching offices ("MTSOs"), cell site
equipment, microwave equipment, engineering and installation. The Company
believes that it has achieved significant economies of scale in constructing the
network. For example, the network uses cellular switching systems capable of
serving multiple markets. As a result of the contiguous nature of the network,
only 9 MTSOs are currently required to serve all 56 of the Company's managed
markets. By consolidating and deploying high capacity MTSOs, the Company
intends to achieve further economies of scale. During fiscal 1998, all MTSO
facilities were expanded and upgraded to provide additional capacity for
continued growth. Economies of scale generated by the network also have
permitted the Company to use one network operations center to centralize
services such as network design and engineering, traffic analysis,
interconnection, billing, roamer verification, maintenance and support and to
access volume discount purchasing of cellular system equipment.
The network also affords the Company certain technical advantages in the
provision of enhanced services, such as call delivery and call forwarding.
Through the use of single switching facilities serving multiple markets, the
Company has implemented continuous coverage on an intrastate basis throughout
the network. The Company has widened the area of coverage within the network by
interconnecting MTSOs located in adjoining markets. The Company has
substantially achieved its objective of providing subscribers with "seamless"
coverage throughout the network, which permits subscribers, as they travel
through the network, to receive calls and otherwise use their cellular
telephones as if they were in their home markets. This is a result of the
networking of the MTSOs managed by the Company and MTSOs of other carriers,
especially those operating adjoining markets within the nine-state area. The
Company has achieved a high degree of network reliability through the deployment
of standardized components and operating procedures, and the introduction of
redundancy in switching and cell site equipment, interconnect facilities and
power supply. Most of the Company's equipment is built by Northern Telecom,
Inc. ("Nortel"), and interconnection between the Nortel MTSOs has been achieved
using Nortel's proprietary software and hardware.
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The Company implemented the "IS-41" technical interface during fiscal 1995.
This technical interface, developed by the cellular industry, allows carriers
that have different types of equipment to integrate their systems, substantially
reducing the cost of validating calls and reducing fraud exposure.
The Company also has entered into agreements with other cellular carriers
to enhance the range of markets and quality of service available to cellular
subscribers when traveling outside the network. Pursuant to existing agreements
with other cellular carriers, the Company's subscribers are able to "roam"
throughout most cellular markets in the United States and Canada. In addition,
the Company has entered into agreements with seven PCS carriers operating or
commencing operations using predominately the 30MHz Blocks A and B. Such
arrangements will be necessary to sustain growth in in-roaming revenues because
of competitive wholesale and retail pressures that are reducing roaming rates.
In order to serve growing PCS carrier in-roaming usage the Company will need to
expand capacity and enhance its switching to accommodate the technology. See "-
- -Competition--Competition From Other Technologies."
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<PAGE>
Expansion. The Company has completed the process of "filling in" the
---------
"CGSA" within its managed markets by adding network facilities which increased
the coverage of the radio signal. The Company significantly enhanced hand-held
portable coverage with construction of 34 new cell sites in fiscal year 1998
primarily within pre-existing coverage areas. In addition, the Company analyzed
the quality of existing coverage based upon empirical data gathered using
sophisticated mobile testing equipment. These "drive tests" gave rise to
changes in how certain sites were configured or deployed in the network. For
example, certain sites were "sectorized" to reduce interference and provide
additional capacity facing particular directions. The Company expects to
continue such efforts to improve coverage, especially for low power portable
cellular phones, throughout fiscal year 1999. In addition, the Company expects
to add digital features and functionality to compete for local customers and to
technologically accommodate digital in-roaming. Expansion and optimization of
signal coverage has increased subscribers, enhanced the use of the systems by
existing subscribers, increased roamer traffic due to the larger geographic area
covered by the radio signal and improved the overall efficiency of the network.
Under the rules and regulations of the FCC, expansion of signal coverage has
preserved the Company's right to provide cellular service in valuable areas
within the network.
The Company continually evaluates acquisitions of cellular properties that
are geographically and/or operationally compatible with the network. In
evaluating acquisition targets, the Company considers, among other things,
demographic factors, including population size and density, traffic patterns,
cell site coverage, required capital expenditures and the likely ability of the
Company to integrate the target market into the network.
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<PAGE>
Services and Products. Mobile subscribers in the Company's managed markets
---------------------
have available to them substantially all of the services typically provided by
landline telephone systems, including custom-calling features such as call
forwarding, call waiting, three-way conference calling, voice mail services and,
in most areas, paging. Several price plans are presented to prospective
customers so that they may choose the plan that will best fit their expected
calling needs. The plans provide specific charges for custom-calling features
and voice mail to offer value to the customer while enhancing airtime use and
revenues for the Company. The Company also packages cellular equipment with its
cellular service as a way to encourage use of its mobile services, including
replacement of subscriber equipment to retain valuable customers. An ongoing
review of equipment and service pricing is maintained to ensure the Company's
competitiveness. Through a centralized procurement and equipment distribution
strategy, the Company obtains the benefits of favorable equipment costs through
bulk purchases. As appropriate, revisions to pricing of service plans and
equipment pricing are made to meet local marketplace demands.
The network affords the Company the opportunity to offer service over
expanded geographic territories at favorable rates. Customers that subscribe to
a stand-alone cellular system generally are charged premium roaming rates when
using a cellular system outside of their home service area. The Company's
subscribers are able to roam within the network and on most current price plans
are afforded "home rate follows" pricing, whereby subscribers are charged the
rate applicable in their home service area when traveling within the network.
In addition, the Company's simplified retail roaming rate structure allows the
customer to roam on certain adjacent carriers' systems
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at a preferred rate and minimizes confusion by consolidating the remainder of
the country into a uniform rate. Finally, the Company offers toll-free calling
across single or multiple states to its subscribers for a nominal monthly fee,
due to favorably negotiated interconnect agreements.
During the fourth fiscal quarter of 1997, CPI commenced commercial
operations. The CPI network consists of 146 paging transmitters owned and
operated by the Company. An additional 18 transmitters are planned for
deployment in fiscal year 1999. To date, the operations of CPI have not been
significant to the Company's consolidated financial statements.
The Company is committed to providing consistently high quality customer
service. The Company maintains a comprehensive, centralized customer assistance
department which offers the advantages of expanded customer service hours,
specialized roaming retention, collections and key account representatives and
an automated customer information database that allows for efficiency and
accuracy, while decreasing the time spent on each customer contact. In
addition, calls are efficiently processed using sophisticated call center
technologies. Inbound calls are processed through an automatic call
distribution system and an integrated voice response system which route and
track calls among customer service representatives and permit customers to
obtain information quickly and accurately on their own. Outbound welcome,
proactive retention and collection calls are placed to select cross sections of
the customer base using a predictive dialing system. Recently, the Company
began analyzing its customer base to identify segments of customers and their
relative value to the Company. This effort has led to the formation of a
specialized group of customer service representatives who offer tailored
incentives to high value customers to optimize retention and minimize bad debts.
The customer assistance department also supports the administrative functions
required to activate a customer's phone through a high speed, call-in process
and to enter the customer into the informational databases required for customer
service and billing. Recently, the centralized systems that process activations
and update customer accounts have been made accessible by retail store
employees. This enables better quality and efficient face-to-face service
without compromising the benefits of centralization. The Company believes this
approach provides cost efficiencies while also addressing the need for quality
control. To ensure that it is delivering a consistently high level of quality
service, the Company monitors customer satisfaction with its network quality,
sales and customer service support, billing and quality of roaming through
regular surveys conducted by an independent research firm.
Marketing. The Company coordinates the marketing strategy for each of its
---------
managed markets. The Company markets cellular telephone service under the
CommNet Cellular name. The use of a single name over a broad geographic
territory creates strong brand-name recognition and allows the Company to
achieve advertising efficiencies. In addition, the Company packages services
which are marketed under a program called "Makin' It Easy." Benefits to
customers include flexible combinations of home areas, included minutes, roaming
pricing and premium features, along with free use of a base model phone,
permissive dialing to complete calls, toll-free calling in the home area code,
free enhanced features such as call forwarding, call waiting and itemized call
listing and others.
The Company believes that a key competitive advantage in marketing its
service is the large geographic area covered by the network. Seamless coverage
in the network is critical to marketing, as customers are attracted to the
higher percentage of delivered calls that such coverage provides. Furthermore,
the Company's optional "home rate follows" pricing allows customers to make
calls from anywhere in the network without incurring additional daily fees or
surcharges which usually occur when customers roam outside of their home market.
Additionally, the Company uses the "INLink" and "Follow-Me-Roaming" services
provided by GTE Telecommunication Services, Inc. which permit customers to
receive calls in any market that is part of the INLink or Follow Me Roaming
system without having to dial complicated access codes. The Company also offers
discounted roaming prices and enhanced services in certain markets as a result
of arrangements to link with certain adjacent markets managed by other carriers.
See "The Company's Operations -- Network Construction and Operations." The
Company offers additional services such as toll-free calling across multiple
area codes, use of premium model phones, weekend blocks of usage to its
subscribers for nominal monthly fees. In a majority of the Company's managed
RSA markets, the Company was the first cellular system operator to provide
service in the market, thereby affording a significant competitive advantage.
Being first to market in the majority of the Company's managed RSA markets has
also allowed the Company to obtain exclusive marketing agreements with the
leading telecommunication retailers in a particular market and to obtain prime
locations for its sales centers.
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<PAGE>
Initially, the Company relied to a significant extent on direct sales
representatives and on independent sales agents and intends to increase its
current direct sales force to gain a greater share of the market of high-usage
and group accounts. The Company currently emphasizes a channel of distribution,
which also performs local customer service functions, represented by 54 full
service and 56 single employee Company-owned retail locations strategically
located within the network, which will be supplemented by 2 additional Company-
owned retail locations scheduled to open during fiscal 1999. 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. The Company also employs 66 direct sales representatives and
has exclusive contracts with 332 agents or outlets, including 62 Radio Shack(C)
and 16 Sears(C) stores. In general, such agents earn a fixed commission, which
can vary depending upon the price plan sold, when a customer subscribes to the
Company's cellular service and remains a subscriber for a certain period of
time. An in-house telemarketing staff contributes significantly to additions to
the customer base and also provides targeted communication to customers to
optimize retention.
Subscribers. To date, a substantial majority of the subscribers who use
-----------
cellular service in markets managed by the Company have been business users of
mobile communication services. However, safety and combined personal and
business use are reasons newer customers subscribe. This trend is consistent
with the experience of the cellular industry generally, although given the
Company's geographic presence in the mountain and plains states, its customers
have tended to include proportionally more persons in agricultural, construction
and energy industries. The Company believes that certain demographic
characteristics of the rural marketplace will enhance the Company's ability to
market cellular service to its primary customer base within its managed RSA
markets. On average, rural residents spend a higher percentage of their annual
household income on transportation and travel a relatively greater distance by
personal vehicle than do urban residents. The relatively large average distance
between public telephones in the rural marketplace is an additional factor that
increases the need for mobile telecommunication services in that market.
Management Agreements. Management agreements applicable to the Company's
---------------------
managed RSA markets generally appoint the Company as exclusive management agent
of the licensee with specifically enumerated responsibilities relating to the
day-to-day business operation of the licensee, although the licensee retains
ultimate control over its cellular system. Generally, the RSA management
agreements were for initial terms of five years and are automatically renewed
for additional terms unless terminated by notice from either party prior to
expiration of the then current term. The agreements provide for reimbursement
to the Company of expenses incurred on behalf of the licensee.
The Company has entered into management agreements with three MSA
affiliates pursuant to which the Company has been appointed the exclusive
management agent for each such affiliate. The MSA management agreements appoint
the Company as managing agent of the MSA affiliate with specifically enumerated
responsibilities relating to the day-to-day business operation of the affiliate.
The affiliate is the general partner in the licensee, and the Company acts as
exclusive management agent for the licensee, although the licensee retains
ultimate control over its cellular system. The MSA management agreement
provides for compensation to the Company in an amount equal to 10% of the
distributions to the affiliate derived from the affiliate's interest in the
licensee. The agreements also provide for reimbursement of reasonable
administrative and overhead expenses. The agreements generally were for an
initial term of five years, were extended for an additional one-year term and
are automatically renewed for one-year terms thereafter unless terminated by
notice from either party prior to expiration of the then current term.
The Company has also entered into a management agreement with CINC, whereby
it manages all systems owned by CINC and in which CINC is the general partner.
Financing Arrangements with Affiliates; CIFC. CIFC has entered into loan
--------------------------------------------
agreements with RSA and MSA affiliates to finance or refinance the costs related
to the construction, operation and expansion of cellular telephone systems in
which such affiliates own an interest. The loans are financed with funds
borrowed by CIFC from the Chase Manhattan Bank as administrative agent and
collateral agent, Chase Manhattan Bank Delaware as fronting bank, and a
consortium of lenders ("Chase") and the Company. As of September 30, 1998, CIFC
had loan
I-11
<PAGE>
agreements outstanding with 25 RSA affiliates, 3 MSA affiliates and CINC and had
advanced $212,135,000 thereunder, including $181,140,000 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, 1998, all loans bore interest at the 90-day LIBOR rate plus a
margin (determined based on the affiliate's leverage ratio), adjusted quarterly
(5.3125% at September 30, 1998).
As of September 30, 1998, the Company and CIFC had net advances of
$207,243,000 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 $180,043,000. In addition, the Company had proportionate
obligations of additional debt of its affiliates from other financing sources of
$9,636,000. The assets of the affiliates in which the Company has investments
or advances represent 4,602,000 pops, which include 3,881,000 net Company pops.
Advances related to pops attributable to parties other than the Company total
$27,200,000.
The Cellular Telephone Industry. Cellular telephone service is a form of
-------------------------------
wireless telecommunication capable of providing high quality, high capacity
service to and from mobile, portable and fixed radio telephones. Cellular
telephone technology is based upon the division of a given market area into a
number of regions, or "cells," which in most cases are contiguous. Each cell
contains a low-power transmitter-receiver at a "base station" or "cell site"
that communicates by radio signal with cellular telephones located in the cell.
The cells are typically designed on a grid, although terrain factors, including
natural and man-made obstructions, signal coverage patterns and capacity
constraints, may result in irregularly shaped cells and overlaps or gaps in
coverage. Cells generally have radii ranging from two miles to more than 25
miles. Cell boundaries are determined by the strength of the signal emitted by
the cell's transmitter-receiver. Each cell site is connected to a MTSO, which,
in turn, is connected to the local landline telephone network.
When a cellular subscriber in a particular cell dials a number, the
cellular telephone sends the call by radio signal to the cell's transmitter-
receiver, which then sends it to the MTSO. The MTSO completes the call by
connecting it with the landline telephone network or another cellular telephone
unit. Incoming calls are received by the MTSO which instructs the appropriate
cell to complete the communications link by radio signal between the cell's
transmitter-receiver and the cellular telephone. By leaving the cellular
telephone on, a signal is emitted so the MTSO can sense in which cell the
cellular telephone is located. The MTSO also records information on system
usage and subscriber statistics.
The FCC has allocated the cellular telephone systems frequencies in the 800
MHz band of the radio spectrum. Each of the two initial licensees in each
cellular market was assigned 416 frequency pairs. Each conversation on a
cellular system occurs on a pair of radio talking paths, thus providing full
duplex (i.e., simultaneous two-way) service. Two distinguishing features of
----
cellular telephone systems are: (i) frequency reuse, enabling the simultaneous
use of the same frequency in two or more adequately separated cells, and (ii)
call hand-off, occurring when a deteriorating transmission path between a cell
site and a cellular telephone is rerouted to an adjacent cell site on a
different channel to obtain a stronger signal and maintain the call. A cellular
telephone system's frequency reuse and call hand-off features result in far more
efficient use of available frequencies and enable cellular telephone systems to
process more simultaneous calls and service more users over a greater area than
pre-cellular mobile telephone systems.
Call hand-off in a cellular telephone system is automatic and virtually
unnoticeable to either party to the call. The MTSO and base stations
continuously monitor the signal strength of calls in progress. The signal
strength of the transmission between the cellular telephone and the base station
declines as the caller moves away from the base station in that cell. When the
signal strength of a call declines to a predetermined threshold level, the MTSO
automatically determines if the signal strength is greater in another cell and,
if so, hands off the cellular telephone to that cell. The automatic hand-off
process within the system takes a fraction of a second. However, if the
cellular telephone leaves the reliable service areas of the cellular telephone
system, the call is disconnected unless an appropriate technical interface is
established with an adjacent system through intersystem networking arrangements.
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
I-12
<PAGE>
used in adjacent cells. Because of the relatively low transmission power of the
base stations and cellular telephones, two cells sufficiently far apart can use
the same frequencies in the same market without interfering with one another.
A cellular telephone system's capacity can be increased in various ways.
Within certain limitations, increasing demand may be met by simply adding
available frequency capacity to cells as required or, by using directional
antennas, dividing a cell into discrete multiple sectors or coverage areas,
thereby facilitating frequency reuse in other cells. Furthermore, an area
within a system may be served by more than one cell through procedures which
utilize available channels in adjacent cells. When all possible channels are in
use, further growth can be accomplished through a process called "cell
splitting." Cell splitting entails dividing a single cell into a number of
smaller cells serviced by lower-power transmitters, thereby increasing the reuse
factor and the number of calls that can be handled in a given area. Digital
transmission technologies provide cellular licensees with additional capacity to
handle calls on cellular frequencies. As a result of present technology and
assigned spectrum, however, there are limits to the number of signals that can
be transmitted simultaneously in a given area. In highly populated MSAs, the
level of demand for mobile and portable service is often large in relation to
the existing capacity.
FCC rules require that all cellular telephones be functionally compatible
with cellular telephone systems in all markets within the United States and with
all frequencies allocated for cellular use, so that a cellular telephone may be
used wherever a subscriber is located, subject to appropriate arrangements for
service charges. Changes to cellular telephone numbers or other technical
adjustments to cellular telephones by the manufacturer or local cellular
telephone service businesses may be required, however, to enable the subscriber
to change from one cellular service provider to another within a service area.
Because cellular telephone systems are fully interconnected with the
landline telephone network and long distance networks, subscribers can receive
and originate both local and long-distance calls from their cellular telephones.
Cellular telephone systems operate under interconnection agreements with
various local exchange carriers and interexchange carriers. The interconnection
agreements establish the manner in which the cellular telephone system
integrates with other telecommunications systems. The cellular operator and the
local landline telephone company must cooperate in the interconnection between
the cellular and landline telephone systems to permit cellular subscribers to
call landline subscribers and vice versa. The technical and financial details
of such interconnection arrangements are subject to negotiation and vary from
system to system. See "Federal Regulation--Recent Legislation."
While most MTSOs process information digitally, most radio transmissions of
cellular telephone calls are done on an analog basis, although most new
construction and the most rapid growth in usage can be attributed to fully
digital technology. It offers advantages, including improved voice quality,
larger system capacity, and perhaps lower incremental costs for additional
subscribers. The conversion from analog to digital radio technology is expected
to be an industry-wide process that will take a number of years. Based on
estimated capacity requirements, the Company does not foresee a need to convert
a significant portion of its network to digital radio transmission technology in
the near term. However, the Company will add digital capacity in certain
strategic markets to more effectively compete for local subscribers and to
capture digital roaming traffic. Capital expenditures will increase modestly
over a number of years to achieve the Company's strategic goals. Additionally,
dual mode handsets capable of using both analog and digital technology will be
available to customers.
Competition
- -----------
General. Initially, the FCC awarded two cellular licenses in each market,
-------
although certain markets have been subdivided as a result of voluntary
settlements. Each licensee has the exclusive use of a defined frequency band
within its market.
Currently, the primary competition for the Company's mobile cellular
service in any market comes from the other licensee in such market, which may
have significantly greater resources than the Company and its affiliates.
Competition is principally on the basis of coverage, services and enhancements
offered, technical quality of the system, quality and responsiveness of customer
service and price. In addition, the unserved area licensing process
I-13
<PAGE>
allows for new companies to apply with the FCC for a license to provide cellular
service in areas within the relevant MSA or RSA not served by the Company and
for existing carriers to expand their service. See "Federal Regulation --
Cellular Service Area." Within the network, the Company has two primary direct
cellular competitors, in addition to a number of stand-alone operators as
summarized in the following table.
Number of Competing Markets
---------------------------
Competitor States (1) MSAs RSAs Total
---------- ---------- ---- ---- -----
Western Wireless CO, IA, MT, ND, SD UT, WY 7 30 37
US Cellular ID, IA - 7 7
Nine other carriers CO, IA, NM, UT, WY - 12 12
-- -- --
7 49 56
== == ==
(1) States in which the competitor operates a competing cellular licensee.
Competition From Other Technologies. The FCC has licensed, subject to
-----------------------------------
relicensing and changes to the terms under which certain licenses were granted,
commercial personal communications services ("PCS"). PCS is not a specific
technology, but a variety of potential technologies that compete with cellular
telephone systems. The FCC has identified two categories of PCS: broadband and
narrowband. Licenses are awarded by competitive bidding. Auctions for most of
the spectrum blocks have been completed and many systems have commenced
operations in major metropolitan locations.
The FCC has adopted rules to authorize the operation of narrowband PCS
systems in the 900 MHz band. The possible new services using this 900 MHz band
spectrum include advanced voice paging, two-way acknowledgment paging, data
messaging, electronic mail and facsimile transmissions. These services most
likely will be provided using a variety of devices, such as laptop and palmtop
computers and computerized "personal organizers" that allow receipt of office
messages, calendar planning and document editing from remote locations in some
circumstances. Because narrowband PCS does not allow real-time, two-way voice
communications, and allows only limited data transfer, it is not clear to what
extent this technology will offer direct competition to cellular.
The FCC also has adopted rules to authorize the operation of new, broadband
PCS systems in the 2 GHz band. Equipment proposed for broadband PCS includes
small, lightweight and wireless telephone handsets; computers that can
communicate over the airwaves wherever they are located; and portable facsimile
machines and other graphic devices. The regulatory plan adopted for broadband
PCS includes an allocation of spectrum, a flexible regulatory structure,
eligibility restrictions and technical and operational rules. In addition, the
FCC revised its cellular rules to state explicitly that cellular licensees may
provide any PCS-type services (including wireless PBX, data transmission and
telepoint services) on their 800 MHz band cellular channels without prior
notification to the FCC (other than the notification required to report the
construction of new cell sites).
The FCC allocated 140 MHz of spectrum in the 2 GHz band for the provision
of licensed and unlicensed broadband PCS. Much of the spectrum allocated for
broadband PCS is already occupied by microwave licensees. As a general
proposition, broadband PCS licensees are required to pay the costs associated
with relocating these existing microwave users to other portions of the radio
spectrum or to alternative technologies (such as fiber optics), within a
specified time frame.
Of the 140 MHz of spectrum allocated to broadband PCS, 120 MHz has been
allocated for licensed PCS. The 120 MHz of spectrum allocated to licensed PCS
has been divided into six channel blocks, as follows: (i) two channel blocks
(Blocks A and B) have been allocated 30 MHz of spectrum each, and have been
licensed on the basis of the 51 Rand McNally Major Trading Areas ("MTAs"), (ii)
one channel block (Block C) has been allocated 30 MHz of spectrum and has been
licensed on the basis of the 493 Rand McNally Basic Trading Areas ("BTAs"),
(iii) three channel blocks (Blocks D, E and F) have been allocated 10 MHz of
spectrum each and have been licensed on the basis of BTAs. The FCC will allow a
single entity to combine all three 10 MHz blocks or to combine a 30 MHz license
with a 10 MHz license, as long as the entity complies with the 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
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<PAGE>
apply to those channel bands (Blocks C & F) which were set aside for licensing
to small businesses and other certain "entrepreneurs."
Subject to certain cross-ownership benchmarks, spectrum aggregation is
permitted in broadband PCS, but 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, and attributable interests can include management and joint
marketing arrangements, as well as partitioning. The 45 MHz spectrum cap is a
complex rule which is currently under legal challenge. In November 1998, the
FCC issued a Notice of Proposed Rulemaking proposing to modify or eliminate the
spectrum cap.
Broadband PCS licensees are subject to minimum construction requirements.
Broadband PCS licenses will be awarded for a period of ten years, with
provisions for a license renewal expectancy similar to those currently applied
to cellular licensees.
PCS carriers operate primarily in urban areas of the country and represent
potential new services of in-roaming for the Company's network. It is estimated
that PCS carriers currently compete with the Company in one MSA and three RSA
managed markets.
To date, the Company has experienced little impact from PCS competition,
however, it is uncertain what long-term effect these new personal communications
services may have on the Company. The Company believes that the cost to build
out a PCS network in a representative market of the Company would be three to
four times as expensive as the cost incurred by the Company for the same
coverage. This higher cost is due in part to the fact that PCS channels are
higher in the frequency band than cellular, and the radio signal does not travel
as far. Thus, more transmitter sites are required to cover the same area.
Therefore, the Company believes that PCS will have difficulty competing
effectively with cellular telephone service in the rural marketplace in the near
future, but there can be no assurance that this will be the case. In addition,
technological advances in cellular telephone technology provide essentially the
same services as PCS described above and the FCC revised its rules to authroize
cellular licensees to provide any PCS-type service on their channels without
prior notification to the FCC. The FCC issued operating authority for personal
communications services competitive to the Company's services in markets managed
by the Company. Because of the FCC's buildout requirements (mandating certain
level of population coverage at five and ten year benchmarks), coupled with the
higher construction costs and lower population density in rural areas, it is
likely that many PCS licensees will concentrate buildout efforts in the largest
urban and suburban areas, and may not reach rural areas for several years, if at
all. In many PCS license areas, it is possible to meet all coverage
requirements without serving rural communities.
Potential users of cellular systems may find an increasing number of
current and developing technologies able to meet their communication needs. For
example, SMRs of the type generally used by taxicab and tow truck services and
other communications services have the technical capability to handle mobile
telephone calls (including interconnection to the landline telephone network)
and may provide competition in certain markets.
Although SMR operators historically were subject to limitations that made
usage of SMR frequencies more appropriate for short dispatch messages, the FCC
has granted waivers of its rules to permit the construction and operation of low
powered "cellular-like" services using a collection of SMR frequencies ("ESMR")
in a number of markets in the United States. In addition, legislation permits
commercial mobile service providers, including SMR providers, to obtain upon
demand physical interconnection with the landline telephone network. Such
interconnection enhances an SMR provider's ability to compete with cellular
operators, including the Company. The FCC has encouraged ESMR activities and
has amended its rules to establish an Expanded Mobile Service Provider ("EMSP")
licensing approach that facilitates such operations. The new rules grant a new
type of 800 MHz wide-area license that would permit channels to be aggregated
for operation of systems throughout defined geographic areas. The FCC has
completed spectrum auctions to license these wide-area systems, and at least one
SMR carrier (Nextel) is advertising its service as competition to cellular.
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<PAGE>
One-way paging or beeper services that feature voice message and data
display as well as tones may be adequate for potential cellular subscribers who
do not need to transmit back to the caller. SMR and paging systems are in
operation in many of the service areas within the network.
In 1991, and again in late 1998, the FCC auctioned licenses to operate
wide-area systems in the 220 MHz band. However, the narrow bandwidth of these
channels may hinder the ability of licensees to compete effectively with
cellular. The Company has not to date experienced significant competition from
any of the regional or national 220 MHz licenses granted in 1991.
In early 1997, the FCC issued rules designating the 2305-2320 and 2345-2360
MHz bands for new communications services to be called Wireless Communications
Service ("WCS"). The auction for these licenses was completed during fiscal
year 1997. Licensees will be allowed to offer any fixed, mobile or radio
location service or satellite Digital Audio Radio Services on a primary basis.
On a secondary basis, amateur radio service and aeronautical telemetry
operations will continue in certain portions of the band. Because of the
potential for interference from grandfathered satellite operations and other
technical constraints, the FCC has indicated that it is unlikely WCS licensees
will be able to effectively provide cellular-like mobile services.
Technological advances in the communications field continue to occur and
make it difficult to predict the extent of additional future competition for
cellular systems. See "The Company's Operations -- Expansion." Although
satellite service, such as Motorola's "Iridium" system, may offer a customer
worldwide coverage, the substantial investments required to initiate service, as
well as significant technical, political and regulatory hurdles that need to be
overcome, may impede the early growth of this technology. Recent legislation
may make available up to 200 MHz of spectrum for new communications systems.
Each of these systems could provide services that compete with those provided by
the Company. The FCC has also authorized Basic Exchange Telecommunications
Radio Service to make basic telephone service more accessible to rural
households and businesses. In mid-1998, the FCC auctioned spectrum for Local
Multipoint Distribution Service ("LMDS") operations. Such licensees will likely
provide wireless local loop and video services, primarily on a fixed basis, but
may compete indirectly with cellular. Because LMDS operates in the 29-30 GHz
band, signal propagation is severely limited compared to cellular, and can be
blocked by foilage, rainfall or other obstructions. Therefore, mobile
operations on LMDS channels is unlikely. The primary competitive impact of LMDS
would be on fixed cellular applications.
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
I-16
<PAGE>
were filed simultaneously. The FCC chose among mutually exclusive applicants for
each license through the use of a lottery.
Upon favorable review of the lottery winner or settlement entity,
designation of the tentative selectee and following a public comment period, the
FCC issued a construction permit for the cellular telephone system on each
frequency block in a specified market. An operating license was then granted
for an initial term not to exceed ten years (although a license may be revoked
during its term for cause after formal proceedings by the FCC).
License Renewal. Cellular licenses are granted by the FCC for a term not
---------------
exceeding ten years, and are subject to renewal at the end of that term. The
cellular license expiration date has passed for all of CommNet's seven MSAs.
The majority of the company's RSA licenses expire in 1999 or the year 2000. The
FCC has established rules and procedures to process cellular renewal
applications filed by existing carriers, as well as any competing applications
filed by renewal challengers. At the end of the ten-year license term, the FCC
requires a license renewal application be submitted for each station
authorization. Upon the FCC's acceptance of the renewal application, the
application goes through a standard thirty-day Public Notice process. Renewal
applications for the seven MSA's have been through this Public Notice process,
and all applications for renewal have been granted. The Company also
anticipates all RSA applications for renewal will be granted. The Company also
anticipates all RSA applications for renewal will be granted. Once the Public
Notice process is completed, provided there are no challenges, the FCC will
grant a new license for a second ten-year term. If there are challenges to a
renewal application, the FCC's renewal proceeding is initiated. Subject to one
exception discussed below, the renewal proceeding is a two-step hearing process.
Under the two-step procedure, the FCC will conduct a threshold proceeding (the
"step-two" hearing) to determine whether or not the incumbent licensee is
entitled to a license renewal expectance for its performance during the past
license term and remains basically qualified to hold a cellular license. Two
criteria are evaluated to determine whether the existing licensee will receive a
renewal expectancy. The first criterion is whether the licensee has provided
"substantial" service during its past license term, defined as service which is
sound, favorable and substantially above a level of mediocre service which
minimally might justify renewal. The second criterion requires that the
licensee must have substantially complied with applicable FCC rules and
policies. Under this second criterion, the FCC determines whether the licensee
has demonstrated a pattern of compliance. The second criterion does not require
a perfect record of compliance, but if a licensee has demonstrated a pattern of
noncompliance it will not receive a renewal expectancy. If the FCC grants the
licensee a renewal expectancy during the first step of the hearing process and
the licensee is basically qualified, its license renewal application will be
automatically granted and any competing applications will be denied. If,
however, the FCC denies the licensee's request for renewal expectancy, the
licensee's application will be comparatively evaluated under specifically
enumerated criteria with the applications filed by competing applicants.
The exception to the two-step renewal hearing process allows a competing
applicant proposing to provide service that far exceeds the service presently
being provided by the incumbent licensee to request a waiver of the two-step
process. If the waiver request is granted, the FCC will hold only a comparative
hearing, i.e., it will not make a threshold determination in the first instance
----
as to whether the incumbent licensee is entitled to a renewal expectancy.
Cellular Service Area. In all markets, at least one cell site must have
---------------------
been placed into commercial service within 18 months after the award of the
initial construction permit. The CGSA is defined as the area served by the
cellular licensee (as computed by a mathematical formula based on the height and
power of operating cell sites within which the licensee is entitled to
protection from interference on its frequencies). The CGSA will be smaller than
the market if a licensee has not fully built-out its system, or it may be larger
than the market if the licensee serves areas of adjacent markets. Cellular
licensees do not need to obtain FCC authority prior to increasing the CGSA
within their market during the five-year period after the construction permit is
initially granted for the market. However, FCC notification of construction is
still generally required. After the five-year exclusive period has expired, any
entity may apply to serve the unserved areas of the market that comprise at
least 50 contiguous square miles and are outside of the licensee's CGSA (an
"unserved area application").
Unserved area applications are filed in two phases, Phase I and Phase II.
During the first half of 1993, the FCC accepted Phase I unserved area
applications for frequency blocks in all markets in which: the five-year fill-
in period had already expired or would expire on or before March 15, 1993; no
applications for initial authorizations
I-17
<PAGE>
were filed; or authorizations were surrendered or canceled for failure to meet
the 18-month construction deadline or other reasons. For all other markets,
Phase I applications were due on the 31st day following expiration of the five-
year fill-in period. All Phase I applications for a given market are deemed
mutually exclusive even if their proposed CGSAs do not overlap. Once an
authorization has been granted to a Phase I applicant, the permittee has 90 days
within which to file an application requesting FCC authority to make major
modifications to its Phase I system. During this period, the FCC will not accept
any other applications for unserved areas in a market that are mutually
exclusive (overlap of proposed CGSAs) with the Phase I carrier's major
modification application.
Phase II unserved area applications for any remaining area may be filed on
the 121st day after the Phase I authorization has been granted (or if no Phase I
applications are filed, on the first day after Phase I applications for that
market are permitted). In the event mutually exclusive applications are filed
the authorization will be issued by auction. Phase II applications may propose
CGSAs that cover area in more than one market. Phase II applications will be
placed on public notice by the FCC, and all interested and qualified parties
will have an opportunity to apply for the same market area within 30 days of the
public notice.
Unserved area applicants not proposing to expand an existing system, i.e.,
applicants for new cellular systems must propose to serve a minimum of 50
contiguous square miles and must demonstrate their financial qualifications to
construct the proposed system and to operate it for one year (assuming no
revenues). Existing licensees proposing to expand their systems through the
filing of an unserved area application are not subject to the 50 square mile
minimum coverage rule, nor are they required to make a financial qualifications
showing. 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.
In November 1998, the FCC adopted rules, which became effective January 1,
1998, that liberalized foreign investment in U.S. telecommunications carriers,
consistent with the 1997 World Trade Organization (WTO) Basic Telecom Agreement.
Foreign investors can own up to 49 percent of a carrier in the U.S. market
without special authorization. The FCC has also enhanced its regulatory
safeguards to prevent the exercise of foreign market power in the U.S.
telecommunications market.
Recent Legislation. The Telecommunications Act of 1996 (the "Act"), which
------------------
modifies and amends the Communications Act, covers virtually every element of
communications. Congress' main objective was to promote competition and reduce
regulation in order to secure lower prices and higher quality services for
telecommunications consumers and to encourage the rapid deployment of new
telecommunications technologies. A great portion of the Act is aimed at
removing restrictions which prevent local and long distance service providers
from offering competing services in the same territory and redefining
compensation arrangements between CMRS providers, which include cellular
carriers such as the Company, Interexchange Carriers ("IXCs"), Local Exchange
Carriers
I-18
<PAGE>
("LECs") and Independent Local Exchange Carriers ("ILECs"). The major impact of
the Act on the Company was to reduce the costs paid by the Company to
interconnect and terminate calls on LEC, ILEC and IXC networks. The Act requires
such carriers to base termination charges to CMRS providers on cost and to
compensate CMRS providers for calls they terminate. The Company began to benefit
from these changes in fiscal year 1997. While the FCC's interconnection rules
were being challenged in court, the Company successfully negotiated new
interconnection agreements throughout its operating territory based on interim
pricing rules. Although many of the FCC's rules were struck down by a federal
court, the portion of the rules setting lower interconnection rates for wireless
carriers was upheld. As a result, the Company anticipates maintaining these
favorable rates and, in some cases, possibly negotiating even lower rates in the
future.
The Act mandates CMRS providers pay into the Universal Service Fund
("USF"). The USF is to ensure basic telephone services are available,
reasonable and affordable for all citizens. In addition, the USF will promote
access to high capacity telecommunications services for schools, libraries and
rural health care providers. Customers began seeing a new line item on their
bills from the Company as well as other carriers in general beginning January 1,
1998, with the revenues passing through to the USF administrator. The rate
charged by the Company was initially .75% of local service revenues.
Additionally, states may create their own funds imposing charges only on
intrastate service to supplement the resources available from the Federal USF.
State governments will be responsible for determining who will be eligible to
receive federal or state USF subsidies. Most states have not finalized their
rules, but it is likely that any CMRS provider which seeks to draw funds from
the USF will be subject to additional regulation by that state.
Number Portability. The FCC's recent Report and Order mandates that by
------------------
December 31, 1998 CMRS providers must be capable of routing calls that originate
on their network to wireline customers that have ported their numbers. By March
31, 2000 CMRS providers must allow their own customers to take their numbers to
other carriers. A significant amount of capital will be required to upgrade and
install equipment to ensure compliance of the FCC's rules. On May 14, 1998, the
FCC released its Order establishing federal cost recovery rules for number
portability. All carriers providing service within the area served by a number
portability database must contribute, on a pro rata basis, to the cost of
maintaining the shared database, and each carrier is responsible for recovering
its own number portability costs in any lawful manner.
CALEA. The Communications Assistance for Law Enforcement Act ("CALEA")
-----
requires telecommunications carriers ensure their facilities enable law
enforcement officials, pursuant to authorization, to intercept calls and access
call-identifying information. The FCC recently extended the compliance date to
June 30, 2000. In November 1998, the FCC reached some tentative conclusions and
adopted a Further Notice of Proposed Rulemaking about the technical requirements
with which CMRS carriers must comply. A significant amount of capital will be
required to upgrade and install equipment to ensure compliance of the FCC's
rules. The Attorney General, subject to availability of appropriations, may
agree to reimburse wireless providers for costs directly associated with
modifications to provide the required capacity.
E-911. The FCC's Order requires CMRS carriers to provide Phase I
-----
enhanced 911 service which is the delivery of a ten-digit callback number and
identification of the cell site from where the 911 call originated to the Public
Safety Answering Point ("PSAP") by April 1, 1998 as long as the PSAPs have met
specific criteria. Phase II of the FCC's mandate is to deliver the coordinates,
i.e., geographical data to the PSAPs by identifying the location of the wireless
call within 125 meters in 67% of all cases. Phase II must be available by
October 1, 2001, and the PSAPs must meet the same specific criteria as required
for Phase I. The FCC's Order mandates that CMRS providers be reimbursed for
their costs to provide enhanced 911 services, but left it up the state
governments to determine specific cost recovery mechanisms for each state.
Legislation reflecting cost recovery guarantees has been passed in some of the
states in which the Company operates.
State, Local and Other Regulation
- ---------------------------------
State. Following receipt of an FCC construction permit and prior to the
-----
commencement of commercial service (prior to construction in certain states), a
cellular licensee must also obtain any necessary approvals from the appropriate
regulatory bodies in each of the states in which it will offer cellular service.
Some state authorities
I-19
<PAGE>
regulate certain service practices of cellular system operators. While such
state regulations may affect the manner in which the Company's affiliates
conduct their business and could adversely affect their profitability, they
should not place the Company's affiliates at a competitive disadvantage with
other service providers in the same markets. The Company has not experienced and
does not presently contemplate any regulatory constraints, difficulties or
delays.
FAA, Zoning and Other Land Use. The location and construction of cellular
------------------------------
transmitter towers and antennas are subject to Federal Aviation Administration
("FAA") regulations and may be subject to federal, state and local environmental
regulation as well as state or local zoning, land use and other regulation.
Before a system can be put into commercial operation, the grantee of a
construction permit must obtain all necessary zoning and building permit
approvals for the cell sites and MTSO locations. The time needed to obtain FAA
approvals, zoning approvals and requisite state permits varies from market to
market and state to state. Likewise, variations exist in local zoning
processes. There can be no assurance that any state or local regulatory
requirements currently applicable to the systems in which the Company's
affiliates have an interest will not be changed in the future or that regulatory
requirements will not be adopted in those states and localities which currently
have none.
Employees
- ---------
As of December 14, 1998, the Company had 716 full-time employees. The
Company engages the services of independent contractors on an as-needed basis.
Item 2. Properties.
In addition to the direct and attributable interests in cellular licensees
discussed in this Report, the Company leases its principal executive offices
(consisting of approximately 60,000 square feet) located in Englewood, Colorado.
The Company and its affiliates lease and own locations for retail sales,
inventory storage, microwave, cell site and switching equipment and
administrative offices.
Item 3. Legal Proceedings.
On October 22, 1997, The Rye Telephone Company ("Rye"), a shareholder in
Pueblo Cellular, Inc. ("Pueblo") filed an action in the District Court, Pueblo
County, State of Colorado, against the Company. The lawsuit alleged intentional
interference with contract, breach of contract and breach of covenant of good
faith in connection with a proposed sale of shares in Pueblo by Rye and Pine
Drive Telephone Company ("Pine Drive") and a related lawsuit filed by the
Company against Pine Drive in Arapahoe County court. The court granted the
Company's motion for a directed verdict in favor of the Company. Rye has
appealed this decision to the Colorado Court of Appeals. Rye seeks, among other
things, general and specific damages of not less than $5,493,840, exemplary
damages, fees and costs. The Company intends to defend the lawsuit vigorously.
Former employees of CommNet Cellular Inc., Homer Hoe and Amy M. Shapiro are
claiming $963,000 and $551,000 respectively plus 12 months' of benefits
against the Company for payments which they allege are due under change-in-
control agreements that they allege were triggered by the Blackstone merger.
The Company is defending this case which has been submitted to binding
arbitration. Hearing has been set for March 9-11, 1999. The Company is
vigorously defending this action.
On May 29, 1997 a lawsuit was filed on behalf of all the stockholders of
CommNet Cellular Inc. alleging improper acts by the officers and directors of
CommNet Cellular Inc. with respect to the merger between CommNet Cellular Inc.
and AV Acquisition Corporation (Blackstone) and seek unspecified damages. The
parties have entered into a Memorandum of Understanding settling this case for
payment by CommNet Cellular Inc. of $450,000 to Plaintiff's attorneys to cover
their fees and costs. CommNet has also agreed to pay up to $250 in broker's
fees to any class member who wishes to purchase additional CommNet Cellular Inc.
stock and to obtain a fairness opinion prior to engaging in any merger where the
Shares held by the public shareholders are converted into cash or other
consideration. Insurance carriers for CommNet have agreed to pay $400,000 to
CommNet Cellular Inc. as payment
I-20
<PAGE>
of CommNet's claim under its D&O policy. Notices have been sent to members of
the class. Once the class members have had an opportunity to respond, the court
may approve the settlement as final.
There are no other 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.
None.
I-21
<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, as adjusted for
the 5 for 1 stock split on May 7, 1998, for each fiscal quarter since October 1,
1996.
<TABLE>
<CAPTION>
Fiscal Year 1997: High Low
------- ------
<S> <C> <C>
First Quarter.... $ 6.250 $5.425
Second Quarter... 5.900 4.875
Third Quarter.... 7.000 4.925
Fourth Quarter... 7.100 6.875
Fiscal Year 1998: High Low
------- ------
First Quarter.... $ 7.200 $6.650
Second Quarter... 10.000 7.075
Third Quarter.... 19.400 8.500
Fourth Quarter... 14.625 7.000
</TABLE>
As of December 14, 1998, there were 54 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)
<TABLE>
<CAPTION>
Statement of Operations Data (1):
Years ended September 30,
--------------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues $ 171,435 $ 150,867 $ 115,196 $ 89,844 $ 61,360
Costs and expenses (net
of amounts allocated
to affiliates):
Operations 100,905 94,497 76,123 68,929 50,856
Corporate 23,310 (985) 880 1,327 406
Total depreciation and
amortization 26,636 22,116 19,750 16,655 11,578
Write-down of invest-
ment in cellular
system equipment - - - - 3,117
----------- ----------- ----------- ----------- -----------
Operating income (loss) 20,584 35,239 18,443 2,933 (4,597)
Equity in net income (loss)
of affiliates 5,127 (7,589) (1,636) (5,028) (5,092)
Minority interest in net
income of consolidated
affiliates (5,701) (2,964) (1,123) (964) (544)
Gains (losses) on sales of
affiliates - 350 (250) 19,471 3,912
Amortization of deferred costs (2,651) (1,072) (2,090) (940) (1,072)
Interest expense (49,212) (29,464) (28,208) (26,044) (21,339)
Interest income 4,876 6,532 10,468 13,046 12,081
----------- ----------- ----------- ----------- -----------
Income (loss) before
income taxes and
extraordinary charge (26,977) 1,032 (4,396) 2,474 (16,651)
Income tax expense - - - 400 100
----------- ----------- ----------- ----------- -----------
Income (loss) before
extraordinary charge (26,977) 1,032 (4,396) 2,074 (16,751)
Extraordinary charge (3) (33,500) - - (2,012) -
----------- ----------- ----------- ----------- -----------
Net income (loss) $ (60,477) $ 1,032 $ (4,396) $ 62 $ (16,751)
=========== =========== =========== =========== ===========
Basic and diluted income
(loss) per common
share before
extraordinary charge $ (.68) $.01 $(.06) $.03 $(.29)
Extraordinary charge (.85) - - (.03) -
----------- ----------- ----------- ----------- -----------
Basic and diluted net
income (loss) per
common share $ (1.53) $.01 $(.06) $.- $(.29)
=========== =========== =========== =========== ===========
Weighted average shares
outstanding 39,397,393 68,835,650 68,636,015 60,767,960 57,885,955
=========== =========== =========== =========== ===========
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Balance Sheet Data (1):
Years ended September 30,
-----------------------------------------------------
1998 1997 1996 1995 1994
------------ -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
Working capital $ 38,065 $ 15,840 $ 16,246 $ 39,911 $ 25,525
Investments in and
advances to affiliates 33,637 47,211 57,245 56,919 61,909
Net property and
equipment 154,598 143,875 118,099 105,289 79,918
Total assets 384,752 352,916 331,837 325,668 282,638
Long-term debt 682,999 250,852 245,845 246,357 243,913
Total liabilities 720,200 291,016 268,855 267,012 266,731
Stockholders' equity
(deficit) (2) (335,448) 61,900 62,982 58,656 15,906
</TABLE>
<TABLE>
<CAPTION>
Supplemental Financial Data:
Years ended September 30,
---------------------------------------------------
1998 1997 1996 1995 1994
---------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
EBITDA (See "Management's
Discussion and Analysis--
General") $71,069 (4) $ 57,355 $ 38,193 $ 19,588 $ 10,098
Net cash provided (used) by
operating activities $26,431 (5) $ 48,631 $ 20,751 $ 14,068 $ (7,170)
</TABLE>
Differences between EBITDA and net cash provided (used) by operating activities
were primarily cash interest expense and changes in operating assets and
liabilities.
(1) Markets in which the Company holds a greater than 50% net interest are
reflected on a consolidated basis in the Company's consolidated financial
statements. Markets in which the Company holds a net interest which is 50%
or less but 20% or greater are accounted for under the equity method.
Markets in which the Company holds a less than 20% interest are accounted
for under the cost method. The following table sets forth the number of
markets and relevant accounting methods at the end of each of the last five
fiscal years.
<TABLE>
<CAPTION>
September 30,
--------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Consolidated 48 46 46 45 42
Equity 17 18 18 20 35
Cost 17 18 18 18 18
---- ---- ---- ---- ----
82 82 82 83 95
==== ==== ==== ==== ====
</TABLE>
(2) No cash dividends were declared or paid during any period presented.
(3) Extraordinary charge related to the early extinguishment of long-term debt.
(4) Excludes $23,849,000 of nonrecurring stock-based compensation expense
related to the Merger.
(5) Excludes $13,400,000 of nonrecurring stock-based cash compensation expense
related to the Merger.
II-3
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
General
- -------
The Company generated operating income during fiscal 1998, net income and
operating income during fiscal 1997 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, 1998 and 1997, will also be positive in future fiscal
years (although there can be no assurance that this will be the case). Certain
financial analysts consider EBITDA a meaningful measure of an entity's ability
to meet long-term financial obligations, and growth in EBITDA a meaningful
barometer of future profitability, especially in a capital-intensive industry
such as cellular telecommunications. However, EBITDA should not be considered
in isolation to, or be construed as having greater significance than, other
indicators of an entity's performance. The results discussed below may not be
indicative of future results.
As a consequence of the Merger, results of operations and financial
position were impacted significantly on a one-time basis and on a recurring
basis. One-time charges were recorded as corporate general and administrative
expenses to account for $13,400,000 of options that were settled in cash on
February 10, 1998, $10,449,000 of noncash expense (and increase to capital in
excess of par value) for old options that were changed on April 2, 1998
triggering a remeasurement. In addition, an extraordinary charge of $33,500,000
was recorded related to the premiums paid and deferred charges written off to
extinguish $270,427,000 of debt that existed prior to the Merger. Under a new
$760,000,000 debt facility, $680,000,000 was drawn to finance extinguishment of
old debt, the repurchase of $475,496,000 of Common Stock and transaction costs.
This increase in leverage in the capital structure of the Company caused
amortization expense and interest expense to increase significantly and this
trend will continue.
Interest income reflects interest income derived from the financing
activities of CIFC and the Company with nonconsolidated affiliates, as well as
interest income derived from cash and short-term investments of the Company and
its consolidated affiliates. CIFC has entered into loan agreements with the
Company's affiliates pursuant to which CIFC makes loans to such entities for the
purpose of financing or refinancing the affiliates' costs of construction and
operation of cellular telephone systems. Such loans are financed with funds
borrowed by CIFC from Chase Manhattan Bank as administrative agent and
collateral agent, Chase Manhattan Bank Delaware as fronting bank, and a
consortium of lenders ("Chase") and from the Company. At September 30, 1998,
loans bore interest at the 90-day LIBOR rate plus a margin (determined based on
the affiliate's leverage ratio). From time to time, the Company advances funds
on an interim basis to affiliates. These advances typically are refinanced
through CIFC. To the extent that the cellular markets in which the Company
holds an interest generate positive cash flow, the cash is generally used to
repay borrowings by the affiliates from CIFC and thereafter will be used to make
cash distributions to equity holders, including the Company.
Management believes there exists a seasonality in both service revenues,
which tend to be greater in the third and fourth fiscal quarters, and operating
expenses, which tend to be highest in the first fiscal quarter due to increased
marketing activities and customer growth, which may cause operating income to
vary from quarter to quarter.
Year 2000 Compliance. The Company has prepared an inventory of its
--------------------
critical computer hardware and software systems to determine what reasonable
steps should be taken by the Company in order to assure that these systems do
not experience operating problems as a result of these systems failure to
properly recognize dates in the year 1999 and beyond, that is, to assure that
they are "Y2K compliant."
The Company has adopted a plan to become Y2K compliant which has been
approved by the Board of Directors of the Company (the "Y2K Plan"). The Company
has a standing Y2K Committee composed of senior management and professionals of
the Company that regularly meet to assess Y2K compliance issues. The Y2K Plan
requires that the Y2K Committee identify potential Y2K scenarios and the
implications of each to the operational and financial viability of the Company
and assess the level of effort, expense and impact to make the Company Y2K
compliant for each potential scenario. Members of the Y2K Committee have
published master lists of scenarios and efforts required for remediation. Major
areas being addressed by the Y2K Committee include: the cellular network;
interconnect arrangements to connect the cellular network with landline systems;
clearinghouse arrangements to allow verification and billing of roaming traffic;
the Company's wide area and local area networks; the Company's internal
communications systems; Company server hardware, software and desktop systems;
billing software and related elements (call detail records, rating, posting);
financial and operational reporting systems; information integration systems;
critical suppliers including financial institutions, payroll/benefits
processing, credit bureaus, benefit plans, building systems, and office
equipment.
Within each area of inquiry the Y2K Committee is prioritizing and
evaluating each scenario and the remediation effort required to achieve Y2K
compliance and choosing whether to either address the scenario through
implementation of full or partial remediation efforts, or not address the
scenario with remediation efforts. For those scenarios to be addressed, a
remediation schedule in being prepared showing when remediation efforts will be
undertaken. As part of the development of remediation efforts the Y2K Committee
will develop testing strategies for those remediation efforts and assumptions
that must be tested.
For all areas addressed by the Y2K Committee, whether addressed by
remediation efforts or not, the Y2K Committee will develop contingency plans in
the event that critical systems, services and/or equipment are not operational
on or after January 1, 2000 based upon the anticipated viability of critical
systems, services and/or equipment on or after January 1, 2000. Also, the Y2K
Committee will develop contingency plans in case some elements or assumptions
for addressing the Year 2000 problem may be false or incorrect.
As of the time of this report, the Company has reviewed all material
software license and maintenance agreements with its vendors to determine
whether these vendors have obligations to make their hardware and software Y2K
compliant and has initiated plans with such vendors to remedy any Y2K compliance
problems. Critical suppliers of the Company have been contacted to determine
whether or not they are Y2K compliant and to assess whether these suppliers'
compliance efforts to continue to meet the Company's needs.
The following identifies the current status of these efforts:
The Cellular Network. MTSO software has been upgraded to more current
versions and Y2K software "patches" have been installed in some cases. Some
testing of the system is complete. The Company believes that these efforts
should result in a cellular network that will continue to function without
material service affecting outages due to Y2K problems. Notwithstanding the
Company's efforts, network equipment suppliers have been unwilling to give
unqualified warranties that network equipment is Y2K compliant. Vendors and the
Company have committed to having resources available to expeditiously correct
Y2K problems if they arise. Service affecting outages, if prolonged and
widespread, could affect Company revenues. See "--Customer Service Terms and
Conditions" below.
Interconnect and Other Arrangements with Wireline Telephone Service
Vendors. In order to complete calls to/from wireline telephones and cellular
telephones not connected to the same MTSO, and to transmit calls from many
Company cell sites to Company MTSOs, the Company relies on wireline telephone
services from numerous vendors. U S WEST Communications, Inc. ("U S WEST") is
the largest of these vendors. Other smaller telephone companies, provide
geographically limited wireline services. The failure of any of these systems
would result in an inability of cellular customers to make or receive calls in
the geographic area affected by the failure. The Company has not received
unconditional warranties from any of these vendors that their systems are Y2K
complaint. The Company has reviewed the Y2K compliance efforts that have been
disclosed by U S WEST and other vendors and believes that efforts by these
vendors should not result in material service outages due to Y2K problems. The
Company has no alternatives to using these vendors and thus must rely on these
vendors' efforts. Service affecting outages, if prolonged and widespread, could
affect Company revenues. See "--Customer Service Terms and Conditions" below.
Company Software, Hardware, and Information Resources. The Company has
evaluated major internal computer systems for potential Y2K problems and is in
the process of implementing efforts to provide enhancements. Some testing has
been completed on these systems. Many of the Company's systems are
interconnected with third party systems (see below). Communication between
internal and third party systems is largely dependent on the wireline systems
discussed above. The Company is working with software and hardware vendors to
correct any Y2K problems that are detected. The Company believes that these
efforts should result in internal software, hardware and information resources
that will continue to function without material failures due to Y2K problems.
Significant failures could impair the Company's ability to provide timely
financial and other internal reporting data as result of having to rely on
backup data and manual methods of record keeping. Productivity of Company
personnel could be adversely affected by having to use alternate means of
communication and alternative office systems and equipment.
Third Party Service Providers. The Company relies on a single billing
vendor to produce bills for its customers. This billing vendor also supplies
billing and customer care software used by the Company internally. Raw billing
information is captured by Company MTSO's. The Company upgraded its billing
software during 1998. The Company uses other vendors to validate and provide for
some of its in and out roaming traffic. The Company uses third party financial
institutions and employee benefit services. The Company has contacted these
third party service providers and believes that these vendors have programs in
place that should result in these vendors being able to continue to function
without material failures due to Y2K problems. However, none of these third
party vendors have given unqualified warranties to the Company that they will be
Y2K compliant. The Company could rely on internal systems to provide monthly
access billing to its customers, but has not developed a means to bill rated
minutes of use and toll to its customers. The result of a billing vendor failure
would be to delay billing of customers by the Company with resultant delays in
receiving payments from Company customers. Failure of roamer service vendors
could result in an inability for some of the Company's customers to roam in
markets that are not directly connected to the Company's cellular network as
well as an inability for customers of unconnected systems to roam in the
Company's markets. Paper-based financial institution and employee benefit
records could be used to continue these services, although at a higher cost to
the Company.
Customer Service Terms and Conditions. The terms and conditions under
which the Company provides cellular and paging services to its customers contain
provisions that limit the Company's liability in the event that there is a
service failure. The terms and conditions provide that the Company is not liable
for any consequential or incidental damages to its customers. They further
provide that no credit will be given for service outages of less than 24 hours
in duration. In addition, they limit damages for failure to provide service to a
credit for the pro rated number of days that service was unavailable. Service
affecting outages have occurred in limited geographic areas on numerous
occasions in the past and the Company has not been found liable to any person
for damages in excess of the limitations imposed by the terms and conditions of
service. The Company believes it is unlikely that an outage occasioned by a
failure attributable to a Y2K problem would lead to a different result. Under
the terms and conditions, if the Company were unable to supply cellular service
to a significant portion of its customer base over a prolonged period of time,
the Company would experience a loss of revenues from the customers affected
which could have a material adverse affect on the Company. The Company has
adopted a policy of not giving any warranties to customers regarding Y2K
compliance.
Litigation. The Company, at this time, does not anticipate any litigation
involving the Company that would arise as a result of Y2K compliance issues.
Insurance. The Company has investigated specialized Y2K insurance products
and has not, to date, found any such products that provide appropriate coverage
for the Company at acceptable premium levels.
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.
II-4
<PAGE>
Results of Operations
- ---------------------
Fiscal Year 1998 Compared With Fiscal Year 1997. Service revenues,
-----------------------------------------------
including in-roaming revenues, increased by 14%, or $20,818,000, from
$147,264,000 for the year ended September 30, 1997 to $168,082,000 for the year
ended September 30, 1998. The growth was primarily due to the increase in the
number of subscribers in consolidated markets, offset by lower revenues per
subscriber and growth of in-roaming usage. In addition to increases in market
penetration, growth resulted from an increase of two newly consolidated markets
during the fiscal year. Growth in subscribers offset by lower revenues per
subscriber accounted for 46% of the increase, growth of in-roaming usage
accounted for 40% of the increase, and the number of newly consolidated market
accounted for 14% of the increase. In-roaming revenues increased by 24%, or
$9,444,000, from $39,881,000 for the year ended September 30, 1997 to
$49,325,000 for the year ended September 30, 1998 due to increased coverage in
cellular markets and to industry-wide subscriber increases. 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 are expected to decline,
consistent with industry trends.
Average monthly revenue per subscriber, including in-roaming, decreased
from $60 for the year ended September 30, 1997 to $54 for the year ended
September 30, 1998, reflecting the benefit of declining prices to the consumer
which is consistent with an overall industry trend. In-roaming revenues per
subscriber per month was unchanged at $16.
Cost of service decreased as a percentage of service revenues from 19% in
fiscal year 1997 to 15% in fiscal year 1998, as revenues derived from the
growing subscriber base outpaced the fixed components of cost of service. The
Company has renegotiated some interconnect agreements for lower prices and is in
the process of renegotiating others.
Equipment sales decreased 7% from $3,603,000 for the year ended September
30, 1997 to $3,353,000 for the year ended September 30, 1998 due to decreases in
sales of accessories. Cost of equipment sales increased 19% from $12,609,000
for the year ended September 30, 1997 to $14,971,000 for the year ended
September 30, 1998. Approximately $6,624,000 and $3,572,000 of the year ended
September 30, 1998 cost of equipment sales relates to equipment provided to new
and existing customers, respectively, which the customers are generally required
to return equipment to the Company if service is terminated. Although the
Company retains ownership of the equipment, it 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.
General and administrative costs of operations increased 12% from
$30,343,000 during the year ended September 30, 1997 to $34,023,000 during the
year ended September 30, 1998, due to the growth in the customer base. The
majority of these costs were incremental customer billing expenses and
consulting expenses, offset by a reduction of bad debt expenses due to more
aggressive collection efforts. Bad debt expense decreased from 2.51% of total
revenues during the year ended September 30, 1997 to 1.22% of total revenues
during the year ended September 30, 1998. General and administrative costs as a
percentage of service revenues decreased from 21% for the year ended September
30, 1997 to 20% for the year ended September 30, 1998.
Marketing and selling costs increased 17% from $23,437,000 for the year
ended September 30, 1997 to $27,482,000 for the year ended September 30, 1998,
primarily as a result of increased advertising costs and increased commission
costs as a result of higher subscriber activations. Marketing costs per gross
new subscriber increased 4% from $221 for the year ended September 30, 1997 to
$230 for the year ended September 30, 1998.
Depreciation and amortization relating to operations increased 23% from
$20,461,000 for the year ended September 30, 1997 to $25,182,000 for the year
ended September 30, 1998, primarily related to increased property and equipment
balances.
Corporate costs and expenses for the year ended September 30, 1997 were
$670,000, which represented gross expenses of $7,086,000 less amounts allocated
to nonconsolidated affiliates of $6,416,000. Corporate costs and expenses for
the year ended September 30, 1998 were $24,764,000 which represented gross
expenses of
II-5
<PAGE>
$33,517,000 less amounts allocated to nonconsolidated affiliates of $8,753,000.
Excluding nonrecurring transaction costs related to the cash settlement of stock
options associated with the merger of $13,400,000 and the establishment of a new
measurement date for the remaining options requiring recognition of an
additional $10,449,000 of compensation expense, corporate costs and expenses
were $915,000. The increase was due primarily to a write-off of demonstration
subscriber equipment.
Equity in net income of affiliates for the year ended September 30, 1998
was $5,127,000 compared to equity in net loss of $7,589,000 for the year ending
September 30, 1997. The improvement was primarily due to increased
profitability of those markets accounted for under the equity method and the
absence of TVX, Inc. losses in the current period. TVX, Inc., a former
affiliate in the security alarm industry, ceased operations in the third fiscal
quarter of 1997.
Amortization of deferred costs increased 90% from $1,397,000 for the year
ended September 30, 1997 to $2,651,000 for the year ended September 30, 1998, as
a result of increased deferred costs associated with the Chase Credit facility.
Interest expense increased 67% from $29,464,000 for the year ended
September 30, 1997 to $49,212,000 for the year ended September 30, 1998 due to
increased borrowings under the Chase Credit Agreement, offset by lower interest
rates. Cash paid for interest increased 239% from $12,548,000 during the year
ended September 30, 1997 to $42,479,000 during the year ended September 30,
1998.
Interest income decreased 25% from $6,532,000 for the year ended September
30, 1997 to $4,876,000 for the year ended September 30, 1998. The decrease was
due to lower average cash and cash equivalent balances and lower notes
receivable balances from nonconsolidated affiliates.
At September 30, 1998, the Company had net operating loss ("NOL")
carryforwards for income tax purposes of $157,593,000, compared to $45,165,000
at September 30, 1997. The increase was due to current year taxable operating
loss of $112,038,000.
Fiscal Year 1997 Compared With Fiscal Year 1996. Service revenues,
-----------------------------------------------
including in-roaming revenues, increased by 31%, or $34,877,000, from
$112,387,000 for the year ended September 30, 1996 to $147,264,000 for the year
ended September 30, 1997. The growth was primarily due to the increase in the
number of subscribers in consolidated markets, offset by lower revenues per
subscriber and growth of in-roaming usage. In addition to increases in market
penetration, growth resulted from an increase in the number of markets
consolidated for the entire year from 44 during the year ended September 30,
1996 to 46 during the year ended September 30, 1997. Growth in subscribers
offset by lower revenues per subscriber accounted for 65% of the increase,
growth of in-roaming usage accounted for 22% of the increase, and the number of
consolidated markets accounted for 13% of the increase. In-roaming revenues
increased by 35%, or $10,293,000, from $29,588,000 for the year ended September
30, 1996 to $39,881,000 for the year ended September 30, 1997 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 are expected to
decline, consistent with industry trends.
Average monthly revenue per subscriber, including in-roaming, decreased
from $63 for the year ended September 30, 1996 to $60 for the year ended
September 30, 1997, reflecting the benefit of declining prices to the consumer
which is consistent with an overall industry trend. In-roaming revenues per
subscriber per month was unchanged at $16.
Cost of service, as a percentage of service revenues, remained constant at
19% for the fiscal years ended September 30, 1997 and 1996.
Equipment sales increased 28% from $2,809,000 for the year ended September
30, 1996 to $3,603,000 for the year ended September 30, 1997 due primarily to
increases in sales of accessories. This increase was partially offset by the
effects of the Company's customer satisfaction and pricing program which was
introduced in February 1996 allowing subscribers to use handsets and accessories
at virtually no cost at the time of activation. Cost of
II-6
<PAGE>
equipment sales increased 19% from $10,588,000 for the year ended September 30,
1996 to $12,609,000 for the year ended September 30, 1997. Approximately
$7,565,000 and $2,380,000 of the year ended September 30, 1997 cost of equipment
sales relates to equipment provided to new and existing customers, respectively.
Customers are generally required to return equipment 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.
General and administrative costs of cellular operations increased 32% from
$23,038,000 during the year ended September 30, 1996 to $30,343,000 during the
year ended September 30, 1997, due to the growth in the customer base. The
majority of this increase was incremental customer billing expense, bad debt
expense and customer service support staff. In addition, bad debt expense
increased from 1.07% of total revenues during the year ended September 30, 1996
to 2.51% of total revenues during the year ended September 30, 1997. General
and administrative costs as a percentage of service revenues increased from 20%
to 21% for the year ended September 30, 1997.
Marketing and selling costs increased 12% from $20,920,000 for the year
ended September 30, 1996 to $23,437,000 for the year ended September 30, 1997,
primarily as a result of increased advertising costs offset by reductions in
commission costs. Marketing costs per gross new subscriber decreased 6% from
$233 for the year ended September 30, 1996 to $220 for the year ended September
30, 1997, as a result of increased gross subscriber additions which outpaced
increases in costs incurred.
Depreciation and amortization relating to cellular operations increased 13%
from $18,149,000 for the year ended September 30, 1996 to $20,461,000 for the
year ended September 30, 1997, primarily related to increased property and
equipment balances.
Corporate costs and expenses for the year ended September 30, 1996 were
$2,481,000, which represented gross expenses of $8,947,000 less amounts
allocated to nonconsolidated affiliates of $6,466,000. Corporate costs and
expenses for the year ended September 30, 1997 were $670,000, which represented
gross expenses of $7,086,000 less amounts allocated to nonconsolidated
affiliates of $6,416,000. The decrease was due primarily to the write-off of
certain assets totaling approximately $1,800,000 related to the Company's
corporate office move during the year ended September 30, 1996, offset by costs
and expenses to develop operations of CPI incurred during the fiscal year ended
September 30, 1997 which were not allocated to affiliates. Corporate costs and
expenses are expected to decrease slightly in future periods because CPI
operations are expected to expand resulting in separate line of business
reporting of CPI revenues and costs and expenses.
Equity in net loss of affiliates increased 364% from $1,636,000 for the
year ended September 30, 1996 to $7,589,000 for the year ended September 30,
1997. The increase was due primarily to decreased losses in nonconsolidated
affiliates, offset by recognition of the entire $6,189,000 net loss of TVX, Inc.
which was $2,729,000 higher than the Company's proportionate share of the net
loss based upon ownership. This accounting reflected that the Company was the
sole source of funding of TVX, Inc.
Interest expense increased 4% from $28,208,000 for the year ended September
30, 1996 to $29,464,000 for the year ended September 30, 1997 due to the higher
accreted discount notes balance. Cash paid for interest decreased 10% from
$14,012,000 during the year ended September 30, 1996 to $12,548,000 during the
year ended September 30, 1997 due to lower average secured bank financing
balances.
Interest income decreased 38% from $10,468,000 for the year ended September
30, 1996 to $6,532,000 for the year ended September 30, 1997. The decrease was
due to lower average cash and cash equivalent balances and lower notes
receivable balances from nonconsolidated affiliates.
At September 30, 1997, the Company had net operating loss ("NOL")
carryforwards for income tax purposes of $45,165,000, compared to $50,808,000 at
September 30, 1996. The decrease was due to utilization of NOL carryforwards to
offset current year taxable income.
II-7
<PAGE>
Acquisitions and Sales
- ----------------------
On February 10, 1998, the Company consummated a recapitalization whereby AV
Acquisition Corp., ("Newco"), a subsidiary of Blackstone CCI Capital Partners
L.P., a Delaware limited partnership (the "Partnership") affiliated with
Blackstone Management Associates II L.L.C., a Delaware limited liability company
("Blackstone"), was merged into the Company (the "Merger") pursuant to an
Agreement and Plan of Merger dated May 27, 1997 (the "Merger Agreement"). At
the effective time of the Merger, each share of Common Stock issued and
outstanding (other than those shares described below) was converted, at the
election of the holder thereof and subject to the terms of the Merger Agreement,
into either (a) the right to receive $36.00 in cash or (b) the right to retain
one fully paid and nonassessable share of Common Stock. The following shares of
Common Stock were not subject to conversions pursuant to the Merger: shares of
Common Stock held by the Partnership, and partnerships affiliated with
Blackstone that acquired interests in Newco prior to the consummation of the
Merger, Newco, and any wholly-owned subsidiary of the Company or any wholly-
owned subsidiary of Newco; fractional shares that were converted to cash; and
shares of Common Stock in respect of which dissenters' rights had been properly
exercised. The election to retain Common Stock was subject to proration so
that, following the Merger, 2,943,055 shares (representing approximately 4% of
the issued and outstanding Common Stock) were retained by existing shareholders
of the Company, representing approximately 13% of the shares of the Company
issued and outstanding immediately after the Merger. The shares of Common Stock
owned by the shareholders of Newco represent approximately 87% of the shares of
the company issued and outstanding after the Merger, resulting in such
shareholders of Newco becoming the controlling shareholders of the Company.
In addition, on February 10, 1998, the Company repurchased approximately
$176,600,000 of the approximately $176,700,000 aggregate principal amount of its
11 3/4% Senior Subordinated Discount Notes and all of the $80,000,000 aggregate
principal amount of its 11 1/4% Subordinated Notes, and repaid the entire
amount of indebtedness under the CoBank Credit Agreement. The Merger, debt
repayment, and payment of certain costs and expenses of the Merger were funded
through borrowings under a new $760,000,000 senior bank credit facility with the
Chase Manhattan Bank as administrative agent and collateral agent, Chase
Manhattan Bank Delaware as fronting bank, and a consortium of lenders (the
"Chase Credit Agreement").
In April 1998, the Company purchased an additional 90% interest in one
managed RSA market for $9,000,000 in cash.
In May 1998, the Company purchased an additional 16% interest in one
managed RSA market for $300,000 in cash.
In December 1998, the Company purchased substantially all of the
independent telco interests in three managed RSA markets and one managed MSA
market in South Dakota for approximately $56,100,000. As a result of the
closing, all pending claims and litigation were resolved.
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 1998. Net cash provided by operating activities was
----------------
$13,031,000 during the year ended September 30, 1998. This was due to cash
provided in generating the net loss after adjustments to reconcile net cash
provided by operating activities of $16,238,000 and by cash used to fund changes
in working capital of $3,207,000.
Net cash used by investing activities was $17,958,000 for the year ended
September 30, 1998. This was due primarily to $28,437,000 required to fund the
purchase of property and equipment and investment in cellular system equipment,
$9,300,000 to purchase additional interests in affiliates, offset by a decrease
of $21,248,000 to investments in and advances to affiliates from CIFC note
repayments.
II-8
<PAGE>
Net cash provided by financing activities was $16,948,000 for the year
ended September 30, 1998. This was primarily due to net increases as a result
of the merger of $21,539,000, offset by distributions to minority interests of
$4,433,000.
Fiscal Year 1997. Net cash provided by operating activities was
----------------
$48,631,000 during the year ended September 30, 1997 composed primarily of
$46,259,000 from net income after adjustments to reconcile net cash provided by
operating activities and decreases in working capital requirements of
$2,372,000.
Net cash used by investing activities was $30,313,000 for the year ended
September 30, 1997. This was due primarily to $37,363,000 required to fund the
purchase of property and equipment and additions to other assets of $1,335,000
offset by proceeds of $8,480,000 from CIFC note repayments recorded as
reductions to investment and advances to affiliates.
Net cash used by financing activities was $15,678,000 for the year ended
September 30, 1997. This was due primarily to net reductions to long-term debt
and capital leases of $14,728,000, repurchases of Common Stock of $2,933,000 and
distributions to minority interests of $2,349,000, offset by $4,111,000 of
capital contributions received from minority interests.
Liquidity and Capital Resources
- -------------------------------
General. CommNet Cellular Inc. (referred to herein as the "parent
-------
company") is effectively a holding company and, accordingly, must rely on
distributions, loan repayments and other intercompany cash flows from its
affiliates and subsidiaries to generate the funds necessary to satisfy the
parent company's capital requirements. On a consolidated basis, the Company's
principal source of financing through February 10, 1998 was a loan facility with
CoBank (the "CoBank Credit Agreement"), pursuant to which CoBank had agreed to
lend up to $165,000,000 to CIFC.
On September 18, 1997, CIFC and the Company entered into a senior bank
credit facility with The Chase Manhattan Bank as administrative agent and
collateral agent, Chase Manhattan Bank Delaware, as fronting bank, and the other
lenders named therein (the "Chase Credit Agreement"). The Chase Credit
Agreement provides for aggregate credit commitments of up to $760 million
comprised of term loans of $680,000,000 and a revolving credit facility of
$80,000,000. All obligations of CIFC and the guarantors under the Chase Credit
Agreement and the guarantees are secured by first priority security interests in
substantially all tangible and intangible assets, trademarks, tradenames and
equipment of CIFC and the guarantors. In addition, the Chase Credit Agreement
is secured by a first priority security interest in substantially all of the
assets held by the Company and certain of its wholly-owned subsidiaries, to the
extent the Company and such subsidiaries have the legal ability to pledge such
assets. The Chase Credit Agreement includes limitations on dividends and
distributions on capital stock and other significant operating and financial
restrictions and covenants, including limits on the ability of the Company and
its subsidiaries to incur or prepay indebtedness, create liens, enter into
leases or transactions with affiliates, sell assets, engage in mergers or
acquisitions, make investments, and redeem or repurchase capital stock or debt.
On February 10, 1998, in connection with the closing of the Merger (see
"Acquisitions and Sales"), CIFC and the Company drew down the $680,000,000 term
loans under the Chase Credit Agreement which was used, in part, to pay off
outstanding amounts under the CoBank Credit Agreement, to repurchase the
majority of the Company's 11 3/4% Senior Subordinated Notes and all of the
Company's 11 1/4% Subordinated Notes, to pay the cash portion of the Merger
consideration to holders of the Company's Common Stock, and to fund costs
associated with the Merger. Advances made under to Chase Credit Agreement will
be used, when necessary, to fund capital and operating requirements of the
Company and to fund loans made by CIFC to the affiliates. The Chase Credit
Agreement provides for aggregate credit commitments of up to $760,000,000 at
interest rates that vary from 1.00% to 2.50% over prime for variable rate loans
or 2.00% to 3.50% over LIBOR for fixed rate loans at September 30, 1998.
Additionally, in accordance with the terms of the Chase Credit Agreement, CIFC
has entered into various interest rate protection agreements to reduce the risk
of interest rate fluctuations on the $680,000,000 of term loans at net interest
rates ranging from 6.9375% to 8.4375% through fiscal year 1999.
II-9
<PAGE>
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, 1998, the Company had unused commitments under the
Chase Credit Agreement of $80,000,000 in the form of revolving loans. In
addition to the liquidity provided by the Chase Credit Agreement, at September
30, 1998, the Company, on a consolidated basis, had available $26,153,000 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, 1998 was $23,396,000. These expenditures were primarily for 34
new cell sites, switch upgrades, increased channel capacity, paging
infrastructure and corporate assets. The Company expects capital expenditures
for fiscal year 1999 to be approximately $42,394,000 to optimize coverage,
upgrade switching capacity, increase channel capacity and for digital upgrades.
Currently, the Company's near-term debt service requirements consist
primarily of interest payments on the indebtedness incurred under the Chase
Credit Agreement. The Company anticipates its cash paid for interest under the
Chase Credit Agreement for fiscal year 1999 will be approximately $58,736,000.
The first principal payment for the Chase term loans is due December 31, 1999.
Additional borrowings under the Chase Credit Agreement may be required if cash
from operating activities is not sufficient to fund cash interest expense. See
"The Credit Agreements" below.
The Company believes operating cash flow, existing cash balances and
borrowing availability under the Chase Credit Agreement will be sufficient to
meet all future anticipated capital requirements of the parent company and its
affiliates and debt service requirements of the Company at both the parent
company level and on a consolidated basis.
Although the Company believes that the foregoing sources of liquidity will
be sufficient to meet budgeted capital expenditures and debt service
requirements of the parent company and the affiliates, there can be no assurance
that this will be the case. In such event, the Company believes it will be able
to satisfy its capital expenditure and debt service requirements with
unrestricted operating cash flow; however, the Company may be 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.
On December 2, 1998 CIFC and the Company borrowed $42,000,000 under the
revolving credit facility to use with existing cash, to purchase affiliate
interests in South Dakota.
CIFC and the Company are currently in compliance with all covenants and
anticipate they will continue to meet the requirements of the Chase Credit
Agreement. Approval may be required from the participants in the Chase Credit
Agreement for waivers or other amendments to the Chase Credit Agreement
requested by CIFC or the Company.
Recently Issued Accounting Standards
- ------------------------------------
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting Comprehensive
Income." SFAS 130 requires companies to disclose comprehensive income and its
components. The Company has not yet completed its evaluation of the impact of
the
II-10
<PAGE>
adoption of SFAS 130. In June 1997, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 131 ("SFAS 131"),
"Disclosures about Segments of an Enterprise and Related Information." SFAS 131
redefines how operating segments are determined and requires disclosure of
certain financial and descriptive information about a company's operating
segments. SFAS 131 is not anticipated to have any impact on the Company. In
June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 requires derivatives to be
carried at fair value. The Company has not yet determined the impact of SFAS
133.
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 in a GAAP operating statement.
<TABLE>
<CAPTION>
Years ended September 30,
----------------------------------------------------------------------------------------
1998 1997 1998 1997 1998 1997
----------------------------------------------------------------------------------------
Combined (1) Financed Proportionate (2) Company Proportionate (3)
-------------------------- -------------------------- ---------------------------
<S> <C> <C> <C> <C> <C> <C>
MANAGED MARKETS
Revenues:
Cellular service $139,515 $126,755 $125,896 $116,238 $106,212 $ 96,034
In-roaming 56,463 46,389 51,222 42,504 44,611 36,023
Equipment sales 3,512 3,969 3,222 3,636 2,786 3,184
-------- -------- -------- -------- -------- --------
Total revenues 199,490 177,113 180,340 162,378 153,609 135,241
Costs and expenses
involving cash:
Cost of sales:
Cellular service
(including in-roaming) 25,176 29,058 23,277 27,027 19,623 22,648
Equipment sales 16,972 14,231 15,376 13,012 13,098 11,193
General and administrative (4) 39,550 35,178 38,710 34,305 31,750 27,307
Marketing and selling 31,030 28,391 28,216 26,123 23,718 21,361
-------- -------- -------- -------- -------- --------
Total cash costs and
expenses 112,728 106,858 105,579 100,467 88,189 82,509
-------- -------- -------- -------- -------- --------
EBITDA $ 86,762 $ 70,255 $ 74,761 $ 61,911 $ 65,420 $ 52,732
======== ======== ======== ======== ======== ========
Capital expenditures $ 23,396 $ 50,548 $ 19,590 $ 47,623 $ 16,009 $ 38,384
Subscriber count 335,881 274,745 301,727 242,975 254,676 204,420
Total markets 56 56 56 56 56 56
NONMANAGED MARKETS
Revenues:
Cellular service
(including in-roaming) $131,792 $119,194 $ 20,918 $ 18,802 $ 15,066 $ 13,761
Equipment sales 7,958 7,453 580 690 474 551
-------- -------- -------- -------- -------- --------
Total revenues 139,750 126,647 21,498 19,492 15,540 14,312
Costs and expenses
involving cash:
Cost of sales:
Cellular service 28,970 25,440 4,153 4,242 2,973 3,114
Equipment sales 12,020 9,665 936 1,171 719 880
General and administrative 25,844 25,276 4,658 4,374 3,215 3,093
Marketing and selling 20,816 26,162 3,783 4,119 2,934 3,188
-------- -------- -------- -------- -------- --------
Total cash costs
and expenses 87,650 86,543 13,530 13,906 9,841 10,275
-------- -------- -------- -------- -------- --------
EBITDA $ 52,100 $ 40,104 $ 7,968 $ 5,586 $ 5,699 $ 4,037
======== ======== ======== ======== ======== ========
Capital expenditures $ 14,621 $ 17,280 $ 1,630 $ 2,177 $ 1,317 $ 1,435
Subscriber count 254,022 194,563 37,436 31,909 27,722 23,559
Total markets 27 26 27 26 27 26
</TABLE>
II-12
<PAGE>
<TABLE>
<CAPTION>
Years ended September 30,
------------------------------
1998 1997
------------------------------
Reconciliation From Company Proportionate EBITDA to Consolidated Net Income (Loss):
<S> <C> <C>
Total proportionate EBITDA (managed and nonmanaged markets) $ 71,119 $ 56,769
Depreciation and amortization (21,928) (17,681)
Interest expense (13,505) (11,203)
Equity in nonlicensee affiliates (1,374) (11,550)
Minority interests 1,167 3,035
Intercompany interest 12,841 10,075
Depreciation and amortization not owned by affiliates (2,043) (2,525)
Unallocated corporate expenses (5,363) (3,052)
Stock-based compensation expense (23,849) -
Gain (loss) on sales of affiliates - 350
Interest expense (net) and other (44,042) (23,186)
Extraordinary charge (33,500) -
-------- --------
Consolidated net income (loss) $(60,477) $ 1,032
======== ========
</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.
(4) Includes certain corporate costs and expenses for Financed and Company
Proportionate.
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.
On April 17, 1998, the Board of Directors of the Company accepted and
approved the replacement of Ernst & Young LLP with Deloitte & Touche LLP as the
Company's independent certified public accountants for the fiscal year ended
September 30, 1998. Ernst & Young LLP was notified of its dismissal on April 21,
1998, and Deloitte & Touche LLP of its engagement.
During the Company's two most recent fiscal years and the subsequent
interim period preceding April 21, 1998, there were no disagreements with Ernst
& Young LLP on any matter of accounting principals or practices, financial
statement disclosure, or auditing scope or procedure, which disagreements, if
not resolved to the satisfaction of Ernst & Young LLP, would have caused that
firm to make reference to the subject matter of the disagreement in connection
with its report.
Ernst & Young LLP's report on the Company's financial statements for the
past two years contained no adverse opinion or disclaimer of opinion and was not
qualified or modified as to uncertainty, audit scope, or accounting principals.
During the Company's two most recent fiscal years and through April 21, 1998,
there were no reportable events (as described in Regulation S-K Item 304
(a)(1)(v)).
During the Company's two most recent fiscal years and through April 21,
1998, the Company has not consulted Deloitte & Touche LLP with respect to any
matter described in Regulation S-K Item 304 (a)(2)(i) and (ii).
The Company has provided Ernst & Young with a copy of the disclosures
contained herein and has requested that Ernst & Young LLP furnish it with a
letter addressed to the Securities and Exchange Commission stating whether it
agrees with the statements made by the Company herein and, if not, stating the
respects in which it does not agree. A copy of Ernst & Young LLP's letter dated
April 27, 1998 is filed as Exhibit 16 to Form 8-K as filed on April 29, 1998.
II-14
<PAGE>
Independent Auditors Report
---------------------------
The Board of Directors and Stockholders
CommNet Cellular Inc.
We have audited the accompanying consolidated balance sheet of CommNet Cellular
Inc. and subsidiaries as of September 30, 1998, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the year then
ended. Our audit also included the financial statement schedules as of and for
the year ended September 30, 1998 listed in the Index at Item 14 (a)(2). These
financial statements and schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedules based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of CommNet
Cellular Inc. and subsidiaries as of September 30, 1998, and the consolidated
results of their operations and their cash flows for the year then ended, in
conformity with generally accepted accounting principles. Also, in our opinion,
such related financial statement schedules, when considered in relation to the
basic consolidated financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Denver, Colorado
December 10, 1998
II-15
<PAGE>
Report of Independent Auditors
------------------------------
The Board of Directors and Stockholders
CommNet Cellular Inc.
We have audited the accompanying consolidated balance sheet of CommNet Cellular
Inc. as of September 30, 1997, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the two years in
the period ended September 30, 1997. Our audits also included the financial
statement schedules listed in the Index at Item 14 (a)(2) as of and for the two
years ended September 30, 1997. These financial statements and schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedules based on our 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)(1)) present fairly, in all material
respects, the consolidated financial position of CommNet Cellular Inc. at
September 30, 1997, and the consolidated results of its operations and its cash
flows for each of the two years in the period ended September 30, 1997, in
conformity with generally accepted accounting principles. Also, in our opinion,
the related financial statement schedules, when considered in relation to the
basic financial statements taken as a whole, present fairly in all material
respects the information set forth therein as of and for the two years ended
September 30, 1997.
ERNST & YOUNG LLP
Denver, Colorado
December 5, 1997
II-16
<PAGE>
COMMNET CELLULAR INC.
CONSOLIDATED BALANCE SHEETS
September 30, 1998 and 1997
(Amounts in thousands, except share data)
<TABLE>
<CAPTION>
ASSETS (Note 4) 1998 1997
- ------ ---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 26,153 $ 14,132
Accounts receivable, net of allowance for
doubtful accounts of $2,487 and $2,122 in
1998 and 1997, respectively 28,051 25,386
Current portion of advances to affiliates 3,438 2,873
Prepaid expenses and other 1,682 1,344
Inventory 4,564 3,214
-------- --------
Total current assets 63,888 46,949
Investment in and advances to affiliates (Notes 2 and 3) 33,637 47,211
Investment in cellular system equipment 3,816 10,243
Property and equipment, at cost:
Cellular system equipment 185,851 159,436
Land, buildings and improvements 35,280 31,688
Furniture and equipment 23,155 19,505
-------- --------
244,286 210,629
Less accumulated depreciation 89,688 66,754
-------- --------
Net property and equipment 154,598 143,875
Other assets, less accumulated amortization of
$37,295 and $36,883 in 1998 and 1997,
respectively (Note 2):
FCC licenses and filing rights 100,380 98,216
Deferred loan costs and other 28,433 6,422
-------- --------
Total other assets 128,813 104,638
-------- --------
$384,752 $352,916
======== ========
</TABLE>
See accompanying notes.
II-17
<PAGE>
COMMNET CELLULAR INC.
CONSOLIDATED BALANCE SHEETS (continued)
September 30, 1998 and 1997
(Amounts in thousands, except share data)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
- ------------------------------------ ---- ----
<S> <C> <C>
Current liabilities:
Accounts payable - trade $ 4,954 $ 7,695
Accounts payable - property and equipment purchases 3,675 8,228
Accrued commissions 953 1,118
Accrued interconnect costs 1,741 1,851
Accrued operating taxes 3,891 2,809
Other accrued liabilities 8,188 5,988
Interest payable 2,421 2,302
Current portion of long-term debt - 1,118
--------- ---------
Total current liabilities 25,823 31,109
Long-term debt:
Secured bank financing (Note 4) 680,000 8,803
Note payable and other long-term debt (Note 4) 2,916 2,916
11 3/4% senior subordinated discount notes (Note 5) 83 159,133
11 1/4% subordinated notes (Note 5) - 80,000
Minority interests 11,378 9,055
Commitments and contingencies (Note 6)
Stockholders' equity
(Notes 2, 4, 8, 9, and 10):
Preferred Stock, $.01 par value; 1,000,000 shares
authorized; no shares issued - -
Common Stock, $.001 par value; 40,000,000 shares
authorized; 22,662,985 and 68,926,055 shares issued
at September 30, 1998 and 1997, respectively 5 14
Capital in excess of par value 307,271 165,989
Deferred compensation to employees (2,661) -
Accumulated deficit (640,063) (104,103)
--------- ---------
Total stockholders' equity (335,448) 61,900
--------- ---------
$ 384,752 $ 352,916
========= =========
</TABLE>
See accompanying notes.
II-18
<PAGE>
COMMNET CELLULAR INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended September 30, 1998, 1997 and 1996
(Amounts in thousands, except share and per share data)
<TABLE>
<CAPTION>
Revenues: 1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Service $ 118,757 $ 107,383 $ 82,799
In-roaming 49,325 39,881 29,588
Equipment sales 3,353 3,603 2,809
----------- ----------- -----------
171,435 150,867 115,196
Costs and expenses:
Operations:
Cost of service 24,429 28,108 21,577
Cost of equipment sales 14,971 12,609 10,588
General and administrative 34,023 30,343 23,038
Marketing and selling 27,482 23,437 20,920
Depreciation and amortization 25,182 20,461 18,149
Corporate:
General and administrative (Note 8) 32,063 5,431 7,346
Depreciation and amortization 1,454 1,655 1,601
Less amounts allocated to
nonconsolidated affiliates (8,753) (6,416) (6,466)
----------- ----------- -----------
150,851 115,628 96,753
----------- ----------- -----------
Operating income 20,584 35,239 18,443
Equity in net income (loss) of affiliates (Note 3) 5,127 (7,589) (1,636)
Minority interest in net income of
consolidated affiliates (5,701) (2,964) (1,123)
Gains (losses) on sales of affiliates and other (Note 2) - 350 (250)
Amortization of deferred costs (2,651) (1,072) (2,090)
Interest expense (49,212) (29,464) (28,208)
Interest income (Note 3) 4,876 6,532 10,468
----------- ----------- -----------
Income (loss) before extraordinary charge (26,977) 1,032 (4,396)
Extraordinary charge related to early
extinguishment of long-term debt (Note 5) (33,500) - -
----------- ----------- -----------
Net income (loss) $ (60,477) $ 1,032 $ (4,396)
----------- ----------- -----------
Basic and diluted income (loss) per common share:
Income (loss) before extraordinary charge $(0.68) $.01 $(0.06)
Extraordinary charge (0.85) - -
----------- ----------- -----------
Basic and diluted net income (loss) per
common share $(1.53) $.01 $(0.06)
=========== =========== ===========
Weighted average common shares outstanding 39,397,393 68,835,650 68,636,015
=========== =========== ===========
</TABLE>
See accompanying notes.
II-19
<PAGE>
COMMNET CELLULAR INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended September 30, 1996, 1997 and 1998
(Amounts in thousands, except share data)
<TABLE>
<CAPTION>
Deferred
Compensation
Capital in Related to
Common Stock Excess of Employee Accumulated
Shares Amount Par Value Options Deficit
------------ ------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Balance at October 1, 1995 67,214,835 $ 13 $159,382 $ - $(100,739)
Exercise of options 240,000 - 978 - -
Debenture and note
conversion 1,000,000 1 2,908 - -
Issuance of Common Stock -
acquisitions (Note 2) 958,930 - 5,506 - -
Issuance of Common Stock -
ESOP (Note 9) 122,435 - 707 - -
Common Stock repurchased (237,500) - (1,378) -
Net loss - - - - (4,396)
----------- ------ -------- ------------ -----------
Balance at September 30, 1996 69,298,700 14 168,103 - (105,135)
Exercise of options 53,750 - 221 - -
Issuance of Common Stock -
ESOP (Note 9) 83,605 - 598 - -
Common Stock repurchased (510,000) - (2,933) - -
Net income - - - - 1,032
----------- ------ -------- ------------ -----------
Balance at September 30, 1997 68,926,055 14 165,989 - (104,103)
Exercise of options 82,220 - 352 - -
New share issued in connection
with the Merger (Note 12) 19,695,835 4 141,806 - -
Conversion of shares to cash in
connection with the Merger (66,041,125) (13) - - (475,483)
Stock offering costs - - (13,986) - -
Stock-based compensation (Note 8) - - 13,110 (2,661) -
Net loss - - - - (60,477)
----------- ------ -------- ------------ -----------
Balance at September 30, 1998 22,662,985 $ 5 $307,271 $(2,661) $(640,063)
=========== ====== ======== ============ ===========
</TABLE>
See accompanying notes.
II-20
<PAGE>
COMMNET CELLULAR INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended September 30, 1998, 1997 and 1996
(Amounts in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Operating activities:
Net income (loss) $(60,477) $ 1,032 $(4,396)
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities:
Extraordinary charge related to early
extinguishment of long-term debt 33,500 - -
Minority interests 5,701 2,964 1,123
Compensation expense related
to ESOP and option grants - 598 707
Depreciation 23,930 19,266 16,933
Amortization 5,357 3,922 4,907
Equity in net loss (income) of affiliates (5,127) 7,589 1,636
Losses (gains) on sales of affiliates
and other - (350) 250
Interest expense on 11 3/4%
senior discount notes 6,614 17,170 15,318
Stock-based compensation expense 10,449 - -
CoBank patronage income - (99) (289)
Accrued interest on advances to
affiliates (3,709) (5,833) (8,738)
Change in operating assets and liabilities,
net of effects from consolidating acquired
interests (Note 2):
Accounts receivable (1,948) (5,453) (5,435)
Inventory (1,350) (508) (418)
Prepaid expenses and other (278) (101) (600)
Accounts payable and
accrued liabilities 250 8,688 462
Interest payable 119 (254) (709)
-------- ------- -------
Net cash provided by operating activities 13,031 48,631 20,751
</TABLE>
See accompanying notes.
II-21
<PAGE>
COMMNET CELLULAR INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Years ended September 30, 1998, 1997 and 1996
(Amounts in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Investing activities:
Reductions in (additions to) investments
in and advances to affiliates, net $ 21,451 $ 8,480 $ (4,112)
Additions to property and equipment
and investment in cellular system
equipment (28,437) (37,363) (32,320)
Reductions in (additions to) other assets (1,672) (1,335) 58
Proceeds from sales of interests in
affiliates (Note 2) - 829 614
Purchase of interests in affiliates, net
of cash acquired and net of assets
and liabilities recorded due to
consolidation (Note 2) (9,300) (924) (3,676)
Purchases of available-for-sale
securities - - (987)
Sales of available-for-sale
securities - - 987
-------- -------- --------
Net cash used by investing activities (17,958) (30,313) (39,436)
</TABLE>
See accompanying notes.
II-22
<PAGE>
COMMNET CELLULAR INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Years ended September 30, 1998, 1997 and 1996
(Amounts in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Financing activities:
Proceeds from secured bank financing $ 695,000 $ 43,336 $ 16,250
Payments of secured bank financing (24,765) (57,763) (28,270)
Payment of 11 3/4% senior subordinated
discount notes (165,662) - -
Payment of 11 1/4% subordinated notes (80,000) - -
Extraordinary charge related to early
extinguishment of long-term debt (29,015) - -
Loan fees and offering costs related
to long-term debt (26,699) - -
Reductions of obligation under capital leases (158) (301) (308)
Additions to notes payable - - 2,916
Distributions to minority interest (4,433) (2,349) (1,029)
Capital contributions from minority interest - 4,111 -
Issuance of Common Stock, net of
offering costs 128,176 221 978
Repurchases of Common Stock - (2,933) (1,378)
Conversion of Common Stock in connection
with the Merger (475,496) - -
--------- -------- --------
Net cash (used) provided by financing
activities 16,948 (15,678) (10,841)
--------- -------- --------
Net increase (decrease) in cash and
cash equivalents 12,021 2,640 (29,526)
Cash and cash equivalents at beginning
of year 14,132 11,492 41,018
--------- -------- --------
Cash and cash equivalents at end of year $ 26,153 $ 14,132 $ 11,492
========= ======== ========
</TABLE>
See accompanying notes.
II-23
<PAGE>
COMMNET CELLULAR INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Years ended September 30, 1998, 1997 and 1996
(Amounts in thousands)
Supplemental schedule of additional cash flow information and noncash
activities:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash paid for interest $42,479 $12,548 $14,012
Purchase of cellular system equipment
through accounts payable 3,675 8,228 2,116
Purchases of interests in affiliates by
issuance of Common Stock - - 5,506
Conversion of convertible subordinated
debentures and notes to Common Stock - - 2,909
</TABLE>
See accompanying notes.
II-24
<PAGE>
COMMNET CELLULAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of significant accounting policies
------------------------------------------
Organization and basis of presentation
CommNet Cellular Inc. and its majority-owned affiliates (the "Company")
operates, manages and finances cellular telephone systems principally in the
mountain and plains regions of the United States. Cellular telephone systems
are capable of providing a wide variety of telecommunication services including
high quality wireless local and long-distance telephone service within a
specified market area through mobile, portable or fixed telephone equipment.
The Federal Communications Commission ("FCC") initially granted only two
licenses in each cellular market area, one to a telephone company with an
exchange presence in the area ("wireline" license), and one to an entity other
than a telephone company ("nonwireline" license).
The Company initially acquired its cellular interests by participating in
the wireline licensing process conducted by the FCC. In order to participate in
that process, the Company formed affiliates which were originally owned at least
51% by one or more independent telephone companies and no more than 49% by the
Company. In addition to obtaining interests in cellular markets through
participation in the FCC licensing process, the Company also has purchased
direct interests in additional markets in order to expand the network.
All entities in which the Company has greater than a 50% interest are
consolidated. All entities in which the Company has a 50% or less but 20% or
greater interest are accounted for under the equity method. All entities in
which the Company has less than a 20% interest are accounted for under the cost
method.
The Company and its affiliates owned interests in the following markets as
of September 30, 1998:
<TABLE>
<CAPTION>
Net Company
MSA or Interest in
RSA Code (1) State Licensee (2)
-------------- ------------------- ------------
<C> <S> <C> <C>
MSAs: 167 Duluth, MN - WI 16.34%
206 Terre Haute, IN 16.67%
241 Pueblo, CO 73.99%
253 Sioux City, IA 74.50%
267 Sioux Falls, SD 51.00%
268 Billings, MT 91.63%
283 Lewiston-Auburn, ME 11.11%
289 Rapid City, SD 100.00%
297 Great Falls, MT 91.63%
298 Bismarck, ND 51.00%
</TABLE>
II-25
<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 100.00%
349 Colorado 61.75%
351 Colorado 61.75%
352 Colorado 66.00%
353 Colorado 100.00%
354 Colorado (B1) 69.40%
355 Colorado 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 50.00%
425 Iowa 13.28%
426 Iowa 49.14%
427 Iowa 49.17%
428 Kansas 4.11%
429 Kansas 4.11%
430 Kansas 4.11%
431 Kansas 4.11%
432 Kansas 4.11%
433 Kansas 4.11%
434 Kansas 4.11%
435 Kansas 4.11%
436 Kansas 4.11%
437 Kansas 4.11%
438 Kansas 4.11%
439 Kansas 4.11%
440 Kansas 4.11%
441 Kansas 4.11%
442 Kansas 4.11%
512 Missouri (B1) 14.70%
523 Montana (B1) 91.63%
523 Montana (B2) 91.63%
524 Montana (B1) 91.63%
526 Montana (B1) 91.63%
II-26
<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)
- -------------- ------------------- ------------
527 Montana 91.63%
528 Montana 91.63%
529 Montana 91.63%
530 Montana 91.63%
531 Montana 91.63%
532 Montana 91.63%
553 New Mexico (B2) 58.36%
555 New Mexico 12.25%
557 New Mexico 16.33%
580 North Dakota 53.36%
581 North Dakota 65.06%
582 North Dakota 41.45%
583 North Dakota 49.00%
584 North Dakota 61.75%
634 South Dakota 100.00%
635 South Dakota 100.00%
636 South Dakota 100.00%
638 South Dakota (B1) 100.00%
638 South Dakota (B2) 100.00%
639 South Dakota (B1) 100.00%
639 South Dakota (B2) 100.00%
640 South Dakota 64.49%
641 South Dakota 61.13%
642 South Dakota 49.00%
675 Utah 100.00%
676 Utah 100.00%
677 Utah (B3) 100.00%
678 Utah 80.00%
718 Wyoming 66.00%
719 Wyoming 100.00%
720 Wyoming 100.00%
(1) Metropolitan Statistical Area ("MSA") rankings are based on population
as established by the FCC. Rural Service Areas ("RSAs") have been
numbered by the FCC alphabetically by state.
(2) Represents the net ownership interest held by the Company in the
licensee for the respective market.
II-27
<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 are recognized by the Company only when other
stockholders or partners provide funding to the affiliates or the underlying
affiliate has attained a positive accumulated earnings position.
For those affiliates which do not have other stockholders or partners which
provide funding to the affiliates and the underlying affiliate has not attained
a positive accumulated earnings position, the Company records all operating
losses, recognizing that the minority interests have no funding obligation. The
Company also recognizes all operating income from these affiliates until the
underlying affiliate has attained a positive accumulated earnings position.
Use of estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and cash equivalents
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
Accounts receivable
The Company performs credit evaluations of its customers' financial
condition prior to initial activation and generally does not require collateral.
Receivables generally are due within 30 days. The Company's provision for
doubtful accounts receivable was approximately $2,487,000, $3,789,000 and
$1,231,000 for the years ended September 30, 1998, 1997 and 1996, respectively.
Inventory
Inventories are stated at the lower of cost (first-in, first-out) or market
and are comprised of cellular communication equipment and accessories held for
resale to the Company's subscribers.
Investment in cellular system equipment
Investment in cellular system equipment relates to cellular system
equipment under construction or held in inventory at the Company's warehouse
facility.
II-28
<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. As of October 1, 1996, the date of adoption, and as of September
30, 1997 and 1998, management believes that there was not any impairment of the
Company's long-lived assets or any other such identifiable assets.
Deferred debt issuance costs
Deferred debt issuance costs relate to the offerings of senior notes and to
loan agreements (see Notes 4 and 5). These costs are being amortized over the
respective terms of the notes and loans.
FCC licenses and filing rights
FCC licenses represent the costs of the FCC licenses acquired by
consolidated affiliates. Filing rights represent costs associated with
acquiring the rights to file for cellular telephone licenses. The excess of the
purchase price of affiliate interests acquired over the fair market value of the
related net assets acquired is included as the cost of FCC licenses and filing
rights and is amortized over 40 years from the date of acquisition.
Revenue recognition
Cellular service revenues based upon subscriber usage are recognized at the
time service is provided. Access and special feature cellular service revenues
are recognized when earned. Equipment sales are recognized at the time
equipment is delivered to the subscriber or to an unaffiliated agent.
Cost of equipment sold
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-29
<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 indirect costs related to cell site
construction. As a result, the Company capitalized $1,975,000, $2,870,000 and
$1,937,000 for the years ended September 30, 1998, 1997 and 1996, respectively,
which is included in property and equipment, and investment in cellular system
equipment. In addition, the Company allocated $303,000, $749,000 and $429,000
to nonconsolidated affiliates for the years ended September 30, 1998, 1997 and
1996, respectively.
Advertising
The Company expenses advertising costs as incurred. Advertising expense
was approximately $7,109,000, $4,453,000 and $2,825,000 for the years ended
September 30, 1998, 1997 and 1996, respectively.
Income taxes
A current or deferred income tax asset or liability is recognized for
temporary differences which exist due to recognition of certain income and
expense items for financial reporting purposes in periods different than for tax
reporting purposes.
Earnings per common share
The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings per Share," ("SFAS No. 128") in fiscal 1998. SFAS No. 128 requires
retroactive restatement of earnings per share data for all years presented. In
accordance with SFAS No. 128, the increase in weighted average common shares
assuming dilution is due to the application of the treasury share method for
outstanding stock options. The application of the treasury share method resulted
in an additional 1,486,000, 8,116,000, and 6,752,000 weighted average shares for
1998, 1997 and 1996 respectively. However, diluted earnings per share are not
presented as the effect is anti-dilutive.
The Company split its Common Stock 5 for 1, with shareholders receiving
four additional shares for each share owned as of April 20, 1998, the record
date for the split. The payment date was May 7, 1998. Accordingly, all share
and earnings per share information has been restated to give effect to the
split. Prior year issued shares are restated as if the stock split occurred
prior to September 30, 1997, although the Company's Articles of Incorporation
would not have permitted such an action.
Related party transactions
As a result of the Merger, the Company entered into a monitoring agreement
with its majority shareholder, effective February 10, 1998 requiring a $500,000
annual payment. During the year ended September 30, 1998, the Company incurred
$362,000 of expense under the agreement. In addition, certain members of
management have entered into an agreement with the majority shareholder whereby
they will receive consideration upon the attainment of certain financial
measures as defined in the agreement.
During the year ended September 30, 1998, the Company paid $1,104,000 to a
minority shareholder for consulting services. No such expenses were incurred
during the years ended September 30, 1997 and 1996.
II-30
<PAGE>
COMMNET CELLULAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of significant accounting policies (continued)
------------------------------------------
Certain reclassifications
Certain reclassifications have been made to the 1996 and 1997 financial
statements to conform with the 1998 financial statement presentation.
2. Business acquisitions and dispositions
--------------------------------------
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.
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. During fiscal 1997, the
Company wrote off its investment in TVX, Inc. recognizing an approximate
$3,288,000 charge reflected in equity in net loss of affiliates. TVX, Inc.
ceased operations during the third fiscal quarter of 1997.
1997
In January 1997, the Company purchased an additional 15% in one previously
nonmanaged RSA for approximately $876,000 in cash. The Company assumed
management of this market upon consummation of the transaction.
II-31
<PAGE>
COMMNET CELLULAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Business acquisitions and dispositions (continued)
--------------------------------------
In April 1997, the Company sold a 10% interest in one of its managed MSA
markets to a partner in such market for approximately $436,000 in cash, pursuant
to an option granted at the time of the Company's purchase of such market. In
June 1997 the Company sold an additional 9% interest in this market to the same
partner for approximately $393,000 in cash.
1998
In April 1998, the Company purchased an additional 90% interest in one
managed RSA market for $9,000,000 in cash.
In May 1998, the Company purchased an additional 16% interest in one
managed RSA market for $300,000 in cash.
In December 1998, the Company purchased substantially all of the
independent telco interests in three managed RSA markets and one managed MSA
market in South Dakota for approximately $56,100,000.
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:
<TABLE>
<CAPTION>
Years ended September 30,
---------------------------------------------
1998 1997 1996
---- ---- ----
(Amounts in thousands, except per share data)
<S> <C> <C> <C>
Revenues $178,616 $158,585 $118,603
Equity in net income (loss) of affiliates 4,302 (8,204) (1,933)
Income (loss) before extraordinary charge (26,051) 1,936 (5,694)
Net income (loss) (59,551) 1,936 (5,694)
Basic and diluted net income (loss)
per common share (1.51) .03 (.08)
</TABLE>
3. Investment in and advances to affiliates
----------------------------------------
Investment in and advances to the Company's nonconsolidated affiliates
consisted of the following:
September 30,
------------------------
1998 1997
----------- -----------
(Amounts in thousands)
Investment $ 15,704 $ 22,912
Equity in loss cumulative (10,031) (28,629)
Advances and other 31,402 55,801
-------- --------
$ 37,075 $ 50,084
======== ========
II-32
<PAGE>
COMMNET CELLULAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Investment in and advances to affiliates
----------------------------------------
The combined financial position of the nonconsolidated affiliates is as
follows:
<TABLE>
<CAPTION>
September 30,
-------------------------
1998 1997
-------------- ---------
(Amounts in thousands)
<S> <C> <C>
Current assets $ 9,782 $ 8,315
Investment in affiliated limited partnerships 8,973 9,229
Property and equipment, net of accumulated
depreciation 16,917 19,179
Other assets 2,031 3,582
-------- --------
Total assets $ 37,703 $ 40,305
======== ========
Due to CommNet Cellular Inc. $ 854 $ 14,883
Due to Cellular, Inc. Financial Corporation 23,210 38,464
Other liabilities 5,382 6,577
Minority interests 1,020 842
Owners' equity (deficit) 7,237 (20,461)
-------- --------
Total liabilities and owners' equity (deficit) $ 37,703 $ 40,305
======== ========
</TABLE>
Combined operations of these nonconsolidated affiliates are summarized as
follows:
<TABLE>
<CAPTION>
Years ended September 30,
-----------------------------------
1998 1997 1996
-------- -------- --------
(Amounts in thousands)
<S> <C> <C> <C>
Revenues $ 29,571 $ 28,539 $ 21,826
Operating costs (21,653) (33,729) (29,262)
Minority interests (663) (486) (276)
Equity in income of affiliates 4,077 2,445 3,811
-------- -------- --------
Net income (loss) $ 11,332 $ (3,231) $ (3,901)
======== ======== ========
</TABLE>
Interest income on advances to affiliates was $3,709,000, $5,833,000 and
$8,738,000 for the years ended September 30, 1998, 1997 and 1996, respectively.
Certain advances to affiliates bear interest at the prime rate of Norwest
Bank (8.25% at September 30, 1998, 8.50% at September 30, 1997 and 8.25% at
September 30, 1996) plus 2%. These advances to and receivables from affiliates
are temporary in nature, and are generally refinanced under loan agreements with
Cellular Inc. Financial Corporation, a wholly-owned subsidiary of the Company
("CIFC"). The CIFC loans generally bear interest at the 90-day LIBOR rate plus
a margin (determined based upon the affiliates' leverage ratio) and will be
repaid from income derived from the operation of the cellular system or income
derived from the affiliates' interest in the licensee providing cellular
service.
II-33
<PAGE>
COMMNET CELLULAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Secured bank financing and note payable
---------------------------------------
At September 30, 1997 CIFC had borrowed $9,762,000 under the CoBank credit
facility of which $976,000 was classified as current. At September 30, 1997
interest was payable at prime plus .25% for variable rate loans or LIBOR plus
1.75% for fixed rate loans. At September 30, 1997, loans were fixed for terms
ranging from one to three months at an average rate of 7.41%.
On September 18, 1997, the Company and CIFC entered into a secured
financing agreement with The Chase Manhattan Bank as administrative agent and
collateral agent, Chase Manhattan Bank Delaware, as rating bank, and the other
lenders named therein (the "Chase Credit Agreement") which provides for
aggregate credit commitments of up to $760 million. All obligations of CIFC and
the Company's wholly-owned subsidiaries (the "guarantors") under the Chase
Credit Agreement will be secured by first priority security interests in
substantially all tangible and intangible assets, trademarks, tradenames and
equipment of CIFC and the guarantors. CIFC's assets totaled approximately
$294,235,000 and $252,451,000 at September 30, 1998 and 1997, respectively. In
addition, the Chase Credit Agreement is secured by a first priority security
interest in substantially all of the assets held by CommNet Cellular Inc. and
certain of its wholly-owned subsidiaries, to the extent CommNet Cellular Inc.
and such subsidiaries have the legal ability to pledge such assets. The Chase
Credit Agreement includes limitations on dividends and distributions on common
stock and other significant operating and financial restrictions and covenants,
including limits on the ability of the Company and its subsidiaries to incur or
prepay indebtedness, create liens, enter into leases or transactions with
affiliates, sell assets, engage in mergers or acquisitions, make investments,
and redeem or repurchase common stock or debt.
Of the $760 million available under the Chase Credit Agreement, $680
million is comprised of term loans and $80 million is a revolver. On February
10, 1998 the entire term loan facility was borrowed by CIFC and remained
outstanding at September 30, 1998. Quarterly amortized principal payments on
the term loans begin December 31, 1999 with the final principal payment due
September 30, 2007. At September 30, 1998, interest was payable at prime plus
margins ranging from 1.00% to 2.50%. Interest rate margins are determined for
$200 million of the term loans and revolving loans based on the Company's
leverage ratio and are set at three levels for the remaining $480 million of
term loans. A commitment fee is payable by CIFC under the Chase Credit Agreement
on the average daily unborrowed commitment. At September 30, 1998, the
commitment fee was .5% per annum.
As mandated by the Chase Credit Agreement, the Company has fixed the
interest rates on $408,000,000 of the borrowings through interest rate
protection agreements in the form of one interest rate collar and two interest
rate swaps with Chase. These agreements effectively reduce the interest rate
exposure of the Company, and are accounted for as effective interest rate
hedges. On October 19, 1998, CIFC fixed interest rates on the term loans for a
one-year period at an average interest rate of 7.81%.
One consolidated affiliate of the Company has entered into a financing
arrangement with First Union National Bank (formally 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, 1998 and September
30, 1997, the affiliate had borrowed $2,916,000 at an interest rate of 7.00% and
7.56%, respectively.
Aggregate maturities of the secured bank financing and note payable for
each of the next five years ending September 30 are as follows: 1999 - $0; 2000
- - $6,091,000; 2001 - $22,425,000; 2002 - $35,300,000; 2003 - $40,384,000; 2004
and thereafter - $578,800,000.
II-34
<PAGE>
COMMNET CELLULAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Senior and subordinated debt
----------------------------
In September 1993, the Company completed an offering of $176,651,000
aggregate principal amount of 11 3/4% Senior Subordinated Discount Notes Due
2003. The notes were issued at a substantial discount from their principal
amount resulting in gross proceeds to the Company of approximately $100,000,000.
After deducting offering costs, net proceeds were $96,740,000. The notes are
general unsecured obligations of the Company and are subordinate in right of
payment to all Senior Debt of the Company. From September 1993 through August
1998 interest will accrete into the principal balance. 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.
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.
On February 10, 1998, the Company repurchased approximately $176,600,000 of
the approximately $176,700,000 aggregate principal amount of its 11 3/4% Senior
Subordinated Discount Notes and all of the $80,000,000 aggregate principal
amount of its 11 1/4% Subordinated Notes in connection with the Merger (See Note
12.). As a result of the extinguishments, the Company recorded a $33,500,000
extraordinary charge during the fiscal year ended September 30, 1998 primarily
as a result of prepayment call premiums.
6. Commitments and contingencies
-----------------------------
The Company leases office space and equipment under agreements which
provide for rental payments. Certain of these lease agreements contain renewal
option clauses. Rent expense was $6,368,000, $5,266,000 and $3,798,000 for the
years ended September 30, 1998, 1997 and 1996, respectively.
The aggregate annual rental commitment as of September 30, 1998 is as
follows (amounts in thousands):
1999 $ 4,370
2000 3,267
2001 2,873
2002 2,394
2003 1,480
Future years 7,008
-------
$21,392
=======
II-35
<PAGE>
COMMNET CELLULAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Commitments and contingencies (continued)
-----------------------------
On May 15, 1989, the Company adopted a retirement savings plan (pursuant to
Section 401(k) under the Internal Revenue Code) providing for a deferred
compensation and Company matching provision. Under the plan, all full-time
employees are permitted to contribute up to 15% of gross compensation, subject
to certain limitations into the retirement plan and the Company will match at
the minimum 25% of each employee's contribution up to 6% of the employee's
eligible compensation. During the years ended September 30, 1998, 1997 and
1996, the Company contributed $223,000, $189,000 and $84,000, respectively as
matching contributions.
On January 31, 1996, the Company entered into two Option to Sell Agreements
as part of the New Mexico 1 RSA transaction pursuant to which the minority
owners in that market can require the Company to purchase their interests at a
price based upon a multiple of EBITDA. If the transaction occurs after January
1, 2001, the minimum purchase price will be $10,000,000, plus any capital
contributed by the minority owners subsequent to October 1, 1995.
On October 22, 1997, The Rye Telephone Company ("Rye"), a shareholder in
Pueblo Cellular, Inc. ("Pueblo") filed an action in the District Court, Pueblo
County, State of Colorado, against the Company. The lawsuit alleged intentional
interference with contract, breach of contract and breach of covenant of good
faith in connection with a proposed sale of shares in Pueblo by Rye and Pine
Drive Telephone Company ("Pine Drive") and a related lawsuit filed by the
Company against Pine Drive in Arapahoe County court. The court granted the
Company's motion for a directed verdict in favor of the Company. Rye has
appealed this decision to the Colorado Court of Appeals. Rye seeks, among other
things, general and specific damages of not less than $5,493,840, exemplary
damages, fees and costs. The Company intends to defend the lawsuit vigorously.
Former employees of CommNet Cellular Inc., Homer Hoe and Amy M. Shapiro are
claiming $963,000 and $551,000 respectively plus 12 months' of benefits against
the Company for payments which they allege are due under change-in-control
agreements that they allege were triggered by the Merger (See Note 12.). The
Company is defending this case which has been submitted to binding arbitration.
Hearing has been set for March 9-11, 1999. The Company is vigorously defending
this action.
On May 29, 1997 a lawsuit was filed on behalf of all the stockholders of
CommNet Cellular Inc. alleging improper acts by the officers and directors of
CommNet Cellular Inc. with respect to the merger between CommNet Cellular Inc.
and AV Acquisition Corporation (Blackstone) and seek unspecified damages. The
parties have entered into a Memorandum of Understanding settling this case for
payment by CommNet Cellular Inc. of $450,000 to Plaintiff's attorneys to cover
their fees and costs. CommNet has also agreed to pay up to $250 in broker's
fees to any class member who wishes to purchase additional CommNet Cellular Inc.
stock and to obtain a fairness opinion prior to engaging in any merger where the
Shares held by the public shareholders are converted into cash or other
consideration. Insurance carriers for CommNet have agreed to pay $400,000 to
CommNet Cellular Inc. as payment of CommNet's claim under its D&O policy.
Notices have been sent to members of the class. Once the class members have had
an opportunity to respond, the court may approve the settlement as final.
II-36
<PAGE>
COMMNET CELLULAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Income taxes
------------
At September 30, 1998, the Company had cumulative NOL carryforwards of
$157,593,000 for income tax purposes and tax credit carryforwards of $942,000.
On February 10, 1998, the Company experienced an ownership change as defined
under Internal Revenue Code (S)382. Accordingly, the pre-change NOL of
$86,379,000 will be limited in utilization to $10,775,000 per year plus any
adjustments necessary under (S)382. If not offset against taxable income, the
tax loss carryforwards will expire between 2001 and 2018 and the tax credit
carryforwards, if not offset against regular taxes, will expire between 2008 and
2018. There was no income tax provision for the years ended September 30, 1998,
1997 and 1996 as a result of net operating losses.
As of September 30, 1998 and 1997, the Company's net deferred tax asset has
been fully reserved with a valuation allowance. Significant components of the
Company's deferred tax assets and liabilities are as follows:
September 30,
------------------------
1998 1997
----------- -----------
(Amounts in thousands)
Deferred tax assets:
Net operating loss carryforwards $ 59,886 $ 17,163
Tax credit carryforwards 942 993
Intangible assets 6,912 7,684
Inventory 249 491
Accrued liabilities 412 270
Interest expense on 11 3/4% discount notes - 22,471
Other, net 324 349
Other capitalized costs, net 10,901 2,700
-------- --------
Total deferred tax assets 79,626 52,121
-------- --------
Deferred tax liabilities:
License costs 23,952 21,928
Equity method investments 5,599 1,912
Property and equipment 8,137 5,619
-------- --------
Total deferred tax liabilities 37,688 29,459
-------- --------
Net deferred tax asset 41,938 22,662
Valuation allowance (41,938) (22,662)
-------- --------
Net deferred taxes $ - $ -
======== ========
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:
<TABLE>
<CAPTION>
Years ended September 30,
--------------------------
1998 1997 1996
--------- ---- ----
(Amounts in thousands)
<S> <C> <C> <C>
Income tax provision (benefit) at federal
statutory rate $(20,964) $ 361 $(1,539)
Benefit of tax losses not recognized 20,964 - 1,539
Benefit due to utilization of regular tax
NOL carryforwards - (361) -
-------- ------- --------
Total income tax expense $ - $ - $ -
======== ======= ========
</TABLE>
8. Common Stock options
--------------------
The Company adopted an Omnibus Stock and Incentive Plan, effective November
1, 1991, pursuant to which 500,000 shares of the Company's Common Stock were
reserved for issuance pursuant to Options, Stock Appreciation Rights, Stock
Bonuses or Phantom Stock Rights. In February 1993, the Company's shareholders
approved an additional 500,000 shares of the Company's Common Stock to be
reserved for issuance pursuant to the Omnibus Stock and Incentive Plan plus 1%
of the number of shares outstanding at the end of each fiscal year commencing
October 1, 1993. In February 1995, the Company's shareholders approved an
additional 750,000 shares of the Company's Common Stock to be reserved for
issuance under this plan.
II-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>
Weighted
Omnibus Stock Average
and Amended Exercise Exercise
Incentive Plan Plan Price Range Price
------------------- ------------------- ---------------------- ------------------
<S> <C> <C> <C> <C>
Outstanding options at September
30, 1996 8,006,875 $2.35 - $5.125 $4.524
Granted 1,476,250 $5.875 $5.875
Forfeitures (44,375)
Exercised (53,750) $2.60 - $5.125 $4.854
----------
Outstanding options at September
30, 1997 9,385,000 $2.35 - $5.875 $4.742
Granted -
Forfeitures -
Exercised (82,220) $0.84 - $5.875
Transfer to amended plan (4,835,225) 4,835,225
Options canceled per Merger (4,359,805) (3,237,275)
---------- ------------------
Options outstanding at September
30, 1998 107,750 1,597,950 $0.84 - $3.162 $ 1.42
========== ==================
Options available for grant at
September 30, 1998 - -
========== ==================
</TABLE>
In September 1995, the Company granted options to purchase 300,000 shares
of Common Stock to a former officer at an exercise price of $6.075. These
options are exercisable over a period of four years from the date of grant. In
June 1996, options to purchase 150,000 of these shares were canceled. The
remaining 150,000 shares were canceled per the Merger agreement.
II-39
<PAGE>
COMMNET CELLULAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. Common Stock options (continued)
--------------------
On October 1, 1996, the Company granted options to purchase 4,500 shares of
Common Stock to three key agents, under the Key Agent Stock Option Plan, at a
price of $5.775. These 4,500 shares were canceled per the Merger.
Stock-based compensation
The Company applies APB Opinion 25 ("APB 25"), "Accounting for Stock Issued
to Employees" and related interpretations in accounting for its plan. Under APB
25, no compensation expense is recognized for options granted to employees which
are at or above market value.
During the year ended September 30, 1998, the Company and certain option
holders negotiated certain changes to the terms of option agreements affecting
most, but not all of the outstanding options. A portion of the vested value of
the options were paid in cash based on the price of common shares on the date of
Merger and, pursuant to APB 25, 13,400,000 of compensation expense was recorded
in February 1998. In addition options outstanding that were not paid in cash on
the date of the Merger were changed such that the expiration date of options was
extended from ten years after date of grant to February 5, 2008. However, any
appreciation in the value of an option due to increases in the value of Common
Stock over $36 per share (the value of a share of Common Stock on February 10,
1998, the date of the Merger) became subjected to vesting over six years, with a
limit on vesting of 75% of such appreciation until a liquidation event as
defined in the replacement stock option agreements. In addition, the number of
options and exercise prices were reduced such that the value of unexercised
options on February 10, 1998 remained constant and the number of shares subject
to all options held by participants bore the same relationship to the total
number of shares of common stock outstanding on a fully-diluted basis after the
Merger. These changes created a new measurement date for options in a
transaction not involving cash, resulting in recognition of $12,652,000 of
compensation recorded as capital in excess of par value and $10,400,000 recorded
in the current fiscal year as compensation expense. The excess $2,252,000 of
compensation has been recorded as a component of equity and will be recognized
as compensation expense ratably over the vesting period.
Had compensation cost for the company's stock-based compensation plans been
determined based on the fair value at the grant dates for awards under those
plans consistent with the method of Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation," ("SFAS 123") the Company's
pro forma net income and earnings per share would have been as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------- -------- --------
<S> <C> <C> <C>
Pro forma net loss $(60,101) $(9,798) $(5,607)
Pro forma basic and diluted loss per share $ (1.53) $ (.14) $ (.08)
</TABLE>
Pro forma information regarding net loss and loss per share is required by
Statement No. 123, and has been determined as if the Company had accounted for
its employees stock options under the fair value method of that Statement. The
fair value for these options was estimated at the date of grant using a Black-
Scholes option pricing model with the following weighted average assumptions for
1998, 1997 and 1996, respectively: risk-free interest rates of 4.67%, 6.10% and
5.85%; dividend yields of 0%; volatility factors of the expected market price of
the Company's Common Stock of .41, .36 and .39; and a weighted average expected
life of the option of six years for 1998 and eight years for 1997 and 1996. The
weighted average fair value of options granted during the years ended September
30, 1998, 1997 and 1996 was $28.90, $15.68 and $14.01, respectively.
II-40
<PAGE>
COMMNET CELLULAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. Common Stock options (continued)
--------------------
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
9. Employee stock ownership plan
-----------------------------
On October 1, 1988, the Company adopted an Employee Stock Ownership Plan
("ESOP"). The cost of the ESOP is borne by the Company through annual
contributions to a Trustee in amounts determined by the Board of Directors.
Employees are eligible to participate in the ESOP after one year of service.
Shares of Common Stock acquired by the ESOP are to be allocated to each employee
and held until the employee's retirement or death. The employee can also choose
early withdrawal under certain circumstances. Each employee's account vests
ratably over a period of five years. Contributions totaling approximately
$598,000 (83,605 shares), and $707,000 (122,435 shares) were made to the ESOP
for the years ended September 30, 1997 and 1996, respectively. Shares are deemed
issued for accounting purposes in the year that ESOP contribution expense is
recognized. In connection with the Merger, the ESOP was terminated in 1998.
10. Stockholders' equity
--------------------
In December 1990, the Board of Directors declared a dividend distribution
of one right (a "Right") attached to each outstanding share of the Company's
Common Stock at any point in time. Each Right, when exercisable, entitles the
registered holder to purchase from the Company one one-hundredth of a share of
Series A Preferred Stock, at a price of $9 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-41
<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, 1997, the Company had
repurchased 747,500 shares at prices ranging from $5.55 - $5.825 per share for
an aggregate price of $4,310,938. The program was discontinued during fiscal
1997.
In March 1997, the Company entered into a Retirement and Consulting
Agreement with an executive officer, whereby upon retirement from the Company
82,090 shares of restricted stock will be issued. As a result of the agreement,
the Company has recorded $458,000 of deferred compensation as of September 30,
1998.
11. Fair values of financial instruments
------------------------------------
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires disclosure of fair value information about financial instruments for
which it is practicable to estimate that value, whether or not recognized in the
balance sheet. In cases where quoted market prices are not available, fair
values are based on estimates using present value or other valuation techniques.
SFAS No. 107 excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements. Accordingly, the aggregate fair
value amounts do not represent the underlying value of the Company.
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
Advances to affiliates: The carrying amounts of the Company's advances to
----------------------
and receivables from affiliates approximate their fair value due to borrowings
carrying a variable interest rate.
Long and short-term debt: The carrying amounts of the secured bank
------------------------
financing and note payable borrowings approximate their fair value as all
borrowings either carry a variable interest rate or fixed interest rates having
a term of three months or less. Other long-term debt is valued based on quoted
market prices.
The carrying amounts and fair values of the Company's financial instruments
at September 30, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
Carrying Amount Fair Value
---------------------------------- ----------------------------------
1998 1997 1998 1997
---------------- ---------------- ---------------- ----------------
(Amounts in thousands)
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 26,153 $ 14,132 $ 26,153 $ 14,132
Advances to affiliates and other 42,143 55,801 42,413 55,801
Notes payable 2,916 2,916 2,916 2,916
Secured bank financing 680,000 9,921 680,000 9,921
11 1/4% subordinated notes - 80,000 - 91,800
11 3/4% senior subordinated discount notes 83 159,133 88 173,780
</TABLE>
II-42
<PAGE>
COMMNET CELLULAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. The Merger
----------
On February 10, 1998, the Company consummated a recapitalization whereby AV
Acquisition Corp., ("Newco"), a subsidiary of Blackstone CCI Capital Partners
L.P., a Delaware limited partnership (the "Partnership") affiliated with
Blackstone Management Associates II L.L.C., a Delaware limited liability company
("Blackstone"), was merged into the Company (the "Merger") pursuant to an
Agreement and Plan of Merger dated May 27, 1997 (the "Merger Agreement"). At
the effective time of the Merger, each share of Common Stock issued and
outstanding (other than those shares described below) was converted, at the
election of the holder thereof and subject to the terms of the Merger Agreement,
into either (a) the right to receive $36.00 in cash or (b) the right to retain
one fully paid and nonassessable share of Common Stock. The following shares of
Common Stock were not subject to conversions pursuant to the Merger: shares of
Common Stock held by the Partnership, and partnerships affiliated with
Blackstone that acquired interests in Newco prior to the consummation of the
Merger, Newco, and any wholly-owned subsidiary of the Company or any wholly-
owned subsidiary of Newco; fractional shares that were converted to cash; and
shares of Common Stock in respect of which dissenters' rights had been properly
exercised. The election to retain Common Stock was subject to proration so
that, following the Merger, 2,943,055 shares (representing approximately 4% of
the issued and outstanding Common Stock) were retained by existing shareholders
of the Company, representing approximately 13% of the shares of the Company
issued and outstanding immediately after the Merger. The shares of Common Stock
owned by the shareholders of Newco represent approximately 87% of the shares of
the Company issued and outstanding after the Merger, resulting in such
shareholders of Newco becoming the controlling shareholders of the Company.
13. Subsequent events
-----------------
In December 1998, the Company purchased substantially all of the
independent telco interests in three managed RSA markets and one managed MSA
market in South Dakota for approximately $56,100,000. As a result of the
closing, all pending claims and litigation were resolved. The Company financed
approximately $42,000,000 of the purchase price through borrowings under the
Chase Credit Agreement revolver, and the remainder through existing cash
balances.
II-43
<PAGE>
COMMNET CELLULAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. Quarterly financial data (unaudited)
------------------------------------
Quarterly financial data and per share data are presented below (amounts in
thousands, except for per share data):
<TABLE>
<CAPTION>
First Second Third Fourth
Quarterly Financial Data Quarter Quarter Quarter Quarter
- ----------------------------------- -------- --------- --------- -------
<S> <C> <C> <C> <C>
1998
Revenues $39,344 $ 34,499 $ 42,780 $54,812
Operating income (loss) 8,270 (11,211) 2,141 21,384
Income (loss) before
extraordinary charge 1,000 (21,304) (12,958) 6,285
Net income (loss) 1,000 (54,804) (12,958) 6,285
Basic and diluted income
(loss) per share:
Income (loss) before
extraordinary charge $ 0.01 $ (0.49) $ (0.57) $ 0.28
Basic and diluted net
income (loss) $ 0.01 $ (1.27) $ (0.57) $ 0.28
-----------------------------------------------------------------------
1997
Revenues $34,496 $ 31,734 $ 38,118 $46,519
Operating income 5,431 4,681 8,537 16,590
Net income (loss) (1,375) (2,913) (627) 5,947
Basic and diluted net income
(loss) per share $ (0.02) $ (0.04) $ (0.01) $ 0.09
</TABLE>
II-44
<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 70 Chairman of the Board, President, Chief Executive Officer and
Director
Daniel P. Dwyer (2) 39 Executive Vice President, Treasurer, Chief Financial Officer
and Director
Andrew J. Gardner 44 Senior Vice President and Controller
David S. Lynn 41 Senior Vice President - Network Operations
Timothy C. Morrisey 45 Executive Vice President - Sales Operations
James C. Everson 48 Vice President, Secretary and General Counsel
Mark T. Gallogly (2) 41 Director
Lawrence H. Guffey (2) 30 Director
Glenn H. Hutchins 43 Director
Simon P. Lonergan (1) 30 Director
William J. Ryan (1)(2) 66 Director
John P. Scully (1)(2) 52 Director
</TABLE>
- ----------
(1) Member Audit Committee.
(2) Member Compensation Committee.
The members of the Board of Directors are elected annually at each annual
meeting. Currently, there is one vacancy.
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 Chairman
Emeritus and a director of the Executive Committee of the Board of Directors of
the Cellular Telecommunications Industry Association. He is a member of the
board and past Chairman of the CTIA Foundation for Wireless Telecommunications.
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
III-1
<PAGE>
Public Accountant and a member of the American Institute of Certified Public
Accountants and the Colorado Society of Certified Public Accountants.
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.
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.
Jame C. Everson was named General Counsel and Secretary of the Company in
March 1998. He was Vice President - Legal Affairs from March 1996 to March 1998
and has been legal counsel to the Company since March 1992.
Mark T. Gallogly was designated a director of the Company in February 1998.
Mr. Gallogly is a member of the limited liability company which acts as the
general partner of the Blackstone Entities. He is a Senior Managing Director of
The Blackstone Group L.P. and has been with Blackstone since 1989. Mr. Gallogly
is a member of the boards of directors of InterMedia VI Cable TV, and Time
Warner-Fanch Co.
Lawrence H. Guffey was designated a director of the Company in February
1998. Mr. Guffey is a Vice President of The Blackstone Group L.P., with which
he has been associated since 1991. He is a member of the board of directors of
TW Fanch-One Co.
Glenn H. Hutchins was designated a director of the Company in May 1998. He
is a member of the limited liability company which acts as the general partner
of the Blackstone Entities. He is a Senior Managing Director of The Blackstone
Group L.P. and has been with Blackstone since 1994. Previously, he was a
Managing Director of Thomas H. Lee Co. ("THL") from 1987 until 1994. Mr.
Hutchins is a member of the boards of directors of Clark Refining & Marketing,
Inc., Clark USA, Inc. American Axle and Manufacturing Holdings, Inc., American
Axle and Manufacturing, Inc., Corp Banca (Argentina) S.A., Corp Group C.V., and
Haynes International, Inc.
Simon P. Lonergan was designated a director of the Company in February
1998. Mr. Lonergan is an Associate of the Blackstone Group L.P., which he
joined in 1996. Prior to joining Blackstone, Mr. Lonergan was an Associate at
Bain Capital, Inc. and a Consultant at Bain and Co. He currently serves on the
Advisory Committees of Intermedia Partners VI and Graham Packaging Company.
William J. Ryan was designated a director of the Company in May 1998. Mr.
Ryan was named CEO of Price Communications Wireless, a subsidiary of Price
Communications Corporation ("Price"), in October 1997 following the purchase of
Palmer Wireless, Inc. by Price. From 1995 to October 1997, Mr. Ryan was
President & CEO of Palmer Wireless, Inc. Prior thereto, he was President & CEO
of Palmer Communications Incorporated. Mr. Ryan is currently Trustee, Naples
Community Hospital; Vice Chairman, Naples Philharmonic Center for the Arts;
Director, Florida Council on Economic Education; Member CATV Pioneers, Broadcast
Pioneers, and the International Radio & Television Society.
John P. Scully was designated a director of the Company in May 1998. From
May 1992 until April 1998, Mr. Scully was Vice President External Relations &
Colorado for U S WEST Communications. In March 1997, external relations
responsibilities were added. Mr. Scully serves on the boards of the Greater
Denver Chamber of Commerce (past chairman), the Metro Denver Board of Governors,
the Public Education and Business Coalition (past chairman), the Denver Center
for the Performing Arts, the State Board of Agriculture, the Urban League of
Metro Denver and the National Exchange Carrier Association.
Item 11. Executive Compensation.
III-2
<PAGE>
III-3
<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, 1998.
<TABLE>
<CAPTION>
Long-Term
---------
Annual Compensation Compensation
------------------- ------------
Name and Principal Position Year Salary ($) Bonus ($) All Others Options (#) All Others
--------------------------- ---- ---------- --------- ---------- ----------- ----------
($)(1) ($)(2)
------ ------
<S> <C> <C> <C> <C> <C> <C>
Arnold C. Pohs................... 1998 450,000 242,811 3,703 - 7,088
Chairman of the Board, 1997 400,000 234,944 10,778 - 9,750
President and Chief 1996 350,000 149,306 11,473 100,000 10,125
Executive Officer
Daniel P. Dwyer.................. 1998 350,000 151,082 8,006 - 7,088
Executive Vice President, 1997 300,000 140,966 4,242 - 9,750
Treasurer and Chief 1996 250,000 83,598 2,880 50,000 10,125
Financial Officer
Timothy C. Morrisey.............. 1998 175,000 74,141 6,256 - 7,088
Executive Vice President - 1997 158,000 72,978 11,463 - 9,750
Sales Operations 1996 132,000 36,753 - 20,000 10,125
David S. Lynn.................... 1998 165,000 54,537 58 - 7,088
Senior Vice President - 1997 148,000 51,950 - - 9,650
Network Operations 1996 132,000 35,103 - 20,000 10,125
Andrew J. Gardner................ 1998 155,000 51,232 58 - 7,088
Senior Vice President and 1997 138,000 49,075 - - 9,750
Controller 1996 126,000 35,082 - 20,000 10,125
</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-4
<PAGE>
Change in Control Agreements
- ----------------------------
In July 1993, the Board of Directors approved change in control agreements
with Messrs. Pohs and Dwyer. In October 1994, the Board authorized a comparable
agreement with Mr. Hoe, the Company's then 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 then Senior Vice
President and General Counsel. The purpose of these agreements is to reinforce
and encourage the officers to maintain objectivity and a high level of attention
to their duties without distraction from the possibility of a change in control
of the Company. These agreements provide that in the event of a change in
control of the Company, as that term is defined in the agreements, each officer
is entitled to receive certain severance benefits upon the subsequent
termination or constructive termination of employment, unless such termination
is due to death, disability or voluntary retirement; unless the termination is
by the Company for cause (as defined in the agreements) or is by the officer for
other than good reason (as defined in the agreements).
The severance benefits include the payment of the officer's full base
salary through the date of termination. The severance benefits also include a
lump sum payment equal to 2.99 times the sum of (a) the officer's annual base
salary in effect immediately prior to the circumstances giving rise to
termination, and (b) the actual bonus earned by the officer in the year prior to
the year in which termination occurs. In addition, each officer will be
provided with life and health benefits and a continuation of all other employee
benefits for 12 months following the date of termination. In addition, the
officers will be fully vested in all benefit plans to the extent not otherwise
entitled to 100% of all contributions made by the Company on their behalf.
On February 10, 1998, the date of the Merger, Messrs. Pohs, Dwyer, Gardner,
Lynn and Morrisey executed an amendment to their change in control agreements.
Under the amendment, each officer is entitled to receive certain severance
benefits upon termination or constructive termination of employment subject to
the same conditions as the original agreements, but only if termination occurs
prior to February 10, 2000. In addition, the amendment causes the agreements to
expire on February 10, 2001. Mr. Hoe and Ms. Shapiro did not execute an
amendment to their agreements. Both Mr. Hoe and Ms. Shapiro have asserted that
they are entitled to receive severance benefits under their change in control
agreements, however the Company believes that no such benefits are owed by the
Company.
On March 30, 1997, CommNet and Mr. Pohs entered into a Retirement and
Consulting Agreement (the "Consulting Agreement") pursuant to which Mr. Pohs
will receive the following upon his retirement from the Company: (i) a payment
equal in amount to the additional employment contributions and matching
contributions under the CommNet Cellular Inc. Retirement Savings Plan and the
ESOP to which Mr. Pohs would have been entitled had such contributions been
determined without regard to the statutory limits applicable to such
contributions under the Code for the five year period ending on Mr. Pohs'
retirement date; (ii) a payment equal to the present value of five times the
annual premium cost with respect to Mr. Pohs' coverage level and plan option of
the Company's health plan and the Exec-U-Care Medical Reimbursement Insurance;
and (iii) a grant of 82,090 shares of restricted stock under the CommNet
Cellular Inc. Omnibus Stock and Incentive Plan (which shares will vest upon
death, disability, the end of the consulting period described below or a change
of control). The Consulting Agreement also provides that the Company will
retain Mr. Pohs as a consultant for a period of six years following his
retirement in exchange for a consulting fee equal to 50% of Mr. Pohs' final
annualized base salary plus his final year's annualized bonus per year. In the
event of a change in control of the Company, as defined in the Consulting
Agreement, (i) if Mr. Pohs has not yet retired, he may elect to receive the
benefits set forth in his change of control agreement, as described in the two
preceding paragraphs, or to receive the benefits provided for in the Consulting
Agreement, and (ii) if Mr. Pohs has retired, he will be entitled to receive a
lump-sum payment of all consulting fees due for the remaining portion of the
consulting arrangement, and all restrictions on the shares granted pursuant to
the Consulting Agreement will lapse.
III-5
<PAGE>
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-6
<PAGE>
1998 AGGREGATED OPTION EXERCISES
AND YEAR-END OPTION VALUES
The following table provides information on the value of unexercised
options at
September 30, 1998.
<TABLE>
<CAPTION>
Value of Unexercised
Number of Unexercised Options at In-the-Money Options
Fiscal Year End at Fiscal Year End
---------------------------------------- ----------------------------------------
Name Vested Unvested (1) Vested Unvested
- ------------------------- ------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Arnold C. Pohs 933,150 - $5,539,000 $2,659,000
Daniel P. Dwyer 328,370 - 1,895,000 936,000
Timothy C. Morrisey 59,150 - 300,000 169,000
David S. Lynn 90,740 - 500,000 259,000
Andrew J. Gardner 48,760 - 272,000 139,000
</TABLE>
(1) The option shares are 100% vested up to $36 per option. Any additional
appreciation above $36 is subject to a six-year vesting schedule.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
At December 14, 1998, there were 22,662,985 shares of Common Stock of the
Company issued and outstanding. As of such date options to purchase 1,705,700
shares were outstanding. Each holder of Common Stock, but not unexercised
options, is entitled to one vote per share on each matter which may be presented
at a meeting of stockholders. Cumulative voting is not allowed. The Company's
Common Stock is traded on the Nasdaq National Market under the symbol CELS.
The following table sets forth information regarding ownership of the
Company's Common Stock as of the filing date of this report by each person who
is known by management of the Company to own beneficially more than 5% of the
Common Stock, by each director of the Company and by all directors and executive
officers of the Company as a group. Shares issuable on exercise of options are
deemed to be outstanding for the purpose of computing the percentage ownership
of persons beneficially owning such options, but have not been deemed to be
outstanding for the purpose of computing the percentage ownership of any other
person. Insofar as is known to the Company, the persons indicated below have
sole voting and investment power with respect to the shares indicated as owned
by them except as otherwise stated in the notes to the table.
III-7
<PAGE>
<TABLE>
<CAPTION>
Name and Address of Amount and Nature of Percent of
Beneficial Owner Beneficial Ownership Class
---------------- -------------------- -----
<S> <C> <C>
Arnold C. Pohs 1,015,240 (1) 4.19%
8350 East Crescent Parkway
Englewood, Colorado 80111
Daniel P. Dwyer 328,370 (2) 1.36%
8350 East Crescent Parkway
Englewood, Colorado 80111
William J. Ryan 5,000 .02%
8111 Bay Colony Drive
Naples, Florida 34108
BCP CommNet L.P. 19,695,835 86.91%
c/o The Blackstone Group
345 Park Avenue, 31st Floor
New York, New York 10154
All executive officers and directors 1,548,825 6.42%
(13 persons - stock, options and restricted
stock)
</TABLE>
__________
(1) Includes options to purchase 933,150 shares of Common Stock and restricted
stock to be granted subject to a retirement agreement of 82,090 shares.
(2) Includes options to purchase 328,370 shares of Common Stock.
(3) Includes options to purchase 1,548,825 shares of Common Stock.
Item 13. Certain Relationships and Related Transactions.
None.
III-8
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a)(1) Financial Statements
--------------------
1. Report of Independent Auditors Deloitte & Touche LLP
2. Report of Independent Auditors Ernst & Young LLP
3. Consolidated Balance Sheets, September 30, 1998 and 1997
4. Consolidated Statements of Operations, Years ended September 30, 1998,
1997 and 1996
5. Consolidated Statements of Stockholders' Equity, Years ended September 30,
1996, 1997 and 1998
6. Consolidated Statements of Cash Flows, Years ended September 30, 1998,
1997 and 1996
7. Notes to Consolidated Financial Statements
(a)(2) Financial Statement Schedules
-----------------------------
Schedule I. Condensed Financial Information of Registrant
Schedule II. Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes thereto.
(a)(3) Exhibits
--------
3.1 Amended and First Restated Articles of Incorporation, as amended, of
the Company. Incorporated herein by reference to Exhibit 3.1 to the
Company's annual report on Form 10-K for the fiscal year ended
September 30, 1994.
3.2 Bylaws, as amended, of the Company. Incorporated herein by reference
to Exhibit 3.2 to the Company's registration statement on Form S-18,
SEC File No. 33-2700.
4.1 Specimen certificate representing Common Stock. Incorporated herein
by reference to Exhibit 4.1 to the Company's registration statement
on Form S-18, SEC File No. 33-2700.
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. Incorporated herein by reference to Exhibit 4.5 to
the Company's annual report on Form 10-K for the fiscal year ended
September 30, 1996.
10.1 Lease Agreement dated August 8, 1995 between the Company and TCD
North, Inc. Incorporated herein by reference to Exhibit 10.1 to
the Company's annual report on Form 10-K for the fiscal year ended
September 30, 1995.
10.2 Amended and Restated Employee Stock Ownership Plan and Trust.
Incorporated herein by reference to Exhibit 10.1 to the Company's
quarterly report on Form 10-Q for the quarter ended June 30, 1996.
10.3 Short-Term Incentive Plan. Incorporated herein by reference to
Exhibit 10.6 to Company's annual report on Form 10-K for the
fiscal year ended September 30, 1990.
10.4 Omnibus Stock and Incentive Plan. Incorporated herein by reference
to Exhibit 10.7 to the Company's annual report on Form 10-K for
the fiscal year ended September 30, 1991.
10.6 Form of change in control agreement between the Company and its
senior management. Incorporated herein by reference to Exhibit
10.7 to the Company's annual report on Form 10-K for the fiscal
year ended September 30, 1995.
10.7 Retirement and Consulting Agreement. Incorporated herein by
reference to Exhibit 10.1 to the Company's quarterly report on
Form 10-Q for the quarter ended March 31, 1996.
10.8 Agreement and Plan of Merger dated May 27, 1997 between the
Company and AV Acquisition Corp. Incorporated herein by reference
to Exhibit 2.1 to the Company's report on Form 8-K dated May 29,
1997.
IV-2
<PAGE>
(a)(3) Exhibits (continued)
--------
10.9 Credit Agreement among the Company and CIFC and The Lenders Party
Hereto and The Chase Manhattan Bank, as Administrative Agent, and
Chase Manhattan Bank Delaware, as Fronting Bank dated September
18, 1997. Incorporated herein by reference to Exhibit 99.1 to the
Company's report on Form 8-K dated November 24, 1997.
*21.1 Subsidiaries of the Company.
*23.1 Consent of Independent Auditors Deloitte & Touche LLP.
*23.2 Consent of Independent Auditors Ernst & Young LLP.
__________
* Filed herewith
(b) Reports on Form 8-K during the quarter ended September 30, 1997:
Date of Report Item Reported Financial Statements Filed
-------------- ------------- -------------------- -----
September 21, 1998 Item 5 None
IV-3
<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: ___________________________
Arnold C. Pohs, President
Date: December 29, 1998
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 Officer December 29, 1998
Arnold C. Pohs and Director
/s/ Daniel P. Dwyer
___________________________ Executive Vice President, Treasurer, December 29, 1998
Daniel P. Dwyer Chief Financial Officer and Director
/s/ Andrew J. Gardner
___________________________ Senior Vice President and Controller December 29, 1998
Andrew J. Gardner (Principal Accounting Officer)
/s/ Mark T. Gallogly
___________________________ Director December 29, 1998
Mark T. Gallogly
/s/ Lawrence H. Guffey
___________________________ Director December 29, 1998
Lawrence H. Guffey
/s/ Glenn H. Hutchins
___________________________ Director December 29, 1998
Glenn H. Hutchins
/s/ Simon P. Lonergan
___________________________ Director December 29, 1998
Simon P. Lonergan
/s/ William J. Ryan
___________________________ Director December 29, 1998
William J. Ryan
/s/ John P. Scully
___________________________ Director December 29, 1998
John P. Scully
</TABLE>
IV-4
<PAGE>
COMMNET CELLULAR INC.
SCHEDULE I
Condensed Financial Information of Registrant
(Amounts in thousands)
CONDENSED BALANCE SHEETS
- ------------------------
<TABLE>
<CAPTION>
September 30,
-----------------------
1998 1997
---------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 25,253 $ 13,992
Accounts receivable 4 12
Inventory and other 6,632 4,546
--------- --------
Total current assets 31,889 18,550
Property, plant and equipment 55,177 54,511
Less allowance for depreciation 23,776 18,051
--------- --------
31,401 36,460
OTHER ASSETS
Investment in and advances to subsidiaries and affiliates 8,389 259,710
Other 5,330 11,160
--------- --------
13,719 270,870
--------- --------
$ 77,009 $325,880
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES $ 14,366 $ 24,830
LONG-TERM DEBT 83 239,150
INVESTMENT IN CIFC 398,008 --
STOCKHOLDERS' EQUITY
Common stock 5 14
Other stockholders' equity (335,453) 61,886
--------- --------
(335,448) 61,900
--------- --------
$ 77,009 $325,880
========= ========
</TABLE>
S-1-1
<PAGE>
COMMNET CELLULAR INC.
SCHEDULE I
Condensed Financial Information of Registrant
(continued)
(Amounts in thousands)
CONDENSED STATEMENTS OF OPERATIONS
- ----------------------------------
<TABLE>
<CAPTION>
Years ended September 30,
---------------------------------
1998 1997 1996
---- ---- ----
COST AND EXPENSES
<S> <C> <C> <C>
General and administrative $ 72,032 $35,820 $ 31,248
Depreciation and amortization 8,394 7,217 8,077
Less amounts allocated to subsidiaries
and affiliates (55,662) (42,526) (40,527)
-------- -------- --------
NET INCOME (LOSS) BEFORE EQUITY IN
NET INCOME (LOSS) OF SUBSIDIARIES AND
AFFILIATES AND INTEREST INCOME
AND EXPENSE (24,764) (511) 1,202
Equity in net income (loss) of
subsidiaries and affiliates 2,172 12,814 (3,528)
Gains (loss) on sales of affiliates - 350 (250)
Interest expense (10,507) (26,170) (24,474)
Interest income 6,122 14,549 22,654
-------- -------- --------
NET INCOME (LOSS) BEFORE
EXTRAORDINARY CHARGE $ (26,977) $ 1,032 $ (4,396)
Extraordinary charge related to early
extinguishment of long-term debt (33,500) - -
---------- --------- --------
NET INCOME (LOSS) $ (60,477) $ 1,032 $ (4,396)
========== ========= ========
</TABLE>
S-1-2
<PAGE>
COMMNET CELLULAR INC.
SCHEDULE I
Condensed Financial Information of Registrant
(continued)
(Amounts in thousands)
CONDENSED STATEMENTS OF CASH FLOWS
- ----------------------------------
<TABLE>
<CAPTION>
Years ended September 30
----------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
CASH PROVIDED (USED) BY
OPERATING ACTIVITIES $ (11,272) $ 34,611 $ (495)
INVESTING ACTIVITIES
Purchase of short-term investments - - (987)
Sale of short-term investments - - 987
Additions to property and equipment (666) (5,792) (5,715)
Additions/(reductions) to investment in affiliates 73,281 (19,581) (23,518)
Dividends received from subsidiary 427,715 - -
Additions to other assets (3,975) (2,437) 461
Payments received on advances to affiliates 148,333 - -
-------- ------- -------
644,688 (27,810) (28,772)
FINANCING ACTIVITIES
Reductions to capital lease (158) (301) (308)
Repurchase of Common Stock - (2,933) (1,378)
Issuance of Common Stock, net of offering costs 128,176 221 978
Payment of 11 3/4% senior subordinated discount notes (165,662) - -
Payment of 11 1/4% subordinated notes (80,000) - -
Extraordinary charge related to
extinguishment of long-term debt (29,015) - -
Conversion of Common Stock as a condition of
the Merger (475,496) - -
-------- ------- -------
(622,155) (3,013) (708)
-------- ------- -------
INCREASE (DECREASE) IN CASH 11,261 3,788 (29,975)
BEGINNING OF YEAR CASH AND CASH EQUIVALENTS 13,992 10,204 40,179
-------- ------- -------
END OF YEAR CASH AND CASH EQUIVALENTS $ 25,253 $13,992 $10,204
SUPPLEMENTAL SCHEDULE OF NONCASH ACTIVITIES:
Write-off of offering costs included in extraordinary
loss on early extinguishment of long-term debt 4,485 - -
Conversion of convertible subordinated debentures and Notes - - 2,909
</TABLE>
S-1-3
<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. To the extent
dividends received from affiliates exceed the Company's investment, these
amounts are presented as a long-term liability. Parent company only financial
statements should be read in conjunction with the Company's consolidated
financial statements.
Certain amounts for 1996 and 1997 have been reclassified to conform to the
1998 presentation.
S-1-4
<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:
Fiscal year 1998 $2,122,000 $2,088,000 $ - $1,723,000 $2,487,000
Fiscal year 1997 $1,947,000 $3,789,000 $ - $3,614,000 $2,122,000
</TABLE>
(1) All deductions are the result of actual write-offs to accounts receivable.
S-2-1
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES
Jurisdiction of
Organization
---------------
Cellular, Inc. Financial Corporation CO
Cellular Inc. Network Corporation CO
CommNet Cellular License Holding LLC (1) CO
CommNet Paging 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 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
Gold Creek Cellular of Montana Limited Partnership (1) CO
Gold Creek Cellular Inc. 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 Central 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
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
__________
(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 10, 1998, 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, 1998:
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).
8. Registration Statement of Form S-4 (No. 333-33391).
9. Registration Statement on Form S-3 (No. 33-46737).
10. Registration Statement on Form S-3 (No. 33-62504).
11. Registration Statement on Form S-3 (No. 33-58309).
12. Registration Statement on Form S-8 (No. 33-35192).
DELOITTE & TOUCHE LLP
Denver, Colorado
December 23, 1998
<PAGE>
EXHIBIT 23.2
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 5, 1997, 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, 1998:
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).
8. Registration Statement of Form S-4 (No. 333-33391).
9. Registration Statement on Form S-3 (No. 33-46737).
10. Registration Statement on Form S-3 (No. 33-62504).
11. Registration Statement on Form S-3 (No. 33-58309).
12. Registration Statement on Form S-8 (No. 33-35192).
ERNST & YOUNG LLP
Denver, Colorado
December 23, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> SEP-30-1998
<CASH> 26,153
<SECURITIES> 0
<RECEIVABLES> 30,538
<ALLOWANCES> 2,487
<INVENTORY> 4,564
<CURRENT-ASSETS> 63,888
<PP&E> 244,286
<DEPRECIATION> 89,688
<TOTAL-ASSETS> 384,752
<CURRENT-LIABILITIES> 25,823
<BONDS> 682,999
0
0
<COMMON> 306,818
<OTHER-SE> (642,266)
<TOTAL-LIABILITY-AND-EQUITY> 384,752
<SALES> 171,435<F1>
<TOTAL-REVENUES> 171,435
<CGS> 39,400
<TOTAL-COSTS> 150,851
<OTHER-EXPENSES> (1,651)
<LOSS-PROVISION> 2,092
<INTEREST-EXPENSE> 49,212
<INCOME-PRETAX> (26,977)
<INCOME-TAX> 0
<INCOME-CONTINUING> (26,977)
<DISCONTINUED> 0
<EXTRAORDINARY> (33,500)
<CHANGES> 0
<NET-INCOME> 60,477
<EPS-PRIMARY> (1.53)<F2>
<EPS-DILUTED> 0
<FN>
<F1>Includes cellular, paging, and equipment revenues
<F2>Basic and diluted EPS are equal.
</FN>
</TABLE>
