-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, crrSQUnfEe+MSrUDA9TayYb8nq+MyZJvhHvD9n9G6O0IFMGyvrNGla1QxDlT8n0d PPBFwDir+w38ea7NLJje+w== 0000912057-95-004954.txt : 199506290000912057-95-004954.hdr.sgml : 19950629 ACCESSION NUMBER: 0000912057-95-004954 CONFORMED SUBMISSION TYPE: S-3/A PUBLIC DOCUMENT COUNT: 4 FILED AS OF DATE: 19950628 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMMNET CELLULAR INC CENTRAL INDEX KEY: 0000787912 STANDARD INDUSTRIAL CLASSIFICATION: RADIO TELEPHONE COMMUNICATIONS [4812] IRS NUMBER: 840924904 STATE OF INCORPORATION: CO FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: S-3/A SEC ACT: 1933 Act SEC FILE NUMBER: 033-60393 FILM NUMBER: 95550205 BUSINESS ADDRESS: STREET 1: 5990 GREENWOOD PLZ BLVD STE 300 CITY: ENGLEWOOD STATE: CO ZIP: 80111 BUSINESS PHONE: 3036943234 MAIL ADDRESS: STREET 1: 5990 GREENWOOD PLAZA BLVD STREET 2: SUITE 300 CITY: ENGLEWOOD STATE: CO ZIP: 80111 FORMER COMPANY: FORMER CONFORMED NAME: CELLULAR INC DATE OF NAME CHANGE: 19920703 S-3/A 1 S-3/A AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 28, 1995 REGISTRATION STATEMENT 33-60393 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ AMENDMENT NO. 1 TO FORM S-3 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ COMMNET CELLULAR INC. (Exact name of registrant as specified in its charter) COLORADO 84-0924904 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation) 5990 GREENWOOD PLAZA BOULEVARD ENGLEWOOD, COLORADO 80111 (303) 694-3234 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) AMY M. SHAPIRO, ESQ. SECRETARY AND GENERAL COUNSEL COMMNET CELLULAR INC. 5990 GREENWOOD PLAZA BOULEVARD ENGLEWOOD, COLORADO 80111 (303) 694-3234 (Name, address, including zip code, and telephone number, including area code, of registrant's agent for service) ------------------------ COPIES TO: John D. Watson, Jr., Esq. Mark C. Smith, Esq. Latham & Watkins Skadden, Arps, Slate, Meagher & Flom 1001 Pennsylvania Avenue, N.W. 919 Third Avenue Washington, D.C. 20004-2505 New York, New York 10022 (202) 637-2200 (212) 735-3000 ------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS SOON AS PRACTICABLE AFTER THE REGISTRATION STATEMENT BECOMES EFFECTIVE. ------------------------ If the securities being registered on this Form are being offered pursuant to dividend or interest reinvestment plans, please check the following box. / / If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box. / / If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / ________ If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / ________ If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. /X/ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION PRELIMINARY PROSPECTUS DATED JUNE 28, 1995 P_R_O_S_P_E_C_T_U_S $80,000,000 LOGO % SUBORDINATED NOTES DUE 2005 -------------- Interest on the % Subordinated Notes due 2005 (the "Notes") is payable semi-annually on and of each year, commencing , 1996. In the event the Conversion Condition (as defined) is satisfied, from and after the Convertible Redemption Date (as defined), the interest rate on the Notes will decrease .25% to a rate of % per annum. The Notes will mature on , 2005 and will be redeemable at the option of CommNet Cellular Inc. (the "Company"), in whole or in part, at any time on or after , 2000 at the redemption prices set forth herein, plus accrued and unpaid interest, if any, to the date of redemption. Upon a Change of Control (as defined), each holder of the Notes may require the Company to repurchase all or a portion of such holder's Notes at a price in cash equal to 101% of the principal amount thereof, together with accrued and unpaid interest, if any, to the date of repurchase. The Notes will be unsecured subordinated obligations of the Company, subordinated in right of payment to all existing and future Senior Indebtedness (as defined) of the Company. As of March 31, 1995, on a pro forma basis, after giving effect to the sale of the Notes offered hereby and the application of the estimated net proceeds therefrom as described herein, the aggregate outstanding principal amount of Senior Indebtedness of the Company would have been approximately $185.0 million (assuming all of the Company's outstanding 6 3/4% Convertible Subordinated Debentures (as defined) are redeemed by the Company) and $156.4 million (assuming all of the Company's outstanding 6 3/4% Convertible Subordinated Debentures are converted by the holders thereof into shares of the Company's Common Stock). See "Description of the Notes." SEE "RISK FACTORS" ON PAGES 12-15 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE NOTES. ------------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
PRICE TO UNDERWRITING PROCEEDS TO PUBLIC (1) COMMISSION (2) COMPANY (1)(3) Per Note.......................... % % % Total............................. $ $ $ (1) Plus accrued interest, if any, from , 1995. (2) The Company has agreed to indemnify the Underwriters against certain liabilities, including certain liabilities under the Securities Act of 1933, as amended. See "Underwriting." (3) Before deducting expenses payable by the Company estimated at $ .
------------------- The Notes are being offered by the Underwriters, subject to prior sale, when, as and if delivered to and accepted by the Underwriters and subject to certain other conditions. The Underwriters reserve the right to withdraw, cancel or modify such offer and to reject orders in whole or in part. It is expected that delivery of the Notes will be made in New York, New York, on or about , 1995. ------------------- MERRILL LYNCH & CO. SMITH BARNEY INC. ------------ The date of this Prospectus is , 1995. [MAP SEE ANNEX A] INCORPORATION OF CERTAIN INFORMATION BY REFERENCE The following documents which have been filed by the Company with the Securities and Exchange Commission (the "Commission") are hereby incorporated by reference in this Prospectus: (1) the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1994, as amended by Form 10-K/A No. 1 dated January 11, 1995, Form 10-K/A No. 2 dated May 25, 1995 and Form 10-K/A No. 3 dated June 16, 1995; (2) the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 1994, as amended by Form 10-Q/A No. 1 dated May 25, 1995; and (3) the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1995, as amended by Form 10-Q/A No. 1 dated June 16, 1995. In addition, all documents subsequently filed by the Company pursuant to Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), prior to the termination of this offering shall be deemed to be incorporated by reference in this Prospectus and to be a part hereof from the date of filing of such documents (such documents, and the documents enumerated above, being hereinafter referred to as the "Incorporated Documents"). Any statement contained in an Incorporated Document shall be deemed to be modified or superseded for all purposes to the extent that a statement contained in this Prospectus or in any other subsequently filed Incorporated Document or in an accompanying prospectus supplement modifies or supersedes such statement. The Company will provide without charge to each person to whom this Prospectus is delivered, on the written or oral request of such person, a copy (without exhibits unless such exhibits are specifically incorporated by reference) of any or all of the Incorporated Documents. Written requests for such copies should be directed to the Secretary, CommNet Cellular Inc., 5990 Greenwood Plaza Boulevard, Englewood, Colorado 80111. Telephone requests may be directed to (303) 694-3234. CERTAIN DEFINITIONS As used herein, "pops" means the estimated total 1993 population of a Metropolitan Statistical Area ("MSA") or Rural Service Area ("RSA") as initially licensed by the Federal Communications Commission ("FCC"), based upon Strategic Marketing, Inc. 1993 population estimates. "Net Company pops" means an MSA's or RSA's pops multiplied by the Company's net ownership interest in the entity licensed by the FCC to operate a cellular telephone system in that MSA or RSA. An MSA or RSA is referred to herein as a "market," and a market served by a cellular telephone system that is managed, directly or indirectly, by the Company is referred to herein as a "managed market." The radio signal from the Company's managed systems currently covers approximately 88% of the total pops within the managed markets, and the Company intends to increase signal coverage to approximately 96% by September 30, 1995 and to approximately 98% by September 30, 1996 (pops covered by the Company's radio signal being referred to herein as "covered pops"). The Company does not thereafter intend to significantly expand radio signal coverage within its managed markets, and, accordingly, the number of covered pops will be marginally lower than the number of total pops on a going-forward basis. The number of pops does not represent the current number of users of cellular services and is not necessarily indicative of the number of users of cellular services in the future. Those corporations and partnerships through which the Company holds ownership interests in cellular licensees and those cellular licensees in which the Company holds a direct ownership interest are referred to herein as "affiliates." Any reference herein to an "affiliate" does not necessarily imply that the Company exercises, or has the power to exercise, control over the management and policies of such entity. IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE NOTES AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. 2 PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS. REFERENCES IN THIS PROSPECTUS TO FISCAL YEARS ARE TO THE COMPANY'S FISCAL YEARS ENDED SEPTEMBER 30 OF EACH YEAR (FOR EXAMPLE, REFERENCES TO "FISCAL YEAR 1994" ARE TO THE COMPANY'S FISCAL YEAR ENDED SEPTEMBER 30, 1994). UNLESS THE CONTEXT INDICATES OTHERWISE, THE "COMPANY" MEANS COMMNET CELLULAR INC. AND ITS CONSOLIDATED SUBSIDIARIES. THE COMPANY The Company operates, manages and finances cellular telephone systems, primarily in rural markets in the mountain and plains regions of the United States. The Company's cellular interests currently represent approximately 3,356,000 net Company pops in 93 markets located in 15 states. These markets consist of 83 RSA markets having a total of 6,152,000 pops and 10 MSA markets having a total of 1,274,000 pops, of which the Company's interests represent 2,734,000 and 622,000 net Company pops, respectively. Systems in which the Company holds an interest constitute the largest geographic collection of contiguous cellular markets in the United States. The Company was formed to acquire cellular interests through participation in the licensing process conducted by the FCC. In order to participate in that process, the Company formed affiliates which originally were owned at least 51% by one or more independent telephone companies and no more than 49% by the Company. See "Business -- Federal Regulation." In exchange for the Company's 49% interest, the Company agreed to provide financing to affiliates for their ongoing capital needs, as well as certain management services. The Company subsequently has purchased additional interests in many of such affiliates, as well as in additional cellular properties. The Company currently manages 55 of the 93 markets in which it holds an interest and owns a greater than 50% interest in 45 of its 55 managed markets. The Company currently finances entities holding interests representing approximately 4,459,000 pops, of which 3,356,000 are included in net Company pops and 1,103,000 are attributable to parties other than the Company. Since completion of the licensing process, the Company has concentrated on creating an integrated network of contiguous cellular systems comprised of markets which are managed by the Company (the "network"). The network currently consists of 55 markets (48 RSA and 7 MSA markets) spanning eight states and represents approximately 3,905,000 pops and 2,915,000 net Company pops. As of March 31, 1995, the RSA and MSA managed markets had 87,377 and 36,680 subscribers, respectively. The Company has been significantly expanding radio signal coverage, with the construction of 50 cell sites already complete in fiscal year 1995 and 57 additional cell sites expected to be completed by the end of the fiscal year. The Company expects that by September 30, 1995, radio signal coverage will reach 96% of the population within the managed markets and will reach 98% during fiscal year 1996. No significant expansion of radio signal coverage within the 55 managed markets is contemplated thereafter. The Company's integrated network of contiguous cellular systems benefits from certain technical, operational and marketing efficiencies which have enabled the Company to produce operating results that compare favorably with other cellular operators. For example, for the calendar year 1994, the Company's average monthly revenue per subscriber in managed markets was approximately $68, compared to an industry average of $64. During the same period, the Company's acquisition cost per net added subscriber was $520, compared to $625 for the industry as a whole. In addition, during this same period the Company achieved a penetration rate (I.E., the number of subscribers expressed as a percentage of the total covered pops) of 3.5%, notwithstanding the fact that a substantial majority of the markets within the network have been operational for less than five years and are not as mature as more established markets, particularly large MSA markets with longer operating histories. Finally, the Company has achieved annual subscriber growth of over 60% in each of the last two fiscal years and has recorded positive EBITDA for the last eight quarters. "EBITDA" represents, for any relevant period, the sum of operating income (loss), depreciation or write-downs of property, plant and equipment and amortization of intangible assets included in operating 3 income (loss). EBITDA should not be considered in isolation to, or be construed as having greater significance than, other indicators of an entity's performance. See "Summary Consolidated Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- General." The Company believes that certain demographic characteristics of the rural marketplace should further facilitate commercial exploitation of the network. As compared to urban residents, rural residents travel greater distances by personal vehicle and have access to fewer public telephones along drive routes. The Company believes that these factors will sustain demand for mobile telecommunication service in the rural marketplace. These same factors produce "roaming" revenues that are higher as a percentage of total revenues than would likely be the case in more densely populated urban areas ("roaming" is an industry term for calls made by cellular customers when traveling in another carrier's cellular system). Roaming revenues result in higher margins because roaming calls are priced at higher rates than local calls without generating associated sales commission costs. During the 12 months ended March 31, 1995, roaming revenues constituted 30% of the Company's total managed markets service revenues, compared to 13% of industry service revenues generally for calendar year 1994. STRATEGY The Company's primary objective is to grow revenue and cash flow through increased market penetration and subscriber usage and expansion of the network. The Company intends to accomplish this objective by leveraging existing network advantages and brand name recognition, through acquisitions and dispositions of cellular properties and through product line extensions. NETWORK ADVANTAGES. The Company seeks to leverage the substantial competitive and cost advantages created by the network. For example, the network uses only 12 switching facilities that provide sufficient capacity to serve all 55 of the Company's managed markets. Cost savings are realized as the Company uses one network-wide operations center, centralizes services such as interconnection, billing, roamer verification, maintenance and support and has access to 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. With respect to the competing cellular carrier in any given managed market, the network also gives the Company important marketing advantages by permitting the Company to offer service over expanded geographic territories at favorable rates and to offer enhanced call delivery service. In addition, the Company has entered into agreements with other cellular carriers that permit the Company to offer its subscribers preferred rates and enhanced services when travelling outside the network. See "Business -- The Company's Operations -- Network Construction and Operations." MARKETING. The Company's marketing strategy is to market its cellular service on a network-wide basis under the CommNet Cellular name. The use of a single name over a broad geographic territory has created strong brand-name recognition and allowed the Company to achieve advertising efficiencies. Historically, the Company has relied to a significant extent on direct sales representatives and on independent sales agents. The Company is currently emphasizing development of a new channel of distribution represented by 17 Company-owned retail stores located within the network, which will be supplemented by 11 additional Company-owned retail stores scheduled to open by the end of fiscal year 1995. The retail distribution channel is also being expanded by the addition of 19 Wal-Mart-Registered Trademark- kiosks staffed by Company employees. The Company believes that development of retail distribution channels owned or staffed by the Company will increase customer additions, enhance customer service and generate cost efficiencies in the acquisition of new subscribers. The Company also maintains 46 direct sales representatives and 596 independent sales agents or outlets, including 52 Radio Shack and eight - -C-Sears stores which have exclusive distribution agreements with the Company. See "Business -- The Company's Operations -- Marketing." ACQUISITIONS AND DISPOSITIONS. The Company continually evaluates acquisitions of cellular properties that are geographically and operationally compatible with the network. In evaluating acquisition targets, the Company considers, among other things, demographic factors, including population size and density, traffic patterns, cell site coverage, required capital expenditures and the likely ability of the Company to integrate the target market into the network. In pursuing such acquisitions, the Company may exchange interests in 4 nonmanaged markets for interests in existing or new markets that serve to expand the network. The Company also from time to time may sell nonmanaged assets to raise capital for network expansion. For example, the Company has entered into an agreement to sell an indirect interest in ten Nebraska RSA markets not managed by the Company for approximately $24.3 million in cash. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Acquisitions and Sales." ADDITIONAL CELLULAR APPLICATIONS; PAGING. Demand for "traditional" cellular service within the network is not expected to use all available system capacity. As a result, the Company is actively exploring the use of the network to transmit data in innovative and cost-effective ways that can be tailored for use by a variety of industrial and agricultural customers. The Company expects that this additional capacity may be adapted (at a nominal marginal cost) for data transmission, monitoring, control and other cellular uses that are well suited for agriculture, energy and other industries that have widespread operations within the Company's rural marketplace. The Company also believes that certain attributes of the Company's operating infrastructure, including existing towers, established distribution channels and other administrative resources, can be utilized to offer one-way paging service throughout the managed markets on a cost-efficient basis. The Company intends to commence offering such paging services in fiscal year 1996, subject to the receipt of sufficient FCC paging licenses to offer economically feasible paging services. See "Business -- The Company's Operations -- Services and Products." The Company maintains its registered office and executive offices at 5990 Greenwood Plaza Boulevard, Englewood, Colorado 80111. The Company's telephone number is (303) 694-3234. 5 THE OFFERING Notes Offered..................... $80,000,000 principal amount of % Subordinated Notes due 2005. Maturity Date..................... , 2005. Interest Rate..................... The Notes will bear interest at a rate of % per annum; provided that in the event the Conversion Condition (as described below) is satisfied, from and after the Convertible Redemption Date, the interest rate on the Notes will decrease .25% to a rate of % per annum. See "Description of the Notes -- Principal, Maturity and Interest." Conversion Condition.............. The Company intends to redeem its 6 3/4% Convertible Subordinated Debentures due 2009 (the "6 3/4% Convertible Subordinated Debentures") with the net proceeds from the sale of the Notes (the "Offering"). Holders of the 6 3/4% Convertible Subordinated Debentures have the right, exercisable at any time on or prior to the Convertible Redemption Date for such debentures (approximately 20 days after the consummation of the Offering) to convert such debentures into the Company's Common Stock at a conversion price of $27.625 per share of Common Stock. The Conversion Condition will be satisfied if a majority in aggregate principal amount of the outstanding 6 3/4% Convertible Subordinated Debentures is converted by the holders thereof on or prior to the Convertible Redemption Date into shares of the Company's Common Stock. The last reported sales price of the Company's Common Stock on the National Association of Securities Dealers Automated Quotation System (the "Nasdaq") National Market on June 27, 1995 was $27. At the close of business on such date, a total of $74,747,000 in principal amount of the 6 3/4% Convertible Subordinated Debentures was outstanding. See "Description of the Notes -- Principal, Maturity and Interest." Interest Payment Dates............ and of each year, commencing , 1996. Optional Redemption............... The Notes are redeemable at the option of the Company, in whole or in part, at any time on or after , 2000 at the redemption prices set forth herein, plus accrued and unpaid interest, if any, to the date of redemption. See "Description of the Notes -- Redemption at the Company's Option." Change of Control................. Upon the occurrence of a Change of Control, each holder of Notes may require the Company to repurchase all or a portion of such holder's Notes at a purchase price in cash equal to 101% of the principal amount thereof, together with accrued and unpaid interest, if any, to the date of repurchase. See "Description of the Notes -- Certain Covenants." Ranking........................... The Notes will be unsecured subordinated obligations of the Company and will rank subordinate in right of payment to all existing and future Senior Indebtedness, including (i) the credit agreements (collectively, the "Credit Agreements") between Cellular, Inc. Financial Corporation ("CIFC"), the Company's
6 wholly-owned financing subsidiary, and CoBank, ACB ("CoBank"), (ii) the Company's 11 3/4% Senior Subordinated Discount Notes due 2003 (the "11 3/4% Senior Subordinated Discount Notes") and (iii) all other Indebtedness of the Company whether outstanding on the date of the Indenture or thereafter created, incurred or assumed, unless such Indebtedness provides that it is not superior in right of payment to the Notes. As of March 31, 1995, on a pro forma basis after giving effect to the Offering and the application of the estimated net proceeds therefrom as described in "Use of Proceeds," the aggregate outstanding principal amount of Senior Indebtedness of the Company would have been approximately $185,000,000 (assuming all of the outstanding 6 3/4% Convertible Subordinated Debentures are redeemed by the Company) and $156,387,000 (assuming all of the outstanding 6 3/4% Convertible Subordinated Debentures are converted by the holders thereof). See "Description of the Notes -- Subordination." Covenants......................... The Indenture will contain certain covenants, including, but not limited to, covenants with respect to the following matters: (i) limitation on incurrence of additional indebtedness by the Company and its subsidiaries, (ii) limitation on restricted payments, (iii) limitation on transactions with affiliates, (iv) limitation on dividend and other payment restrictions affecting subsidiaries, (v) prohibition on incurrence of subsidiary indebtedness and the issuance and sale of preferred stock by subsidiaries, and (vi) restrictions on mergers, consolidations and the transfer of all or substantially all of the assets of the Company. See "Description of the Notes -- Certain Covenants." Use of Proceeds................... The net proceeds to the Company from the Offering are estimated to be approximately $77,000,000. The Company intends to use approximately $76,765,000 of such net proceeds to redeem all of the outstanding 6 3/4% Convertible Subordinated Debentures at a redemption price of 102.7% of the principal amount thereof and the remainder, if any, of such proceeds to reduce amounts outstanding under the Credit Agreements. To the extent the holders of the 6 3/4% Convertible Subordinated Debentures exercise their right to convert such debentures into shares of the Company's Common Stock, the Company will repay up to $28,613,000 of indebtedness under the Credit Agreements shortly after the consummation of the Offering. The Company intends to use the balance of such proceeds for general corporate purposes, which may include additional reductions in indebtedness under the Credit Agreements, capital expenditures or acquisitions. See "Use of Proceeds." Risk Factors...................... See "Risk Factors" on pages 12-15 for a discussion of certain factors that should be considered in connection with an investment in the Notes.
7 SUMMARY CONSOLIDATED FINANCIAL DATA The following summary consolidated financial data of the Company for the years ended September 30, 1992, 1993 and 1994 are derived from the consolidated financial statements of the Company that have been audited by Ernst & Young LLP, independent auditors. The following summary consolidated financial data of the Company at March 31, 1995 and for the six months ended March 31, 1994 and 1995 are derived from unaudited consolidated financial statements of the Company, which, in the opinion of the Company, reflect all adjustments necessary for a fair presentation of the results for the unaudited periods. The "Adjusted" March 31, 1995 balance sheet data give effect to the Offering and the assumed use of proceeds thereof, assuming (i) all of the outstanding 6 3/4% Convertible Subordinated Debentures are redeemed and (ii) all of the outstanding 6 3/4% Convertible Subordinated Debentures are converted by the holders thereof into the Company's Common Stock. See "Use of Proceeds." Operating results for the six months ended March 31, 1995 are not necessarily indicative of the results that may be achieved for the fiscal year ending September 30, 1995. The data should be read in conjunction with the consolidated financial statements and other financial information included or incorporated by reference in this Prospectus.
SIX MONTHS ENDED MARCH 31, YEAR ENDED SEPTEMBER 30, -------------------------------------------- ---------------------------- 1992 1993 1994 1994 1995 ------------ ------------ ------------ ------------ ------------ STATEMENT OF OPERATIONS DATA (1): Revenues........................................ $ 14,906,349 $ 33,689,311 $ 61,360,051 $ 26,455,523 $ 38,339,762 Depreciation and amortization, including write-downs.................................... 14,114,817 19,950,508 15,767,111 7,357,198 8,029,368 Operating loss.................................. (18,344,157) (15,430,533) (5,669,335) (5,109,983) (3,413,858) Equity in net loss of affiliates................ (8,851,753) (6,339,145) (5,092,484) (3,586,024) (2,735,777) Minority interest in net income of consolidated affiliates..................................... -- -- (543,607) -- (261,004) Gains on sales of affiliates and other.......... 14,339,063 7,821,424 3,811,943 2,459,004 67,247 Interest expense................................ (14,800,908) (16,427,796) (21,338,505) (9,860,292) (11,886,742) Interest income (2)............................. 10,616,024 10,701,511 12,080,836 6,813,532 5,955,762 Extraordinary charge............................ -- (2,991,673) -- -- -- Net loss........................................ (17,041,731) (22,666,212) (16,751,152) (9,283,763) (12,274,372) OTHER DATA: EBITDA (3)...................................... $ (4,229,340) $ 4,519,975 $ 10,097,776 $ 2,247,215 $ 4,615,510 Capital expenditures (4)........................ 10,006,787 8,607,732 40,933,127 12,475,110 20,663,454 Cash interest expense (5)....................... 14,800,908 15,581,591 9,205,350 3,996,380 5,249,182 Adjusted cash interest expense (6).............. 12,759,927 7,026,471 Ratio of earnings to fixed charges (7).......... -- -- -- -- --
AS OF MARCH 31, 1995 ------------------------------------------ ADJUSTED FOR ADJUSTED FOR ACTUAL REDEMPTION CONVERSION ------------ ------------ ------------ BALANCE SHEET DATA (1): Working capital................................. $ 18,308,376 $ 18,543,207 $ 66,695,233 Investment in and advances to affiliates........ 57,063,587 57,063,587 57,063,587 Net property and equipment...................... 86,254,160 86,254,160 86,254,160 Total assets.................................... 290,880,354 292,502,217 340,654,243 Long-term debt.................................. 263,138,161 268,391,161 239,778,018 Total stockholders' equity...................... 7,824,562 4,193,425 80,958,594 - ------------------------------ (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 three fiscal years and at March 31, 1994 and 1995. SEPTEMBER 30, MARCH 31, ------------------ ----------- 1992 1993 1994 1994 1995 ---- ---- ---- ---- ---- Consolidated.................. 28 36 42 40 44 Equity........................ 37 38 35 37 31 Cost.......................... 18 6 18 6 18 ---- ---- ---- ---- ---- Total..................... 83 80 95 83 93 ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
8 (2) Primarily represents accrued but unpaid interest on advances to affiliates. Also includes interest income on cash balances and short-term investments. (3) "EBITDA" represents, for any relevant period, the sum of operating income (loss), depreciation or write-downs of property, plant and equipment and amortization of intangible assets included in operating income (loss). Certain financial analysts consider EBITDA a meaningful measure of an entity's ability to meet long-term financial obligations, and growth in EBITDA a meaningful barometer of future profitability, especially in a capital-intensive industry such as cellular telecommunications. However, EBITDA should not be considered in isolation to, or be construed as having greater significance than, other indicators of an entity's performance. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- General." (4) Includes additions of property and equipment including those temporarily financed through accounts payable and through vendor long-term debt. (5) Cash interest expense excludes capitalized interest and deferred financing fees. (6) Adjusted to give effect to the Offering and the assumed use of proceeds thereof (assuming the 6 3/4% Convertible Subordinated Debentures are redeemed by the Company) as if such transactions occurred as of the beginning of the latest fiscal or interim period presented. If all of the 6 3/4% Convertible Subordinated Debentures are converted by the holders thereof, and the Company repays $28,613,000 of indebtedness under the Credit Agreements, adjusted cash interest expense for fiscal year 1994 and the six months ended March 31, 1995 would be $10,120,113 and $5,706,564, respectively. See "Use of Proceeds." (7) The ratio of earnings to fixed charges is determined by dividing the sum of earnings before extraordinary item and accounting change, interest expense, taxes and a portion of rent expense representative of interest by the sum of interest expense and a portion of rent expense representative of interest. The ratio of earnings to fixed charges is not meaningful for periods that result in a deficit. For the years ended September 30, 1992, 1993 and 1994, the deficit of earnings to fixed charges was $17,041,731, $22,666,212 and $16,751,152, respectively. For the six months ended March 31, 1994 and 1995, the deficit of earnings to fixed charges was $9,283,763 and $12,274,372, respectively.
9 SUMMARY SELECTED COMBINED AND PROPORTIONATE OPERATING RESULTS OF CELLULAR LICENSEES The following table presents operating data for all cellular licensees in which the Company holds an interest. The "Combined," "Financed Proportionate" and "Company Proportionate" operating results, which are not included in the Company's consolidated financial statements, are provided to assist in understanding the results of the licensees in which the Company holds an interest. Generally accepted accounting principles ("GAAP") prescribe inclusion of revenues and expenses for consolidated interests (generally interests of more than 50%), but not for equity interests (generally interests of 20% to 50%) or cost interests (generally interests of less than 20%). Equity accounting results in the same net income as consolidation; however the net operating results are reflected on a single line below operating income. Operating activity related to interests accounted for under the cost method are not reflected at all in a GAAP operating statement. For a reconciliation from Company Proportionate to consolidated net loss, see "Selected Combined and Proportionate Operating Results of Cellular Licensees."
YEAR ENDED SEPTEMBER 30, ------------------------------------------------------------------------------------------ FINANCED PROPORTIONATE (2) COMPANY PROPORTIONATE (3) COMBINED (1) --------------------------- ---------------------------- ---------------------------- 1993 1994 1993 1994 1993 1994 ------------ ------------ ------------ ------------ ------------ ------------ OPERATIONS DATA: Revenues........................... $ 98,679,038 $128,478,339 $ 58,223,424 $ 83,187,599 $ 39,345,809 $ 59,201,047 Depreciation and amortization...... 15,647,017 20,330,211 10,557,582 15,343,319 6,213,146 11,489,961 Operating income (loss)............ (3,059,665) 3,749,309 (5,752,345) (96,880) (3,121,304) 7,221 Net loss........................... (10,629,347) (6,867,086) (12,516,546) (9,979,948) (7,615,856) (7,130,376) EBITDA............................. 12,587,352 24,079,520 4,805,237 15,246,439 3,091,842 11,497,182 Capital expenditures............... 24,032,021 56,934,648 17,059,409 43,595,885 12,721,083 33,530,618 SUBSCRIBER DATA: Managed market subscribers......... 63,500 99,002 56,524 90,163 41,126 68,378 Nonmanaged market subscribers...... 49,786 78,984 14,695 22,845 7,579 11,198 ------------ ------------ ------------ ------------ ------------ ------------ Total subscribers.................. 113,286 177,986 71,219 113,008 48,705 79,576 Total markets...................... 81 95 81 95 81 95 MANAGED MARKETS: Revenue per subscriber (monthly average).......................... $ 71 $ 71 $ 73 $ 72 $ 75 $ 74 Marketing cost per net new subscriber........................ $ 553 $ 546 $ 512 $ 565 $ 511 $ 534 Ending penetration................. 2.48% 3.18% Covered pops....................... 2,559,584 3,114,628
SIX MONTHS ENDED MARCH 31, --------------------------------------------------------------------------------------- FINANCED PROPORTIONATE (2) COMPANY PROPORTIONATE (3) COMBINED (1) --------------------------- --------------------------- --------------------------- 1994 1995 1994 1995 1994 1995 ------------ ------------ ------------ ------------ ------------ ------------ OPERATIONS DATA: Revenues........................... $ 59,558,872 $ 83,337,124 $ 36,270,337 $ 53,214,615 $ 25,331,313 $ 37,995,247 Depreciation and amortization...... 7,976,101 10,986,459 5,624,505 8,148,181 3,967,637 5,957,343 Operating income (loss)............ (373,524) 2,332,021 (1,852,333) (122,825) (816,900) (15,611) Net loss........................... (5,040,373) (4,229,421) (6,175,834) (6,273,194) (3,924,083) (4,493,343) EBITDA............................. 7,602,577 13,318,480 3,772,172 8,025,356 3,150,737 5,941,732 Capital expenditures............... 18,783,090 38,407,300 9,452,442 23,455,056 6,160,835 16,620,316 SUBSCRIBER DATA: Managed market subscribers......... 78,496 124,057 70,909 114,834 53,040 87,518 Nonmanaged market subscribers...... 63,577 107,118 17,617 31,064 8,698 16,771 ------------ ------------ ------------ ------------ ------------ ------------ Total subscribers.................. 142,073 231,175 88,526 145,898 61,738 104,289 Total markets...................... 83 93 83 93 83 93 MANAGED MARKETS: Revenue per subscriber (monthly average).......................... $ 68 $ 63 $ 69 $ 63 $ 71 $ 65 Marketing cost per net new subscriber........................ $ 557 $ 507 $ 616 $ 479 $ 568 $ 472 Ending penetration................. 2.94% 3.67% Covered pops....................... 2,721,862 3,384,101
10
YEAR ENDED DECEMBER 31, ------------------------ 1992 1993 1994 ------ ------ ------ INDUSTRY OPERATING DATA (4): Revenue per subscriber (monthly average)............ $ 74 $ 73 $ 64 Marketing cost per net new subscriber............... $ 700 $ 675 $ 625 Ending penetration.................................. 2.16% 3.10% 4.54% - ------------------------------ (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) Derived from Cellular Telephone Industry Association Data Survey and other industry market sources.
11 RISK FACTORS IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS AND OTHERWISE INCORPORATED BY REFERENCE HEREIN, THE FOLLOWING FACTORS SHOULD BE CAREFULLY CONSIDERED IN EVALUATING THE COMPANY AND ITS BUSINESS BEFORE PURCHASING THE NOTES OFFERED HEREBY. HIGHLY LEVERAGED FINANCIAL POSITION; DEBT SERVICE REQUIREMENTS The Company is highly leveraged and has substantial debt service requirements. At March 31, 1995, the Company had outstanding long-term debt of $263,138,000, compared to stockholders' equity of $7,825,000. Interest expense was $21,339,000 for fiscal year 1994, $9,731,000 of which was payable on a cash basis and the balance of which constituted accretion on the Company's 11 3/4% Senior Subordinated Discount Notes. The Credit Agreements provide for the reborrowing of any loan repayments made to CoBank until the revolving commitments under the Credit Agreements terminate in December 1995. Upon such termination, amounts due under the Credit Agreements are converted into term loans requiring quarterly cash amortization payments through December 31, 2000. The Company is currently negotiating with CoBank to extend the termination date under the Credit Agreements until December 1996, and to reduce the principal amortization period from five to four years. There can be no assurance that the extension will be obtained. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." The Company's ability to meet its debt service requirements will require significant and sustained growth in cash flow by the Company and its affiliates. Historically, the Company has been able to make required interest payments on its indebtedness from borrowings under bank loans and from equity and debt financings. The Company will require continued access to such financing sources until such time as the Company generates sufficient positive cash flow from operations to service its debt and, to the extent that the Company's leverage increases, the Company's access to such financing sources may be curtailed or made more expensive. There can be no assurance that the Company will experience the necessary growth in cash flow or will be able to access the financing sources described above. OPERATING LOSSES AND NET LOSSES The Company has experienced operating losses and net losses from inception. The accumulated deficit was $107,239,016 and $113,075,709 at December 31, 1994 and March 31, 1995, respectively. The Company anticipates that losses will continue over the next several years. Operating losses in fiscal years 1992, 1993 and 1994 were $18,344,000, $15,431,000 and $5,669,000, respectively (including depreciation, amortization and write-downs of switch assets related to an upgrade program of $14,115,000, $19,951,000 and $15,767,000, respectively), and net losses for the same periods were $17,042,000, $22,666,000 and $16,751,000, respectively. Operating losses for the six months ended March 31, 1995 were $3,414,000 (including depreciation and amortization of $8,029,000), and net losses for the same period were $12,274,000. There can be no assurance that future operations will be profitable or generate positive operating income. HOLDING COMPANY STRUCTURE A substantial portion of the Company's assets and operations are investments in its subsidiaries and affiliates and, to that extent, the Company is effectively a holding company. The Company must rely on dividends, loan repayments and other intercompany cash flows from its subsidiaries and affiliates to generate the funds necessary to meet the Company's debt service obligations, including payment of principal and interest on the Notes. The Credit Agreements contain restrictions on the ability of any subsidiary or affiliate of the Company which has borrowed from CIFC to make distributions to the Company. The Company has guaranteed the obligations of CIFC to CoBank and has granted a first security interest in all of the assets of the Company as security for such guaranty. The assets of affiliates which borrow funds from CIFC are pledged to CIFC, which in turn assigns such pledges to CoBank. See "Description of Certain Indebtedness" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." Claims of other creditors of the Company's subsidiaries and affiliates, including CoBank, tax authorities, trade creditors and creditors of those affiliates which have financing sources in 12 addition to the Company, will generally have priority as to the assets of such subsidiaries and affiliates over the claims of the Company and the holders of certain indebtedness of the Company, including holders of the Notes. SUBORDINATION The Notes will be unsecured and subordinated to the prior payment in full of all existing and future Senior Indebtedness, including the Credit Agreements and the 11 3/4% Senior Subordinated Discount Notes. As of March 31, 1995, on a pro forma basis, after giving effect to the Offering and the application of the net proceeds therefrom the aggregate outstanding principal amount of Senior Indebtedness would have been approximately $185,000,000 (assuming all of the outstanding 6 3/4% Convertible Subordinated Debentures are redeemed) and $156,387,000 (assuming all of the outstanding 6 3/4% Convertible Subordinated Debentures are converted by the holders thereof). In the event of a bankruptcy, liquidation or reorganization of the Company, the assets of the Company will be available to pay obligations on the Notes only after all Senior Indebtedness has been paid in full, and there may not be sufficient assets remaining to pay amounts due on any or all of the Notes. In addition, the Company may not pay principal or premium, if any, or interest on the Notes if any Senior Indebtedness is not paid when due or any other default on any Senior Indebtedness occurs and the maturity of such Senior Indebtedness is accelerated in accordance with its terms, unless in either case, such Senior Indebtedness has been paid in full or the default has been cured or waived and such acceleration shall have been rescinded. In addition, if any default occurs with respect to certain Senior Indebtedness and certain other conditions are satisfied, the Company may not make any payments on the Notes for a designated period of time. Finally, if any judicial proceeding shall be pending with respect to any such default in payment on any Senior Indebtedness, or other default, with respect to certain Senior Indebtedness, or if the maturity of the Notes is accelerated because of a default under the Indenture and such default constitutes a default with respect to any Senior Indebtedness, the Company may not make any payment on the Notes. See "Description of the Notes -- Subordination." RESTRICTIONS UNDER DEBT INSTRUMENTS The Company's operations and financial performance are subject to covenants contained in certain agreements related to the Company's indebtedness, including the Credit Agreements and the indenture governing the 11 3/4% Senior Subordinated Discount Notes. Among other things, those agreements (i) limit the Company's ability to incur additional indebtedness, including guarantees, sell or create liens upon its assets, pay dividends on and make other distributions with respect to its capital stock and enter into new lines of business and (ii) require the Company to meet certain financial performance tests and use portions of the net proceeds from the sale of certain assets and the issuance of debt securities by the Company to repay obligations under certain agreements. These restrictions could limit the Company's ability to effect future acquisitions or financing or otherwise restrict corporate activities. See "Description of the Notes" and "Description of Certain Indebtedness." NATURE OF COMPANY'S OWNERSHIP OF LICENSES Many of the Company's interests in cellular systems are owned through affiliates that are partners in limited partnerships which are the licensees for their respective systems. In those partnerships in which the Company's affiliate is a limited partner or is one of several general partners, certain decisions, such as the timing and amount of cash distributions and sale or liquidation of the partnership, may not be subject to a vote of the limited partners or may require a greater percentage vote than that owned by the Company's affiliate. In those partnerships that are not managed by the Company, the Company is dependent on the managing partner to meet the licensee's obligations under the FCC's rules and regulations. There can be no assurance that any partnership in which the Company holds an interest will make decisions on such matters which will be in the Company's best interest or that other partners' conduct and character will not adversely affect the continuing qualification of licensees in which the Company holds an interest. LIMITED OPERATING HISTORY; NEW INDUSTRY Cellular operations within the network began in 1988 and, accordingly, the Company's operating history is limited. Moreover, its operations to date have concentrated on the acquisition of interests in cellular systems licenses and licensees and the construction and initial operation of cellular systems. A substantial 13 majority of the cellular telephone systems in which the Company holds an interest have been operational for less than five years. While there are a substantial number of cellular telephone systems operating in the United States and in other countries, cellular telecommunications is a relatively new industry with a limited history. Moreover, most of the cellular systems in which the Company holds an interest are RSA markets, which have an even more limited operating history than the larger MSA markets. Based on demographic factors, including population size and density, traffic patterns and other relevant market characteristics, the Company believes that successful commercial exploitation of the RSA and MSA markets in which the Company holds interests can be achieved. However, there can be no assurance that this will be the case. COMPETITION; NEW TECHNOLOGIES; OBSOLESCENCE The FCC licenses two cellular carriers in each market. Competition for customers between the two systems is principally on the basis of quality, service and price. The Company's competitors may have financial resources which are substantially greater than those of the Company and its partners. In addition, FCC policy requires cellular licensees to provide, on a nondiscriminatory basis, cellular service to resellers that purchase blocks of mobile telephone numbers and then resell them to the public. This may create added competition at the retail level. Competition also may arise from other technologies, including conventional mobile telephone services, mobile satellite systems, wireless data services, paging services and Specialized Mobile Radio ("SMR") systems. The FCC has recently given approval for the creation of enhanced SMR ("ESMR") systems, which combine multiple SMR systems in a cellular structure and employ frequency reuse, like cellular, thereby potentially eliminating much of the current technological distinction between SMR and cellular. The FCC has also allocated radio channels for personal communications services ("PCS"). Among other possible uses, PCS will be capable of providing a two-way mobile voice and data telephone service that is similar to cellular service. PCS will be a digital, wireless communications system that will utilize technology that could allow it to compete effectively with cellular systems, particularly in densely populated areas. Licenses will be awarded by competitive bidding. Auctions for the first two spectrum blocks have been completed. Absent delays caused by any judicial proceedings, PCS systems can be expected to commence operation in major metropolitan areas as early as the end of calendar year 1995. Continuing technological advances in the communications field make it impossible to predict the extent of additional future competition for cellular systems, but it is certain that in the future there will be more potential substitutes for cellular service. There can be no assurance that the Company will not face significant future competition or that cellular technology will not eventually become obsolete. VALUE OF CELLULAR LICENSES DEPENDENT UPON SUCCESS OF OPERATIONS AND INDUSTRY A substantial portion of the Company's assets consists of interests in cellular licenses and in entities holding cellular licenses. The value of cellular licenses will depend significantly upon the success of the operations of such licensees and the growth of the industry generally. Although a market for interests in cellular licenses currently exists and the Company believes that such a market will continue, there can be no assurance that this will be the case. Even if a market does continue in the future, the values obtainable for interests in cellular licenses in such a market may be significantly lower than current values. REGULATORY CONSIDERATIONS The licensing, construction, operation, sale and acquisition of cellular systems are regulated by the FCC. In addition, certain aspects of cellular operations, such as resale of cellular services, may be subject to public utility regulation in the state in which the service is provided. The ongoing operations of the Company may require permits, licenses and other authorization from regulatory authorities (including but not limited to the FCC) not now held by the Company. In addition, licensing proceedings and applications for granting and transferring construction permits and operating licenses have been subject to substantial delays by the FCC. While the Company expects that it will receive requisite authorizations and approvals in the ordinary course of business, no assurance can be given that the applicable regulatory authority will grant such approvals in a timely manner, if at all. Moreover, changes in regulation, such as increased price regulation or deregulation of interconnection arrangements, could adversely affect the Company's financial condition and 14 operating results. Under the FCC rules, licenses for cellular systems are generally issued for ten-year terms. Although a licensee may apply for renewal and, under certain circumstances, may be entitled to a renewal expectancy, renewal is not automatic. The Company's renewal applications may be subject to petitions to deny or competing applications. Therefore, no assurance can be given that any license will be renewed. RADIOFREQUENCY EMISSION CONCERNS Media reports have suggested that certain radiofrequency ("RF") emissions from portable cellular telephones might be linked to cancer. Concerns over RF emissions may have the effect of discouraging the use of cellular telephones, which could have an adverse effect upon the Company's business. The FCC has a rulemaking proceeding pending to update the guidelines and methods it uses for evaluating RF emissions from radio equipment, including cellular telephones. The proposal would impose more restrictive standards on RF emissions from lower power devices such as portable cellular telephones. DEPENDENCE ON KEY PERSONNEL The Company's affairs are managed by a small number of key personnel, the loss of which could have an adverse impact on the Company. See "Management." RESTRICTIONS ON REPURCHASES AT HOLDER'S OPTION In the event of a Change of Control, the Company would be required, subject to certain conditions, to offer to repurchase all outstanding Notes at a price equal to 101% of the principal amount thereof, plus accrued interest thereon. In addition, the indenture governing the 11 3/4% Senior Subordinated Discount Notes requires the Company to make an offer to repurchase all outstanding 11 3/4% Senior Subordinated Discount Notes in the event of a change of control, which is similar to the Change of Control offer requirement applicable to the Notes. However, upon a Change of Control, all amounts due under the Credit Agreements would become immediately due and payable at the election of CoBank. The subordination provisions relating to the Notes would prohibit any payment under the Notes until all amounts due under the Credit Agreements and the 11 3/4% Senior Subordinated Discount Notes were repaid in full. There can be no assurance that the Company will have the financial resources available to honor its obligations in respect of the Notes in the event of a Change of Control. LACK OF A PUBLIC MARKET FOR THE NOTES There is no public market for the Notes and the Company does not intend to list the Notes on any securities exchange or for quotation over any over-the-counter market. The Company has been advised by the Underwriters that, following the completion of the Offering, the Underwriters presently intend to make a market in the Notes. However, the Underwriters are under no obligation to do so and may discontinue any market making activities at any time without notice. No assurance can be given as to the liquidity of the trading market for the Notes or that an active public market for the Notes will develop or, if developed, will continue. If an active public market does not develop or is not maintained, the market price and liquidity of the Notes may be adversely affected. USE OF PROCEEDS The net proceeds to the Company from the Offering are estimated to be approximately $77,000,000. The Company intends to use approximately $76,765,000 of such net proceeds to redeem all of the outstanding 6 3/4% Convertible Subordinated Debentures at a redemption price of 102.7% of the principal amount thereof and the remainder, if any, of such proceeds to reduce amounts outstanding under the Credit Agreements. Holders of the 6 3/4% Convertible Subordinated Debentures have the right, exercisable at any time on or prior to the Convertible Redemption Date for such debentures, to convert such debentures into the Company's Common Stock at a conversion price of $27.625 per share of Common Stock. The last reported sales price of the Company's Common Stock on the Nasdaq National Market on June 27, 1995 was $27. To the extent the holders of the 6 3/4% Convertible Subordinated Debentures exercise their right to convert such debentures into shares of the Company's Common Stock, the Company will repay up to $28,613,000 of indebtedness under the Credit Agreements shortly after the consummation of the Offering. The Company does not intend immediately to reduce borrowings below $34,591,000 in order to avoid 15 penalties relating to early termination of agreements that fix interest rates. However, the Company will consider further reductions in borrowings under the Credit Agreements as such agreements fixing interest rates expire. The Company intends to use the balance of such proceeds for general corporate purposes which may include additional reductions in indebtedness under the Credit Agreements, capital expenditures or acquisitions. Indebtedness outstanding under the Credit Agreements matures in 2000. The Credit Agreements provide, at the Company's option, for interest at 1.00% over prime or 2.25% over the London Interbank Offered Rate ("LIBOR"). As of May 31, 1995, the weighted average interest rate on debt outstanding under the Credit Agreements was 9.94%. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." 16 CAPITALIZATION The following table sets forth the capitalization of the Company as of March 31, 1995 and as adjusted to give effect to the Offering and the assumed use of proceeds thereof, assuming (i) all of the outstanding 6 3/4% Convertible Subordinated Debentures are redeemed and (ii) all of the outstanding 6 3/4% Convertible Subordinated Debentures are converted by the holders thereof into shares of the Company's Common Stock. This table should be read in conjunction with the Company's consolidated financial statements, related notes and other financial information included or incorporated by reference in this Prospectus.
AS OF MARCH 31, 1995 ------------------------------------------------------- ADJUSTED FOR ADJUSTED FOR ACTUAL REDEMPTION CONVERSION (1) --------------- ------------------ ------------------ Cash and available-for-sale securities................. $ 14,408,024 $ 14,642,855 $ 62,794,881 --------------- ------------------ ------------------ --------------- ------------------ ------------------ Short-term debt: Current portion of long-term debt(2)................... $ 1,090,870 $ 1,090,870 $ 1,090,870 Obligation under capital leases due within one year.............................................. 467,798 467,798 467,798 --------------- ------------------ ------------------ Total short-term debt.............................. $ 1,558,668 $ 1,558,668 $ 1,558,668 --------------- ------------------ ------------------ --------------- ------------------ ------------------ Long-term debt: Secured bank financing (2)........................... $ 63,203,738 $ 63,203,738 $ 34,590,595 Obligation under capital leases...................... 620,138 620,138 620,138 11 3/4% Senior Subordinated Discount Notes (2)....... 119,617,285 119,617,285 119,617,285 % Subordinated Notes due 2005...................... -- 80,000,000 80,000,000 8.75% Convertible Senior Subordinated Notes (3)...... 4,950,000 4,950,000 4,950,000 6 3/4% Convertible Subordinated Debentures (3)....... 74,747,000 -- -- --------------- ------------------ ------------------ Total long-term debt............................... 263,138,161 268,391,161 239,778,018 Stockholders' equity: Preferred Stock: $.01 par value; 1,000,000 shares authorized; none issued............................. -- -- -- Common Stock: $.001 par value; 40,000,000 shares authorized; 11,953,959 shares issued (14,659,733 shares adjusted for conversion)..................... 11,954 11,954 14,660 Capital in excess of par value....................... 120,888,317 120,888,317 194,019,643 Accumulated deficit.................................. (113,075,709) (116,706,846) (113,075,709) --------------- ------------------ ------------------ Total stockholders' equity......................... 7,824,562 4,193,425(4) 80,958,594(5) --------------- ------------------ ------------------ Total capitalization............................. $ 270,962,723 $ 272,584,586 $ 320,736,612 --------------- ------------------ ------------------ --------------- ------------------ ------------------ - ------------------------ (1) The 6 3/4% Convertible Subordinated Debentures are convertible into shares of the Company's Common Stock at a conversion price of $27.625 per share of Common Stock on or prior to the Convertible Redemption Date. As of June 27, 1995, the last reported sales price of the Company's Common Stock on the Nasdaq National Market was $27. (2) See "Description of Certain Indebtedness." (3) See Note 6 to the Consolidated Financial Statements. (4) Reflects the write-off of deferred loan costs of $1,612,968 and the payment of the redemption premium of $2,018,169 related to the 6 3/4% Convertible Subordinated Debentures. (5) The change in Common Stock and capital in excess of par value reflects the conversion of the 6 3/4% Convertible Subordinated Debentures and the charge of deferred loan costs of $1,612,968.
17 SELECTED CONSOLIDATED FINANCIAL DATA The following selected consolidated financial data as of and for each of the five years in the period ended September 30, 1994 are derived from consolidated financial statements of the Company that have been audited by Ernst & Young LLP, independent auditors. The selected financial data as of and for the six months ended March 31, 1994 and 1995 are derived from the unaudited financial statements of the Company which, in the opinion of the Company, reflect all adjustments necessary for a fair presentation of the results for the unaudited periods. Operating results for the six months ended March 31, 1995 are not necessarily indicative of the results that may be achieved for the fiscal year ending September 30, 1995. The data should be read in conjunction with the financial statements and other financial information included or incorporated by reference in this Prospectus.
SIX MONTHS ENDED YEAR ENDED SEPTEMBER 30, MARCH 31, -------------------------------------------------------------------- -------------------------- 1990 1991 1992 1993 1994 1994 1995 ------------ ------------ ------------ ------------ ------------ ------------ ------------ STATEMENT OF OPERATIONS DATA (1): Revenues...................... $ 1,024,676 $ 4,908,170 $ 14,906,349 $ 33,689,311 $ 61,360,051 $ 26,455,523 $ 38,339,762 Costs and expenses: Cellular operations......... 2,419,515 11,940,438 18,138,532 30,288,634 50,855,637 23,741,650 33,235,077 Corporate (net of amounts allocated to affiliates)... 1,518,498 (592,798) 997,157 (1,119,298) 406,638 466,658 489,175 Depreciation and amortization............... 1,855,678 8,569,325 14,114,817 19,950,508 12,650,855 5,884,296 8,029,368 Write-down of property and equipment.................. -- -- -- -- 3,116,256 1,472,902 -- ------------ ------------ ------------ ------------ ------------ ------------ ------------ Operating loss................ (4,769,015) (15,008,795) (18,344,157) (15,430,533) (5,669,335) (5,109,983) (3,413,858) Equity in net loss of affiliates................... (5,071,980) (10,931,161) (8,851,753) (6,339,145) (5,092,484) (3,586,024) (2,735,777) Minority interest in equity of affiliates................... -- -- -- -- (543,607) -- (261,004) Gains on sales of affiliates and other.................... -- -- 14,339,063 7,821,424 3,811,943 2,459,004 67,247 Interest expense.............. (6,894,329) (11,245,394) (14,800,908) (16,427,796) (21,338,505) (9,860,292) (11,886,742) Interest income (2)........... 9,028,813 8,484,298 10,616,024 10,701,511 12,080,836 6,813,532 5,955,762 ------------ ------------ ------------ ------------ ------------ ------------ ------------ Loss before extraordinary charge....................... (7,706,511) (28,701,052) (17,041,731) (19,674,539) (16,751,152) (9,283,763) (12,274,372) Extraordinary charge.......... -- -- -- (2,991,673) -- -- -- ------------ ------------ ------------ ------------ ------------ ------------ ------------ Net income (loss)............. $ (7,706,511) $(28,701,052) $(17,041,731) $(22,666,212) $(16,751,152) $ (9,283,763) $(12,274,372) ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ OTHER DATA: EBITDA (3).................... $ (2,913,337) $ (6,439,470) $ (4,229,340) $ 4,519,975 $ 10,097,776 $ 2,247,215 $ 4,615,510 Capital expenditures.......... $ 10,119,823 $ 16,683,753 $ 10,006,787 $ 8,607,732 $ 40,933,127 $ 12,475,110 $ 20,663,454 Cash interest expense......... $ 6,202,185 $ 11,245,394 $ 14,800,908 $ 15,581,591 $ 9,205,350 $ 3,996,380 $ 5,249,182 Net income (loss) per common share........................ $ (1.68) $ (6.00) $ (2.44) $ (2.65) $ (1.45) $ (0.81) $ (1.04) Weighted average shares outstanding.................. 4,594,778 4,780,674 6,984,541 8,551,785 11,577,191 11,414,210 11,792,419 Ratio of earnings to fixed charges (4).................. -- -- -- -- -- -- -- BALANCE SHEET DATA (AT PERIOD END) (1): Working capital............... $ 32,058,078 $ 15,317,636 $ 29,477,995 $ 63,560,591 $ 25,524,500 $ 47,062,957 $ 18,308,376 Investment in and advances to affiliates................... 39,456,182 50,745,576 52,019,577 55,892,372 61,908,761 56,656,672 57,063,587 Net property and equipment.... 13,923,725 33,555,291 44,209,682 53,460,296 79,917,727 57,462,184 86,254,160 Total assets.................. 149,528,094 181,972,276 208,363,573 269,290,185 281,752,821 268,579,932 290,880,354 Long-term debt................ 131,299,631 183,208,596 189,430,430 259,676,224 243,913,168 227,914,886 263,138,161 Total liabilities............. 143,221,602 204,059,999 204,123,685 278,711,956 265,846,354 246,570,843 283,055,792 Stockholders' equity (deficit)(5)................. 6,306,492 (22,087,723) 4,239,888 (9,421,771) 15,906,467 22,009,089 7,824,562 - ------------------------------ (1) Markets in which the Company holds a greater than 50% net interest are reflected on a consolidated basis in the Company's consolidated financial statements. Markets in which the Company holds a net interest which is 50% or less but 20% or greater are accounted for under the equity method. Markets in which the Company holds a less than 20% interest are accounted for under the cost method. The following table sets forth the number of markets and relevant accounting methods at the end of each of the last five fiscal years and at March 31, 1994 and 1995. SEPTEMBER 30, MARCH 31, -------------------------------- ----------- 1990 1991 1992 1993 1994 1994 1995 ---- ---- ---- ---- ---- ---- ---- Consolidated........ 4 22 28 36 42 40 44 Equity.............. 63 47 37 38 35 37 31 Cost................ 18 18 18 6 18 6 18 ---- ---- ---- ---- ---- ---- ---- Total............. 85 87 83 80 95 83 93 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
18 (2) Primarily represents accrued but unpaid interest on advances to affiliates. Also includes interest income on cash balances and short-term investments. (3) "EBITDA" represents, for any relevant period, the sum of operating income (loss), depreciation or write-downs of property, plant and equipment and amortization of intangible assets included in operating income (loss). Certain financial analysts consider EBITDA a meaningful measure of an entity's ability to meet long-term financial obligations, and growth in EBITDA a meaningful barometer of future profitability, especially in a capital-intensive industry such as cellular telecommunications. However, EBITDA should not be considered in isolation to, or be construed as having greater significance than, other indicators of an entity's performance. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- General." (4) The ratio of earnings to fixed charges is determined by dividing the sum of earnings before extraordinary item and accounting charges, interest expense, taxes and a portion of rent expense representative of interest by the sum of interest expense and a portion of rent expense representative of interest. The ratio of earnings to fixed charges is not meaningful for periods that result in a deficit. For the years ended September 30, 1990, 1991, 1992, 1993 and 1994 the deficit of earnings to fixed charges was $7,706,511, $28,701,052, $17,041,731, $22,666,212 and $16,751,152, respectively, and for the six months ended March 31, 1994 and 1995 the deficit of earnings to fixed charges was $9,283,763 and $12,274,372, respectively. (5) No cash dividends were declared or paid during any of the periods presented.
19 SELECTED COMBINED AND PROPORTIONATE OPERATING RESULTS OF CELLULAR LICENSEES The following table presents operating data for all cellular licensees in which the Company holds an interest. The "Combined," "Financed Proportionate" and "Company Proportionate" operating results, which are not included in the Company's consolidated financial statements, are provided to assist in understanding the results of the licensees in which the Company holds an interest. 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 results in the same net income as consolidation; however the net operating results are reflected on one line below operating income. Operating activity related to interests accounted for under the cost method are not reflected at all in a GAAP operating statement.
YEAR ENDED SEPTEMBER 30, ---------------------------------------------------------------------------------- 1993 1994 1994 1993 1994 ------------ ------------ ------------ ------------ ------------ 1993 ------------ FINANCED PROPORTIONATE (2) COMPANY PROPORTIONATE (3) COMBINED (1) -------------------------- -------------------------- -------------------------- MANAGED MARKETS (4) Revenues: Cellular service................. $ 29,635,917 $ 46,628,193 $ 26,374,172 $ 42,682,463 $ 19,454,354 $ 32,766,412 Roaming.......................... 14,357,892 21,724,739 12,813,518 19,845,947 9,249,813 14,881,347 Equipment sales.................. 5,830,780 5,082,082 5,124,328 4,661,880 3,611,838 3,501,916 ------------ ------------ ------------ ------------ ------------ ------------ Total revenues............... 49,824,589 73,435,014 44,312,018 67,190,290 32,316,005 51,149,675 Cash costs and expenses: Cost of sales: Cellular service (including roaming)...................... 10,082,848 11,871,044 9,152,718 11,077,524 6,843,566 8,015,495 Equipment sales................ 6,393,571 5,330,514 5,601,091 4,879,149 3,938,476 3,665,013 General and administrative....... 16,953,198 21,777,015 15,116,346 20,026,263 11,158,734 15,189,078 Marketing and selling............ 13,198,287 20,160,573 11,707,982 18,447,497 8,471,407 14,078,272 ------------ ------------ ------------ ------------ ------------ ------------ Total cash costs and expenses.................... 46,627,904 59,139,146 41,578,137 54,430,433 30,412,183 40,947,858 ------------ ------------ ------------ ------------ ------------ ------------ EBITDA............................. $ 3,196,685 $ 14,295,868 $ 2,733,881 $ 12,759,857 $ 1,903,822 $ 10,201,817 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Capital expenditures............... $ 14,663,546 $ 38,590,797 $ 14,198,732 $ 37,990,560 $ 11,372,540 $ 30,777,363 Subscribers........................ 63,500 99,002 56,624 90,163 41,126 68,378 Total markets...................... 51 55 51 55 51 55 NONMANAGED MARKETS Revenues: Cellular service (including roaming)........................ $ 46,250,589 $ 51,913,569 $ 13,162,799 $ 15,063,941 $ 6,645,574 $ 7,557,907 Equipment sales.................. 2,603,860 3,129,756 748,607 933,368 384,230 493,465 ------------ ------------ ------------ ------------ ------------ ------------ Total revenues............... 48,854,449 55,043,325 13,911,406 15,997,309 7,029,804 8,051,372 Cash costs and expenses: Cost of sales: Cellular service............... 14,715,247 17,184,198 4,537,081 5,121,737 2,180,221 2,509,440 Equipment sales................ 3,226,711 1,865,154 956,915 660,441 484,417 340,680 General and administrative....... 11,548,977 13,007,116 3,517,485 3,914,072 1,794,766 2,030,094 Marketing and selling............ 9,972,847 13,203,205 2,828,569 3,814,477 1,382,380 1,875,793 ------------ ------------ ------------ ------------ ------------ ------------ Total cash costs and expenses.................... 39,463,782 45,259,673 11,840,050 13,510,727 5,841,784 6,756,007 ------------ ------------ ------------ ------------ ------------ ------------ EBITDA............................. $ 9,390,667 $ 9,783,652 $ 2,071,356 $ 2,486,582 $ 1,188,020 $ 1,295,365 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Capital expenditures............... $ 9,368,475 $ 18,343,851 $ 2,860,677 $ 5,605,325 $ 1,348,543 $ 2,753,255 Subscribers........................ 49,786 78,984 14,695 22,845 7,579 11,198 Total markets...................... 29 40 29 40 29 40 RECONCILIATION FROM COMPANY PROPORTIONATE EBITDA TO CONSOLIDATED REPORTING Total Company Proportionate EBITDA (managed and nonmanaged markets).......................... $ 3,091,842 $ 11,497,182 Proportionate depreciation and amortization...................... (6,213,146) (8,976,825) Proportionate write-down of cellular system equipment......... -- (2,513,136) Proportionate interest............. (4,494,552) (7,137,597) Equity in nonlicensee affiliates... (3,892,280) (4,361,848) Minority interests................. (1,897,072) (1,310,177) Intercompany interest.............. 3,317,736 5,021,225 Amortization of license costs not owned by affiliates............... (11,038,663) (1,892,465) Unallocated corporate expenses..... (678,927) (2,516,017) Gains on sales of affiliates....... 7,821,424 3,811,943 Interest expense (net) and other... (8,682,574) (8,373,437) ------------ ------------ Consolidated net loss.............. $(22,666,212) $(16,751,152) ------------ ------------ ------------ ------------
20
SIX MONTHS ENDED MARCH 31, ---------------------------------------------------------------------------------- 1994 1995 1995 1994 1995 ------------ ------------ ------------ ------------ ------------ 1994 ------------ FINANCED PROPORTIONATE (2) COMPANY PROPORTIONATE (3) COMBINED (1) -------------------------- -------------------------- -------------------------- MANAGED MARKETS Revenues: Cellular service................. $ 19,816,799 $ 30,632,634 $ 18,143,975 $ 28,487,884 $ 13,709,098 $ 22,018,537 Roaming.......................... 8,752,626 11,741,508 7,860,799 10,985,625 5,849,634 8,256,246 Equipment sales.................. 2,470,291 2,436,845 2,253,343 2,259,232 1,656,245 1,687,086 ------------ ------------ ------------ ------------ ------------ ------------ Total revenues............... 31,039,716 44,810,987 28,258,117 41,732,741 21,214,977 31,961,869 Cash costs and expenses: Cost of sales: Cellular service (including roaming)...................... 6,260,522 9,719,179 5,698,926 9,186,918 3,983,567 6,797,354 Equipment sales................ 2,562,610 2,811,436 2,322,915 2,576,201 1,707,691 1,945,158 General and administrative....... 9,964,834 12,923,156 9,105,600 12,131,513 6,597,336 9,333,603 Marketing and selling............ 9,133,909 12,698,455 8,312,733 11,814,069 6,286,637 9,026,762 ------------ ------------ ------------ ------------ ------------ ------------ Total cash costs and expenses.................... 27,921,875 38,152,226 25,440,174 35,708,701 18,575,231 27,102,877 ------------ ------------ ------------ ------------ ------------ ------------ EBITDA............................. $ 3,117,841 $ 6,658,761 $ 2,817,943 $ 6,024,040 $ 2,639,746 $ 4,858,992 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Capital expenditures............... $ 6,390,983 $ 19,522,053 $ 6,249,889 $ 17,295,360 $ 4,594,056 $ 13,389,707 Subscribers........................ 78,496 124,057 70,909 114,834 53,040 87,518 Total markets...................... 54 55 54 55 54 55 NONMANAGED MARKETS Revenues: Cellular service (including roaming)........................ $ 26,859,839 $ 35,592,108 $ 7,501,158 $ 10,628,092 $ 3,847,400 $ 5,543,288 Equipment sales.................. 1,659,317 2,934,029 511,062 853,782 268,936 490,090 ------------ ------------ ------------ ------------ ------------ ------------ Total revenues............... 28,519,156 38,526,137 8,012,220 11,481,874 4,116,336 6,033,378 Cash costs and expenses: Cost of sales: Cellular service............... 10,425,979 11,713,506 2,988,035 3,487,467 1,494,754 1,784,999 Equipment sales................ (124,750) 2,050,558 83,971 631,365 45,428 347,255 General and administrative....... 6,849,097 7,457,553 2,063,582 2,219,846 1,103,100 1,660,914 Marketing and selling............ 6,884,094 10,644,801 1,922,403 3,141,880 962,063 1,157,470 ------------ ------------ ------------ ------------ ------------ ------------ Total cash costs and expenses.................... 24,034,420 31,866,418 7,057,991 9,480,558 3,605,345 4,950,638 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ EBITDA............................. $ 4,484,736 $ 6,659,719 $ 954,229 $ 2,001,316 $ 510,991 $ 1,082,740 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Capital expenditures............... $ 12,392,107 $ 18,885,247 $ 3,202,553 $ 6,159,696 $ 1,566,779 $ 3,230,609 Subscribers........................ 63,577 107,118 17,617 31,064 8,698 16,771 Total markets...................... 29 38 29 38 29 38 RECONCILIATION FROM COMPANY PROPORTIONATE EBITDA TO CONSOLIDATED REPORTING Total proportionate EBITDA (managed and nonmanaged markets)........... $ 3,150,737 $ 5,941,732 Proportionate depreciation and amortization...................... (3,967,637) (5,957,343) Proportionate interest expense..... (3,107,183) (4,477,732) Equity in nonlicensee affiliates... (2,241,252) (2,613,204) Minority interests................. (1,096,388) (1,145,423) Intercompany interest.............. 2,239,556 3,155,605 Amortization of license costs not owned by affiliates............... (917,611) (1,062,466) Unallocated corporate expenses..... (3,037,920) (1,617,271) Gains on sales of affiliates....... 2,459,004 67,247 Interest expense (net) and other... (2,765,069) (4,565,517) ------------ ------------ Consolidated net loss.............. $ (9,283,763) $(12,274,372) ------------ ------------ ------------ ------------ - ---------------------------------- (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) 1993 Managed Markets include results and statistics related to the Eau Claire, WI (232) MSA and exclude results and statistics related to the Montana B1 (523) RSA, which were sold and purchased, respectively, in August 1993. The Company continued to manage the Eau Claire MSA through September 30, 1993, and had not yet commenced management of the Montana B1 RSA as of that date. Had 1993 Managed Markets included Montana B1 and excluded Eau Claire, combined subscribers would have been 60,381.
21 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the consolidated financial statements and other financial information included elsewhere or incorporated by reference in this Prospectus. GENERAL Cellular systems typically experience losses and negative cash flow in their initial years of operation and, consistent with this pattern, the Company has incurred losses and negative cash flow since its inception. However, operating losses have declined recently as the Company's focus has shifted from construction and initial operation of cellular systems to increasing penetration and subscriber usage, and the Company expects that EBITDA, which was positive during the fiscal year ended September 30, 1994 and the six months ended March 31, 1995, will also be positive in future fiscal years (although there can be no assurance that this will be the case). Certain financial analysts consider EBITDA a meaningful measure of an entity's ability to meet long-term financial obligations, and growth in EBITDA a meaningful barometer of future profitability, especially in a capital-intensive industry such as cellular telecommunications. However, EBITDA should not be considered in isolation to, or be construed as having greater significance than, other indicators of an entity's performance. The results discussed below may not be indicative of future results. Consolidated results of operations include the revenues and expenses of those markets in which the Company holds a greater than 50% interest. The results of operations of 44 markets, 42 of which were consolidated for the entire period, are included in the consolidated results for the quarter ended March 31, 1995. The results of operations of 40 markets, 39 of which were consolidated the entire quarter, are included in the consolidated results for the quarter ended March 31, 1994. The increase in the number of markets included in consolidated results is due to acquisitions consummated subsequent to March 31, 1994. Consolidated results of operations also include the operations of CIFC as well as the operations of Cellular Inc. Network Corporation ("CINC"), a wholly-owned subsidiary through which the Company holds interests in certain cellular licenses. Equity in net loss of affiliates includes the Company's share of net loss in the markets in which the Company's interest is 50% or less but 20% or greater. For the quarter ended March 31, 1995, 31 markets were accounted for under the equity method, compared to 37 such markets for the quarter ended March 31, 1994. Markets in which the Company's interest is less than 20% are accounted for under the cost method. Eighteen markets were accounted for under the cost method for the quarter ended March 31, 1995, compared to six such markets for the quarter ended March 31, 1994. Interest income reflects interest income derived from the financing activities of CIFC and the Company with nonconsolidated affiliates, as well as interest income derived from the Company's short-term investments. CIFC has entered into loan agreements with the Company's affiliates pursuant to which CIFC makes loans to such entities for the purpose of financing or refinancing the affiliates' costs of construction and operation of cellular telephone systems. Such loans are financed with funds borrowed by CIFC from CoBank and from the Company and bear interest at a rate 1% above CoBank's average rate. From time to time, the Company advances funds on an interim basis to affiliates. These advances typically are refinanced through CIFC. To the extent that the cellular markets in which the Company holds an interest mature and generate positive cash flow, the cash will be used to repay borrowings by the affiliates from CIFC and thereafter to make cash distributions to equity holders, including the Company. RESULTS OF OPERATIONS SIX MONTHS ENDED MARCH 31, 1995 AND 1994. Cellular service revenues, including roaming revenues, increased 53% from $21,852,000 for the six months ended March 31, 1994 to $33,511,000 for the six months ended March 31, 1995. The growth was primarily due to the increase in the number of subscribers in consolidated markets. In addition to increases in market penetration, growth resulted from an increase in the number of markets consolidated for the entire six months from 36 during the six months ended March 31, 1994 to 42 during the six months ended March 31, 1995. Growth in subscribers accounted for 90% of the 22 increase, and the number of consolidated markets accounted for 10% of the increase. Roaming revenues increased 38% or $2,483,000 from $6,495,000 to $8,978,000 due to increased coverage in cellular markets. Roaming revenues are expected to increase in the future as a result of industry-wide growth in subscribers and the Company's expansion of its coverage, particularly along highway corridors; however, roaming rates may decline, consistent with expected industry trends. Average monthly revenue per subscriber, including roaming revenues, decreased from $69 for the six months ended March 31, 1994 to $65 for the six months ended March 31, 1995. The decline primarily reflects the fact that initial subscribers in a market tend to use more cellular service than those who subscribe after a system has been in operation for a period of time. Cost of service increased as a percentage of service revenues from 21% for the six months ended March 31, 1994 to 23% for the six months ended March 31, 1995, primarily due to an increase in costs related to interconnect service. Cellular equipment revenues increased 5% from $4,603,000 for the six months ended March 31, 1994 to $4,829,000 for the six months ended March 31, 1995. The growth was due to the increase in the number of subscribers added, which accounted for $176,000, or 78%, of the increase. In addition, growth resulted from an increase in the number of consolidated markets operated during the six months which represented $50,000, or 22%, of the increase. Cost of equipment sales increased 13% from $4,501,000 for the six months ended March 31, 1994 to $5,072,000 for the six months ended March 31, 1995. General and administrative costs of cellular operations increased 39% from $7,486,000 for the six months ended March 31, 1994 to $10,381,000 for the six months ended March 31, 1995, due to the growth in the customer base and the number of consolidated markets. The majority of these costs were incremental customer billing expense and customer service support staff. In addition, the Company more conservatively estimated uncollectible accounts receivable for the six months ended March 31, 1995, representing approximately $900,000 of the increase compared to the six months ended March 31, 1994. General and administrative costs as a percentage of service revenues decreased from 34% for the six months ended March 31, 1994 to 31% for the six months ended March 31, 1995. The decrease is primarily due to revenues increasing at a faster rate than incremental general and administrative costs. Marketing and selling costs increased 42% from $7,104,000 for the six months ended March 31, 1994 to $10,088,000 for the six months ended March 31, 1995, primarily as a result of the number of subscribers added in consolidated markets. The majority of these costs were incremental sales commissions, advertising costs and incremental sales staff. Marketing costs per net new subscriber decreased 10% from $584 for the six months ended March 31, 1994 to $526 for the six months ended March 31, 1995, as a result of increased net subscriber additions which outpaced increases in costs incurred. The Company is continuing to expand its own retail presence to capitalize on retail trade while driving down commission costs. Results of this expansion are expected by the fourth fiscal quarter. Depreciation and amortization relating to cellular operations increased from $4,786,000 for the six months ended March 31, 1994 to $6,901,000 for the six months ended March 31, 1995, primarily related to increased fixed asset balances. Corporate costs and expenses for the six months ended March 31, 1994 were $1,565,000, which represented gross expenses of $4,451,000 less amounts allocated to nonconsolidated affiliates of $2,886,000. Corporate costs and expenses for the six months ended March 31, 1995 were $1,617,000, which represented gross expenses of $4,850,000 less amounts allocated to nonconsolidated affiliates of $3,233,000. The increase in expenses and amounts allocated to nonconsolidated affiliates reflects an increase in corporate costs attributed to financing operations and incurred costs relative to equipment distribution and other corporate functions. Equity in net loss of affiliates decreased 24% from $3,586,000 for the six months ended March 31, 1994 to $2,736,000 for the six months ended March 31, 1995. The decrease is principally attributable to decreasing losses in markets being accounted for under the equity method at March 31, 1995 compared to March 31, 23 1994 due to increasing penetration and subscriber usage. This has caused a consistent trend of improved operating results. In addition, equity in net loss of affiliates has decreased as fewer markets are being accounted for under the equity method. Interest expense increased 15% from $11,024,000 for the six months ended March 31, 1994 to $12,651,000 for the six months ended March 31, 1995 due to higher accreted discount note and secured bank financing balances. Cash paid for interest decreased 1% from $5,702,000 for the six months ended March 31, 1994 to $5,649,000 for the six months ended March 31, 1995. The CoBank patronage distribution decreased 34% from $1,164,000 in March 1994 to $764,000 in March 1995. The patronage distribution is calculated using the Company's prior calendar year interest expense compared to total interest paid to CoBank by all patrons. The decrease is due to a reduction of approximately $50,000,000 in the Company's debt to CoBank during the fourth fiscal quarter of 1993 which resulted in lower average debt balances for patronage dividend purposes during 1994. Interest income decreased 13% from $6,814,000 for the six months ended March 31, 1994 to $5,956,000 for the six months ended March 31, 1995. The decrease is primarily related to the increase in the number of markets consolidated for the six months ended March 31, 1995, compared to the six months ended March 31, 1994. Consolidation caused the interest earned on advances to the related affiliates to be eliminated as an intercompany transaction. Additionally, interest income for the six months ended March 31, 1995 declined due to lower short-term investment balances. FISCAL YEAR 1994 COMPARED WITH FISCAL YEAR 1993. As of September 30, 1994, the Company held interests in 84 RSA markets and 10 MSA markets compared to 70 RSA markets and 10 MSA markets as of September 30, 1993. All markets in which the Company held an interest were operational as of such dates. Cellular service revenues, including roaming revenues, increased 82% from $28,861,000 in fiscal year 1993 to $52,586,000 in fiscal year 1994. The growth was due to the increase in the number of subscribers in consolidated markets. In addition to increases in market penetration, growth resulted from an increase in the number of markets consolidated during the fiscal year from 36 at September 30, 1993 to 42 at September 30, 1994. Growth in subscribers accounted for 75% of the increase and the number of consolidated markets accounted for 25% of the increase. Average monthly revenue per subscriber decreased 1% from $75 in fiscal year 1993 to $74 in fiscal year 1994. The decline reflects the fact that initial subscribers in a market tend to use more cellular service than those who subscribe after a system has been in operation for a period of time. Cost of service decreased as a percentage of service revenues from 21% in fiscal year 1993 to 18% in fiscal year 1994. Cost of service as a percentage of revenues is expected to continue to decline slightly from this level as revenues derived from the growing subscriber base continue to outpace the fixed components of cost of service. Cellular equipment revenues increased 82% from $4,829,000 in fiscal year 1993 to $8,774,000 in fiscal year 1994. The growth was due to the increase in the number of subscribers added as compared to the number of subscribers added during the prior fiscal year, which accounted for $2,923,000, or 74%, of the increase. In addition, growth resulted from an increase in the number of consolidated markets operated during the year which represented $1,022,000, or 26%, of the increase. Cost of equipment sales increased 69% from $5,218,000 in fiscal year 1993 to $8,835,000 in fiscal year 1994. To enhance subscriber growth, the Company has sold cellular equipment sometimes below cost. The equipment sales margin improved in fiscal year 1994, as compared to fiscal year 1993, as the Company focused on minimizing equipment discounting. General and administrative costs of cellular operations increased 60% from $10,505,000 in fiscal year 1993 to $16,768,000 in fiscal year 1994, due to the growth in the customer base and the number of consolidated markets. The majority of these costs were incremental customer billing expense, roaming validation services and customer service support staff. General and administrative costs as a percentage of service revenues decreased from 36% in fiscal year 1993 to 32% in fiscal year 1994. The decrease is primarily due to revenues increasing at a faster rate than incremental general and administrative costs. 24 Marketing and selling costs increased 86% from $8,465,000 in fiscal year 1993 to $15,786,000 in fiscal year 1994, primarily as a result of the number of subscribers added in consolidated markets. The majority of these costs were incremental sales commissions, advertising costs and incremental sales staff. Marketing costs per net new subscriber decreased 6% from $606 in fiscal year 1993 to $568 in fiscal year 1994, as a result of subscriber additions which outpaced increases in costs incurred. Depreciation and amortization relating to cellular operations decreased 40% from $17,582,000 in fiscal year 1993 to $10,541,000 in fiscal year 1994, primarily as a result of the change, effective October 1, 1993, in the Company's estimate of the useful life of acquired FCC license costs from the remaining initial ten-year term to 40 years from the date of acquisition. The change is predicated upon the FCC's establishment of procedures to grant a renewal expectancy to incumbent cellular licensees virtually assuring that the initial ten-year term of an FCC license to provide cellular telephone service will be renewed if a licensee meets broadly defined public service benchmarks. Other publicly-held cellular telephone companies also treat a cellular license as economically perpetual. Commencing October 1, 1993, the net book value of acquired license costs at September 30, 1993 will be amortized over 40 years less the number of months from the date of the acquisition which gave rise to such costs. Management believes this treatment complies with accounting literature given current facts and circumstances and will reevaluate this estimate as changes in facts and circumstances occur. During the year ended September 30, 1994, the Company recognized a $3,116,000 write-down of equipment associated with a program of upgrades to switching capacity and features, the relocation of certain cell sites to increase coverage and other nonrecurring events. The program of upgrades to switching capacity and features will continue into the next fiscal year and will cause a further write-down of approximately $234,000 when new equipment is placed into service. Corporate costs and expenses in fiscal year 1993 were $1,249,000, which represented gross expenses of $9,491,000 less amounts allocated to nonconsolidated affiliates of $8,242,000. Corporate costs and expenses in fiscal year 1994 were $2,516,000, which represented gross expenses of $9,054,000 less amounts allocated to nonconsolidated affiliates of $6,538,000. The decrease in expenses and amounts allocated to nonconsolidated affiliates reflects the decrease in the number of nonconsolidated managed markets as consolidation caused corporate costs and expenses to be reclassified as cellular costs and expenses. Equity in net loss of affiliates decreased 20% from $6,339,000 in fiscal year 1993 to $5,092,000 in fiscal year 1994. The decrease is principally attributable to decreasing losses in markets being accounted for under the equity method at September 30, 1994, compared to September 30, 1993, due to the shift in focus in these markets from construction and initial operation to increasing penetration and subscriber usage. This shift has caused a consistent trend of improved operating results. Interest expense increased 30% from $16,428,000 in fiscal year 1993 to $21,339,000 in fiscal year 1994. The increase is a result of the issuance in August 1993 of the Company's 11 3/4% Senior Subordinated Discount Notes. However, cash paid for interest decreased 37% from $15,455,000 in fiscal year 1993 to $9,731,000 in fiscal year 1994 as interest accretes during the first five years of the term of the discount notes. Interest income increased 13% from $10,702,000 in fiscal year 1993 to $12,081,000 in fiscal year 1994. The modest increase in interest income was the result of higher note balances owed to the Company by nonconsolidated affiliates, offset by lower cash and short-term investment balances, declining interest rates and the consolidation of six additional markets during fiscal year 1994. Consolidation caused the interest earned on advances to the related affiliates to be eliminated as an intercompany transaction. During fiscal year 1994, the Company recognized a permanent write-down of certain short-term government bond investments of approximately $744,000 due to market conditions. During fiscal year 1994, the Company recognized gains on sales of affiliates of $2,905,000, primarily related to the sale of its limited partnership interest in MSA 239 (Joplin, MO) during the second quarter of fiscal 1994 ($1,921,000) and a multimarket transaction with Contel Cellular, Inc. during the third quarter of fiscal 1994 ($841,000). An additional $907,000 gain was recognized due to the write-off of contingent liabilities related to stock price guarantees. See "Acquisitions and Sales." During fiscal year 1993, the 25 Company recognized gains on sales of affiliates of $7,821,000 primarily related to the multimarket exchanges with U S WEST NewVector Group, Inc. ("U S WEST NewVector") during the second quarter of fiscal 1993 ($3,812,000) and Pacific Telecom Cellular, Inc. ("PTI") during the fourth quarter of fiscal 1993 ($4,889,000). At September 30, 1994, the Company had net operating loss carryforwards for income tax purposes of $54,725,000, compared to $46,578,000 at September 30, 1993. FISCAL YEAR 1993 COMPARED WITH FISCAL YEAR 1992. As of September 30, 1993, the Company held interests in 70 RSA markets and 10 MSA markets compared to 72 RSA markets and 11 MSA markets as of September 30, 1992. All markets in which the Company held an interest were operational as of such dates. Cellular service revenues, including roaming revenues, increased 135% from $12,302,000 in fiscal year 1992 to $28,861,000 in fiscal year 1993. The growth was due to the increase in the number of subscribers in consolidated markets. In addition to increases in market penetration, growth resulted from an increase in the number of markets consolidated during the fiscal year from 28 at September 30, 1992 to 36 at September 30, 1993. Growth in subscribers accounted for 69% of the increase and the number of consolidated markets accounted for 31% of the increase. Average monthly revenue per subscriber decreased 6% from $80 in fiscal year 1992 to $75 in fiscal year 1993. This decline was consistent with industry trends and reflects the fact that initial subscribers in a market tend to use more cellular service than those who subscribe after a system has been in operation for a period of time. Cost of service decreased as a percentage of service revenues from 35% in fiscal year 1992 to 21% in fiscal year 1993. Cellular equipment revenues increased 85% from $2,605,000 in fiscal year 1992 to $4,829,000 in fiscal year 1993. The growth was due to the increase in the number of subscribers added as compared to the number of subscribers added during the prior fiscal year, which accounted for $1,381,000, or 62%, of the increase. In addition, growth resulted from an increase in the number of consolidated markets operated during the year which represented $843,000, or 38%, of the increase. Cost of equipment sales increased 57% from $3,320,000 in fiscal year 1992 to $5,218,000 in fiscal year 1993. The equipment sales margin improved in fiscal year 1993, as compared to fiscal year 1992, as the Company focused on minimizing equipment discounting. General and administrative costs of cellular operations increased 100% from $5,260,000 in fiscal year 1992 to $10,505,000 in fiscal year 1993, due to the growth in the customer base and the number of consolidated markets. The majority of these costs were incremental customer billing expense, roaming validation services and customer service support staff. General and administrative costs as a percentage of service revenues decreased from 43% in fiscal year 1992 to 36% in fiscal year 1993. Marketing and selling costs increased 62% from $5,236,000 in fiscal year 1992 to $8,465,000 in fiscal year 1993, primarily as a result of the number of subscribers added in consolidated markets. The majority of these costs were incremental sales commissions, advertising costs and incremental sales staff. Marketing costs per net new subscriber decreased 6% from $647 in fiscal year 1992 to $606 in fiscal year 1993. Depreciation and amortization relating to cellular operations increased 51% from $11,611,000 in fiscal year 1992 to $17,582,000 in fiscal year 1993, primarily as a result of amortization of intangible assets related to markets acquired subsequent to September 30, 1992. The Company amortized intangible assets related to acquired license rights over the remainder of the initial ten-year license term which in the case of the majority of additions to license rights from 1993 acquisitions was less than four years. Corporate costs and expenses in fiscal year 1992 were $3,501,000, which represented gross expenses of $12,973,000 less amounts allocated to nonconsolidated affiliates of $9,472,000. Corporate costs and expenses in fiscal year 1993 were $1,249,000, which represented gross expenses of $9,491,000 less amounts allocated to nonconsolidated affiliates of $8,242,000. The decrease in expenses and amounts allocated to nonconsolidated affiliates reflects the decrease in the number of nonconsolidated managed markets as consolidation caused corporate costs and expenses to be reclassified as cellular costs and expenses. 26 Equity in net loss of affiliates decreased 28% from $8,852,000 in fiscal year 1992 to $6,339,000 in fiscal year 1993. The decrease is principally attributable to decreasing losses in markets being accounted for under the equity method at September 30, 1993, compared to September 30, 1992, due to the shift in focus in these markets from construction and initial operation to increasing penetration and subscriber usage which has caused a consistent trend of improved operating results. Interest expense increased 11% from $14,801,000 in fiscal year 1992 to $16,428,000 in fiscal year 1993. The increase was commensurate with increases in long-term debt. Interest income increased 1% from $10,616,000 in fiscal year 1992 to $10,702,000 in fiscal year 1993. The modest increase in interest income was the result of higher note balances owed to the Company by nonconsolidated affiliates, offset by lower cash and short-term investment balances, declining interest rates and the consolidation of eight additional markets during fiscal year 1993. Consolidation caused the interest earned on advances to the related affiliates to be eliminated as an intercompany transaction. During fiscal year 1993, the Company recognized gains on sales of affiliates of $7,821,000, primarily related to the multimarket exchanges with U S WEST NewVector during the second quarter of fiscal 1993 ($3,812,000) and with PTI during the fourth quarter of fiscal 1993 ($4,889,000). During fiscal year 1992, the Company recognized gains on sales of affiliates of $14,339,000 of which $8,711,000 was related to the disposition of the Company's interest in the Colorado Springs, Colorado wireline cellular system during the first quarter of fiscal 1992, $4,157,000 was related primarily to an exchange of interests with US West NewVector during the second quarter of fiscal 1992 and $2,310,000 was related to the disposition of the Company's interest in one limited partnership during the third quarter of fiscal year 1992. At September 30, 1993, the Company had net operating loss carryforwards for income tax purposes of $46,578,000, compared to $42,202,000 at September 30, 1992. ACQUISITIONS AND SALES In December 1993, the Company acquired 100% of the stock of a corporation which owns and operates the Rapid City, South Dakota MSA market and owns general partnership interests in two partitioned RSA markets (South Dakota 5 (B2) and South Dakota 6 (B2)) for approximately $10,420,000 in cash plus property valued at approximately $400,000. In December 1993, the Company sold its interests in affiliates which held a 44.44% limited partnership interest in the wireline licensee for RSA 608 (Oregon 3) for approximately $2,076,000 in cash. The sale resulted in a gain of approximately $630,000. In December 1993, the Company acquired additional interests in two affiliated corporations for approximately $139,000. In February 1994, the Company acquired an additional 51% of the stock of an affiliate which held a 28.6% limited partnership interest in MSA 239 (Joplin, MO) for 69,051 shares of the Company's common stock, then sold the limited partnership interest for $4,494,000 in cash. The sale resulted in a gain of approximately $1,921,000. In March 1994, the Company acquired an additional interest in an affiliated corporation for 2,732 shares of the Company's common stock. In April 1994, the Company acquired three affiliated corporations which hold limited partnership interests in Utah RSA markets for 80,145 shares of the Company's common stock. In May 1994, the Company sold its interest in an affiliate which held a 8.125% limited partnership interest in three nonmanaged RSA markets for approximately $2,468,000 in cash. The sale resulted in a gain of approximately $841,000. Contemporaneously, the Company acquired additional limited partnership interests in four managed RSA markets for approximately $373,000. In July 1994, the Company acquired an additional interest in an affiliated corporation for approximately $199,000 in cash. 27 In August 1994, the Company acquired an aggregate of 3.07% of the stock of a corporation which operates cellular systems throughout Kansas from two unrelated corporations for approximately $3,000,000 in cash. In November 1994, the Company purchased an additional 5.97% interest in Nebwest Cellular, Inc. for $1,600,000 in cash. Pursuant to the terms of a shareholder's agreement, the Company subsequently sold a portion of that interest to the other shareholders on a pro rata basis for approximately $450,000 in cash. In February 1995, the Company purchased an additional 3.37% interest in this corporation for 34,688 shares of the Company's Common Stock. In March 1995, the Company purchased an additional 2.57% interest in this corporation for 28,638 shares of the Company's Common Stock. In January 1995, the Company sold a wholly-owned subsidiary for approximately $86,000 which resulted in a loss of approximately $297,000. In January 1995, the Company transferred its 25% interest in one nonmanaged RSA market to a partner in that market pursuant to a judgment. The judgment is currently being appealed. The Company received approximately $1,699,000 upon transfer of the interest which resulted in a gain of approximately $497,000. In February 1995, the Company purchased additional interests ranging from 2% to 41% in eleven managed and one nonmanaged markets for approximately $1,259,000 in cash and the issuance of 49,738 shares of the Company's Common Stock. The Company has entered into an agreement to sell its 61.5% interest in Nebwest Cellular, Inc. which owns 25.52% of Nebraska Cellular Telephone Corporation, the licensee for the ten wireline RSA markets in the state of Nebraska, for approximately $24,300,000 which will result in a gain after tax of approximately $19,600,000. This transaction is expected to close during July 1995. The interest to be purchased from the Company, as well as interests in the Nebraska RSA markets to be purchased from other entities, will be acquired at a cost of over $200 per pop after taking into account debt assumed or refinanced. In May and June 1995, the Company acquired additional interests ranging from 17% to 51% in two managed and two nonmanaged markets for an aggregate of 138,168 shares of the Company's Common Stock. The Company has initiated discussions regarding possible acquisition of markets or interests in Iowa, Wyoming, North Dakota and Kansas. Such acquisitions will be pursued to the extent they enhance or extend the Company's network and increase shareholder value. Accordingly, there can be no assurance that any such acquisitions will be consummated. CHANGES IN FINANCIAL CONDITION SIX MONTHS ENDED MARCH 31, 1995 Net cash provided by operating activities was $747,000 during the six months ended March 31, 1995. This was primarily due to an increase to accrued interest of $364,000 and decreases of $129,000 to accounts receivable and $905,000 to inventory and other current assets. Additionally, a loss of $222,000 was recognized on the sale of available-for-sale securities during the first quarter of fiscal year 1995. Working capital increases will likely require cash in future periods as growth in the subscriber base continues. Net cash used by investing activities was $1,672,000 for the six months ended March 31, 1995. This was due primarily to the sale of available-for-sale securities which provided $21,427,000, offset by $12,529,000 required to fund the purchase of property and equipment, $7,515,000 to increase the investment in cellular system equipment, and $2,427,000 used for additions to investments in and advances to affiliates. Net cash provided by financing activities was $13,240,000 for the six months ended March 31, 1995. These proceeds include $13,409,000 of cash from incremental secured bank financing and $770,000 of cash from the issuance of Common Stock upon exercise of options. 28 FISCAL YEAR 1994. Net cash used by operating activities was $7,170,000 during the year ended September 30, 1994. The rapid increase in subscribers and revenues caused an increase of $2,912,000 in accounts receivable and an increase of $4,363,000 in inventory and other current assets. Working capital increases will likely require cash in future periods as growth in the subscriber base continues. Net cash used by investing activities was $49,864,000 for the year ended September 30, 1994. This was due primarily to $31,455,000 of cash required to fund the purchase of property and equipment related to the Company's expansion efforts, including $6,789,000 related to nonconsolidated affiliates reflected as additions to investments in and advances to affiliates. In addition, the Company acquired the Rapid City MSA and interests in other managed markets using $13,992,000, and sold nonmanaged interests providing cash of $9,037,000. Net cash provided by financing activities was $13,455,000 for the year ended September 30, 1994. These proceeds include $11,149,000 of incremental secured bank financing and $1,479,000 of cash from the issuance of Common Stock upon exercise of options. FISCAL YEAR 1993. Net cash used by operating activities was $18,579,000 during the year ended September 30, 1993. The rapid increase in subscribers and revenues caused an increase of $3,721,000 in accounts receivable and an increase of $789,000 in inventory and other current assets. Working capital increases will likely require cash in future periods as growth in the subscriber base continues. Net cash used by investing activities was $29,831,000 for the year ended September 30, 1993. This was due primarily to $7,547,000 of cash required to fund the purchase of property and equipment related to the Company's expansion efforts, including $9,274,000 related to nonconsolidated affiliates reflected as additions to investments in and advances to affiliates. In addition, the Company acquired interests in other managed markets using $12,082,000, and sold nonmanaged interests providing cash of $7,334,000. Net cash provided by financing activities was $69,535,000 for the year ended September 30, 1993. These proceeds include $100,000,000 from the issuance of senior discount notes, and $4,950,000 of cash from the issuance of convertible subordinated notes. In addition, the Company paid down a net of $35,629,000 of secured bank financing. LIQUIDITY AND CAPITAL RESOURCES GENERAL. CommNet Cellular Inc. (referred to herein as the "parent company") is effectively a holding company and, accordingly, must rely on dividends, loan repayments and other intercompany cash flows from its affiliates and subsidiaries to generate the funds necessary to satisfy the parent company's capital requirements. On a consolidated basis, the Company's principal source of liquidity is the Credit Agreements, pursuant to which CoBank agreed to lend up to $130,000,000 to CIFC generally to be reloaned by CIFC to the Company's affiliates for the construction, operation and expansion of cellular telephone systems. Of the $130,000,000, up to $57,100,000 was available to be borrowed by CIFC to be loaned to the Company for general corporate purposes, including capital expenditures, debt service and acquisitions. The Credit Agreements restrict the ability of the Company's affiliates and subsidiaries, a substantial number of which are consolidated for financial statement purposes, to make distributions to the parent company until such affiliates and subsidiaries have repaid all outstanding debt to CIFC. As a result, a substantial portion of the Company's consolidated cash flows and cash balances is not available to satisfy the parent company's capital and debt service requirements. The Company's budgeted capital requirements consist primarily of (i) parent company capital expenditures, working capital, debt service and certain potential acquisitions and (ii) the capital expenditures, working capital, 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 (see "Prospectus Summary -- Strategy -- Acquisitions and Dispositions"), and to the extent the Company consummates acquisitions not presently contemplated by the budget, additional capital will be required. As of March 31, 1995, the Company had unused commitments under the Credit Agreements of $65,940,000, of which approximately $43,000,000 was available to be loaned to the parent company for 29 general corporate purposes. In addition to the liquidity provided by the Credit Agreements, at March 31, 1995 the Company, on a consolidated basis, had available $14,408,000 of cash and cash equivalents, of which $14,341,000 is available to fund parent company capital and debt service requirements. In addition, the Company has entered into an agreement to sell its Nebraska RSA interests for approximately $24,300,000 in cash. See "-- Acquisitions and Sales." The Company expects that substantially all of the net proceeds from such sale will be available to fund parent company capital expenditures and acquisitions, if any. On a consolidated basis, the Company's capital expenditures for fiscal year 1994 and the six months ended March 31, 1995 were $40,933,000 and $20,663,000, respectively. The Company plans to make parent company capital expenditures and fund working capital and acquisition requirements for the balance of fiscal year 1995 and for fiscal year 1996 of $28,686,000 and $29,182,000, respectively, primarily for switch capacity and computer system upgrades. Capital expenditures, working capital, and other operating requirements of the Company's affiliates are expected to be $30,760,000 and $21,221,000 for the balance of fiscal 1995 and fiscal 1996, respectively, for working capital requirements, channel expansion and additional cell sites. The Company's affiliates will require an additional $15,639,000 during calendar year 1996 for principal amortization of the Credit Agreements if the extension of the termination date of the Credit Agreements (as described in the following paragraph) is not obtained. The Company believes operating cash flow, existing cash balances, borrowing availability under the Credit Agreements and proceeds of the sale of the Nebraska RSA interests will be sufficient to meet the anticipated capital requirements of the parent company and the affiliates. The Company's near-term debt service requirements will consist of interest payments on the indebtedness incurred under the Credit Agreements, interest payments on the Company's 8.75% Convertible Senior Subordinated Notes and interest payments on the Notes. Interest on the Company's 11 3/4% Senior Subordinated Discount Notes is payable in cash commencing March 1, 1999. Following the Offering and the application of the net proceeds therefrom (assuming all of the 6 3/4% Convertible Subordinated Debentures are redeemed), the Company anticipates its cash interest expense for the balance of fiscal year 1995 and for fiscal year 1996 will be $9,000,000 and $24,000,000, respectively. Revolving loan indebtedness outstanding under the Credit Agreements will be converted to term loan indebtedness at December 31, 1995 and will be amortized over the next five years. The Company is seeking to extend the termination date of the Credit Agreements to December 31, 1996. See "The Credit Agreements" below. If the extension is not obtained, the Company expects that principal amortization of $15,639,000 in respect of the Credit Agreements will be required during the course of the calendar year ending December 31, 1996. The Company believes operating cash flow, existing cash balances, borrowing availability under the Credit Agreements and the proceeds of the sale of the Nebraska RSA interests will be sufficient to meet the anticipated debt service requirements of the Company at both the parent company level and on a consolidated basis. Although the Company believes that the foregoing sources of liquidity will be sufficient to meet budgeted capital expenditures and debt service requirements of the parent company and the affiliates, there can be no assurance that this will be the case. In particular, there can be no assurance that the Company will be able to consummate the sale of the Nebraska RSA interests or extend the termination date of the Credit Agreements. In such event the Company believes it will be able to satisfy its capital expenditure and debt service requirements with unrestricted operating cash flow; however, the Company may be required to reduce discretionary capital spending. To the extent the Company's cash flow is not sufficient to satisfy such requirements, the Company will be required to raise funds through additional financings or asset sales. The Company continually evaluates the acquisition of cellular properties. Acquisitions are likely to require capital in addition to the budgeted capital requirements described above, and such requirements may in turn require the issuance of additional debt or equity securities. The Company's ability to finance the acquisition of additional cellular properties with debt financing may be constrained by certain restrictions contained in its existing debt instruments. In such event, the Company would be required to seek amendments to such instruments. There can be no assurance that such amendments could be obtained on terms acceptable to the Company. 30 THE CREDIT AGREEMENTS. Pursuant to the Credit Agreements, CoBank has agreed to loan up to $130,000,000 to CIFC to be reloaned by CIFC to affiliates of the Company for the construction, operation and expansion of cellular telephone systems. In addition, as of March 31, 1995, approximately $43,000,000 of the $130,000,000 is available under the Credit Agreements to be borrowed by CIFC and loaned to the Company for general corporate purposes. As of March 31, 1995, the outstanding balance under the Credit Agreements was approximately $64,295,000. The Credit Agreements provide, at the Company's option, for interest at 1.00% over prime (10.00% at March 31, 1995) or 2.25% over LIBOR (8.84% at March 31, 1995). The loans are secured by a first lien upon all of the assets of CIFC and each of the affiliates to which funds are advanced by CIFC. In addition, the Company has guaranteed the obligations of CIFC to CoBank and has granted CoBank a first lien on all of the assets of the Company as security for such guaranty. In accordance with the Company's desire to minimize interest rate fluctuations and to improve the predictability of costs incurred throughout its growth stage, CIFC has elected to fix interest rates on approximately $63,140,000 of its long-term debt payable to CoBank at rates ranging from 8.46% to 10.90%. Additionally, CIFC has entered into a prime-based interest rate swap with CoBank as a means of controlling interest rates on $2,500,000 of its variable rate loans. This swap agreement was entered into on July 1, 1993 for a three-year period ending July 1, 1996. The swap agreement requires CIFC to pay a fixed rate of 7.01% over the term of the swap, and CoBank to pay a floating rate of prime (9.00% at March 31, 1995). The weighted average interest rate of borrowings under the Credit Agreements, after giving effect to the swap, was 9.94% at May 31, 1995. The Credit Agreements prohibit the payment of cash dividends, limit the use of borrowings, prohibit any other senior borrowings, restrict expenditures for certain investments, require the maintenance of certain minimum levels of net worth, working capital, cash and operating cash flow and require the maintenance of certain liquidity, capitalization, debt, debt service and operating cash flow ratios. The requirements of the Credit Agreements were established in relation to the anticipated capital and financing needs of the Company's affiliates and their anticipated results of operations. The Company is currently in compliance with all covenants and anticipates it will continue to meet the requirements of the Credit Agreements. CoBank has sold participations in the Credit Agreements to two other financial institutions whose approval may be required for waivers or other amendments to the Credit Agreements requested by CIFC or the Company. CIFC and CoBank are negotiating to increase the facility under the Credit Agreements from the current $130,000,000 to $165,000,000. Of the increase of $35,000,000, $10,000,000 will be available for loans to affiliates of the Company to cover capital, operating and debt service requirements and $25,000,000 will be available to fund the acquisitions of additional cellular systems, subject to certain conditions. As a result of this increase request, CoBank is currently soliciting potential participations in the facility from commercial banks. The facility will also be amended, among other things, to extend the termination date of the loans from December 31, 1995 to December 31, 1996, to reduce the principal amortization period from five to four years and to incorporate new financial covenants. The Company believes that it will be successful in obtaining the foregoing amendments to the Credit Agreements, although there can be no assurance that it will be able to do so. The Company also believes that if necessary it could refinance and replace the Credit Agreements with a secured bank facility provided by lenders other than CoBank. However, there can be no assurance that the Company would be able to secure any such facility. 31 BUSINESS GENERAL CommNet Cellular Inc. was organized under the laws of Colorado in 1983. CIFC subsequently was organized to provide financing to affiliates of the Company, and CINC was organized to acquire interests in cellular licenses. CIFC and CINC are wholly-owned subsidiaries of CommNet Cellular Inc. The Company operates, manages and finances cellular telephone systems, primarily in rural markets in the mountain and plains regions of the United States. The Company's cellular interests currently represent approximately 3,356,000 net Company pops in 93 markets located in 15 states. These markets consist of 83 RSA markets having a total of 6,152,000 pops and 10 MSA markets having a total of 1,274,000 pops, of which the Company's interests represent 2,734,000 and 622,000 net Company pops, respectively. Systems in which the Company holds an interest constitute the largest geographic collection of contiguous cellular markets in the United States. The Company was formed to acquire cellular interests through participation in the licensing process conducted by the FCC. In order to participate in that process, the Company formed affiliates which originally were owned at least 51% by one or more independent telephone companies and no more than 49% by the Company. See "-- Federal Regulation." In exchange for the Company's 49% interest, the Company agreed to provide financing to affiliates for their ongoing capital needs, as well as certain management services. The Company subsequently has purchased additional interests in many of such affiliates, as well as in additional cellular properties. The Company currently manages 55 of the 93 markets in which it holds an interest and owns a greater than 50% interest in 45 of its 55 managed markets. The Company currently finances entities holding interests representing approximately 4,459,000 pops, of which 3,356,000 are included in net Company pops and 1,103,000 are attributable to parties other than the Company. Since completion of the licensing process, the Company has concentrated on creating an integrated network of contiguous cellular systems comprised of markets which are managed by the Company. The network currently consists of 55 markets (48 RSA and 7 MSA markets) spanning eight states and represents approximately 3,905,000 pops and 2,915,000 net Company pops. As of March 31, 1995, the RSA and MSA managed markets had 87,377 and 36,680 subscribers, respectively. The Company has been significantly expanding radio signal coverage, with construction of 50 cell sites already complete in fiscal year 1995 and 57 additional cell sites expected to be completed by the end of the fiscal year. The Company expects that by September 30, 1995 radio signal coverage will reach 96% of the population within the managed markets and will reach 98% during fiscal year 1996. No significant expansion of radio signal coverage within the 55 managed markets is contemplated thereafter. The Company's integrated network of contiguous cellular systems benefits from certain technical, operational and marketing efficiencies which have enabled the Company to produce operating results that compare favorably with other cellular operators. For example, for the calendar year 1994, the Company's average monthly revenue per subscriber in managed markets was approximately $68, compared to an industry average of $64. During the same period, the Company's acquisition cost per net added subscriber was $520, compared to $625 for the industry as a whole. In addition, during this same period the Company achieved a penetration rate of 3.5%, notwithstanding the fact that a substantial majority of the markets within the network have been operational for less than five years and are not as mature as more established markets, particularly large MSA markets with longer operating histories. Finally, the Company has achieved annual subscriber growth of over 60% in each of the last two fiscal years and has recorded positive EBITDA for the last eight fiscal quarters. EBITDA should not be considered in isolation to, or be construed as having greater significance than, other indicators of an entity's performance. See "Summary Consolidated Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- General." The Company believes that certain demographic characteristics of the rural marketplace should further facilitate commercial exploitation of the network. As compared to urban residents, rural residents travel 32 greater distances by personal vehicle and have access to fewer public telephones along drive routes. The Company believes that these factors will sustain demand for mobile telecommunication service in the rural marketplace. These same factors produce roaming revenues that are higher as a percentage of total revenues than would likely be the case in more densely populated urban areas. Roaming revenues result in higher margins because roaming calls are priced at higher rates than local calls without generating associated sales commission costs. During the 12 months ended March 31, 1995, roaming revenues constituted 30% of the Company's total managed markets service revenues, compared to 13% of industry service revenues generally for calendar year 1994. THE COMPANY'S OPERATIONS GENERAL. Information regarding the Company's interests in each affiliate, the interest of each affiliate in a cellular licensee and the market subject to such license as of June 14, 1995, is summarized in the following table. The table does not reflect transactions that are pending or under negotiation. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Acquisitions and Sales."
AFFILIATE(S) MSA OR COMPANY INTEREST INTEREST IN 1993 NET COMPANY RSA CODE (1) STATE IN AFFILIATE(S) (2) LICENSEE (3) POPULATION (4)(5) POPS (6) - ------------ -------------------- -------------------- -------------------- ------------------ ----------- MSAs: 141 Minnesota 49.00% 16.34% LP 229,336 18,362 185 Indiana 100.00% 16.67% LP 169,124 28,193 241*(7)(8) Colorado 73.99% 100.00% GP 124,638 92,220 253*(7)(8) Iowa 74.50% 100.00% GP 117,652 87,651 267*(7)(8) South Dakota 100.00% 51.00% GP 131,561 67,096 268*(7)(8) Montana 54.10% 100.00% GP 119,363 64,575 279 Maine 33.33% 33.33% GP 103,417 11,488 289*(7)(8) South Dakota 100.00% 100.00% GP 111,371 111,371 297*(7)(8) Montana 100.00% 100.00% GP 80,098 80,098 298*(7)(8) North Dakota 100.00% 70.00% GP 86,977 60,884 ---------- ----------- Total MSA 1,273,537 621,938
RSAs: 348*(8) Colorado 10.00% 100.00% GP 43,672 4,367 349*(7)(8) Colorado 58.60% 100.00% GP 61,659 36,132 351*(7)(8) Colorado 61.75% 100.00% GP 62,916 38,851 352*(7)(8) Colorado 66.00% 100.00% GP 25,783 17,017 353*(7)(8) Colorado 100.00% 100.00% GP 65,251 65,251 354*(7)(8) Colorado 69.40% 100.00% GP 44,328 30,764 355*(8) Colorado 49.00% 100.00% GP 44,194 21,655 356*(8) Colorado 49.00% 100.00% GP 27,259 13,357 389 Idaho 100.00% 50.00% LP 64,671 32,336 390 Idaho 100.00% 33.33% LP 15,485 5,162 392*(7)(8) Idaho (B1) 100.00% 100.00% LP 132,888 132,888 393*(7)(8) Idaho 91.64% 100.00% GP 280,569 257,113 415 Iowa 49.00% 20.64% LP 155,247 15,701 416 Iowa 49.00% 78.57% LP 108,129 41,629 417*(7)(8) Iowa 100.00% 100.00% GP 152,597 152,597 419* Iowa 49.00% 91.67% GP 54,659 24,552 420*(7)(8) Iowa 100.00% 100.00% GP 63,458 63,458 424 Iowa 49.00% 35.00% LP 66,743 11,446 425* Iowa 49.00% 27.11% LP 108,426 14,403 426*(8) Iowa 52.65% 93.33% GP 84,932 41,734 427*(8) Iowa 53.64% 91.66% GP 102,773 50,530
33
AFFILIATE(S) MSA OR COMPANY INTEREST INTEREST IN 1993 NET COMPANY RSA CODE (1) STATE IN AFFILIATE(S) (2) LICENSEE (3) POPULATION (4)(5) POPS (6) - ------------ -------------------- -------------------- -------------------- ------------------ ----------- 428(8) Kansas 100.00% 3.07% LP 28,103 863 429(8) Kansas 100.00% 3.07% LP 31,121 955 430(8) Kansas 100.00% 3.07% LP 52,640 1,616 431(8) Kansas 100.00% 3.07% LP 129,852 3,986 432(8) Kansas 100.00% 3.07% LP 118,599 3,641 433(8) Kansas 100.00% 3.07% LP 20,138 618 434(8) Kansas 100.00% 3.07% LP 81,515 2,503 435(8) Kansas 100.00% 3.07% LP 126,535 3,885 436(8) Kansas 100.00% 3.07% LP 57,937 1,779 437(8) Kansas 100.00% 3.07% LP 104,942 3,222 438(8) Kansas 100.00% 3.07% LP 81,130 2,491 439(8) Kansas 100.00% 3.07% LP 42,198 1,295 440(8) Kansas 100.00% 3.07% LP 29,155 895 441(8) Kansas 100.00% 3.07% LP 171,226 5,257 442(8) Kansas 100.00% 3.07% LP 154,341 4,738 512 Missouri (B1) 49.00% 30.00% LP 76,061 11,181 523*(7)(8) Montana (B1) 100.00% 100.00% GP 66,841 66,841 523*(7)(8) Montana (B2) 100.00% 98.76% GP 70,350 69,478 524*(7)(8) Montana 61.75% 100.00% GP 37,386 23,086 525*(7)(8) Montana 69.40% 100.00% GP 14,877 10,325 526*(7)(8) Montana 100.00% 100.00% GP 39,843 39,843 527*(7)(8) Montana 100.00% 100.00% GP 174,631 174,631 528*(7)(8) Montana 61.75% 100.00% GP 63,009 38,908 529*(7)(8) Montana 74.50% 100.00% GP 28,742 21,413 530*(7)(8) Montana 61.75% 100.00% GP 83,488 51,554 531*(7)(8) Montana 100.00% 100.00% GP 30,990 30,990 532*(7)(8) Montana 100.00% 100.00% GP 19,431 19,431 533 Nebraska 61.50% 25.52% LP 90,016 14,128 534 Nebraska 61.50% 25.52% LP 31,353 4,921 535 Nebraska 61.50% 25.52% LP 115,108 18,066 536 Nebraska 61.50% 25.52% LP 35,803 5,619 537 Nebraska 61.50% 25.52% LP 142,155 22,311 538 Nebraska 61.50% 25.52% LP 105,599 16,574 539 Nebraska 61.50% 25.52% LP 89,125 13,988 540 Nebraska 61.50% 25.52% LP 58,058 9,112 541 Nebraska 61.50% 25.52% LP 81,697 12,822 542 Nebraska 61.50% 25.52% LP 85,250 13,380 553 New Mexico 49.00% 33.33% LP 245,584 40,108 555 New Mexico 49.00% 25.00% LP 76,635 9,388 557 New Mexico 49.00% 33.33% LP 55,076 8,995 580*(7)(8) North Dakota 52.76% 100.00% GP 102,513 54,086 581*(8) North Dakota 49.00% 100.00% GP 60,131 29,464 582 North Dakota 49.00% 84.59% LP 91,629 37,979 583*(8) North Dakota 49.00% 100.00% GP 65,783 32,234 584*(7)(8) North Dakota 61.75% 100.00% GP 49,671 30,672 634*(7)(8) South Dakota 100.00% 100.00% GP 35,624 35,624 635*(7)(8) South Dakota 56.29% 100.00% GP 22,563 12,701 636*(7)(8) South Dakota 57.50% 100.00% GP 53,724 30,891 638*(7)(8) South Dakota (B1) 100.00% 100.00% GP 16,443 16,443 638*(7)(8) South Dakota (B2) 100.00% 100.00% GP 8,220 8,220
34
AFFILIATE(S) MSA OR COMPANY INTEREST INTEREST IN 1993 NET COMPANY RSA CODE (1) STATE IN AFFILIATE(S) (2) LICENSEE (3) POPULATION (4)(5) POPS (6) - ------------ -------------------- -------------------- -------------------- ------------------ ----------- 639*(7)(8) South Dakota (B1) 61.75% 100.00% GP 33,390 20,618 639*(7)(8) South Dakota (B2) 61.75% 100.00% GP 5,568 3,438 640*(7)(8) South Dakota 64.49% 100.00% GP 65,549 42,273 641*(7)(8) South Dakota 61.13% 100.00% GP 71,921 43,965 642*(8) South Dakota 49.00% 100.00% GP 91,706 44,936 675*(7)(8) Utah 100.00% 100.00% GP 51,727 51,727 676*(7)(8) Utah 100.00% 100.00% GP 86,612 86,612 677*(7)(8) Utah (B3) 74.50% 100.00% GP 37,966 28,285 678*(7)(8) Utah 100.00% 80.00% GP 23,840 19,072 718*(7)(8) Wyoming 66.00% 100.00% GP 46,896 30,951 719*(7)(8) Wyoming 100.00% 100.00% GP 72,795 72,795 720*(7)(8) Wyoming 100.00% 100.00% GP 145,382 145,382 ---------- ----------- Total RSA 6,151,832 2,734,148 ---------- ----------- Total MSA and RSA 7,425,369 3,356,086 ---------- ----------- ---------- ----------- - ------------------------ (1) MSA ranking is based on population as established by the FCC. RSAs have been numbered by the FCC alphabetically by state. (2) Represents the composite ownership interest held by the Company in the respective affiliate(s). Composite ownership by the Company in affiliate(s) of greater than 50% does not necessarily represent a controlling interest in any affiliate. (3) Represents the composite ownership interest of the Company's affiliate(s) in the licensee for a cellular telephone system in the respective market. Composite ownership by affiliate(s) in a licensee of greater than 50% does not necessarily represent a controlling interest in such licensee. GP indicates that at least one affiliate has a general partner or controlling interest in the licensee; LP indicates that the affiliate(s) has a limited partner or minority interest. (4) Derived from the Strategic Marketing, Inc. 1993 population estimates. (5) Represents population within the market area initially licensed by the FCC. The number of pops which are covered by radio signal in a market is expected to be marginally lower than the market's total pops on a going-forward basis. See "Certain Definitions." (6) Net Company Pops represents Company Interest in Affiliate(s) multiplied by Affiliate(s) Interest in Licensee multiplied by 1993 Population. (7) The operations of these markets are currently reflected on a consolidated basis in the Company's consolidated financial statements. The operations of the other markets in which the Company holds an interest are reflected in such financial statements on either an equity or a cost basis. (8) The Company's interest in these markets is held, in whole or in part, directly in the licensee. Markets managed by the Company are denoted by an asterisk (*).
35 SUBSCRIBER GROWTH TABLE Information regarding subscribers to the MSA and RSA cellular systems managed by the Company is summarized by the following table:
NUMBER OF MANAGED MARKETS ESTIMATED POPULATION OF MANAGED MARKETS NUMBER OF SUBSCRIBERS ------------------- --------------------------------------- ----------------------------- SUBSCRIBER TOTAL MSA RSA TOTAL MSA RSA TOTAL MSA RSA GROWTH ----- ---- ---- ---------- ----------- ------------ -------- -------- ------- ---------- Sept. 30, 1987....... 0 0 0 0 0 0 0 0 0 Sept. 30, 1988....... 4 4 0 504,529 504,529(1) 0 424 424 0 Sept. 30, 1989....... 4 4 0 500,804 500,804(2) 0 1,362 1,362 0 221.23% Sept. 30, 1990....... 18 4 14 1,687,481 500,804(2) 1,186,677(2) 6,444 3,513 2,931 373.13% Sept. 30, 1991....... 49 5 44 3,509,779 566,722(3) 2,943,057(3) 17,952 6,387 11,565 178.58% Sept. 30, 1992....... 49 5 44 3,509,779 566,722(3) 2,943,057(3) 35,884 11,119 24,765 99.89% Sept. 30, 1993....... 51 6 45 3,665,758 644,526(4) 3,021,232(4) 60,381 17,898 42,483 68.27% Sept. 30, 1994....... 55 7 48 3,906,063 771,660(5) 3,134,403(5) 99,002 30,711 68,291 63.96% Dec. 31, 1994........ 55 7 48 3,904,636 771,660(5) 3,132,976(5) 114,918 34,702 80,216 16.08% March 31, 1995....... 55 7 48 3,904,636 771,660(5) 3,132,976(5) 124,057 36,680 87,377 7.95% - ------------------------ (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.
NETWORK CONSTRUCTION AND OPERATIONS. Construction of cellular telephone systems requires substantial capital investment in land and improvements, buildings, towers, mobile telephone switching offices ("MTSOs"), cell site equipment, microwave equipment, engineering and installation. The Company believes that it has achieved significant economies of scale in constructing the network. For example, the network uses cellular switching systems capable of serving multiple markets. As a result of the contiguous nature of the network, only 12 MTSOs are currently required to serve all 55 of the Company's managed markets. By consolidating and deploying high capacity MTSOs, the Company intends to achieve further economies of scale. Economies of scale generated by the network also have permitted the Company to use one network operations center, to centralize services such as network design and engineering, traffic analysis, interconnection, billing, roamer verification, maintenance and support and to access volume discount purchasing of cellular system equipment. The network also affords the Company certain technical advantages in the provision of enhanced services, such as call delivery and call forwarding. Through the use of single switching facilities serving multiple markets, the Company has implemented continuous coverage on an intrastate basis throughout most of the network. The Company has widened the area of coverage within the network by interconnecting MTSOs located in adjoining markets. The Company's current objective is to provide subscribers with "seamless" coverage throughout the network, which will permit subscribers, as they travel through the network, to receive calls and otherwise use their cellular telephone as if they were in their home market. This will occur once all of the MTSOs managed by the Company and in adjoining markets within the eight-state area are networked. The Company has achieved a high degree of network reliability through the deployment of standardized components and operating procedures, and the introduction of redundancy in switching and cell site equipment, interconnect facilities and power supply. Most of the Company's equipment is built by Northern Telecom, Inc. ("NTI"), and interconnection between MTSOs has been achieved using NTI's internal software and hardware. 36 The Company began implementing the "IS-41" technical interface during fiscal 1994. This technical interface, developed by the cellular industry, allows carriers that have different types of equipment to integrate their systems with the eventual goals of establishing a national seamless network, substantially reducing the cost of validating calls and reducing fraud exposure. The Company also has entered into and is negotiating agreements with other cellular carriers to enhance the range of markets and quality of service available to cellular subscribers when traveling outside the network. Pursuant to existing agreements with other cellular carriers, the Company's subscribers are able to "roam" throughout most MSA and RSA markets in the United States and Canada. EXPANSION. The Company is in the process of "filling in" the "cellular geographic service area" or "CGSA" (as defined by the FCC) within its managed markets by adding network facilities to increase the coverage of the radio signal. The Company has been significantly expanding radio signal coverage, with construction of 50 cell sites already complete in fiscal year 1995 and 57 additional cell sites expected to be completed by the end of the fiscal year. The Company expects that by September 30, 1995, radio signal coverage will reach approximately 96% of the population within the managed markets. Expansion of signal coverage is expected to add additional subscribers, enhance use of the systems by existing subscribers, increase roamer traffic due to the larger geographic area covered by the radio signal and further improve the overall efficiency of the network. Under the rules and regulations of the FCC, expansion of signal coverage will also preserve the Company's right to provide cellular service in potentially valuable areas within the network which are not currently covered by the Company's radio signal. The Company continually evaluates acquisitions of cellular properties that are geographically and operationally compatible with the network. In evaluating acquisition targets, the Company considers, among other things, demographic factors, including population size and density, traffic patterns, cell site coverage, required capital expenditures and the likely ability of the Company to integrate the target market into the network. In pursuing such acquisitions, the Company may exchange interests in nonmanaged markets for interests in existing or new markets that serve to expand the network. Certain acquisitions and related dispositions may be subject to rights of first refusal held by the partners in the respective partnerships in which the Company holds an interest. Recent and pending acquisitions are described in "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Acquisitions and Sales." The Company also from time to time may sell nonmanaged assets to raise capital for network expansion. For example, the Company has entered into an agreement to sell its interest in ten Nebraska RSA markets not managed by the Company for approximately $24,300,000 in cash. The transaction is expected to result in an after-tax gain to the Company of approximately $19,600,000 and to close in July 1995. The interest to be purchased from the Company, as well as interests in the Nebraska RSA markets to be purchased from other entities, will be acquired at a cost of over $200 per pop after taking into account debt assumed or refinanced. Proceeds from the transaction will be available to the Company to pursue acquisitions of additional managed interests and to fund parent company capital expenditures. In an effort to provide comprehensive availability of mobile communications services to its subscribers, regardless of location throughout North America, the Company has entered into a distribution agreement with American Mobile Satellite Corporation ("AMSC"). AMSC holds an FCC construction permit to build and operate a mobile satellite service which will complement the existing terrestrial cellular system by providing mobile voice, fax and data communications in all areas not covered by cellular service. Subscribers will access AMSC's satellite through a cellular/satellite mobile phone which will route calls through the cellular network in those areas covered by cellular service and will process the call via satellite in the absence of cellular coverage. AMSC, which launched its satellite in April 1995, anticipates its service will be available some time this year. The agreement with AMSC is essentially a roaming arrangement that may add incremental value to certain customers in remote areas, but is not expected to have a material impact on the Company. SERVICES AND PRODUCTS. Mobile subscribers in the Company's managed markets have available to them substantially all of the services typically provided by landline telephone systems, including custom-calling features such as call forwarding, call waiting, three-way conference calling and, in most cases, voice mail 37 services. Several price plans are presented to prospective customers so that they may choose the plan that will best fit their expected calling needs. The plans provide specific charges for custom-calling features and voice mail to offer value to the customer while enhancing airtime use and revenues for the Company. The Company also sells cellular equipment at discounted prices as a way to encourage use of its mobile services. The Company provides warranty and repair services after the sale through regional equipment service centers, which provide state-of-the-art test equipment and certified repair technicians. An ongoing review of equipment and service pricing is maintained to ensure the Company's competitiveness. Through a centralized procurement and equipment distribution strategy, the Company obtains the benefits of favorable equipment costs through bulk purchases. As appropriate, revisions to pricing of service plans and equipment pricing are made to meet local marketplace demands. The network affords the Company the opportunity to offer service over expanded geographic territories at favorable rates. Customers that subscribe to a stand-alone cellular system generally are charged premium roaming rates when using a cellular system outside of their home service area. The Company's subscribers are able to roam within the network and are afforded "home rate follows" pricing, whereby subscribers are charged the rate applicable in their home service area when traveling within the network. In addition, the Company's simplified retail roaming rate structure allows the customer to roam on certain adjacent carriers' systems at a preferred rate and minimizes confusion by consolidating the remainder of the country into a uniform rate. Finally, the Company offers toll-free calling across single or multiple states to its subscribers for a nominal monthly fee, due to favorably negotiated interconnect agreements. Because the licensed radio spectrum available to the Company was designed to serve densely populated metropolitan areas, demand for "traditional" cellular service within the network is not expected to use all available spectrum. The Company expects that this excess capacity may be adapted (at a nominal marginal cost) for data transmission, monitoring, control transaction processing and other cellular uses that are well suited for agriculture, energy and other industries that have widespread operations within the Company's rural marketplace, such as wireless network systems for mobile office applications, credit card verifications, telemetry and polling systems. The Company is working with equipment manufacturers, system integrators and value added resellers to develop and deploy these systems. The Company also is exploring the potential uses of packet data systems, an efficient method of multi-point, simultaneous polling of wireless monitoring devices, to expand the potential market for other uses of cellular technology. The Company also believes that certain attributes of the Company's operating infrastructure, including existing towers, established distribution channels and other administrative resources, can be utilized to offer one-way paging service throughout the managed markets on a cost-efficient basis. The Company intends to commence offering such paging services in fiscal year 1996 subject to the receipt of sufficient FCC paging licenses to offer economically feasible paging services. The Company is committed to providing consistently high quality customer service. The Company maintains a comprehensive, centralized customer assistance department which offers the advantages of expanded customer service hours, specialized roaming and key account representatives and an automated customer information database that allows for efficiency and accuracy, while decreasing the time spent on each customer contact. The customer assistance department also supports the administrative functions required to activate a customer's phone through a high speed, call-in process and to enter the customer into the informational databases required for customer service and billing. The Company believes this centralized approach provides cost efficiencies while also addressing the critical need for quality control. To ensure that it is delivering a consistently high level of quality service, the Company monitors customer satisfaction with its network quality, sales and customer service support, billing and quality of roaming through regular surveys conducted by an independent research firm. 38 In 1992 the Company began investing in TVX, Inc., which holds the distribution rights for the TVX camera systems in North, Central and South America. The TVX system provides visual verification of the cause of an alarm at the time of an incident to distinguish actual emergencies from false alarms. The TVX camera takes four pictures within five seconds and transmits them to a host computer via either the cellular or wireline networks. The Company intends to work closely with TVX, Inc. to market cellular service in conjunction with the TVX system for use at locations where phone lines are not available or as a backup when phone lines have been disabled. The Company and Automated Security Holdings, PLC ("ASH") each hold a 41% equity interest in TVX, Inc. MARKETING. The Company coordinates the marketing strategy for each of its managed markets. The Company markets cellular telephone service principally under the CommNet Cellular name. The use of a single name over a broad geographic territory creates strong brand-name recognition and allows the Company to achieve advertising efficiencies. The Company believes that a key competitive advantage in marketing its service is the large geographic area covered by the network. The seamless coverage being developed in the network is critical to marketing, as customers are attracted to the higher percentage of delivered calls that such coverage provides. Furthermore, the Company's "home rate follows" pricing allows customers to make calls from anywhere in the network without incurring additional daily fees or surcharges which usually occur when customers roam outside of their home market. Additionally, the Company uses the "Follow Me Roaming" service provided by GTE Telecommunication Services, Inc. ("GTE") which permits customers to receive calls in any market that is part of the Follow Me Roaming system without having to dial complicated access codes. The Company also offers discounted roaming prices, and expects to be able to offer enhanced services, in certain markets as a result of arrangements to link with certain adjacent markets managed by other cellular carriers. See "-- The Company's Operations -- Network Construction and Operations." In addition, the Company offers toll-free calling statewide or across multiple states to its subscribers for a nominal monthly fee. In a majority of the Company's managed RSA markets, the Company was the first cellular system operator to provide service in the market, thereby affording a significant competitive advantage. Historically, the Company has relied to a significant extent on direct sales representatives and on independent sales agents. The Company is currently emphasizing development of a new channel of distribution represented by 17 Company-owned retail stores located within the network, which will be supplemented by 11 additional Company-owned retail stores scheduled to open by the end of fiscal year 1995. The retail distribution channel is also being expanded by the addition of 19 Wal-Mart-Registered Trademark- kiosks staffed by Company personnel. The Company believes that development of retail distribution channels owned or staffed by the Company will increase customer additions, enhance customer service and generate cost efficiencies in the acquisition of new subscribers. The Company also maintains 46 direct sales representatives and 596 agents or outlets, including 52 Radio Shack and eight -C-Sears stores which have exclusive distribution agreements with the Company. In general, such agents earn a fixed commission which can vary depending upon the price plan sold when a customer subscribes to the Company's cellular service and remains a subscriber for a certain period of time. Being first to market in the majority of the Company's managed RSA markets has also allowed the Company to obtain exclusive marketing agreements with the leading telecommunication retailers in a particular market and to obtain prime locations for its sales centers. SUBSCRIBERS. To date, a substantial majority of the subscribers who use cellular service in markets in which the Company holds interests have been business users of mobile communication services. This trend is consistent with the experience of the cellular industry generally, although given the Company's geographic presence in the mountain and plains states, its customers have tended to include proportionally more persons in the agricultural and energy industries. The Company believes that certain demographic characteristics of the rural marketplace will enhance the Company's ability to market cellular service to its primary customer base within its managed RSA markets. On average, rural residents spend a higher percentage of their annual household income on transportation and travel a relatively greater distance by personal vehicle than do urban residents. The relatively large average distance between public telephones in the rural marketplace is an additional factor that increases the need for mobile telecommunication services in that market. 39 MANAGEMENT AGREEMENTS. Management agreements generally applicable to the Company's RSA markets appoint the Company as exclusive management agent of the licensee with specifically enumerated responsibilities relating to the day-to-day business operation of the licensee, although the licensee retains ultimate control over its cellular system. Generally, the RSA management agreements are for an initial term of five years and are automatically renewed for additional terms unless terminated by notice from either party prior to expiration of the then current term. The agreements provide for reimbursement to the Company of expenses incurred on behalf of the affiliate or licensee. The Company has entered into management agreements with three MSA affiliates pursuant to which the Company has been appointed the exclusive management agent for each such affiliate. The MSA management agreements appoint the Company as managing agent of the respective MSA affiliate with specifically enumerated responsibilities relating to the day-to-day business operation of the affiliate. In cases in which the affiliate is the general partner in the licensee, the Company acts as exclusive management agent for the licensee, although the licensee retains ultimate control over its cellular system. The MSA management agreements provide for compensation to the Company in an amount equal to 10% of the distributions to the affiliate derived from the affiliate's interest in the licensee, although compensation to date under these agreements has not been material. The agreements also provide for reimbursement for reasonable administrative and overhead expenses. In cases in which the affiliate is a general partner in the licensee, the agreements generally were for an initial term of two years, were extended for an additional three years and are automatically renewed for one-year terms thereafter unless terminated by notice from either party prior to expiration of the then current term. In cases in which the affiliate is a limited partner in the licensee, the agreements generally were for an initial term of five years and are automatically renewed for additional five-year terms unless terminated by notice from either party prior to expiration of the then current term. The Company has also entered into a management agreement with CINC, whereby it manages all systems owned by CINC and in which CINC is the general partner. HISTORY. The Company initially acquired its cellular interests by participating in the wireline licensing process conducted by the FCC. In order to participate in that process, the Company formed affiliates which were originally owned at least 51% by one or more independent telephone companies and no more than 49% by the Company. In exchange for the Company's 49% interest, the Company provided a financing commitment to the affiliates for their capital needs, as well as certain management services. In addition to obtaining interests in cellular markets through participation in the FCC licensing process, the Company also has purchased direct interests in additional markets in order to expand the network. FINANCING ARRANGEMENTS WITH AFFILIATES; CIFC. CIFC has entered into loan agreements with RSA and MSA affiliates to finance or refinance the costs related to the construction, operation and expansion of cellular telephone systems in which such affiliates own an interest. The loans are financed with funds borrowed by CIFC from CoBank and the Company. As of March 31, 1995, CIFC had entered into loan agreements with 50 RSA affiliates, 5 MSA affiliates and CINC and had advanced $193,754,000 thereunder, including $104,928,000 to entities which are consolidated for financial reporting purposes. All loans to affiliates from CIFC bear interest at 1% over the average cost of CoBank borrowings and are secured by a lien upon all assets of the entity to which funds are advanced. Loans from CIFC to affiliates will be repaid from funds generated by operations of the licensee or distributions to affiliates by licensees in which such affiliates own an interest. Amounts paid to CIFC will be applied by CIFC towards payment of its obligations to CoBank and the Company. The repayments allocated to the Company will be retained by CIFC and used to offset future loans which would otherwise have been made by the Company. The Company has made and will continue to make advances to affiliates on an interim basis. Funds borrowed from CIFC by affiliates are used to repay the Company for such interim advances. As of March 31, 1995, the Company had outstanding interim advances of $33,537,000 to affiliates, which advances bear interest at 2% over the prime rate. As of March 31, 1995, the Company and CIFC had advanced a total of $197,242,000 to RSA and MSA affiliates and to finance switches. Based on its proportionate ownership interests in these affiliates, the 40 Company's share of total affiliate and switch loans and advances was $145,002,000. The assets of the affiliates in which the Company has investments or advances represent 4,459,000 pops, which include 3,356,000 net Company pops. THE CELLULAR TELEPHONE INDUSTRY. Cellular telephone service is a form of wireless telecommunication capable of providing high quality, high capacity service to and from mobile, portable and fixed radio telephones. Cellular telephone technology is based upon the division of a given market area into a number of regions, or "cells," which in most cases are contiguous. Each cell contains a low-power transmitter-receiver at a "base station" or "cell site" that communicates by radio signal with cellular telephones located in the cell. The cells are typically designed on a grid, although terrain factors, including natural and man-made obstructions, signal coverage patterns and capacity constraints may result in irregularly shaped cells and overlaps or gaps in coverage. Cells generally have radiuses ranging from two miles to more than 25 miles. Cell boundaries are determined by the strength of the signal emitted by the cell's transmitter-receiver. Each cell site is connected to a MTSO, which, in turn, is connected to the local landline telephone network. When a cellular subscriber in a particular cell dials a number, the cellular telephone sends the call by radio signal to the cell's transmitter-receiver, which then sends it to the MTSO. The MTSO completes the call by connecting it with the landline telephone network or another cellular telephone unit. Incoming calls are received by the MTSO, which instructs the appropriate cell to complete the communications link by radio signal between the cell's transmitter-receiver and the cellular telephone. By leaving the cellular telephone on, a signal is emitted so the MTSO can sense in which cell the cellular telephone is located. The MTSO also records information on system usage and subscriber statistics. The FCC has allocated the cellular telephone systems frequencies in the 800 MHz band of the radio spectrum. Each of the two licensees in each cellular market is assignedq 416 frequency pairs. Each conversation on a cellular system occurs on a pair of radio talking paths, thus providing full duplex (i.e., simultaneous two-way) service. Two distinguishing features of cellular telephone systems are: (i) frequency reuse, enabling the simultaneous use of the same frequency in two or more adequately separated cells, and (ii) call hand-off, occurring when a deteriorating transmission path between a cell site and a cellular telephone is rerouted to an adjacent cell site on a different channel to obtain a stronger signal and maintain the call. A cellular telephone system's frequency reuse and call hand-off features result in far more efficient use of available frequencies and enable cellular telephone systems to process more simultaneous calls and service more users over a greater area than pre-cellular mobile telephone systems. Frequency reuse is one of the most significant characteristics of cellular telephone systems. Each cell in a cellular telephone system is assigned a specific set of frequencies for use between that cell's base station and cellular telephones located within the cell, so that the radio signals being used in one cell do not interfere with those being used in adjacent cells. Because of the relatively low transmission power of the base stations and cellular telephones, two or more cells sufficiently far apart can use the same frequencies in the same market without interfering with one another. A cellular telephone system's capacity can be increased in various ways. Within certain limitations, increasing demand may be met by simply adding available frequency capacity to cells as required or, by using directional antennas, dividing a cell into discrete multiple sectors or coverage areas, thereby facilitating frequency reuse in other cells. Furthermore, an area within a system may be served by more than one cell through procedures which utilize available channels in adjacent cells. When all possible channels are in use, further growth can be accomplished through a process called "cell splitting." Cell splitting entails dividing a single cell into a number of smaller cells serviced by lower-power transmitters, thereby increasing the reuse factor and the number of calls that can be handled in a given area. Expected digital transmission technologies will provide cellular licensees with additional capacity to handle calls on cellular frequencies. As a result of present technology and assigned spectrum, however, there are limits to the number of signals that can be transmitted simultaneously in a given area. In highly populated MSAs, the level of demand for mobile and portable service is often large in relation to the existing capacity. Because the primary objective of the cellular licensing process is to address mobile and portable uses, operators in highly populated MSAs may have capacity constraints which limit their ability to provide alternate cellular service. The Company does 41 not anticipate that the provision of mobile and portable services within the network will require as large a proportion of the systems' available spectrum and, therefore, the systems will have more available spectrum with which to pursue data applications, which may enhance revenues. Call hand-off in a cellular telephone system is automatic and virtually unnoticeable to either party to the call. The MTSO and base stations continuously monitor the signal strength of calls in progress. The signal strength of the transmission between the cellular telephone and the base station declines as the caller moves away from the base station in that cell. When the signal strength of a call declines to a predetermined threshold level, the MTSO automatically determines if the signal strength is greater in another cell and, if so, hands off the cellular telephone to that cell. The automatic hand-off process within the system takes a fraction of a second. However, if the cellular telephone leaves the reliable service areas of the cellular telephone system, the call is disconnected unless an appropriate technical interface is established with an adjacent system through intersystem networking arrangements. FCC rules require that all cellular telephones be functionally compatible with cellular telephone systems in all markets within the United States and with all frequencies allocated for cellular use, so that a cellular telephone may be used wherever a subscriber is located, subject to appropriate arrangements for service charges. Changes to cellular telephone numbers or other technical adjustments to cellular telephones by the manufacturer or local cellular telephone service businesses may be required, however, to enable the subscriber to change from one cellular service provider to another within a service area. Because cellular telephone systems are fully interconnected with the landline telephone network and long distance networks, subscribers can receive and originate both local and long-distance calls from their cellular telephones. Cellular telephone systems operate under interconnection agreements with various local exchange carriers and interexchange carriers. The interconnection agreements establish the manner in which the cellular telephone system integrates with other telecommunications systems. The cellular operator and the local landline telephone company must cooperate in the interconnection between the cellular and landline telephone systems, to permit cellular subscribers to call landline subscribers and vice versa. The technical and financial details of such interconnection arrangements are subject to negotiation and vary from system to system. While most MTSOs process information digitally, most radio transmission of cellular telephone calls are done on an analog basis. Digital technology offers advantages, including improved voice quality, larger system capacity, and perhaps lower incremental costs for additional subscribers. The conversion from analog to digital radio technology is expected to be an industry-wide process that will take a number of years. However, based on estimated capacity requirements, the Company does not foresee a need to convert to digital radio transmission technology in the near or intermediate term. COMPETITION GENERAL. The cellular telephone business is a regulated duopoly. The FCC awarded only two licenses in each market, although certain markets have been subdivided as a result of voluntary settlements. One of these licenses initially was awarded to an entity that was majority owned by local telephone companies or their affiliates and the other license was awarded to an entity that did not provide such service. Each licensee has the exclusive use of a defined frequency band within its market. The primary competition for the Company's mobile cellular service in any market comes from the other licensee in such market, which may have significantly greater resources than the Company and its affiliates. Competition is principally on the basis of coverage, services and enhancements offered, technical quality of the system, quality and responsiveness of customer service and price. Such competition may increase to the extent that licenses pass from weaker stand-alone operators into the hands of better capitalized and more experienced cellular operators who may be able to offer consumers certain network advantages similar to those offered by the Company. Within the network, the Company has three primary direct competitors, in 42 addition to a number of stand-alone operators. The Company also faces competition from other communications technologies that now exist, such as SMR and paging services, and may face competition from technologies introduced in the future. COMPETITION FROM OTHER TECHNOLOGIES. Potential users of cellular systems may find an increasing number of current and developing technologies able to meet their communication needs. For example, SMRs of the type generally used by taxicab and tow truck services and other communications services have the technical capability to handle mobile telephone calls (including interconnection to the landline telephone network) and may provide competition in certain markets. Although SMR operators are currently subject to limitations that make usage of SMR frequencies more appropriate for short dispatch messages, the FCC has granted waivers of its rules to permit the construction and operation of low powered "cellular-like" services using a collection of SMR frequencies ("ESMR") in a number of markets in the United States. Recent legislation permits commercial mobile service providers, including SMR providers, to obtain upon demand physical interconnection with the landline telephone network. Such interconnection enhances an SMR provider's ability to compete with cellular operators, including the Company. The FCC has encouraged ESMR activities and has amended its rules to establish an Expanded Mobile Service Provider ("EMSP") licensing approach that would facilitate such operations. The new rules grant a new type of 800 Mhz wide-area license that would permit channels to be aggregated for operation of systems throughout defined geographic areas. A new rulemaking is underway to determine what protections will be afforded to existing SMR licensees that may now be subject to relocation. One-way paging or beeper services that feature voice message and data-display as well as tones may be adequate for potential cellular subscribers who do not need to transmit back to the caller. SMR and paging systems are in operation in many of the service areas within the network. The FCC is now licensing commercial PCS. PCS is not a specific technology, but a variety of potential technologies that could compete with cellular telephone systems. The FCC has identified two categories of PCS: broadband and narrowband. In 1993, Congress enacted legislation requiring the FCC to adopt final rules for licensing broadband and narrowband PCS by February 1994. This legislation also required the FCC to commence issuing licenses for narrowband PCS by October 1994 and broadband PCS by December 1994. Licenses will be awarded by competitive bidding. Auctions for the first two spectrum blocks have been completed. Absent delays caused by any judicial proceedings, PCS systems can be expected to commence operation in major metropolitan areas as early as the end of calendar year 1995. See "Federal Regulation -- Recent Legislation." The FCC has adopted rules to authorize the operation of new narrowband PCS systems in the 900 Mhz band. The possible new services using this 900 MHz band spectrum include advanced voice paging, two-way acknowledgment paging, data messaging, electronic mail and facsimile transmissions. These services most likely will be provided using a variety of devices, such as laptop and palmtop computers and computerized "personal organizers" that allow receipt of office messages, calendar planning, and document editing from remote locations in some circumstances. The FCC also has adopted rules to authorize the operation of new, broadband PCS systems in the 2 GHz band. Equipment proposed for broadband PCS includes small, lightweight and wireless telephone handsets; computers that can communicate over the airwaves wherever they are located; and portable facsimile machines and other graphic devices. The regulatory plan adopted for broadband PCS includes an allocation of spectrum, a flexible regulatory structure, eligibility restrictions and technical and operational rules. In a related matter in the same proceeding, the FCC revised its cellular rules to explicitly state that cellular licensees may provide any PCS-type services (including wireless PBX, data transmission and telepoint services) on their 800 MHz band cellular channels without prior notification to the FCC (other than the notification required to report the construction of new cell sites). The FCC has allocated 140 MHz of spectrum in the 2 GHz band for the provision of licensed and unlicensed broadband PCS. Much of the spectrum allocated for broadband PCS is already occupied by microwave licensees. As a general proposition, broadband PCS licensees will be required to pay the costs associated with relocating these existing microwave users to other portions of the radio spectrum. 43 Of the 140 MHz of spectrum allocated to broadband PCS, 120 MHz has been allocated for licensed PCS. The 120 MHz of spectrum allocated to licensed PCS has been divided into six channel blocks, as follows: i) two channel blocks (Blocks A and B) have been allocated 30 MHz of spectrum each, and will be licensed on the basis of 51 Major Trading Areas ("MTAs"), iii) three channel blocks (Blocks D, E and F) have been allocated 10 MHz of spectrum each and will be licensed on the basis of 493 Basic Trading Areas ("BTAs"). In a separate proceeding dealing with spectrum auctions and consistent with a directive contained in recently-enacted legislation, the FCC has granted licensing preferences on the Block C and F spectrum allocations for small businesses, rural telephone companies and minority/woman-owned businesses, although the validity of such preferences may be subject to legal challenge. The FCC has recently initiated a rulemaking proceeding to withdraw the licensing preferences granted to minority/woman-owned businesses in light of uncertainty regarding the constitutionality of such preferences. Subject to a five percent cross-ownership benchmark, spectrum aggregation will be permitted in broadband PCS, but will be limited to 40 MHz of spectrum per service area to prevent any one person or entity from exercising undue market power. As a general rule, cellular licensees will be permitted to participate in broadband PCS on the 30 MHz frequency block outside of their existing cellular service areas or in any area where the cellular licensee serves less than ten percent of the 1990 census population of the PCS service area. Under this criterion, a cellular licensee will be ineligible to apply for one of the 30 MHz spectrum blocks if the composite reliable service area contour of its cellular system embraces ten percent or more of the 1990 census population of the PCS service area. Generally, with respect to PCS service areas in which there is ten percent or more cumulative 1990 census population overlap between the cellular and PCS service areas, the cellular carrier will be eligible to hold only one 10 MHz BTA license in addition to its cellular interest. The ownership attribution benchmark for cellular interests has been set at 20%. Therefore, for eligibility purposes, cellular licensees are defined as entities which have an ownership interest of 20% or more in a cellular system. Broadband PCS licensees will be subject to minimum construction requirements. Broadband PCS licenses will be awarded for a period of ten years, with provisions for a license renewal expectancy similar to the rules that currently apply to cellular licensees. Of the 160 MHz of spectrum allocated for broadband PCS, the remaining 40 MHz has been allocated for unlicensed devices. These unlicensed devices will be used in a variety of contexts, such as office environments, to provide such services as high and low speed data links between computing devices, cordless telephones and wireless PBXs. The unlicensed devices will be governed under Part 15 of the FCC's rules, and will not be subject to auctions. It is uncertain what the effect on the Company of these new personal communications services will be. The Company believes that PCS likely will not compete directly with cellular telephone service in the rural marketplace, but there can be no assurance that this will be the case. Management of the Company believes that technological advances in present cellular telephone technology in conjunction with buildout of the present cellular systems throughout the nation with cell splitting and microcell technology would provide essentially the same services as the proposals described above, but there is no assurance that this will happen. The FCC is expected to issue operating authority for personal communications services competitive to the Company's services in the markets in which the Company holds interests in cellular systems. This could result in one or more additional competitors in each of the Company's markets. Technological advances in the communications field continue to occur and make it difficult to predict the extent of additional future competition for cellular systems. For example, several mobile satellite systems are planning to initiate service in the 1995 - 1999 time frame, and AMSC has launched its mobile satellite in April 1995 and anticipates that its service will be available sometime this year. See "Business -- The Company's Operations -- Expansion." Although satellite service may offer a customer worldwide coverage, the substantial investments required to initiate service, as well as significant technical, political, and regulatory hurdles that need to be overcome may impede the early growth of this technology. Recent legislation 44 may make available up to 200 MHz of spectrum for new communications systems. See "Federal Regulation -- Recent Legislation." Each of these systems could provide services that compete with those provided by the Company. The FCC has also authorized Basic Exchange Telecommunications Radio Service to make basic telephone service more accessible to rural households and businesses. FEDERAL REGULATION OVERVIEW. The construction, operation and acquisition of cellular systems in the United States are regulated by the FCC pursuant to the Communications Act and the rules and regulations promulgated thereunder (the "FCC rules"). The FCC rules govern applications to construct and operate cellular systems, licensing and administrative appeals and technical standards for the provision of cellular telephone service. The FCC also regulates coordination of proposed frequency usage, height and power of base station transmitting facilities and types of signals emitted by such stations. In addition, the FCC regulates (or forbears from regulating) certain aspects of the business operations of cellular systems. It has declined to regulate the price and terms of offerings to the public. See "-- Recent Legislation." INITIAL REGULATION. For licensing purposes, the FCC established 734 discrete geographically defined market areas comprising 306 MSAs and 428 RSAs. In each market area, the FCC awarded only two licenses authorizing the use of radio frequencies for cellular telephone service. The allocated cellular frequencies were divided into two equal 25 MHz blocks. One block of frequencies, and the associated operating license, was initially reserved for exclusive use by an entity that was majority owned and controlled by local landline telephone companies or their affiliates. The second block of frequencies initially was reserved for use by entities that did not provide landline telephone service in the market area. Upon the issuance of a construction permit, either wireline or nonwireline, such construction permit could be sold to any qualified buyer, regardless of telephone company affiliation. The FCC generally prohibits a single entity from holding an interest in both the wireline and the nonwireline licensee in the same market. RSAs were divided along county lines and consist of one or more contiguous counties within a single state. The RSAs were numbered alphabetically by state, rather than on the basis of population. The FCC applied a licensing policy for RSA markets similar to that utilized in the MSAs. Applications for both the wireline and nonwireline license in each RSA were filed simultaneously. In RSAs, the FCC allowed only wireline applicants to form pre-lottery settlement entities. If a full market wireline settlement was not negotiated, the FCC chose among mutually exclusive applicants for each license through the use of a lottery. Upon favorable review of the lottery winner or settlement entity, designation of the tentative selectee and following a public comment period, the FCC issued a construction permit for the cellular telephone system on each frequency block in a specified market. An operating license was then granted for an initial term of ten years (although a license may be revoked during its term for cause after formal proceedings by the FCC). LICENSE RENEWAL. The FCC has established rules and procedures to process cellular renewal applications filed by existing carriers and the competing applications filed by renewal challengers. Subject to one exception discussed below, the renewal proceeding is a two-step hearing process. The first step of the hearing process is to determine whether the existing cellular licensee is entitled to a renewal expectancy, and otherwise remains basically qualified to hold a cellular license. Two criteria are evaluated to determine whether the existing licensee will receive a renewal expectancy. The first criterion is whether the licensee has provided "substantial" service during its past license term, defined as service which is sound, favorable and substantially above a level of mediocre service which minimally might justify renewal. The second criterion requires that the licensee must have substantially complied with applicable FCC rules and policies and the Communications Act. Under this second criterion, the FCC determines whether the licensee has demonstrated a pattern of compliance. The second criterion does not require a perfect record of compliance, but if a licensee has demonstrated a pattern of noncompliance it will not receive a renewal expectancy. If the FCC grants the licensee a renewal expectancy during the first step of the hearing process and the licensee is 45 basically qualified, its license renewal application will be automatically granted and any competing applications will be denied. If however, the FCC denies the licensee's request for renewal expectancy, the licensee's application will be comparatively evaluated under specifically enumerated criteria with the applications filed by competing applicants. The exception to the two-step renewal hearing process allows a competing applicant proposing to provide service that far exceeds the service presently being provided by the incumbent licensee to request a waiver of the two-step process. If the waiver request is granted, the FCC will hold only a comparative hearing, I.E., it will not make a threshold determination in the first instance as to whether the incumbent licensee is entitled to a renewal expectancy. CELLULAR SERVICE AREA. Under FCC rules, the authorized service area for a cellular licensee in a market is referred to as the CGSA. In all FCC-designated markets, at least one cell site must have been placed into commercial service within 18 months after the award of the construction permit. The CGSA is defined as the area served by the cellular licensee (as computed by a mathematical formula based on the height and power of operating cell sites within which the licensee is entitled to protection from interference on its frequencies). The CGSA will be smaller than the designated FCC market if a licensee has not fully built-out its system, or it may be larger than the market if the licensee serves areas of adjacent markets that are unserved by the adjacent licensee. Cellular licensees do not need to obtain FCC authority prior to increasing the CGSA within their FCC-designated market during the five-year period after the construction permit is initially granted for the market. However, FCC notification of construction is 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 licensees' CGSA (an "unserved area application"). The Company has selected target expansion areas based upon specific financial criteria and does not plan to expand in areas where these criteria are not projected to be met. Unserved area applications are filed in two phases, Phase I and Phase II. During the first half of 1993, the FCC accepted Phase I unserved area applications for frequency blocks in all markets where: the five-year fill-in period had already expired or would expire on or before March 15, 1993; no applications for initial authorizations were filed; and authorizations were surrendered, or canceled for failure to meet the 18-month construction deadline or other reasons. For all other markets, Phase I applications are due on the 31st day following expiration of the five-year fill-in period. All Phase I applications for a given market are deemed mutually exclusive even if their proposed CGSAs do not overlap. Once an authorization has been granted to a Phase I applicant, the permittee has 90 days within which to file an application requesting FCC authority to make major modifications to its Phase I system. The FCC will not accept any other applications for unserved areas in the market during this period that are mutually exclusive with the Phase I carrier's major modification application. Phase II unserved area applications for any remaining area may be filed on the 121st day after the Phase I authorization has been granted (or if no Phase I applications are filed, on the first day after Phase I applications for that market are permitted). In the event mutually exclusive applications are filed the authorization will be issued by auction. Phase II applications may propose CGSAs that cover area in more than one market. Phase II applications are deemed to be mutually exclusive only if their CGSAs overlap in such a way that the grant of one would preclude the grant of the other. Phase II applications will be placed on public notice by the FCC, and all interested and qualified parties will have an opportunity to apply for the same market area within 30 days of the public notice. Applicants for unserved areas not contiguous with licensed systems must propose to serve a minimum of 50 contiguous square miles and must demonstrate their financial qualifications to construct the proposed system and to operate it for one year (assuming no revenues). Existing licensees proposing to expand their systems through the filing of an unserved area application are not subject to the 50 square mile minimum coverage rule, nor are they required to make a financial qualifications showing. Under recent legislation described below, mutually exclusive unserved area applications are processed by lottery selection procedures (for applications filed prior to July 26, 1993) or by auctions (for applications filed after July 26, 1993), and existing cellular carriers receive no preference in the lottery selection or auction process. 46 Unserved area cellular carriers (both Phase I and Phase II) are accorded one year within which to complete construction of their systems. Unserved area cellular carriers are not accorded a five-year fill-in period. If an unserved area cellular carrier forfeits its authorization for failure to construct, the areas which thereby revert to "unserved" status may be applied for under Phase II procedures. ALIEN OWNERSHIP RESTRICTIONS. The Communications Act prohibits the issuance of a license to, or the holding of a license by, any corporation of which any officer or director is a non-U.S. citizen or of which more than 20% of the capital stock is owned of record or voted by non-U.S. citizens or their representatives or by a foreign government or a representative thereof, or by any corporation organized under the laws of a foreign country. The Communications Act also prohibits the issuance of a license to, or the holding of a license by, any corporation directly or indirectly controlled by any other corporation of which any officer or more than 25% of the directors are non-U.S. citizens or of which more than 25% of the capital stock is owned of record or voted by non-U.S. citizens or their representatives or by a foreign government or representative thereof, or by any corporation organized under the laws of a foreign country, although the FCC has the power in appropriate circumstances to waive these restrictions. The FCC has interpreted these restrictions to apply to partnerships and other business entities as well as corporations, with certain modifications. Failure to comply with these requirements may result in denial or revocation of licenses. The Articles of Incorporation of the Company contain prohibitions on foreign ownership or control of the Company that are substantially similar to those contained in the Communications Act. RECENT LEGISLATION. The Omnibus Budget Reconciliation Act of 1993 (the "Budget Act"), among other things, generally requires the FCC to work with the Department of Commerce to reallocate at least 200 MHz of spectrum from federal government use to private commercial use; to issue initial licenses for radio spectrum for which mutually exclusive applications have been filed for the purpose of offering commercial communications services to subscribers either by comparative hearing or competitive bidding (I.E., auctions); to treat as common carriers PCS licensees as well as providers of commercial mobile services (including SMR services) that previously were regulated as private carriers; to issue final rules relating to the licensing of PCS; and to impose regulatory fees upon virtually all FCC licensees, including cellular licensees, to help recover the FCC's administrative costs in regulating such entities (the "Spectrum Legislation"). In devising a methodology for auctions between mutually exclusive applicants, the Spectrum Legislation directs the FCC, among other things, to promote the development and rapid deployment of new technologies, products and services to the public, including those residing in rural areas. Further, the Spectrum Legislation prohibits the FCC from conducting lotteries to issue initial licenses for commercial services for which mutually exclusive applications are filed, unless one or more applications for such license were accepted for filing prior to July 26, 1993. Thus, all future initial applications for cellular unserved areas (if deemed to be mutually exclusive) and all applications for PCS licenses, would be issued by a competitive bidding process. Competitive bidding will not apply to applications for license renewal or applications to assign or transfer control of existing licenses. The Spectrum Legislation also preempts state rate or entry regulation on commercial mobile services unless a particular state petitions the FCC for authority to exercise (or continue exercising) such regulatory authority and the FCC grants the petition. Several states filed such petitions, all of which have now been denied. The Spectrum Legislation also directs the FCC to assess and collect regulatory fees from virtually all FCC licensees, including cellular carriers. Under the initial fee schedule, cellular carriers are required to pay an annual fee of $60.00 per 1,000 subscribers. STATE, LOCAL AND OTHER REGULATION STATE. Following receipt of an FCC construction permit and prior to the commencement of commercial service (prior to construction in certain states), a cellular licensee must also obtain any necessary approvals from the appropriate regulatory bodies in each of the states in which it will offer cellular service. Certain states require cellular system operators to be certified by such state to serve as common carriers. In addition, certain state authorities regulate certain service practices of cellular system operators. While such state regulations may affect the manner in which the Company's affiliates conduct their business and could 47 adversely affect their profitability, they should not place the Company's affiliates at a competitive disadvantage with other service providers in the same markets. The Company has not experienced and does not presently contemplate any regulatory constraints, difficulties or delays. FAA, ZONING AND OTHER LAND USE. The location and construction of cellular transmitter towers and antennas are subject to Federal Aviation Administration ("FAA") regulations and may be subject to federal, state and local environmental regulation as well as state or local zoning, land use and other regulation. Before a system can be put into commercial operation, the grantee of a construction permit must obtain all necessary zoning and building permit approvals for the cell sites and MTSO locations and must secure state certification and tariff approvals, if required. The time needed to obtain zoning approvals and requisite state permits varies from market to market and state to state. Likewise, variations exist in local zoning processes. There can be no assurance that any state or local regulatory requirements currently applicable to the systems in which the Company's affiliates have an interest will not be changed in the future or that regulatory requirements will not be adopted in those states and localities which currently have none. EMPLOYEES As of June 15, 1995, the Company had 414 full-time employees. The Company engages the services of independent contractors on an as-needed basis. PROPERTIES In addition to the direct and attributable interests in cellular licensees discussed in this Prospectus, the Company leases its principal executive offices (consisting of approximately 49,900 square feet) located in Englewood, Colorado. The Company and its affiliates lease and own locations for inventory storage, microwave, cell site and switching equipment and administrative offices. LEGAL PROCEEDINGS There are no material, pending legal proceedings to which the Company or any of its subsidiaries is a party or of which any of their property is the subject which, if adversely decided, would have a material adverse effect on the Company. MANAGEMENT EXECUTIVE OFFICES AND DIRECTORS The following table sets forth certain information regarding the executive officers and directors of the Company:
NAME AGE POSITION - ---------------------------- --- ---------------------------------------------------------------------- Arnold C. Pohs 66 Chairman of the Board, President, Chief Executive Officer and Director Daniel P. Dwyer (1) 35 Executive Vice President, Treasurer, Chief Financial Officer and Director Andrew J. Gardner 40 Senior Vice President and Controller Homer Hoe 45 Executive Vice President and Chief Information Officer Doron Lurie 35 Executive Vice President and Chief Operating Officer David S. Lynn 38 Senior Vice President -- Network Operations Timothy S. Morrissey 42 Senior Vice President -- Sales Operations Amy M. Shapiro 41 Vice President, Secretary and General Counsel John E. Hayes, Jr. (1)(2) 57 Director Robert J. Paden (2) 39 Director David E. Simmons (1)(2) 37 Director - ------------------------ (1) Member of the Audit Committee. (2) Member of the Compensation Committee.
48 The Company's Articles of Incorporation provide for a classified Board of Directors consisting of three classes, each class to be as nearly equal in number as possible. The members of each class are elected to a three-year term and one class is elected at each annual meeting. Messrs. Pohs and Paden are members of Class I with terms expiring at the 1997 Annual Meeting of Stockholders (to be held in February 1998); Mr. Simmons is a member of Class II with a term expiring at the 1995 Annual Meeting (to be held in February 1996); and Messrs. Dwyer and Hayes are members of Class III with terms expiring at the 1996 Annual Meeting (to be held in February 1997). 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 Second Vice Chairman and a member of the Executive Committee of the Board of Directors of the Cellular Telecommunications Industry Association, as Vice Chairman and a director of the CTIA Foundation for Wireless Telecommunications, a non-profit industry association, as Chairman of the CTIA Industry Information Council and as Chairman of the Board of TVX, Inc. DANIEL P. DWYER has been Executive Vice President of the Company since November 1992, a director of the Company since March 1990 and Chief Financial Officer since August 1988 and Treasurer since August 1987. He was Vice President - -- Finance of the Company from November 1989 until November 1992, Secretary from August 1987 until March 1990, Assistant Secretary from January 1987 until August 1987, Controller from May 1986 until November 1988 and accounting manager for the Company from March 1986 until May 1986. From January 1984 until March 1986, Mr. Dwyer was a staff accountant with Ernst & Young LLP. He is a Certified Public Accountant and a member of the American Institute of Certified Public Accountants and the Colorado Society of Certified Public Accountants. Mr. Dwyer currently serves as a director of TVX, Inc. ANDREW J. GARDNER was named Senior Vice President of the Company in July 1994. He was Vice President and Controller from November 1992 to July 1994 and Assistant Vice President -- Accounting and Tax from August 1990 to October 1992. From August 1986 until joining the Company in August 1990, Mr. Gardner was employed by U S WEST, Inc. in various corporate financial management capacities, most recently Manager, Financial Results. Mr. Gardner is a Certified Public Accountant. HOMER HOE was elected Executive Vice President and Chief Information Officer of the Company in October 1994. From August 1992 until joining the Company in October 1994, he was a self-employed consultant to the Information Services industry, and was contracted by the Company as interim CIO from April to October 1994. From August 1991 to August 1992, Mr. Hoe was Director of Information Services for Tenneco Minerals, a subsidiary of Tenneco, Inc. From May 1986 to August 1991, he was employed by Digital Equipment Corporation, most recently as Senior Consultant, specializing in multi-vendor computer system integration. DORON LURIE was elected Executive Vice President of the Company in October 1994. He was named Chief Operating Officer in July 1994. Mr. Lurie was Senior Vice President -- Operations of the Company from November 1993 to July 1994. From October 1992 until joining the Company in August 1993, he was Managing Director of MobiLink Corporation, a joint venture of 15 cellular telecommunications companies. From April 1988 until August 1993, Mr. Lurie was employed by PacTel Cellular in various corporate and operational capacities, most recently as Director, Sales/Marketing for PacTel's San Diego market. DAVID S. LYNN was named Senior Vice President -- Network Operations of the Company in July 1994. He was Vice President -- Network Operations from March 1993 until July 1994, Vice President -- Network Development from February 1992 until March 1993, Assistant Vice President -- Finance from June 1990 until February 1992, Controller from November 1988 until June 1990 and Manager, Financial Reporting from August 1988 until November 1988. From August 1982 until joining the Company in August 1988, Mr. Lynn was employed by American Television and Communications Corporation in various accounting and financial management capacities. 49 TIMOTHY S. MORRISSEY was named Senior Vice President -- Sales Operations of the Company in February 1995. He was General Sales Manager of the Company's Midwest Region from July 1993 until February 1995. From February 1990 until joining the Company in July 1993, Mr. Morrissey was President and General Manager of the Washington D.C. and Baltimore Cellular operations for Southwestern Bell Mobile Systems. AMY M. SHAPIRO has been Vice President of the Company since November 1992, Secretary of the Company since March 1990 and General Counsel since October 1989. From February 1986 until joining the Company in October 1989, Ms. Shapiro was an associate with Hall & Evans LLC, a Denver, Colorado law firm. JOHN E. HAYES, JR. was elected a director of the Company in October 1990. Mr. Hayes has served as Chairman of the Board, President and Chief Executive Officer of Western Resources, Inc. since October 1989. From May 1989 to October 1989, Mr. Hayes was Chairman of the Board of Triad Capital Partners, a venture capital firm. Mr. Hayes was President and Chief Executive Officer of Southwestern Bell Telephone Company from September 1986 to January 1989. Mr. Hayes is a director of the Automobile Club of Missouri, Boatmen's Bancshares, Inc., American Gas Association, Edison Electric Institute, Security Benefit Group, the Topeka Community Foundation, Boys Hope, Kansas Wildscape and Boy Scouts of America and a Trustee of Midwest Research Institute, Menninger Foundation and Rockhurst College. ROBERT J. PADEN has been a director of the Company since December 1985. For the past ten years, Mr. Paden has been General Manager/Vice President of the Stanton Telephone Company, Stanton, Nebraska. He is also a board member of the Nebraska Telephone Association. DAVID E. SIMMONS has been a director of the Company since August 1987. Mr. Simmons has served as President of Simmons Family Incorporated, a broadcasting and communications company, since 1989 and as its Executive Vice President from 1985 to 1989. Mr. Simmons also serves as Chairman and Chief Executive Officer of Keystone Communications, Inc., a satellite communications company. DESCRIPTION OF CERTAIN INDEBTEDNESS THE CREDIT AGREEMENTS. Pursuant to the Credit Agreements, CoBank has agreed to loan up to $130,000,000 to CIFC to be reloaned by CIFC to affiliates of the Company for the construction, operation and expansion of cellular telephone systems and to the Company for the construction and expansion of switches. In addition, as of March 31, 1995, approximately $43,000,000 of the $65,940,000 unused commitment that is available under the Credit Agreements can be borrowed by CIFC and loaned to the Company for general corporate purposes. As of March 31, 1995, the outstanding balance under the Credit Agreements was approximately $64,295,000. The Credit Agreements provide for interest at 1.00% over prime (10.00% at March 31, 1995) or 2.25% over LIBOR (8.84% at March 31, 1995). The loans are secured by a first lien upon all of the assets of CIFC and each of the affiliates to which funds are advanced by CIFC. In addition, the Company has guaranteed the obligations of CIFC to CoBank and has granted CoBank a first lien on all of the assets of the Company as security for such guaranty. The Credit Agreements prohibit the payment of cash dividends, prohibit any other senior borrowings, limit the use of borrowings, restrict expenditures for certain acquisitions and investments, require the maintenance of certain minimum levels of net worth, working capital, cash and operating cash flow and require the maintenance of certain liquidity, capitalization, debt, debt service and operating cash flow ratios. The requirements of the Credit Agreements were established in relation to the anticipated capital and financing needs of the Company's affiliates and their anticipated results of operations. The Company is currently in compliance with all covenants and anticipates it will continue to meet the requirements of the Credit Agreements. CoBank has sold participations in the Credit Agreements to two other financial institutions whose approval may be required for waivers or other amendments to the Credit Agreements requested by CIFC or the Company. CIFC and CoBank are negotiating to increase the facility under the Credit Agreements from the current $130,000,000 to $165,000,000. Of the increase of $35,000,000, $10,000,000 will be available for loans 50 to affiliates of the Company to cover capital, operating and debt service requirements and $25,000,000 will be available to fund the acquisitions of additional cellular systems, subject to certain conditions. As a result of this increase request, CoBank is currently soliciting potential participations in the facility from commercial banks. The facility will also be amended, among other things, to extend the termination date of the loans from December 31, 1995 to December 31, 1996, to reduce the principal amortization period from five to four years and to incorporate new financial covenants. The Company believes that it will be successful in obtaining the foregoing amendments to the Credit Agreements, although there can be no assurance that it will be able to do so. The Company also believes that if necessary it could refinance and replace the Credit Agreements with a secured bank facility provided by lenders other than CoBank. However, there can be no assurance that the Company would be able to secure any such facility. THE 11 3/4% SENIOR SUBORDINATED DISCOUNT NOTES. The 11 3/4% Senior Subordinated Discount Notes, which have an aggregate principal amount of $176,651,000, were issued at a substantial discount from their principal amount in an underwritten public offering that produced gross proceeds of approximately $100,000,000. The 11 3/4% Senior Subordinated Discount Notes accrete to their principal amount without the payment of cash interest until September 1, 1998; thereafter, interest accrues on the 11 3/4% Senior Subordinated Discount Notes at a rate of 11 3/4% per annum and is payable in cash on each March 1 and September 1, commencing March 1, 1999. The 11 3/4% Senior Subordinated Discount Notes mature on September 1, 2003. The indenture governing the 11 3/4% Senior Subordinated Discount Notes (the "Discount Notes Indenture") limits the ability of the Company and its subsidiaries to, among other things, incur indebtedness, including (i) indebtedness senior in right of payment to the 11 3/4% Senior Subordinated Discount Notes and (ii) subordinated indebtedness of the Company's subsidiaries, pay dividends or make other restricted payments, enter into certain transactions with affiliates, consummate certain asset sales, enter into agreements that restrict the ability of a subsidiary to pay dividends or make certain payments to the Company, merge or consolidate with any other person or sell, assign, transfer, lease or convey or otherwise dispose of all or substantially all of the assets of the Company. The 11 3/4% Senior Subordinated Discount Notes are general unsecured obligations of the Company and are subordinate in right of payment to all Senior Debt (as defined in the Discount Notes Indenture), including all amounts due under the Credit Agreements. The 11 3/4% Senior Subordinated Discount Notes rank senior in right of payment to the Notes. DESCRIPTION OF THE NOTES The Notes are to be issued under an Indenture, to be dated as of , 1995 (the "Indenture"), between the Company and American Bank National Association, as Trustee (the "Trustee"). The Indenture is subject to and governed by the Trust Indenture Act of 1939, as amended. The statements under this caption relating to the Notes and the Indenture are summaries and do not purport to be complete, and where reference is made to particular provisions of the Indenture, such provisions, including the definitions of certain terms, are incorporated by reference as a part of such summaries, which are qualified in their entirety by such reference. The form of the Indenture has been filed with the Commission as an exhibit to the Registration Statement of which this Prospectus is a part. References in this "Description of the Notes" to the "Company" are to CommNet Cellular Inc., without including its subsidiaries. GENERAL The Notes will be unsecured obligations of the Company and will rank subordinate in right of payment to all Senior Indebtedness of the Company, including (i) the Credit Agreements, (ii) the 11 3/4% Senior Subordinated Discount Notes and (iii) all other Indebtedness of the Company, whether outstanding on the date of the Indenture or thereafter created, incurred or assumed, unless such Indebtedness provides that it is not superior in right of payment to the Notes. The Notes will rank PARI PASSU with the Company's 8.75% Convertible Senior Subordinated Notes due 2001. The Indenture provides that the Company may issue up to $125,000,000 aggregate principal amount of the Notes, of which $80,000,000 will be issued in the Offering made hereby. After consummation of the 51 Offering, the Company may issue up to an additional $45,000,000 aggregate principal amount of Notes under the Indenture. The Company has no current plans to issue additional Notes. In the event that the Company issues additional Notes, purchasers of the Notes in the Offering will experience a reduction in the percentage of aggregate principal amount of the Notes then outstanding held by such initial purchasers. See "-- Events of Default" and "-- Modifications and Amendments." The Notes will be issued in fully registered form only, without coupons, in denominations of $1,000 and integral multiples thereof. Initially, the Trustee will act as Paying Agent and Registrar for the Notes. The Notes may be presented for registration of transfer and exchange at the offices of the Registrar, which initially will be the Trustee's corporate trust office. The Company may change any Paying Agent and Registrar without notice to holders. PRINCIPAL, MATURITY AND INTEREST The Notes offered hereby are limited in aggregate principal amount to $80,000,000 and will mature on , 2005. Each Note will bear interest at the rate of % per annum from , 1995 and interest will be payable in cash semi-annually on each and , commencing , 1996, to the persons who are registered holders at the close of business on each and immediately preceding the applicable interest payment date; provided, however, that in the event a majority in aggregate principal amount of the outstanding 6 3/4% Convertible Subordinated Debentures (I.E., not less than $37,374,000 aggregate principal amount) is converted by the holders thereof on or prior to the Convertible Redemption Date (the "Conversion Condition") into shares of the Company's Common Stock, from and after the Convertible Redemption Date, the interest rate on the Notes will decrease .25% to a rate of % per annum. The Company intends to redeem the 6 3/4% Convertible Subordinated Debentures with the net proceeds from the Offering. Holders of the 6 3/4% Convertible Subordinated Debentures have the right, exercisable at any time on or prior to the Convertible Redemption Date for such debentures, to convert such debentures into the Company's Common Stock at a conversion price of $27.625 per share of Common Stock. The last reported sales price of the Company's Common Stock on the Nasdaq National Market on June 27, 1995 was $27. At the close of business on such date, a total of $74,747,000 in principal amount of the 6 3/4% Convertible Subordinated Debentures was outstanding. Interest on the Notes will accrue from the most recent date to which interest has been paid or, if no interest has been paid, from the original date of issuance. Interest will be computed on the basis of a 360-day year comprised of twelve 30-day months. The Notes are not subject to any mandatory sinking fund. REDEMPTION AT THE COMPANY'S OPTION The Notes may be redeemed at the Company's option upon notice as described below, in whole or in part from time to time, at any time on or after , 2000 at the following Redemption Prices (expressed as a percentage of the principal amount) if redeemed during the 12-month period beginning of the years set forth below, plus, in each case, accrued interest thereon to the date of redemption:
REDEMPTION YEAR PRICE - -------------------------------------------------------------------- ---------- 2000................................................................ % 2001................................................................ % 2002................................................................ %
and thereafter at a Redemption Price equal to 100% of the principal amount redeemed. Notice of intention to redeem Notes will be given to the holders of the Notes in accordance with "Notices" below. Notice will be given not more than 60 nor less than 30 days prior to the Redemption Date. Notice of redemption will specify the Redemption Date, the applicable redemption price, and, in the case of partial redemption, the aggregate principal amount of the Notes to be redeemed, the aggregate principal amount of the Notes that will be outstanding after such partial redemption and the serial numbers and the portions thereof called for redemption. 52 Any Note which is to be redeemed in part only shall be redeemed in principal amounts of $1,000 or any integral multiple thereof. If less than all the Notes are to be redeemed, the Trustee shall select the Notes or portions of the Notes to be redeemed by such method as the Trustee shall deem fair and appropriate. SUBORDINATION Payment of the principal of and premium, if any, and interest on the Notes is, to the extent set forth in the Indenture, subordinated in right of payment to the prior payment in full of all Senior Indebtedness. Upon any payment or distribution of assets to creditors upon any liquidation, dissolution, winding up, reorganization, assignment for the benefit of creditors, marshalling of assets or any bankruptcy, insolvency or similar proceedings of the Company, the holders of all Senior Indebtedness will first be entitled to receive payment in full of all amounts due or to become due thereon before the holders of the Notes will be entitled to receive any payment with respect to the principal of or premium, if any, or interest on the Notes. No payments on account of principal, premium, if any, or interest in respect of the Notes may be made if (i) there shall have occurred and be continuing a default in any payment with respect to any Senior Indebtedness; or (ii) an event of default shall have occurred resulting in the acceleration thereof; or (iii) an event of default in respect to any Designated Senior Indebtedness shall have occurred permitting the holders thereof to accelerate the maturity thereof which shall be the subject of an Enforcement Notice (as defined below); or (iv) any judicial proceedings shall be pending with respect to any such default; or (v) any of the Notes become due and payable prior to the date on which they otherwise would have become due and payable because of a default under the Indenture and such default or acceleration under the Indenture constitutes a default with respect to any outstanding issue of Designated Senior Indebtedness. "Enforcement Notice" for purposes of the subordination provisions shall mean a written notice delivered by any holder of an outstanding issue of Designated Senior Indebtedness which shall state that facts constituting an event of default (other than a default in payment) have occurred, describe in reasonable detail the nature of the event of default and any facts constituting any other event of default (other than a default in payment) then known to the holder of such Designated Senior Indebtedness delivering such notice and shall indicate the intention of such holder of Designated Senior Indebtedness, subject to such holder's right to withdraw such notice, to initiate judicial proceedings with respect to any of the events of default so identified. An Enforcement Notice may be withdrawn by the holder of such Designated Senior Indebtedness at any time. An Enforcement Notice shall be deemed to have been withdrawn and shall not affect any payments on the Notes if the holder of such Designated Senior Indebtedness within 150 days of giving the Enforcement Notice to the Trustee does not commence and diligently pursue a judicial proceeding with respect to any events of defaults identified in such Enforcement Notice. After an Enforcement Notice is withdrawn or deemed withdrawn, the Company shall promptly resume making any and all payments on the Notes, including missed payments. The holders of any outstanding issue of Designated Senior Indebtedness shall not be entitled to give more than one Enforcement Notice with respect to all defaults known to such holders at the time of giving any such Enforcement Notice during any consecutive 12-month period; provided, however, that if an event of default with respect to such Designated Senior Indebtedness has resulted in an Enforcement Notice and such event of default has been waived or been cured by an amendment to the Designated Senior Indebtedness, an Enforcement Notice may be given by any holder of such Designated Senior Indebtedness within such 12-month period with respect to an event of default relating to any term or condition of such waiver or amendment. See "Events of Default" for the circumstances under which the failure to make certain payments on Senior Indebtedness, or the acceleration of Senior Indebtedness, would constitute a default under the Indenture. For purposes of the subordination provisions, the payment, issuance or delivery of cash, property or securities (other than stock and certain subordinated securities of the Company) upon conversion, repurchase or other acquisition of a Note will be deemed to constitute payment on account of the principal of such Note. By reason of the subordination provisions, in the event of insolvency, holders of Notes may recover less, ratably, than holders of Senior Indebtedness. 53 "Senior Indebtedness" is defined in the Indenture as all amounts payable under (i) the Credit Agreements; (ii) the Company's obligations under the Guaranty; (iii) Capitalized Lease Obligations of the Company; (iv) Attributable Debt; and (iv) all other Indebtedness of the Company whether outstanding on the Issue Date or thereafter created, incurred or assumed, other than (a) the Notes; and (b) any Indebtedness which provides or in respect of which any instrument creating or evidencing such Indebtedness or pursuant to which the same is outstanding it is provided that such Indebtedness is not superior in right of payment to the Notes. Notwithstanding anything to the contrary in the foregoing, Senior Indebtedness shall not include (i) Indebtedness that is represented by Disqualified Capital Stock, (ii) any liability for federal, state, local or other taxes owed or owing by the Company, (iii) Indebtedness of the Company to any Subsidiary or other Affiliate of the Company, except for any such Indebtedness that is pledged to secure Indebtedness Incurred pursuant to the Credit Agreements, (iv) trade payables and (v) Indebtedness which when incurred is without recourse to the Company or any Subsidiary. "Designated Senior Indebtedness" means (i) the Indebtedness outstanding under the Credit Agreements and the Guaranty, including letters of credit and reimbursement obligations in respect thereof, (ii) the 11 3/4% Senior Subordinated Discount Notes and (iii) any other Senior Indebtedness permitted under the Indenture having a principal amount of at least $20,000,000 that is designated as "Designated Senior Indebtedness" by written notice from the Company to the Trustee. After giving pro forma effect to the issuance of the Notes and the application of the net proceeds therefrom, at March 31, 1995, the aggregate outstanding principal amount of Senior Indebtedness of the Company would have been approximately $185,000,000 (assuming all of the outstanding 6 3/4% Convertible Subordinated Debentures are redeemed by the Company) and $156,387,000 (assuming all of the outstanding 6 3/4% Convertible Subordinated Debentures are converted by the holders thereof into shares of the Company's Common Stock). CERTAIN COVENANTS LIMITATION ON INCURRENCE OF ADDITIONAL INDEBTEDNESS The Company will not, and will not permit any of its Subsidiaries to, Incur any Indebtedness (including Acquired Indebtedness), other than Permitted Indebtedness. Notwithstanding the foregoing limitations, the Company and its Subsidiaries may Incur Indebtedness if (i) no Default or Event of Default shall have occurred and be continuing at the time of or as a consequence of the Incurrence of such Indebtedness and (ii) after giving effect to the Incurrence of such Indebtedness (and all other Indebtedness Incurred since the end of the most recently completed fiscal quarter of the Company preceding the date of determination), Indebtedness of the Company, calculated on a consolidated basis in accordance with GAAP, shall not be more than the greater of (x) the product of the EBITDA of the Company for the four most recent fiscal quarters for which financial information is available multiplied by ten for the period beginning with the Issue Date through July , 1997 and multiplied by eight thereafter and (y) the product of Financed Pops as of the last day of such four fiscal quarter period multiplied by $70.00. The calculations in the preceding sentence shall be made assuming in the case of acquisitions or dispositions which occurred during such four-quarter period or subsequent to such four-quarter period and on or prior to the date of the transaction giving rise to the calculations referred to in the preceding sentence, that such acquisitions or dispositions occurred (on a pro forma basis) on the first day of such four-quarter period. LIMITATION ON RESTRICTED PAYMENTS The Company will not, directly or indirectly: (i) declare or pay any dividend on, or make any distribution to the holders of, any shares of the Company's Capital Stock (other than dividends or distributions payable in its Capital Stock (other than Disqualified Capital Stock) or in options, warrants or other rights to purchase Capital Stock (other than Disqualified Capital Stock)), or (ii) purchase, redeem or otherwise acquire or retire for value, Capital Stock of the Company (including options, warrants or other rights to acquire such Capital Stock), or 54 (iii) make any Investment other than a Permitted Investment (each of the foregoing actions set forth in clauses (i) through (iii) being referred to as a "Restricted Payment"); unless, at the time of such Restricted Payment, and after giving effect thereto: (a) no Default or Event of Default shall have occurred and be continuing; (b) after giving effect to such Restricted Payment (and all other Restricted Payments made since the end of the most recently completed fiscal quarter of the Company preceding the date of determination) and the Incurrence of any Indebtedness the net proceeds of which are used to finance such Restricted Payment (and such other Restricted Payments), the Company would be permitted under the Indenture to Incur at least $1 of additional Indebtedness, other than Permitted Indebtedness; and (c) (1) after giving effect to such Restricted Payment, the aggregate amount of all Restricted Payments (including those made pursuant to clause (c)(2) below) made on or after July 1, 1995 shall not exceed the sum of (i) the amount determined by subtracting (x) 1.5 times the Consolidated Interest Expense of the Company for the period (taken as one accounting period) from July 1, 1995 to the last day of the fiscal quarter preceding the date of the Restricted Payment (the "Computation Period") from (y) EBITDA of the Company for the Computation Period, plus (ii) the aggregate net proceeds, including the fair market value of property other than cash (as determined by the Board of Directors, whose good faith determination shall be conclusive and evidenced by a resolution filed with the Trustee), received by the Company from the issuance or sale on or after the Issue Date of any shares of its Capital Stock (excluding Disqualified Capital Stock, but including Capital Stock issued upon the conversion of, or exchange for, any Indebtedness convertible into or exchangeable for Capital Stock of the Company (other than Disqualified Capital Stock) or options, warrants or rights to purchase Capital Stock of the Company (other than Disqualified Capital Stock)) to any Person (other than a Subsidiary of the Company); provided, however, that in the event the Conversion Condition is satisfied, the aggregate net proceeds received by the Company from the issuance and sale of its Capital Stock in respect of the conversion of the 6 3/4% Convertible Subordinated Debentures shall be excluded from the aggregate net proceeds received by the Company pursuant to this clause (ii). (2) The Company may make Restricted Payments not subject to clauses (b) and (c)(1) above in an aggregate amount not to exceed $10,000,000 on or after July 1, 1995. For purposes of clause (c)(ii) above, the value of the aggregate net proceeds received by the Company from the issuance or sale of its Capital Stock upon conversion or exercise of any other securities convertible into or exchangeable for Capital Stock of the Company will be deemed to be an amount equal to (a) the sum of (i) (x) in the case of Indebtedness convertible into shares of Capital Stock, the principal amount or accreted value (whichever is less) of such Indebtedness on the date of such conversion or exchange or (y) in the case of options, warrants or other rights to purchase shares of Capital Stock, the cash proceeds, if any, received by the Company upon issuance of such options, warrants or other rights, and (ii) the additional cash consideration, if any, received by the Company upon conversion or exchange, less any payment on account of fractional shares, minus (b) all expenses incurred in connection with such issuance or sale. Notwithstanding the foregoing, these provisions do not prohibit: (1) the payment of any dividend or making of any distribution within 60 days after the date of its declaration if the dividend or distribution would have been permitted on the date of declaration; (2) the acquisition of Capital Stock either (i) solely in exchange for shares of Qualified Capital Stock, or (ii) through the application of net proceeds of a substantially concurrent sale for cash (other than to a Subsidiary of the Company) of shares of Qualified Capital Stock; (3) the elimination of fractional shares or warrants; and (4) the purchase for value of shares of Capital Stock of the Company held by directors, officers or employees upon death, disability, retirement, termination of employment not to exceed $1,000,000; provided that in the case of clauses (2), (3) and (4), no Default or Event of Default shall have occurred or be continuing at the time of such payment or as a result thereof. In determining the aggregate amount of Restricted Payments made subsequent to the Issue Date, amounts expended pursuant to clauses (1), 2(ii), (3) and (4) shall be included in such calculation. 55 LIMITATION ON TRANSACTIONS WITH AFFILIATES The Company will not, and will not permit any of its Subsidiaries to, directly or indirectly, enter into or permit to exist any transaction (including, without limitation, the purchase, sale, lease or exchange of any property or the rendering of any service) with or for the benefit of, an Affiliate of the Company or any Subsidiary (other than transactions between the Company and a wholly owned Subsidiary of the Company) (an "Affiliate Transaction"), other than Affiliate Transactions on terms that are no less favorable in the aggregate than those that might reasonably have been obtained in a comparable transaction on an arm's-length basis from a person that is not an Affiliate; provided that neither the Company nor any of its Subsidiaries shall enter into an Affiliate Transaction or series of related Affiliate Transactions involving value of $10,000,000 or more, unless a majority of disinterested members of the Board of Directors of the Company determines in good faith as evidenced by a Board Resolution that the terms are no less favorable in the aggregate to the Company than those that might reasonably have been obtained in a comparable transaction on an arm's-length basis from a Person that is not an Affiliate. REPURCHASE AT OPTION OF HOLDERS UPON CHANGE OF CONTROL If there occurs any Change of Control (as defined below) with respect to the Company, each holder of Notes shall have the right, at the holder's option, to require the Company to repurchase all or any portion of such holder's Notes (except that Notes must be repurchased in $1,000 denominations or integral multiples thereof), on the date (the "Repurchase Date") that is 45 days after the date of the Company Notice (as defined below) at a price equal to 101% of the principal amount of the Notes to be repurchased (the "Repurchase Price"), together with accrued interest, if any, to the Repurchase Date. Within 30 days after the occurrence of a Change of Control, the Company is obligated to give notice (the "Company Notice"), in the manner prescribed for notices of redemption, of the occurrence of such Change of Control and of the repurchase right arising in connection therewith. The Company must deliver a copy of the Company Notice to the Trustee and holders of Senior Indebtedness. The Company will comply with the requirements of Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder to the extent such laws and regulations are applicable in connection with the repurchase of Notes pursuant to a Change of Control. To exercise the repurchase right, holders of Notes must deliver on or before the 30th day after the date of mailing the Company Notice written notice to the Company (or an agent designated by the Company for such purpose) and the Trustee of the holder's exercise of such right, together with the Notes with respect to which the right is being exercised, duly endorsed for transfer. A "Change of Control" of the Company shall be deemed to have occurred at such time as (i) any Person (including any syndicate or group deemed to be a "person" under Section 13(d)(3) of the Exchange Act) is or becomes the beneficial owner, directly or indirectly, through a purchase, merger or other acquisition transaction or series of transactions, of more than 40% of the total voting power of all shares of Capital Stock of the Company entitled to vote in the election of directors, (ii) during any period of two consecutive years, individuals who at the beginning of such period constituted the Board of Directors of the Company (together with any new directors whose election by such Board or whose nomination for election by the shareholders of the Company was approved by a vote of a majority of the directors of the Company still in office who were either directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the Board of Directors of the Company then in office, or (iii) the Company consolidates with or merges with or into another corporation or conveys, transfers or leases all or substantially all of its assets to any person, in either event pursuant to a transaction in which the outstanding shares of capital stock of the Company entitled to vote in the election of directors is changed into or exchanged for cash, securities or other property (excluding, however, any such transaction where the outstanding shares of the Company entitled to vote in the election of directors is changed into or exchanged for (x) voting stock of the surviving or transferee corporation which is neither Redeemable Stock nor Exchangeable Stock or (y) cash, securities and other property in an amount which could be paid by the Company as a Restricted Payment (and such amount will be treated as a Restricted Payment for all purposes of the Indenture)). "Beneficial owner" shall be determined in accordance with Rule 13d-3 promulgated by the Commission under the Exchange Act, as in effect on the Issue Date. 56 Due to limitations on the Company's ability to repurchase Notes, there can be no assurance that the Company will be able to repurchase the Notes upon a Change of Control as required by the Indenture. See "Risk Factors -- Restrictions on Repurchases at Holder's Option." Except as described above with respect to a Change of Control, the Indenture will not contain provisions permitting the holders of the Notes to require the Company to repurchase or redeem the Notes in the event of a takeover, recapitalization or similar transaction. Subject to the limitations described above or otherwise contained in the Indenture, the Company, its management or its Affiliates could, in the future, enter into certain transactions, including acquisitions, refinancings or other recapitalizations, that would not constitute a Change of Control under the Indenture, but that could increase the amount of indebtedness outstanding at such time or otherwise affect the Company's capital structure or credit ratings. LIMITATION ON DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES The Company will not, and will not permit any of its Subsidiaries to, directly or indirectly, create or otherwise cause or permit to exist, or become effective any encumbrance or restriction on the ability of any Subsidiary to (a) pay dividends or make any other distributions on its Capital Stock, (b) make loans or advances or to pay any Indebtedness or other obligation owed to the Company or a Subsidiary of the Company or (c) transfer any of its properties or assets to the Company, except for such encumbrances or restrictions existing under or by reason of: (1) applicable law; (2) the Indenture; (3) customary non- assignment provisions of any lease governing a leasehold interest of the Company or any Subsidiary of the Company; (4) any instrument governing Acquired Indebtedness, which encumbrance or restriction is not applicable to the Company or any Subsidiary of the Company, or the properties or assets of the Company or any Subsidiary of the Company, other than the Person, the properties or assets so acquired and which encumbrance or restriction was not put in place in anticipation of or in connection with such acquisition; (5) agreements existing on the Issue Date; (6) security agreements permitted by the Indenture securing Indebtedness permitted by the Indenture to the extent such security agreements restrict the transfer of the property subject thereto; (7) the Credit Agreements as in effect on the Issue Date; or (8) an agreement effecting a refinancing, modification, replacement, renewal, restatement, refunding, deferral, extension, substitution, supplement, reissuance or resale of Indebtedness issued, assumed or incurred pursuant to an agreement referred to in clause (2), (4), (5), (6) or (7) above; provided, however, that the provisions relating to such encumbrance or restriction contained in any such refinancing, replacement or substitution agreement are not less favorable to the Company in any material respect in the reasonable judgment of the Board of Directors of the Company than the provisions relating to such encumbrance or restriction contained in agreements referred to in such clause (2), (4), (5), (6) or (7). PROHIBITION ON INCURRENCE OF SUBSIDIARY INDEBTEDNESS AND ISSUANCE AND SALE OF PREFERRED STOCK BY SUBSIDIARIES After the Issue Date, the Company shall not permit any of its Subsidiaries to incur any Indebtedness other than (i) Indebtedness incurred pursuant to a Senior Secured Credit Facility, (ii) Vendor Financing Indebtedness, and (iii) Intercompany Indebtedness. After the Issue Date, the Company shall not permit any of its Subsidiaries to issue any Preferred Stock (other than to the Company or a Wholly Owned Subsidiary of the Company). LIMITATION ON LIENS WITH RESPECT TO PARI PASSU OR SUBORDINATED INDEBTEDNESS The Company will not, and will not permit any Subsidiary of the Company to incur as security for any Pari Passu Indebtedness or Subordinated Indebtedness (including any assumption, guarantee or other liability with respect thereto by any Subsidiary of the Company), any Lien of any kind upon any property or assets (including any intercompany notes) of the Company or any Subsidiary of the Company, or any income or profits therefrom, unless the Notes are directly secured equally and ratably with (or prior to in the case of Subordinated Indebtedness) the obligation or liability secured by such Lien, except for any Lien securing Acquired Indebtedness; provided that any such Lien only extends to the assets that were subject to such Lien securing such Acquired Indebtedness prior to the related acquisition by the Company. 57 ADDITIONAL COVENANTS The Indenture also contains covenants with respect to, among others, the following matters: (i) payment of principal and interest; (ii) maintenance of an office or agency in the City of New York; (iii) arrangements regarding the handling of money held in trust; (iv) maintenance of corporate existence and (v) the provision of financial information. MERGER OR SALE OF ASSETS The Company will not, in any transaction or series of transactions, consolidate with or merge with or into any other Person or convey, transfer or lease its properties and assets substantially as an entirety to any Person, and the Company may not permit any Person to consolidate with or merge into the Company or convey, transfer or lease its properties and assets substantially as an entirety to the Company, unless: (1) in case the Company will consolidate with or merge into another Person or convey, transfer or lease its properties and assets substantially as an entirety to any Person, such Person (any such surviving Person or transferee Person being the "Surviving Person") shall be a corporation or partnership, shall be organized and validly existing under the laws of the United States of America or any political subdivision thereof and shall expressly assume by supplemental indenture the due and punctual payment of the principal of and premium, if any, and interest on all the Notes and the performance of every covenant of the Indenture on the part of the Company to be performed or observed; and (2) immediately after giving effect to such transaction, no Event of Default, and no event which, after notice or lapse of time or both, would become an Event of Default, shall have happened and be continuing; and (3) the Company or the Surviving Person, as the case may be, after giving effect to such transactions or series of transactions on a pro forma basis (including any Indebtedness Incurred or anticipated to be Incurred in connection with or in respect of such transaction or series of transactions ) could Incur $1.00 of additional Indebtedness (other than Permitted Indebtedness) under the "Limitation on Incurrence of Additional Indebtedness" covenant described above; provided, however, that the foregoing clause (3) shall not prohibit the merger of a Wholly Owned Subsidiary into the Company. EVENTS OF DEFAULT The following will be "Events of Default" under the Indenture: (i) failure to pay principal of or premium, if any, on any Note when due (upon acceleration, optional redemption, required purchase or otherwise); (ii) failure to pay any interest on any Note when due and payable for 30 days; (iii) (a) failure to perform any covenant or agreement of the Company in the Indenture (other than a default in the performance, or breach, of a covenant or agreement which is specifically dealt with in clause (i) or (ii) or in clause (b) of this clause (iii)), for 30 days after written notice has been given as provided in the Indenture; or (b) failure of the Company to comply with its obligations under "Merger or Sale of Assets" or "Repurchase at Option of Holders upon Change of Control" above; (iv) default or defaults under any mortgage, indenture or instrument under which there may be issued or by which there may be secured or evidenced any Indebtedness of the Company (or the payment of which is guaranteed by the Company) whether such indebtedness or guarantee now exists or is created after the date of the Indenture which default (a) is caused by a failure to pay when due principal or interest on such Indebtedness within the grace period provided in such Indebtedness (a "Payment Default") or (b) results in the acceleration of such Indebtedness prior to its maturity and, in each case, the principal amount of any such Indebtedness, together with the principal amount of any other such Indebtedness under which there has been a Payment Default or the maturity of which has 58 been so accelerated, aggregates $10,000,000 and such Payment Default or acceleration of Indebtedness has not been rescinded or annulled within 10 days after written notice has been given as provided in the Indenture; (v) one or more judgments in an aggregate amount in excess of $10,000,000 shall have been rendered against the Company or any of its Subsidiaries, and such judgments remain undischarged or unstayed for a period of 60 days after such judgment or judgments become final and non-appealable; and (vi) certain events in bankruptcy, insolvency or reorganization with respect to the Company shall have occurred. Subject to the provisions of the Indenture relating to the duties of the Trustee in case an Event of Default shall occur and be continuing, the Trustee will be under no obligation to exercise any of its rights or powers under the Indenture at the request or direction of any of the holders, unless such holders shall have offered to the Trustee reasonable indemnity. Subject to such provisions for the indemnification of the Trustee, the holders of a majority in aggregate principal amount of the Notes then outstanding may direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust or power conferred on the Trustee. If an Event of Default (other than as specified in clause (vi) above) shall occur and be continuing, either the Trustee or the holders of at least 25% in aggregate principal amount of the Notes then outstanding may, and the Trustee, upon the request of the holders of not less than 25% in aggregate principal amount of Notes outstanding, shall, accelerate the maturity of all Notes. Such acceleration may be annulled by the action of the holders of a majority in aggregate principal amount of the Notes then outstanding. If an Event of Default specified in clause (vi) above with respect to the Company occurs and is continuing, then all unpaid principal and accrued interest on all Notes outstanding shall IPSO FACTO become and be immediately due and payable without any declaration or other act on the part of the Trustee or any other holder. No holder of any Note will have any right to institute any proceeding with respect to the Indenture or for any remedy thereunder unless such holder shall have previously given to the Trustee written notice of a continuing Event of Default and unless the holders of at least 25% in aggregate principal amount of the Notes then outstanding shall have made written request, and offered reasonable indemnity, to the Trustee to institute such proceeding as trustee, and the Trustee shall not have received from the holders of a majority in aggregate principal amount of the Notes a direction inconsistent with such request and shall have failed to institute such proceeding within 60 days. However, such limitations do not apply to a suit instituted by a holder of a Note for the enforcement of payment of the principal of and premium, if any, or interest on such Note on or after the respective due dates expressed in such Note. The Company will be required to furnish to the Trustee annually a statement as to the performance by the Company of certain of its obligations under the Indenture and as to any default in such performance. DEFEASANCE AND COVENANT DEFEASANCE DEFEASANCE AND DISCHARGE Under the terms of the Indenture, the Company at its option will be discharged from all of its obligations with respect to the Notes (except for certain obligations to exchange or register the transfer of Notes, to replace stolen, lost or mutilated Notes, to maintain paying agencies and to hold moneys in trust) upon the deposit in trust for the benefit of the holders of the Notes of money or U.S. Government Obligations (as such term is defined in the Indenture), or both, which through the payment of principal and interest in respect thereof in accordance with their terms, will provide money in an amount sufficient to pay the principal of and interest on the Notes in accordance with the terms of the Indenture. Such defeasance and discharge may occur only if, among other things, the Company has delivered to the Trustee an opinion of counsel to the effect that the Company has received from or there has been published by the Internal Revenue Service a ruling, or there has been a change in tax law, in either case to the effect that holders of the Notes will not recognize gain or loss for Federal income tax purposes as a result of such deposit, defeasance or discharge and will be subject to Federal income tax on the same amounts, in the same manner and at the same time as would have been the case if such deposit, defeasance and discharge were not to occur. 59 DEFEASANCE OF CERTAIN COVENANTS Under the terms of the Indenture, the Company may omit to comply with certain covenants of the Indenture including those described under "Certain Covenants" and the occurrence of certain Events of Default, which are described above in clauses (iii)(a), (iii)(b), (iv) and (v) under "Events of Default" will not be deemed to be or result in an Event of Default. The Company, in order to exercise such options, will be required to deposit, in trust for the benefit of the holders of such Notes, money or U.S. Governmental Obligations, or both, which, through the payment of principal and interest in respect thereof in accordance with their terms will provide money in an amount sufficient to pay the principal of and interest on the Notes in accordance with the terms of the indenture. The Company will also be required to, among other things, deliver to the Trustee an opinion of counsel to the effect that holders of the Notes will not recognize gain or loss for Federal income tax purposes as a result of such deposit and defeasance and will be subject to Federal income tax on the same amounts, in the same manner and at the same time as would have been the case if such deposit and defeasance were not to occur. In the event that the Company exercised this option and the Notes were declared due and payable because of any Event of Default or became payable on any Redemption Date at the option of the Company, the amount of money and U.S. Government Obligations so deposited in trust would be sufficient to pay amounts due on the Notes at the time of their final maturity but may not be sufficient to pay amounts due on the Notes at the time of acceleration or redemption. In such case, the Company shall remain liable for such payments. MODIFICATIONS AND AMENDMENTS From time to time the Company and the Trustee, without the consent of the holder of any Note, may modify or amend the Indenture for certain specified purposes, including (i) adding to the covenants of the Company for the benefit of the holders of Notes or surrendering any right or power conferred upon the Company; (ii) evidencing the succession of another Person to the Company; or (iii) curing any ambiguity or correcting any provision which the Company and the Trustee may deem necessary or desirable and which will not adversely affect the interests of the holders of Notes in any material respect. Modifications and amendments of the Indenture also may be made, and past defaults by the Company may be waived, with the consent of the holders of not less than a majority in aggregate principal amount of the Notes then outstanding; however, no such modification, amendment or waiver may, without the consent of the holder of each Note affected thereby, (i) change the final maturity of the principal of, or any installment of interest on, any Notes; (ii) reduce the principal amount of, or the premium, if any, or interest on, any Note; (iii) change the currency of payment of principal of, or premium or interest on, any Note; (iv) modify the obligations of the Company to maintain offices or agencies in New York City; (v) impair the right to institute suit for the enforcement of any payment on or with respect to any Note; (vi) modify the subordination provisions in a manner adverse to the holders of the Notes; or (vii) reduce the above-stated percentage of Notes necessary to modify or amend the Indenture or waive any past default. CANCELLATION All Notes which are redeemed or purchased by the Company will forthwith be canceled and cannot be reissued or resold. NOTICES Notices to holders of Notes will be given by mail to the addresses of such holders as they appear in the register. Such notices will be deemed to have been given on the date of such mailing. REPLACEMENT OF NOTES Notes that become mutilated, destroyed, stolen or lost will be replaced by the Company at the expense of the holder upon delivery to the Trustee of the Notes or evidence of the loss, theft or destruction thereof satisfactory to the Company and the Trustee. In the case of a lost, stolen or destroyed Note an indemnity satisfactory to the Trustee and the Company may be required at the expense of the holder of such Note before a replacement Note will be issued. 60 CONCERNING THE TRUSTEE The Company has appointed American Bank National Association as the Trustee and Registrar and as the paying agent for the Notes. TRANSFER AND EXCHANGE At the option of the holder upon request confirmed in writing, and subject to the terms of the Indenture, Notes are exchangeable into an equal aggregate principal amount of Notes of different authorized denominations. Notes may be presented for exchange and registration of transfer (with the form of transfer endorsed thereon duly executed), at the office of any transfer agent or at the office of the Registrar, without service charge and upon payment of any taxes and any other governmental charges as described in the Indenture. Any registration of transfer or exchanges will be effected upon the transfer agent or the Registrar, as the case may be, being satisfied with the documents of title and identity of the person making the request, and subject to such reasonable regulations as the Company, transfer agent and the registrar may implement from time to time. The Company has initially appointed as Registrar the Trustee acting through its corporate trust offices in New York City. The Company reserves the right to vary or terminate the appointment of the Registrar or of any transfer agent or to appoint additional or other registrars or transfer agents or to approve any change in the office through which any registrar or transfer agent acts; provided that there will at all times be a registrar in New York City. In the event of a redemption in part, the Company will not be required (i) to register the transfer of, or exchange, Notes for a period of 15 days immediately preceding the date notice is given identifying the serial numbers of the Notes called for such redemption; or (ii) to register the transfer of, or exchange, any such Note or portion thereof, called for redemption. CERTAIN DEFINITIONS Set forth below is a summary of certain of the defined terms contained in the Indenture. Reference is made to the Indenture for the full definition of all such terms, as well as any other terms used herein for which no definition is provided. "Acquired Indebtedness" means Indebtedness of a Person or any of its Subsidiaries existing at the time such Person becomes a Subsidiary of the Company or assumed in connection with the acquisition of assets from each Person and not incurred by such Person in connection with or in anticipation or contemplation of, such Person becoming a Subsidiary of the Company or such acquisition. "Affiliate" of any specified Person means any other Person who directly or indirectly through one or more intermediaries controls, or is controlled by, or is under common control with, such specified Person. The term "control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise; and the terms "affiliated", "controlling" and "controlled" have meanings correlative to the foregoing. For purposes of the covenant "Limitation on Transactions with Affiliates," the term "affiliate" shall include any Person who, as a result of any transaction described in the "Limitation on Transactions with Affiliates" covenant, would become an Affiliate. "Asset Sale" means the sale, lease (other than an operating lease), assignment or other disposition (including, without limitation, dispositions pursuant to Sale and Leaseback Transactions) by the Company or one of its Subsidiaries to any Person other than the Company or one of its Subsidiaries of (i) any capital stock of any Subsidiary, or (ii) all or substantially all of the properties and assets of any division or line of business of the Company or any Subsidiary of the Company. For the purposes of this definition, the term "Asset Sale" shall not include the sale or other disposition of Capital Stock of the Company. "Attributable Debt" in respect of a Sale and Leaseback Transaction means, at the time of determination, the present value (discounted at the interest rate implicit in the lease, compounded semi-annually) of the obligation of the lessee of the property subject to such Sale and Leaseback Transaction for rental 61 payments during the remaining term of the lease included in such transaction including any period for which such lease has been extended or may, at the option of the lessor, be extended or until the earliest date on which the lessee may terminate such lease without penalty or upon payment of penalty (in which case the rental payments shall include such penalty), after excluding all amounts required to be paid on account of maintenance and repairs, insurance, taxes, assessments, water, utilities and similar charges. "Capital Lease" means, as applied to any Person, any lease of any property (whether real, personal or mixed) by that Person as lessee which, in conformity with generally accepted accounting principles, is accounted for as a capital lease on the balance sheet of such Person. "Capitalized Lease Obligation" means the discounted present value of the rental obligation under any Capital Lease. "Capital Stock" means (i) with respect to any Person, any and all shares, interests, participation or other equivalents (however designated) of corporate stock, including each class of common stock and preferred stock of such Person and (ii) with respect to any other Person formed other than as a corporation, any and all partnership or other equity interest of such other Person. "Cash Equivalents" means (i) marketable direct obligations issued by, or unconditionally guaranteed by, the United States Government or issued by any agency thereof and backed by the full faith and credit of the United States, in each case maturing within one year from the date of acquisition thereof, (ii) marketable direct obligations issued by any state of the United States of America or any political subdivision of any such state or any public instrumentality thereof maturing within one year from the date of acquisition thereof and, at the time of acquisition, having one of the two highest ratings obtainable from either Standard & Poor's Corporation or Moody's Investors Service, (iii) commercial paper maturing no more than one year from the date of creation thereof and, at the time of acquisition, having a rating of at least A-1 from Standard & Poor's Corporation or at least P-1 from Moody's Investors Service, (iv) certificates of deposit or bankers' acceptances maturing within one year from the date of acquisition thereof issued by any commercial bank organized under the laws of the United States of America or any state thereof or the District of Columbia or any U.S. branch of a foreign bank having at the date of acquisition thereof combined capital and surplus of not less than $250 million, (v) repurchase obligations with a term of not more than seven days for underlying securities of the types described in clause (i) above entered into with any bank meeting the qualifications specified in clause (iv) above, (vi) investments in money market funds which invest substantially all their assets in securities of the types described in clauses (i) through (v) above, and (vii) corporate debt obligations maturing within one year from the date of acquisition thereof and, at the time of acquisition, having an investment grade rating from Standard & Poor's Corporation and Moody's Investors Service. "Consolidated Interest Expense" means, for any period, the amount of interest in respect of Indebtedness (including amortization of original issue discount, amortization of debt issuance costs, non-cash interest payments on any Indebtedness, the interest portion of any deferred payment obligation and the interest component of rentals in respect of any Capitalized Lease Obligation paid, accrued or scheduled to be paid or accrued by such Person during such period), determined on a consolidated basis in accordance with GAAP. For purposes of this definition, interest on a Capitalized Lease Obligation shall be deemed to accrued at an interest rate reasonably determined by such Person to be the rate of interest implicit in such Capitalized Lease Obligation in accordance with GAAP consistently applied. "Consolidated Net Income (Loss)" means, with respect to any Person, for any period, the consolidated net income (or loss) of such Person on a consolidated basis for such period as determined in accordance with GAAP consistently applied adjusted, to the extent included in calculating such net income, by excluding, without duplication, (i) all extraordinary gains or losses (net of fees and expenses relating to the transaction giving rise thereto) and the non-recurring cumulative effect of accounting changes, (ii) the portion of net income (or loss) of such Person and its consolidated Persons allocable to minority interests in unconsolidated Persons to the extent that cash dividends or distributions have not actually been received by such Person or one of its consolidated Persons, (iii) net income (or loss) of any Person combined with such Person or one of its consolidated Persons on a "pooling of interests" basis attributable to any period prior to the date of combination, (iv) gains or losses (on an after tax basis) in respect of any Asset Sales by such Person or 62 one of its consolidated Persons (net of fees and expenses relating to the transaction given rise thereto), and (v) all management fees, or other income relating to services that are in the nature of management, corporate overhead or administrative services, to the extent cash is not actually received by such Person with respect to such services. "Conversion Condition" means the conversion of a majority in aggregate principal amount (i.e. not less than $37,374,000 aggregate principal amount) of the Company's outstanding 6 3/4% Convertible Subordinated Debentures due 2009 by the holders thereof on or prior to the Convertible Redemption Date into shares of the common stock of the Company. "Convertible Redemption Date" means 11:00 a.m. New York City time on the date on which the option to convert the 6 3/4% Convertible Subordinated Debentures into the Common Stock of the Company shall terminate, which shall in no event be later than July 31, 1995. "Credit Agreements" means the Amended and Second Restated Loan Agreement for RSAs, dated as of March 31, 1993, as amended by Amendment No. 1 thereto dated as of August 2, 1993 and Amendment No. 2 thereto dated as of February 22, 1994, between Cellular, Inc. Financial Corporation and National Bank for Cooperatives (now known as CoBank, ACB) and the Amended and Restated Loan Agreement for MSAs, dated as of March 31, 1993, as amended by Amendment No. 1 thereto dated as of August 2, 1993 and Amendment No. 2 thereto dated as of February 22, 1994 between Cellular, Inc. Financial Corporation and National Bank for Cooperatives (now known as CoBank, ACB) and any related notes, any related security agreements, any related letters of credit and any other related documents as such agreements may be amended, supplemented or modified from time to time including any and all refinancings, modifications, replacements, renewals, restatements, refundings, deferrals, extensions, substitutions, supplements or reissuances, including any agreement increasing the amount of Indebtedness incurred thereunder or available to be borrowed thereunder, provided that on the date such Indebtedness is Incurred it would not be prohibited by the covenant described under the caption "Limitation on Incurrence of Additional Indebtedness" above. "Default" means an event or condition the occurrence of which is, or with the lapse of time or the giving of notice or both would be, an Event of Default. "Disqualified Capital Stock" means any Capital Stock which, by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable), or upon the happening of any event, matures or is mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or is redeemable at the sole option of the holder thereof, in whole or in part, on or prior to the final maturity date of the Notes. "Disqualified Pops" means Pops (to the extent such Pops are included in Net Company Pops) in those MSAs and RSAs in which the Company directly or indirectly has an ownership interest in the entity licensed by the FCC to operate a cellular telephone system in such MSAs and RSAs, to which entity a Person other than the Company, a Wholly Owned Subsidiary of the Company or the lender(s) under a Senior Secured Credit Facility pursuant to which the Company or a Wholly Owned Subsidiary of the Company is the primary obligor or guarantor of all obligations thereunder, as of the date of determination, directly or indirectly provides debt financing. "EBITDA" means, for any Person, for any period, an amount equal to: (A) the sum of (i) Consolidated Net Income (Loss) for such period, plus (ii) the provision for taxes for such period based on income or profits to the extent such income or profits were included in computing Consolidated Net Income (Loss) and any provision for taxes utilized in computing net loss under clause (i) hereof, plus (iii) Consolidated Interest Expense for such period, plus (iv) depreciation for such period on a consolidated basis, plus (v) amortization of intangibles for such period on a consolidated basis, plus (vi) any other non-cash items reducing Consolidated Net Income (Loss) for such period, all determined in accordance with GAAP consistently applied, minus (B) the sum of (i) all non-cash items increasing Consolidated Net Income for such period, and (ii) interest income for such period, all for such Person on a consolidated basis determined in accordance with GAAP consistently applied. 63 "Exchangeable Stock" of any issuer means any Capital Stock which is exchangeable or convertible into a debt security of such issuer or any of its Subsidiaries. "Financed Pops" means the sum of, without duplication, (i) Net Company Pops, plus (ii) Secured Pops, minus (iii) Disqualified Pops. "GAAP" means generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as approved by a significant segment of the accounting profession which are in effect in the United States; provided, however, that for purposes of determining compliance with covenants in the Indenture "GAAP" means such generally accepted accounting principles as in effect from time to time. "Guaranty" means the Amended and Second Restated Guaranty dated March 31, 1993, as amended by Amendment No. 1 thereto dated as of August 2, 1993 and Amendment No. 2 thereto dated as of February 22, 1994, given by the Company for National Bank for Cooperatives (now known as CoBank ACB) and any related security agreement, as in effect or amended from time to time, including any and all refinancings, modifications, replacements, renewals, restorations, deferrals, extensions, substitutions, supplements or reissuances, including any agreement increasing the amount of Indebtedness guaranteed thereunder or available to be guaranteed thereunder, provided that on the date such Indebtedness is Incurred it would not be prohibited by the covenant described under the caption "Limitation on Incurrence of Additional Indebtedness" above. "Incur" means, with respect to any Indebtedness or other obligation of any Person, to create, issue, incur (by conversion, exchange or otherwise), assume, guarantee or otherwise become liable in respect of such Indebtedness or other obligation or the recording, as required pursuant to GAAP or otherwise, of any such Indebtedness or other obligation on the balance sheet of such Person (and "Incurrence", "Incurred", "Incurrable" and "Incurring" shall have meanings correlative to the foregoing); provided, however, that a change in GAAP that results in an obligation of such Person that exists at such time becoming Indebtedness shall not be deemed an Incurrence of such Indebtedness. Indebtedness otherwise Incurred by a Person before it becomes a Subsidiary of the Company will be deemed to have been Incurred at the time it becomes such a Subsidiary. Neither the accrual of interest (including the issuance of "pay in kind" securities or similar instruments in respect of such accrued interest) pursuant to the terms of Indebtedness incurred in compliance with the "Limitation on Incurrence of Additional Indebtedness" covenant, nor the accretion of original issue discount, nor the mere extension of the maturity of any Indebtedness shall be deemed to be an Incurrence of Indebtedness. "Indebtedness" of a Person means without duplication (a) all debt of such Person which is (i) for money borrowed or (ii) evidenced by a note or similar instrument given in connection with the acquisition of any businesses, properties or assets of any kind, but excluding any other trade accounts payable or accrued liabilities arising in the ordinary course of business, (b) Capitalized Lease Obligations, (c) Attributable Debt, (d) all obligations of such Person under Interest Swap and Hedging Obligations, (e) Disqualified Capital Stock of such Person, (f) any debt or obligation of others secured by a Lien on the assets of such Person, whether or not such debt or obligation is assumed or guaranteed by such Person, (g) any debt or obligations assumed or guaranteed by such Person (but only to the extent assumed or guaranteed by such Person) if the debt or obligation of the other Person is of the type referred to in clause (a), (b), (c), (d) or (e) and (h) amendments, renewals, extensions, modifications and refundings of any debt or obligations referred to in clause (a), (b), (c), (d) or (e). The outstanding principal amount on any date of any Indebtedness issued with original issue discount is the face amount of such Indebtedness less the remaining unamortized portion of the original issue discount of such Indebtedness on such date. "Intercompany Indebtedness" means (i) Indebtedness Incurred by the Company or a Subsidiary from a Wholly Owned Subsidiary of the Company, (ii) loans and advances from the Company to a Subsidiary made in the ordinary course of business and (iii) loans and advances from the Company to a Wholly Owned Subsidiary of the Company. 64 "Interest Swap and Hedging Obligations" means any obligations of any Person pursuant to any interest rate swaps, caps, collars and similar arrangements providing protection against fluctuations in interest rates. For purposes of the Indenture, the amount of such obligations shall be the amount determined in respect thereof as of the end of the then most recently ended fiscal quarter of such Person, based on the assumption that such obligation had terminated at the end of such fiscal quarter, and in making such determination, if any agreement relating to such obligation provides for the netting of amounts payable by and to such Person thereunder or if any such agreements provides for the simultaneous payment of amounts by and to such Person, then in each such case, the amount of such obligations shall be the net amount so determined, plus any premium due upon default by such Person. "Investment" means any transfer or delivery of cash, stock or other property of value in exchange for Indebtedness, stock or other security or ownership interest by way of loan, advance or capital contribution. The amount of any non-cash Investment shall be the fair market value of such Investment, as determined in good faith by management of the Company unless the fair market value of such Investment exceeds $5,000,000, in which case such fair market value shall also be determined in good faith by the Board of Directors or other equivalent governing body of the Company at the time such Investment is made. "Issue Date" means the date of original issuance of the Notes. "Lien" means any mortgage, charge, pledge, lien (statutory or otherwise), security interest, hypothecation or other encumbrance upon or with respect to any property of any kind, real or personal, movable or immovable, now owned or hereafter acquired. "Net Company Pops" means the aggregate number of Pops in those MSAs and RSAs in which the Company directly or indirectly has an ownership interest in the entity licensed by the FCC to operate a cellular telephone system in those MSAs and RSAs, multiplied by the Company's net ownership interest in such entity. "Obligations" means all obligations for principal, premium, interest, penalties, fees, indemnifications, reimbursements, damages and other liabilities payable under the documentation governing any Indebtedness. "Pari Passu Indebtedness" means any Indebtedness of the Company that is pari passu in right of payment to the Notes. "Permitted Indebtedness" means (i) the Notes issued pursuant to the Indenture in an aggregate principal amount not to exceed $125,000,000, (ii) Indebtedness of the Company and its Subsidiaries outstanding on the Issue Date reduced by the amount of any scheduled amortization payments or mandatory prepayments when actually paid or permanent reductions thereon, (iii) Indebtedness Incurred under or pursuant to the Credit Agreements in an aggregate principal amount at any time outstanding not to exceed $165,000,000, LESS the amount of Indebtedness under the Credit Agreements exchanged, extended, refinanced, renewed, replaced, substituted for or with the proceeds of Indebtedness Incurred pursuant to clause (v) below, (iv) additional Indebtedness incurred for any purpose not to exceed, at any time outstanding, $20,000,000, (v) Indebtedness created, Incurred, issued, assumed or given in exchange for, or the proceeds of which are used substantially concurrently to, extend, refinance, renew, replace, substitute or refund such Indebtedness, including any additional Indebtedness Incurred to pay premiums and fees in connection therewith (the "Refinancing Indebtedness"); provided that (A) the principal amount of such Refinancing Indebtedness shall not exceed the outstanding principal amount of Indebtedness so extended, refinanced renewed replaced, substituted or refunded plus any amounts Incurred to pay premiums and fees in connection therewith; and (B) if the Weighted Average Life to Maturity of the Indebtedness so extended, refinanced, renewed, replaced, substituted or refunded is equal to or greater than the Weighted Average Life to Maturity of the Notes, then the Refinancing Indebtedness shall have no installments of principal (or redemption payment) scheduled to come due on or prior to the stated maturity of the Notes, provided that subclause (B) of this clause (v) will not apply to any refunding or refinancing of the Credit Agreements, and (vi) Intercompany Indebtedness. 65 "Permitted Investments" means in the case of the Company or its Subsidiaries, (i) an Investment related to the business of the Company and its Subsidiaries as it is conducted on the Issue Date, including, but not limited, joint ventures existing on the Issue Date, (ii) Investments in the Company by any Subsidiary or Investments by the Company or any Subsidiary (including acquisitions) in any other Person, if after giving effect of any such Investment, such Person would be a Wholly Owned Subsidiary of the Company, (iii) Investments in cash and Cash Equivalents, and (iv) Investments in Productive Assets. "Person" means an individual, partnership, corporation, unincorporated organization, trust or joint venture, or a governmental agency or political subdivision thereof. "Pops" means the estimated total population of a Metropolitan Statistical Area or a Rural Service Area, based on the most recently available Strategic Marketing Inc. population estimates or, if Strategic Marketing Inc. no longer publishes such information, other similar market service of general acceptance in the cellular telephone industry. "Preferred Stock" means, with respect to any Person, any and all shares, interests, participations or other equivalents (however designated) of such Person's preferred or preference stock whether now outstanding or issued after the Issue Date, and including, without limitation, all classes and series of preferred or preference stock of such Person. "Productive Assets" means assets (including Capital Stock) of a kind used or usable in the business of the Company and its Subsidiaries as conducted on the Issue Date. "Purchase Money Obligations" means indebtedness of any Person secured by Liens (i) on property purchased, acquired or constructed after the Issue Date and used in the ordinary course of business and (ii) securing the payment of all or any part of the purchase price or construction cost of such assets and limited to the property so acquired and improvements thereof; provided that the aggregate principal amount of Indebtedness secured thereby shall not, at the time such Indebtedness is Incurred, exceed 100% of the purchase price to such Person of the assets subject to such Lien. "Qualified Capital Stock" means any stock that is not Disqualified Capital Stock. "Sale and Leaseback Transaction" of any Person means any direct arrangement with any other Person or to which such other Person is a party providing for the leasing by such Person of any property, whether owned by such Person at the Issue Date or later acquired, which has been or is to be sold or transferred by such Person to such other Person or to any other Person from whom funds have been or are to be advanced by such other Person on the security of such property. "Secured Pops" means the aggregate number of Pops in those MSAs and RSAs in which the Company directly or indirectly has an ownership interest in the entity licensed by the FCC to provide cellular telephone service in such MSAs and RSAs and to which entity as of the date of determination, any of (i) the Company, (ii) a Subsidiary of the Company or (iii) the lender(s) pursuant to a Senior Secured Credit Facility pursuant to which the Company or a Wholly Owned Subsidiary of the Company is the primary obligor or guarantor of all obligations thereunder, directly or indirectly, provides financing, and in which in each case, all or substantially all of the assets (except assets which may be encumbered by Purchase Money Obligations) are pledged to the Company, a Subsidiary of the Company or such lender(s) on a perfected first priority basis. "Senior Secured Credit Facility" shall mean the Amended and Second Restated Loan Agreement for RSAs, dated as of March 31, 1993 as amended by Amendment No. 1 thereto dated as of August 2, 1993 and Amendment No. 2 thereto dated as of February 22, 1994 between Cellular, Inc. Financial Corporation and National Bank for Cooperatives (now known as CoBank, ACB) and the Amended and Restated Loan Agreement for MSAs dated as of March 31, 1993 as amended by Amendment No. 1 thereto dated as of August 2, 1993 and Amendment No. 2 thereto dated as of February 22, 1994 between Cellular, Inc. Financial Corporation and National Bank for Cooperatives (now known as CoBank, ACB) and any related notes, security agreements, letters of credit, as such documents may be amended, supplemented or modified from time to time and any successor senior secured credit agreement that may be entered into by the Company or the Subsidiaries. 66 "Subordinated Indebtedness" means Indebtedness of the Company, subordinated in right of payment to the Notes. "Subsidiary" with respect to any Person, means (i) any corporation of which at least a majority of whose Capital Stock with voting power, under ordinary circumstances, to elect directors is at the time, directly or indirectly, owned by such Person, by such Person and one or more Subsidiaries of such Person or by one or more Subsidiaries of such Person, or (ii) a partnership in which such Person or a Subsidiary of such Person owns, at the time, a majority of the general partner interests in such partnership, or (iii) any other Person of which at least a majority of the voting interest under ordinary circumstances is at the time, directly or indirectly, owned by such Person. "Vendor Financing Indebtedness" means, with respect to any Person, an obligation owed by such Person to a vendor of any property or materials used in such Person's business, or to a bank or other financial institution that has financed or refinanced the purchase or lease of such property or materials from such a vendor, in each case solely in respect of the purchase price or lease of such property or materials, or of any services provided by such vendor (and only, in the case of any such obligation owed to such a bank or financial institution, to the extent and for as long as such obligation is guaranteed by, or secured by property or assets of, such vendor). "Weighted Average Life to Maturity" means, when applied to any Indebtedness at any date, the number of years obtained by dividing (a) the then outstanding aggregate principal amount of such Indebtedness into (b) the total of the product obtained by multiplying (i) the amount of each then remaining installment, sinking fund, serial maturity or other required payment of principal, including payment at final maturity, in respect thereof, by (ii) the number of years (calculated to the nearest one-twelfth) which will elapse between such date and the making of such payment. "Wholly Owned Subsidiary" means a Subsidiary of the Company, all of the outstanding equity interests of which are owned by the Company or another wholly owned Subsidiary. 67 UNDERWRITING Subject to the terms and conditions set forth in a purchase agreement (the "Purchase Agreement") among the Company and the Underwriters, each of the Underwriters has severally agreed to purchase from the Company, and the Company has agreed to sell to each of the Underwriters, the principal amount of the Notes set forth opposite its name below. Pursuant to the Purchase Agreement, the Underwriters will be obligated to purchase all of the Notes if any are purchased.
UNDERWRITER PRINCIPAL ----------- AMOUNT ------------ Merrill Lynch, Pierce, Fenner & Smith Incorporated............................................. $ Smith Barney Inc................................................... ------------ Total.................................................... $ 80,000,000 ------------ ------------
The several Underwriters propose to offer the Notes to the public at the public offering price set forth on the cover page of the Prospectus, and to certain dealers at such price less a concession not in excess of % of the principal amount of the Notes. The Underwriters may allow, and such dealers may reallow, a discount not in excess of % of the principal amount of the Notes to certain other dealers. After the initial public offering of the Notes, the public offering price, concession and discount may be changed. There is no public market for the Notes and the Company does not intend to list the Notes on any securities exchange or for quotation over any over-the-counter market. The Company has been advised by the Underwriters that, following the completion of the Offering, the Underwriters presently intend to make a market in the Notes. However, the Underwriters are under no obligation to do so and may discontinue any market making activities at any time without notice. No assurance can be given as to the liquidity of the trading market for the Notes or that an active public market for the Notes will develop or, if developed, will continue. If an active public market does not develop or is not maintained, the market price and liquidity of the Notes may be adversely affected. The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. LEGAL MATTERS The validity of the Notes offered hereby will be passed upon for the Company by Latham & Watkins, Washington, D.C. Certain legal matters will be passed upon for the Underwriters by Skadden, Arps, Slate, Meagher & Flom, New York, New York. Certain other legal matters related to the Offering will be passed upon for the Company by Amy M. Shapiro, Vice President, Secretary and General Counsel for the Company. As of June 14, 1995, Ms. Shapiro was the beneficial owner (for purposes of the Exchange Act) of 22,959 shares of the Company's Common Stock. EXPERTS The consolidated financial statements of the Company at September 30, 1993 and 1994, and for each of the three years in the period ended September 30, 1994, appearing in this Prospectus and Registration Statement and incorporated herein by reference to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1994, as amended by Form 10-K/A No. 1 dated January 11, 1995, Form 10-K/A No. 2 dated May 25, 1995 and Form 10-K/A No. 3 dated June 16, 1995, have been audited by Ernst & Young LLP, independent auditors, and the information under the caption "Selected Consolidated Financial Data" as of and for each of the five years in the period ended September 30, 1994 appearing in this prospectus and Registration Statement has been derived from consolidated financial statements audited by Ernst & Young LLP as set forth in their reports thereon appearing elsewhere herein and incorporated herein by reference. The consolidated financial statements and selected consolidated financial data are included and incorporated herein by reference in reliance upon such reports given upon the authority of such firm as experts in accounting and auditing. 68 ADDITIONAL INFORMATION The Company is subject to the periodic reporting and other informational requirements of the Exchange Act and, in accordance therewith, files reports, proxy statements, information statements and other information with the Commission. Such reports, proxy statements, information statements and other information filed by the Company can be inspected and copied at the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the following Regional Offices of the Commission: New York Regional Office, Seven World Trade Center, 13th Floor, New York, New York, 10048; and Chicago Regional Office, 500 West Madison Street, Suite 1400, Chicago, Illinois, 60661. Copies of such material can be obtained from the Public Reference Section of the Commission, Washington, D.C. 20549, at prescribed rates. The Company's Common Stock is quoted on the Nasdaq National Market under the symbol "CELS". Material filed by the Company can be inspected at the offices of the National Association of Securities Dealers, Inc., 9513 Key West Avenue, Rockville, MD, 20850. The Company has filed with the Commission under the Securities Act of 1933, as amended, a Registration Statement with respect to the Notes offered hereby. This Prospectus does not contain all the information set forth in the Registration Statement and in the exhibits and schedules thereto. With respect to each such contract, agreement or other document filed as an exhibit to the Registration Statement, reference is made to the exhibit for a more complete description of the matter involved, and each such statement shall be deemed qualified in its entirety by such reference. For further information with respect to the Company and the Notes, reference is made to the Registration Statement and to the exhibits and schedules filed therewith. All of these documents may be inspected without charge at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C., 20549, and copies of such material can be obtained from the public reference section of the Commission, Washington, D.C., 20549, at prescribed rates. 69 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Shareholders CommNet Cellular Inc. We have audited the accompanying consolidated balance sheets of CommNet Cellular Inc. (formerly Cellular, Inc.) as of September 30, 1994 and 1993, and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows for each of the three years in the period ended September 30, 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of CommNet Cellular Inc. at September 30, 1994 and 1993, and the consolidated results of its operations and its cash flows for each of the three years in the period ended September 30, 1994, in conformity with generally accepted accounting principles. As discussed in Note 1 to the financial statements, in the fiscal year ended September 30, 1994, the Company changed its methods of accounting for income taxes and short-term investments. ERNST & YOUNG LLP Denver, Colorado December 2, 1994 F-1 COMMNET CELLULAR INC. CONSOLIDATED BALANCE SHEETS ASSETS (NOTE 5)
SEPTEMBER 30, ------------------------------ 1994 1993 -------------- -------------- MARCH 31, 1995 -------------- (UNAUDITED) Current assets: Cash and cash equivalents........................................... $ 2,081,591 $ 45,660,761 $ 14,396,471 Available-for-sale securities (Note 3).............................. 21,198,698 21,092,859 11,553 Accounts receivable, net of allowance for doubtful accounts of $2,677,124 and $1,384,181 in 1994 and 1993, respectively........... 12,706,452 9,397,055 13,532,361 Inventory and other................................................. 7,316,770 2,945,485 6,412,957 -------------- -------------- -------------- Total current assets.............................................. 43,303,511 79,096,160 34,353,342 Investment in and advances to affiliates (Notes 2 and 4).............. 61,908,761 55,892,372 57,063,587 Investment in cellular system equipment............................... 9,732,075 4,366,362 17,246,637 Property and equipment, at cost (Note 7): Cellular system equipment........................................... 79,215,294 53,976,077 88,405,886 Land, buildings and improvements.................................... 17,361,917 11,377,969 19,511,990 Furniture and equipment............................................. 14,796,494 10,463,838 15,999,645 -------------- -------------- -------------- 111,373,705 75,817,884 123,917,521 Less accumulated depreciation....................................... 31,455,978 22,357,588 37,663,361 -------------- -------------- -------------- Net property and equipment........................................ 79,917,727 53,460,296 86,254,160 Other assets, less accumulated amortization of $25,979,913 and $24,361,752 in 1994 and 1993, respectively: FCC licenses and filing rights (Note 2)............................. 80,458,461 68,174,551 90,203,145 Deferred loan costs and other....................................... 6,432,286 8,300,444 5,759,483 -------------- -------------- -------------- Total other assets................................................ 86,890,747 76,474,995 95,962,628 -------------- -------------- -------------- $ 281,752,821 $ 269,290,185 $ 290,880,354 -------------- -------------- -------------- -------------- -------------- -------------- LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable.................................................... $ 10,327,933 $ 5,791,135 $ 7,057,169 Accrued liabilities................................................. 3,441,149 4,401,151 4,733,735 Accrued interest.................................................... 2,331,034 4,031,780 2,695,394 Current portion of long-term debt................................... 1,090,870 1,071,330 1,090,870 Obligation under capital leases due within one year................. 588,025 240,173 467,798 -------------- -------------- -------------- Total current liabilities......................................... 17,779,011 15,535,569 16,044,966 Long-term debt: Secured bank financing (Note 5)..................................... 50,448,361 39,318,703 63,203,738 Obligation under capital leases due after one year (Note 7)......... 785,082 306,127 620,138 11 3/4% senior subordinated discount notes (Note 6)................. 112,979,725 100,846,570 119,617,285 Convertible subordinated debentures (Note 6)........................ 79,700,000 117,572,181 79,697,000 Obligations under purchase agreements................................. -- 1,632,643 -- Minority interests.................................................... 4,154,175 3,500,163 3,872,665 Commitments (Note 8) Stockholders' equity (deficit) (Notes 2, 3, 5, 6, 10, 11 and 12): Preferred Stock, $.01 par value; 1,000,000 shares authorized; no shares issued...................................................... -- -- -- Common Stock, $.001 par value; 40,000,000 shares authorized; 11,739,108 and 8,911,579 shares issued at September 30, 1994 and 1993, respectively................................................. 11,739 8,911 11,954 Capital in excess of par value...................................... 117,146,376 74,619,503 120,888,317 Unrealized losses on available-for-sale securities.................. (450,311) -- -- Accumulated deficit................................................. (100,801,337) (84,050,185) (113,075,709) -------------- -------------- -------------- Total stockholders' equity (deficit).............................. 15,906,467 (9,421,771) 7,824,562 -------------- -------------- -------------- $ 281,752,821 $ 269,290,185 $ 290,880,354 -------------- -------------- -------------- -------------- -------------- --------------
See accompanying notes. F-2 COMMNET CELLULAR INC. CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED SIX MONTHS ENDED SEPTEMBER 30, MARCH 31, ---------------------------------------------- ------------------------------ 1994 1993 1992 1995 1994 -------------- -------------- -------------- -------------- -------------- (UNAUDITED) (UNAUDITED) Revenues: Cellular service....................... $ 36,113,748 $ 19,577,153 $ 8,014,506 $ 24,532,722 $ 15,356,656 Roaming................................ 16,472,391 9,283,377 4,287,058 8,977,812 6,495,465 Equipment sales........................ 8,773,912 4,828,781 2,604,785 4,829,228 4,603,402 -------------- -------------- -------------- -------------- -------------- 61,360,051 33,689,311 14,906,349 38,339,762 26,455,523 Costs and expenses: Cellular operations: Cost of cellular service............. 9,467,025 6,100,229 4,322,152 7,692,715 4,650,091 Cost of equipment sales.............. 8,834,865 5,218,012 3,319,903 5,072,459 4,501,358 General and administrative........... 16,767,717 10,505,106 5,260,148 10,381,459 7,486,387 Marketing and selling................ 15,786,030 8,465,287 5,236,329 10,088,444 7,103,814 Depreciation and amortization........ 10,541,476 17,581,946 11,611,460 6,901,272 4,785,936 Write-down of property and equipment........................... 2,864,589 -- -- -- 1,472,902 Corporate: General and administrative........... 6,944,193 7,122,454 10,469,437 3,721,863 3,352,832 Depreciation and amortization........ 2,109,379 2,368,562 2,503,357 1,128,096 1,098,360 Write-down of property and equipment........................... 251,667 -- -- -- -- Less amounts allocated to nonconsolidated affiliates.......... (6,537,555) (8,241,752) (9,472,280) (3,232,688) (2,886,174) -------------- -------------- -------------- -------------- -------------- 67,029,386 49,119,844 33,250,506 41,753,620 31,565,506 -------------- -------------- -------------- -------------- -------------- Operating loss........................... (5,669,335) (15,430,533) (18,344,157) (3,413,858) (5,109,983) Equity in net loss of affiliates (Note 4)...................................... (5,092,484) (6,339,145) (8,851,753) (2,735,777) (3,586,024) Minority interest in net income of consolidated affiliates................. (543,607) -- -- (261,004) -- Gains on sales of affiliates and other (Note 2)................................ 3,811,943 7,821,424 14,339,063 67,247 2,459,004 Interest expense......................... (21,338,505) (16,427,796) (14,800,908) (11,886,742) (9,860,292) Interest income (Note 4)................. 12,080,836 10,701,511 10,616,024 5,955,762 6,813,532 -------------- -------------- -------------- -------------- -------------- Loss before extraordinary charge......... (16,751,152) (19,674,539) (17,041,731) (12,274,372) (9,283,763) Extraordinary charge related to early extinguishment of secured bank financing (Note 5)................................ -- (2,991,673) -- -- -- -------------- -------------- -------------- -------------- -------------- Net loss................................. $ (16,751,152) $ (22,666,212) $ (17,041,731) $ (12,274,372) $ (9,283,763) -------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------- Loss per common share: Loss before extraordinary charge....... $ (1.45) $ (2.30) $ (2.44) $ (1.04) $ (0.81) Extraordinary charge................... -- (.35) -- -- -- -------------- -------------- -------------- -------------- -------------- Net loss per common share.............. $ (1.45) $ (2.65) $ (2.44) $ (1.04) $ (0.81) -------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------- Weighted average shares outstanding...... 11,577,191 8,551,785 6,984,541 11,792,419 11,414,210 -------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------- --------------
See accompanying notes. F-3 COMMNET CELLULAR INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
COMMON STOCK CAPITAL IN ----------------------- EXCESS OF UNREALIZED ACCUMULATED SHARES AMOUNT PAR VALUE GAINS (LOSSES) DEFICIT ------------ --------- -------------- -------------- --------------- Balance at September 30, 1991.................. 4,801,610 $ 4,802 $ 22,249,717 $ -- $ (44,342,242) Exercise of options.......................... 54,375 54 534,321 -- -- Issuance of Common Stock -- public offering (Note 12)................................... 2,875,000 2,875 37,256,375 -- -- Offering costs............................... -- -- (656,155) -- -- Issuance of Common Stock -- acquisitions (Note 2).................................... 559,009 559 5,967,011 -- -- Issuance of Common Stock -- ESOP (Note 11)... 21,798 22 264,280 -- -- Net loss..................................... -- -- -- -- (17,041,731) ------------ --------- -------------- -------------- --------------- Balance at September 30, 1992.................. 8,311,792 8,312 65,615,549 -- (61,383,973) Exercise of options.......................... 35,000 35 636,077 -- -- Issuance of Common Stock -- acquisitions (Note 2).................................... 405,226 405 5,942,965 -- -- Issuance of Common Stock -- ESOP (Note 11)... 17,232 17 297,235 -- -- Debenture conversion......................... 142,329 142 2,127,677 -- -- Net loss..................................... -- -- -- -- (22,666,212) ------------ --------- -------------- -------------- --------------- Balance at September 30, 1993.................. 8,911,579 8,911 74,619,503 -- (84,050,185) Exercise of options.......................... 121,250 122 1,478,587 -- -- Issuance of Common Stock -- acquisitions (Note 2).................................... 156,132 156 2,761,396 -- -- Issuance of Common Stock -- ESOP (Note 11)... 20,953 21 477,969 -- -- Debenture conversion......................... 2,529,194 2,529 37,808,921 -- -- Unrealized losses............................ -- -- -- (450,311) -- Net loss..................................... -- -- -- -- (16,751,152) ------------ --------- -------------- -------------- --------------- Balance at September 30, 1994.................. 11,739,108 11,739 117,146,376 (450,311) (100,801,337) Exercise of options (unaudited).............. 94,325 94 770,023 -- -- Issuance of Common Stock -- acquisitions (unaudited)................................. 120,418 121 2,968,935 -- -- Debenture conversion (unaudited)............. 108 -- 2,983 -- -- Unrealized losses (unaudited)................ -- -- -- 450,311 Net loss (unaudited)......................... -- -- -- -- (12,274,372) ------------ --------- -------------- -------------- --------------- Balance at March 31, 1995 (unaudited).......... 11,953,959 $ 11,954 $ 120,888,317 $ -- $ (113,075,709) ------------ --------- -------------- -------------- --------------- ------------ --------- -------------- -------------- ---------------
See accompanying notes. F-4 COMMNET CELLULAR INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SIX MONTHS ENDED SEPTEMBER 30, MARCH 31, --------------------------------------------- ----------------------------- 1994 1993 1992 1995 1994 ------------- ------------- ------------- ------------- ------------- (UNAUDITED) (UNAUDITED) Operating activities: Net loss................................... $ (16,751,152) $ (22,666,212) $ (17,041,731) $ (12,274,372) $ (9,283,763) Adjustments to reconcile net loss to net cash used by operating activities: Minority interest........................ 543,607 -- -- 261,004 -- Compensation expense related to ESOP and option grants........................... 477,990 554,648 264,302 -- -- Depreciation and amortization............ 12,650,855 19,950,508 14,114,817 8,029,368 5,884,296 Equity in net loss of affiliates......... 5,092,484 6,339,145 8,851,753 2,735,777 3,586,024 Gains on sales of affiliates and other... (3,811,943) (7,821,424) (14,339,063) (67,247) (2,459,004) Loss on available-for-sale securities.... -- -- -- 221,598 -- Interest expense on 11 3/4% senior discount notes.......................... 12,133,155 846,205 -- 6,637,560 5,863,912 CoBank patronage income.................. (814,837) (719,005) (329,002) (534,690) (814,837) Accrued interest on advances to affiliates.............................. (11,380,231) (9,542,484) (9,151,074) (5,570,098) (5,427,093) Write-down of property and equipment..... 3,116,256 -- -- -- 1,472,902 Write-down of short-term investments..... 743,511 -- -- -- -- Change in operating assets and liabilities, net of effects from consolidating acquired interests (Note 2): Accounts receivable...................... (2,912,318) (3,721,023) 235,471 128,779 (3,886,535) Inventory and other...................... (4,363,083) (789,336) 46,673 904,908 (1,144,961) Accounts payable and accrued liabilities............................. (1,230,322) 2,368,345 (2,136,240) (90,218) 329,713 Accrued interest......................... (663,529) 126,982 577,287 364,360 (1,822,327) Offering costs related to issuance of senior discount notes.............................. -- (3,260,396) -- -- -- Offering cost related to issuance of convertible subordinated debentures......... -- (245,000) -- -- -- ------------- ------------- ------------- ------------- ------------- Net cash provided (used) by operating activities............................ (7,169,557) (18,579,047) (18,906,807) 746,729 (7,701,673) Investing activities: Purchases of available-for-sale securities................................ (16,788,067) (28,994,122) (40,466,570) (11,553) (13,485,157) Sales of available-for-sale securities..... 15,488,406 21,692,323 37,853,347 21,427,411 3,963,892 Additions to investments in and advances to affiliates................................ (6,789,273) (9,274,470) (9,544,385) (2,426,811) (2,188,547) Reductions in (additions to) investment in cellular system equipment................. (5,365,713) 98,370 126,873 (7,514,562) (4,821,271) Additions to property and equipment........ (31,455,008) (7,547,311) (7,512,126) (12,528,606) (6,330,624) Disposals of (additions to) other assets... -- (1,057,834) -- (14,396) -- Proceeds from sales of interests in affiliates (Note 2)....................... 9,037,328 7,334,198 4,642,920 1,835,349 6,569,210 Purchase of interests in affiliates, net of cash acquired and net of assets and liabilities recorded due to consolidation (Note 2).................................. (13,992,000) (12,082,316) (6,276,406) (2,439,005) (10,420,426) ------------- ------------- ------------- ------------- ------------- Net cash used by investing activities............................ (49,864,327) (29,831,162) (21,176,347) (1,672,173) (26,712,923) Financing activities: Proceeds from secured bank financing....... 13,779,086 38,566,144 9,612,445 13,408,742 2,680,780 Payments of secured bank financing......... (2,629,888) (74,195,558) (2,342,770) (653,364) (1,346,669) Additions (reductions) of obligation under capital leases............................ 826,807 (163,989) (301,603) (285,171) (132,477) Proceeds from issuance of senior discount notes..................................... -- 100,000,000 -- -- -- Issuance of convertible subordinated debentures................................ -- 4,950,000 -- -- -- Issuance of Common Stock, net of offering costs..................................... 1,478,709 378,716 37,401,772 770,117 1,433,959 ------------- ------------- ------------- ------------- ------------- Net cash provided by financing activities............................ 13,454,714 69,535,313 44,369,844 13,240,324 2,635,593 ------------- ------------- ------------- ------------- ------------- Net increase (decrease) in cash and cash equivalents................................. (43,579,170) 21,125,104 4,286,690 12,314,880 (31,779,003) Cash and cash equivalents at beginning of year........................................ 45,660,761 24,535,657 20,248,967 2,081,591 45,660,761 ------------- ------------- ------------- ------------- ------------- Cash and cash equivalents at end of year..... $ 2,081,591 $ 45,660,761 $ 24,535,657 $ 14,396,471 $ 13,881,758 ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- -------------
See accompanying notes. F-5 COMMNET CELLULAR INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED SIX MONTHS ENDED SEPTEMBER 30, MARCH 31, --------------------------------------------- ----------------------------- 1994 1993 1992 1995 1994 ------------- ------------- ------------- ------------- ------------- (UNAUDITED) (UNAUDITED) Supplemental schedule of additional cash flow information and noncash activities: Cash paid during the year for interest..... $ 9,731,301 $ 15,454,609 $ 14,223,623 $ 5,648,665 $ 5,701,880 Purchase of cellular system equipment through accounts payable.................. 4,112,406 1,158,791 1,633,069 620,286 1,323,215 Purchase of cellular system equipment through vendor long-term debt............. -- -- 988,465 -- -- Impact on investments and advances to affiliates from minority interest recorded due to reorganization of eight Nebraska affiliates, six of which were accounted for under the equity method, into one consolidated Nebraska affiliate........... -- 1,839,571 -- -- -- Purchases of interests in affiliates by issuance of Common Stock.................. 2,761,552 6,532,467 7,011,116 2,969,056 1,469,214 Addition to deferred loan costs related to convertible subordinated debentures and senior discount notes..................... -- 3,505,761 -- -- -- Conversion of convertible subordinated debentures to Common Stock................ 37,811,450 2,127,819 -- 2,983 37,811,450
See accompanying notes. F-6 COMMNET CELLULAR INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1994 IS UNAUDITED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION AND BASIS OF PRESENTATION CommNet Cellular Inc. (formerly Cellular, Inc.) and its majority-owned affiliates (the "Company") operates, manages and finances cellular telephone systems principally in the mountain and plains regions of the United States. Cellular telephone systems are capable of providing a wide variety of telecommunication services including high quality wireless local and long-distance telephone service within a specified market area through mobile, portable or fixed telephone equipment. The Federal Communications Commission ("FCC") initially granted only two licenses in each cellular market area, one to a telephone company with an exchange presence in the area ("wireline" license), and one to an entity other than a telephone company ("nonwireline" license). The Company initially acquired its cellular interests by participating in the wireline licensing process conducted by the FCC. In order to participate in that process, the Company formed affiliates which were originally owned at least 51% by one or more independent telephone companies and no more than 49% by the Company. In addition to obtaining interests in cellular markets through participation in the FCC licensing process, the Company also has purchased direct interests in additional markets in order to expand the network. All affiliate investments in which the Company has greater than a 50% interest are consolidated. All affiliate investments in which the Company has a 50% or less but 20% or greater interest are accounted for under the equity method. All affiliate investments in which the Company has less than a 20% interest are accounted for under the cost method. The Company and its affiliates participated in the following markets as of September 30, 1994:
COMPANY AFFILIATE(S) MSA OR INTEREST IN INTEREST RSA CODE (1) STATE AFFILIATE(S) (2) IN LICENSEE (3) - --------------- -------------------- ---------------- --------------- MSAs: 141 Minnesota 49.00% 16.34% LP 152 Maine (4) 33.33% 33.33% LP 185 Indiana 100.00% 16.67% LP 241 Colorado 73.99% 100.00% GP 253 Iowa 74.50% 100.00% GP 267 South Dakota 100.00% 51.00% GP 268 Montana 49.00% 90.00% GP 279 Maine 33.33% 33.33% GP 289 South Dakota 100.00% 100.00% GP 297 Montana 100.00% 100.00% GP 298 North Dakota 100.00% 70.00% GP RSAs: 348 Colorado 10.00% 100.00% GP 349 Colorado 58.60% 100.00% GP 351 Colorado 61.75% 100.00% GP 352 Colorado 66.00% 100.00% GP 353 Colorado 100.00% 75.00% GP 354 Colorado 61.75% 80.00% GP 355 Colorado 49.00% 100.00% GP 356 Colorado 49.00% 100.00% GP 389 Idaho 49.00% 50.00% LP 390 Idaho 49.00% 33.33% LP 392 Idaho (B1) 100.00% 100.00% LP
F-7 COMMNET CELLULAR INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1994 IS UNAUDITED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COMPANY AFFILIATE(S) MSA OR INTEREST IN INTEREST RSA CODE (1) STATE AFFILIATE(S) (2) IN LICENSEE (3) - --------------- -------------------- ---------------- --------------- 393 Idaho 91.64% 100.00% GP 415 Iowa 49.00% 20.64% LP 416 Iowa 49.00% 78.57% LP 417 Iowa 100.00% 100.00% GP 419 Iowa 49.00% 91.67% GP 420 Iowa 100.00% 100.00% GP 424 Iowa 49.00% 30.00% LP 425 Iowa 49.00% 27.11% LP 426 Iowa 52.65% 93.33% GP 427 Iowa 53.64% 91.66% GP 428 Kansas 100.00% 3.07% LP 429 Kansas 100.00% 3.07% LP 430 Kansas 100.00% 3.07% LP 431 Kansas 100.00% 3.07% LP 432 Kansas 100.00% 3.07% LP 433 Kansas 100.00% 3.07% LP 434 Kansas 100.00% 3.07% LP 435 Kansas 100.00% 3.07% LP 436 Kansas 100.00% 3.07% LP 437 Kansas 100.00% 3.07% LP 438 Kansas 100.00% 3.07% LP 439 Kansas 100.00% 3.07% LP 440 Kansas 100.00% 3.07% LP 441 Kansas 100.00% 3.07% LP 442 Kansas 100.00% 3.07% LP 512 Missouri (B1) 49.00% 30.00% LP 523 Montana (B1) 49.00% 100.00% GP 523 Montana (B2) 100.00% 98.11% GP 524 Montana 61.75% 100.00% GP 525 Montana 59.20% 100.00% GP 526 Montana 59.20% 100.00% GP 527 Montana 61.75% 100.00% GP 528 Montana 61.75% 100.00% GP 529 Montana 61.75% 100.00% GP 530 Montana 61.75% 100.00% GP 531 Montana 61.75% 100.00% GP 532 Montana 61.75% 100.00% GP 533 Nebraska 51.27% 25.52% LP 534 Nebraska 51.27% 25.52% LP 535 Nebraska 51.27% 25.52% LP 536 Nebraska 51.27% 25.52% LP 537 Nebraska 51.27% 25.52% LP 538 Nebraska 51.27% 25.52% LP 539 Nebraska 51.27% 25.52% LP
F-8 COMMNET CELLULAR INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1994 IS UNAUDITED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COMPANY AFFILIATE(S) MSA OR INTEREST IN INTEREST RSA CODE (1) STATE AFFILIATE(S) (2) IN LICENSEE (3) - --------------- -------------------- ---------------- --------------- 540 Nebraska 51.27% 25.52% LP 541 Nebraska 51.27% 25.52% LP 542 Nebraska 51.27% 25.52% LP 553 New Mexico 49.00% 33.33% LP 555 New Mexico 49.00% 25.00% LP 557 New Mexico 49.00% 33.33% LP 580 North Dakota 52.14% 100.00% GP 581 North Dakota 49.00% 100.00% GP 582 North Dakota 49.00% 84.59% LP 583 North Dakota 46.96% 100.00% GP 584 North Dakota 61.75% 100.00% GP 611 Oregon 100.00% 25.00% LP(5) 634 South Dakota 61.75% 100.00% GP 635 South Dakota 56.29% 100.00% GP 636 South Dakota 57.50% 100.00% GP 638 South Dakota (B1) 82.99% 100.00% GP 638 South Dakota (B2) 82.99% 100.00% GP 639 South Dakota (B1) 60.66% 100.00% GP 639 South Dakota (B2) 60.66% 100.00% GP 640 South Dakota 64.49% 100.00% GP 641 South Dakota 61.13% 100.00% GP 642 South Dakota 49.00% 100.00% GP 675 Utah 100.00% 100.00% GP 676 Utah 100.00% 100.00% GP 677 Utah (B3) 74.50% 100.00% GP 678 Utah 100.00% 80.00% GP 718 Wyoming 66.00% 100.00% GP 719 Wyoming 83.00% 100.00% GP 720 Wyoming 100.00% 100.00% GP - ------------------------ (1) Metropolitan Statistical Area ("MSA") ranking is based on population as established by the FCC. Rural Service Area ("RSAs") have been numbered by the FCC alphabetically by state. (2) Represents the composite ownership interest held by the Company in the respective affiliate(s). (3) Represents the composite ownership interest of the Company's affiliate(s) in the licensee for a cellular telephone system in the respective market. GP indicates that at least one affiliate has a general partner or controlling interest in the licensee; LP indicates that the affiliate(s) has (have) a limited partner or minority interest. (4) The license for the Portland, Maine market has been vacated. (5) The ownership percentages for the market are the subject of litigation.
F-9 COMMNET CELLULAR INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1994 IS UNAUDITED) 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 interest, occurring only when other stockholders or partners provide funding to the affiliates, is classified with noncurrent liabilities in the accompanying balance sheets. For all other majority-owned affiliates, the Company records all operating losses given that the minority interests have no funding obligations. At such time as the cumulative net income attributed to these nonfunding minority interests exceeds the cumulative net losses previously absorbed, the Company will record a minority interest liability for such entities. INTERIM FINANCIAL STATEMENTS The Company, in its opinion, has included all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of its financial position at March 31, 1995 and the results of its operations for the six months ended March 31, 1995 and 1994. The results of operations for the six months ended March 31, 1995 are not necessarily indicative of the results for a full year. CASH AND CASH EQUIVALENTS The Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. SHORT-TERM INVESTMENTS The Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities," as of September 30, 1994. In accordance with the Statement, prior-period financial statements have not been restated to reflect the change in accounting principle. The cumulative effect as of September 30, 1994 of adopting Statement 115, including the reversal of $450,311 of lower of cost or market adjustments recorded in the current year, decreased net loss by $450,311. The ending balance of shareholders' equity also was decreased by $450,311 to reflect the net unrealized holding loss on securities classified as available-for-sale that were previously classified as held for investment and held for sale, and carried at amortized cost and lower of cost or market, respectively. All of the Company's short-term investments are classified as available-for-sale at September 30, 1994. ACCOUNTS RECEIVABLE The Company performs periodic credit evaluations of its customers' financial condition and generally does not require collateral. Receivables generally are due within 30 days. Credit losses relating to the Company's customers consistently have been within management's expectations and comparable to losses for the portfolio as a whole. INVENTORY Inventories are stated at the lower of cost (first-in, first-out) or market and are comprised of cellular communication equipment and accessories held for resale to the Company's subscribers. INVESTMENT IN CELLULAR SYSTEM EQUIPMENT Investment in cellular system equipment relates to cellular system equipment under construction or held in inventory at the Company's warehouse facility. During the twelve months ended September 30, 1994, the Company replaced and upgraded certain cellular system equipment. As a result, the Company has realized a loss representing the excess of net book over realizable values totaling $3,116,000. F-10 COMMNET CELLULAR INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1994 IS UNAUDITED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) DEFERRED LOAN COSTS Deferred loan costs relate to the offerings of senior notes and convertible subordinated debentures and to the CoBank loan agreements (see Notes 5 and 6). These costs are being amortized over the respective terms of the debentures, notes and loans. FCC LICENSES AND FILING RIGHTS FCC licenses represent the costs of the FCC licenses acquired by consolidated affiliates. Filing rights represent costs associated with acquiring the rights to file for cellular telephone licenses. The excess of the purchase price of affiliate interests acquired over the fair market value of the related net assets acquired is included as the cost of FCC licenses and filing rights. Effective October 1, 1993, the Company revised its estimate of the useful life of FCC license acquisition costs from the remaining initial ten-year term to 40 years from the date of acquisition to conform with industry practices. This change in estimate was accounted for prospectively and resulted in a reduction of amortization expense for the year ended September 30, 1994 of approximately $11,024,000, or $.95 per common share. REVENUE RECOGNITION Cellular service revenues based upon subscriber usage are recognized at the time service is provided. Access and special feature cellular service revenues are recognized when earned. Equipment sales are recognized at the time equipment is delivered to the subscriber or to an unaffiliated agent. DEPRECIATION AND AMORTIZATION Depreciation of property and equipment is provided principally on the straight-line method over estimated useful lives as follows:
YEARS ------ Cellular system equipment............................................... 8-15 Building and improvements............................................... 6-10 Furniture and equipment................................................. 3-5
COST ALLOCATIONS The Company allocates shared operating costs to its managed affiliates. Costs which bear an identifiable causal relationship are allocated directly to the affiliate. Indirect costs are allocated based on a methodology negotiated with the affiliates and applied consistently to all managed markets. This methodology allocates functional cost pools on a pro rata basis taking into consideration total property, plant and equipment, population, subscribers and other attributes of the managed markets. In addition, effective October 1, 1993, and for all comparative periods presented, the Company reclassified allocated cellular operations depreciation from cellular operations cost of cellular service, general and administrative and marketing and selling to cellular operations depreciation and amortization. This change does not impact operating or net loss. During the twelve months ended September 30, 1994, the Company incurred certain overhead costs related to expansion. As a result, the Company capitalized $3,991,000, which is included in property and equipment, and investment in cellular system equipment. In addition, the Company allocated $713,000 to nonconsolidated affiliates. INCOME TAXES Effective October 1, 1993, the Company changed its method of accounting for income taxes from the deferred method to the liability method required by SFAS No. 109, "Accounting for Income Taxes" (see Note 9 --"Income taxes"). F-11 COMMNET CELLULAR INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1994 IS UNAUDITED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) NET LOSS PER COMMON SHARE Net loss per Common share is based on the weighted average number of Common shares outstanding during the periods, excluding Common Stock equivalents which are anti-dilutive. Fully diluted earnings per share are not presented because conversion of the convertible subordinated debentures and notes would be anti-dilutive. The convertible subordinated debentures and notes are not considered to be Common Stock equivalents. 2. BUSINESS ACQUISITIONS AND DISPOSITIONS 1992 In October 1991, the Company disposed of its interest in the Colorado Springs, Colorado wireline cellular system in satisfaction of its promissory notes to U S West NewVector totaling $8,400,000 and accrued interest. As a result, the Company realized a gain in the approximate amount of $8,700,000. In December 1991, the Company acquired, by merger, the outstanding shares of a corporation which was the 51% general partner of the Company's affiliates holding an interest in three RSA markets and one MSA market in Indiana for approximately $1,463,000 paid through the issuance of 147,192 shares of Common Stock to the corporation's shareholder. In December 1991 and January 1992, the Company acquired, by merger, the outstanding shares of two corporations each of which owned a 51% general partnership interest in an affiliate of the Company for approximately $1,614,000 paid through the issuance of 149,085 shares of Common Stock to the shareholders of the two corporations. The Company subsequently transferred its interests in the affiliates to U S West NewVector in connection with the multimarket exchange discussed below. In January 1992, the Company consummated a series of transactions pursuant to which it divested itself of 100% of the nonwireline license for RSA 392 (Idaho 5) and acquired a 71.4% interest in the wireline license for such market. In addition, the Company acquired a 33.33% interest in the wireline licensee for RSA 675 (Utah 3), bringing the Company's net ownership interest in such market to 57.83%. The Company also received cash proceeds of approximately $2,493,000, but recognized a $467,000 loss. In February 1992, the Company acquired the assets of an independent telephone company in South Dakota for $425,000 in cash. In March 1992, the Company completed a multimarket exchange with US West NewVector in which the Company acquired from U S West NewVector interests in 13 managed markets within the states of Idaho, Iowa, Utah and South Dakota, in exchange for limited partnership interests in three markets and $2,645,000 in cash. The exchange resulted in a gain of approximately $4,157,000. In May 1992, the Company sold its 49% limited partnership interest in the entity which owned a 36.5% interest in the wireline licensee for RSA 350 (Colorado 3) for approximately $3,080,000. The sale resulted in a gain of approximately $2,311,000. In June 1992, the Company acquired 75.41% of the outstanding shares of a corporation which is the 51% general partner of an entity which owns 66.67% of the wireline licensee for RSA 393 (Idaho 6) for $3,700,000 consisting of $1,685,000 in cash and 161,200 shares of the Company's Common Stock. As a result of this acquisition, the Company holds, directly and indirectly, 91.64% of the licensee for this market. In July 1992, the Company acquired a 7.15% interest in the wireline license for RSA 392 (Idaho 5) for $629,000 in cash. As a result, the Company holds 78.55% of the license for this market. F-12 COMMNET CELLULAR INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1994 IS UNAUDITED) 2. BUSINESS ACQUISITIONS AND DISPOSITIONS (CONTINUED) In August 1992, the Company acquired the nonwireline cellular system serving RSA 420 (Iowa 9) for approximately $1,910,000. The Company issued 101,532 shares of Common Stock and assumed approximately $590,000 in liabilities. 1993 In December 1992, the Company acquired from U S West NewVector its 70% general partner interest in the licensee for MSA 298 (Bismarck, North Dakota), its 51% general partner interest in the licensee for MSA 267 (Sioux Falls, South Dakota) and its 16.66% general partner interest in the licensee for RSA 642 (South Dakota 9). The aggregate purchase price was approximately $10,800,000 paid in cash by the Company. In May 1993, the remaining partners in the licensee for RSA 642 exercised an option to purchase such interest and paid the Company a total of $1,074,000 in cash. In December 1992, the Company acquired an additional 16.07% interest in the licensee for RSA 640 (South Dakota 7) and an additional 11.28% interest in the licensee for RSA 641 (South Dakota 8) for approximately $469,000 which was paid by the issuance of 31,491 shares of Common Stock of the Company. In December 1992, the Company acquired the outstanding shares of a corporation which is a limited partner in two Colorado MSA markets for 40,252 shares of Common Stock valued at approximately $563,000. In December 1992, the Company also acquired the 51% general partner interest in the affiliate which was a limited partner in one Utah RSA market for $1,261,000 paid by the issuance of 43,025 shares of Common Stock and $615,000 in cash. In February 1993, the Company acquired the outstanding shares of two affiliates which were limited partners in two Colorado MSA markets for 94,811 shares of Common Stock valued at approximately $1,268,000. The Company subsequently transferred such affiliates' interest in certain licensees to U S West NewVector pursuant to the multimarket exchange discussed below. In March 1993, the Company completed an additional multimarket exchange with U S West NewVector in which the Company transferred to U S West NewVector the Company's interest in one nonmanaged RSA market and two nonmanaged MSA markets in exchange for U S West NewVector's interest in seven RSA markets and one MSA market managed by the Company plus approximately $3,418,000 in cash. The exchange resulted in a gain to the Company of approximately $3,812,000. In March 1993, the Company acquired all of the outstanding shares of a corporation which is the 51% general partner of the affiliate which is the 50% general partner of the wireline licensee for RSA 353 (Colorado 6) for $228,000 in cash. In June 1993, RSA 392 (Idaho 5) was partitioned by the FCC into two markets and the Company exchanged its 78.55% interest in the Sun Valley (B2) portion of the market for U S West NewVector's 21.45% interest in the Twin Falls (B1) portion of the market and $12,000 in cash. In August 1993, the Company transferred its interest in two affiliates which held interests in one nonmanaged RSA market and one managed MSA market in exchange for a 98.11% interest in an RSA market which will be managed by the Company and $3,916,000 in cash pursuant to an exchange agreement with Pacific Telecom Cellular, Inc. ("PTI"). In order to fulfill its obligations under the agreement, the Company acquired the outstanding shares of four corporations for approximately $3,499,000 paid by the issuance of 194,474 shares of Common Stock of the Company and approximately $478,000 in cash. The exchange resulted in a gain to the Company of approximately $4,889,000. The agreement also provides for the sale by the Company of its interest in two additional affiliates which hold interests in nonmanaged RSA markets. The sale of one interest was consummated in December 1993 (see below). The sale of the second interest is the subject of pending litigation and, accordingly, there can be no assurance that such sale will be consummated. F-13 COMMNET CELLULAR INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1994 IS UNAUDITED) 2. BUSINESS ACQUISITIONS AND DISPOSITIONS (CONTINUED) 1994 In December 1993, the Company acquired 100% of the stock of a corporation which owns and operates the Rapid City, South Dakota MSA market and owns general partnership interests in two partitioned RSA markets (South Dakota 5 (B2) and South Dakota 6 (B2)) for approximately $10,420,000 in cash plus property valued at approximately $400,000. In December 1993, the Company sold its interests in affiliates which held a 44.44% limited partnership interest in the wireline licensee for RSA 608 (Oregon 3) for approximately $2,076,000 in cash. The sale resulted in a gain of approximately $630,000. In December 1993, the Company acquired additional interests in two affiliated corporations for approximately $139,000. In February 1994, the Company acquired an additional 51% of the stock of an affiliate which held a 28.6% limited partnership interest in MSA 239 (Joplin, MO) for 69,051 shares of the Company's Common Stock, then sold the Company's entire limited partnership interest for $4,494,000 in cash. The sale resulted in a gain of approximately $1,921,000. In March 1994, the Company acquired an additional interest in an affiliated corporation for 2,732 shares of the Company's Common Stock. In April 1994, the Company acquired three affiliated corporations which hold limited partnership interests in Utah RSA managed markets for 80,145 shares of the Company's Common Stock. In May 1994, the Company sold its interest in an affiliate which held an 8.125% limited partnership interest in three nonmanaged RSA markets for approximately $2,468,000 in cash. The sale resulted in a gain of approximately $841,000. Contemporaneously, the Company acquired additional limited partnership interests in four managed RSA markets for approximately $373,000. In July 1994, the Company acquired an additional interest in an affiliated corporation for approximately $199,000 in cash. In August 1994, the Company acquired an aggregate of 3.07% of the stock of a corporation which operates cellular systems throughout Kansas from two unrelated corporations for approximately $3,000,000 in cash. During fiscal year 1994, the Company recognized a gain of approximately $907,000 due to the write-off of contingent liabilities related to stock price guarantees in acquisition agreements. 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 had occurred at the beginning of the respective period in which the acquisition occurred, as well as at the beginning of the immediately preceding period:
YEAR ENDED SEPTEMBER 30, ---------------------------------------------- 1994 1993 1992 -------------- -------------- -------------- Revenues............................................... $ 62,273,235 $ 41,241,051 $ 23,371,759 Equity in net loss of affiliates....................... (4,479,329) (4,854,046) (6,989,099) Net loss............................................... (17,480,917) (20,019,844) (11,165,859) Loss per common share.................................. (1.50) (2.25) (1.46)
F-14 COMMNET CELLULAR INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1994 IS UNAUDITED) 2. BUSINESS ACQUISITIONS AND DISPOSITIONS (CONTINUED) In addition, the Company has initiated discussions with other cellular telephone carriers regarding acquisition of markets or interests in Iowa, North Dakota, Kansas, Nebraska and Wyoming. Such acquisitions will be pursued to the extent that enhancement or extension of the Company's network is accomplished, although there can be no assurance any such acquisitions will be consummated. In November 1994, the Company purchased an additional 5.97% interest in Nebwest Cellular, Inc. for $1,600,000 in cash. Pursuant to the terms of a shareholder's agreement, the Company subsequently sold a portion of that interest to the other shareholders on a pro rata basis for approximately $450,000 in cash. In February 1995, the Company purchased an additional 3.37% interest in this corporation for 34,688 shares of the Company's Common Stock. In March 1995, the Company purchased an additional 2.57% interest in this corporation for 28,638 shares of the Company's Common Stock. In January 1995, the Company sold a wholly-owned subsidiary for approximately $86,000 which resulted in a loss of approximately $297,000. In January 1995, the Company transferred its 25% interest in one nonmanaged RSA market to a partner in that market pursuant to a judgment. The judgment is currently being appealed. The Company received approximately $1,699,000 upon transfer of the interest which resulted in a gain of approximately $497,000. In February 1995, the Company purchased additional interests ranging from 19% to 25% in eleven managed and one nonmanaged markets for approximately $1,259,000 in cash and the issuance of 49,738 shares of the Company's Common Stock. The Company has entered into an agreement to sell its 61.5% interest in Nebwest Cellular, Inc. which owns 25.52% of Nebraska Cellular Telephone Corporation, the licensee for the ten wireline RSA markets in the state of Nebraska, for approximately $24.3 million which will result in a gain after tax of approximately $19.6 million. The interest to be purchased from the Company, as well as interests in the Nebraska RSA markets to be purchased from other entities, will be acquired at a cost of over $200 per pop after taking into account debt assumed or refinanced. This transaction is expected to close during July 1995. 3. SHORT-TERM INVESTMENTS On September 30, 1994, the Company adopted SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," and classified all short-term investments as available-for-sale. The following is a summary of available-for-sale securities:
AVAILABLE-FOR-SALE SECURITIES ------------------------------------------------------ GROSS GROSS ESTIMATED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE ------------- ----------- ----------- ------------- U.S. treasury securities and obligations of U.S. government agencies............................. $ 9,182,411 $ -- $ 242,151 $ 8,940,260 U.S. government treasuries and agencies funds.... 11,500,000 -- 184,098 11,315,902 U.S. corporate bonds............................. 966,597 -- 24,062 942,535 ------------- ----------- ----------- ------------- $ 21,649,008 $ -- $ 450,311 $ 21,198,697 ------------- ----------- ----------- ------------- ------------- ----------- ----------- -------------
The gross realized loss on sales of available-for-sale securities totaled $744,000 for the year ended September 30, 1994. The net adjustment to unrealized holding gains (losses) on available-for-sale securities included as a separate component of shareholders' equity totaled $450,000 as of September 30, 1994. F-15 COMMNET CELLULAR INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1994 IS UNAUDITED) 3. SHORT-TERM INVESTMENTS (CONTINUED) The amortized cost and estimated fair value of debt and marketable equity securities at September 30, 1994 are shown below. Expected maturities will differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties.
ESTIMATED COST FAIR VALUE ------------- ------------- Available-for-Sale: Due in one year or less...................................... $ 16,620,000 $ 16,378,522 Due after one year through three years....................... 170,000 171,074 Due after three years........................................ 4,859,008 4,649,101 ------------- ------------- $ 21,649,008 $ 21,198,697 ------------- ------------- ------------- -------------
4. INVESTMENT IN AND ADVANCES TO AFFILIATES Investment in and advances to the Company's nonconsolidated affiliates consisted of the following:
SEPTEMBER 30, ------------------------------ 1994 1993 -------------- -------------- Investment.................................................... $ 12,605,395 $ 13,170,362 Equity in loss -- cumulative.................................. (24,049,632) (23,410,622) Advances and other............................................ 73,352,998 66,132,632 -------------- -------------- $ 61,908,761 $ 55,892,372 -------------- -------------- -------------- --------------
The combined financial position of the nonconsolidated affiliates is as follows:
SEPTEMBER 30, ------------------------------ 1994 1993 -------------- -------------- Current assets.......................................................... $ 8,597,246 $ 9,699,996 Investment in affiliated limited partnerships........................... 10,446,767 7,803,769 Property and equipment, net of accumulated depreciation................. 33,162,750 25,245,274 Other assets............................................................ 4,079,497 3,607,741 -------------- -------------- Total assets........................................................ $ 56,286,260 $ 46,356,780 -------------- -------------- -------------- -------------- Due to CommNet Cellular Inc............................................. $ 11,981,737 $ 4,835,411 Due to Cellular, Inc. Financial Corporation............................. 55,428,739 57,433,612 Other liabilities....................................................... 21,389,471 12,627,438 Minority interest....................................................... 859,823 1,788,098 Stockholders' deficit................................................... (33,373,510) (30,327,779) -------------- -------------- Total liabilities and stockholders' deficit......................... $ 56,286,260 $ 46,356,780 -------------- -------------- -------------- --------------
F-16 COMMNET CELLULAR INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1994 IS UNAUDITED) 4. INVESTMENT IN AND ADVANCES TO AFFILIATES (CONTINUED) Combined operations of these nonconsolidated affiliates are summarized as follows:
YEAR ENDED SEPTEMBER 30, ---------------------------------------------- 1994 1993 1992 -------------- -------------- -------------- Revenues............................................... $ 42,160,218 $ 27,121,816 $ 9,093,887 Operating costs........................................ (50,519,584) (36,205,918) (23,902,180) Minority interest...................................... 7,333 324,259 951,514 Equity in income (loss) of affiliates.................. 369,495 (660,397) (2,681,979) -------------- -------------- -------------- Net loss............................................... $ (7,982,538) $ (9,420,240) $ (16,538,758) -------------- -------------- -------------- -------------- -------------- --------------
Interest income from affiliates on advances was $11,380,231, $9,542,484, and $9,543,783 for the years ended September 30, 1994, 1993 and 1992, respectively. Certain advances to affiliates bear interest at the prime rate of Norwest Bank (7.75% at September 30, 1994 and 6% at September 30, 1993) plus 2%. These advances to and receivables from affiliates are temporary. They are generally refinanced under loan agreements with the Company's financing subsidiary, Cellular, Inc. Financial Corporation ("CIFC"). Advances made under such loan agreements have a term of ten years with interest only payable until December 31, 1995. Principal and interest payments are payable thereafter, until December 31, 2000. These loans bear interest at 1% over CIFC's average cost of borrowing from nonaffiliated lenders. Such advances will be repaid from income derived from the operation of the cellular system or income derived from the affiliates' interest in the partnership providing cellular service. 5. SECURED BANK FINANCING Secured bank financing consists of the following:
SEPTEMBER 30, ---------------------------- 1994 1993 ------------- ------------- Secured bank financing due December 31, 2000, interest only payable quarterly through March 31, 1996, thereafter quarterly principal and interest payments payable through maturity.............................. $ 47,516,124 $ 35,295,597 Secured bank financing (MSA switch loans) due September 30, 1997; quarterly principal and interest payments payable through maturity...... 2,476,577 3,238,600 Secured bank financing (RSA switch loans) due June 30, 1999; quarterly principal and interest payments payable through maturity................ 1,546,530 1,855,836 ------------- ------------- 51,539,231 40,390,033 Less current portion..................................................... (1,090,870) (1,071,330) ------------- ------------- Totals............................................................... $ 50,448,361 $ 39,318,703 ------------- ------------- ------------- -------------
The bank credit agreements are between CIFC and CoBank. Under the terms of these agreements, CoBank has agreed to loan to CIFC a maximum of $130,000,000 to be reloaned by CIFC to affiliates of the Company for the construction, operation and expansion of cellular telephone systems. Interest is payable at either the Chase Manhattan Bank prime rate plus 1.00% for variable rate loans (8.75% at September 30, 1994) or LIBOR (London InterBank Offered Rate) plus 2.25% for fixed rate loans (5.767% at the six-month rate at September 30, 1994). CIFC continues to maintain fixed interest rates on $35.1 million of loans terminating in 1996 at interest rates of 10.8% and 10.9%. The loans are secured by a first lien on all assets of CIFC, as well as all assets of each of the affiliates to which loans are made by CIFC. CIFC's assets totaled F-17 COMMNET CELLULAR INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1994 IS UNAUDITED) 5. SECURED BANK FINANCING (CONTINUED) approximately $197,100,000 and $179,400,000 at September 30, 1994 and 1993, respectively. In addition, the Company has guaranteed the obligations of CIFC to CoBank and has granted CoBank a first security interest in all of the assets of the Company as security for such guaranty. A commitment fee of .5% per annum is payable by CIFC to CoBank on the average daily unborrowed commitment. On September 8, 1993, CIFC paid down $57.1 million of its outstanding loans from CoBank. The loan repayment was funded by an advance from the Company, the proceeds of which were provided by the issuance of senior subordinated discount notes (see Note 6). As a result of this repayment, CIFC terminated all but one $2.5 million interest rate swap agreement previously entered into with CoBank, which resulted in an extraordinary charge of $2,992,000 in the fiscal year ended September 30, 1993. The remaining swap agreement was entered into on July 1, 1993 for a three-year period ending July 1, 1996. The swap agreement requires CIFC to pay a fixed rate of 7.01% over the term of the swap, and CoBank to pay a floating rate of prime (7.75% at September 30, 1994). The CoBank credit agreements prohibit the payment of cash dividends, prohibit any other senior borrowings, limit the use of borrowings, restrict expenditures for certain acquisitions and investments, require the maintenance of certain minimum levels of net worth, working capital, cash and operating cash flow and require the maintenance of certain liquidity, capitalization, debt, debt service and operating cash flow ratios. The requirements of the credit agreements were established in relation to the anticipated capital and financing needs of the Company's affiliates and their anticipated results of operations. The Company is currently in compliance with all covenants and anticipates it will continue to meet the requirements of the credit agreements. CoBank has sold participations in the credit agreements to two other financial institutions whose approval may be required for waivers or other amendments to the credit agreements requested by CIFC or the Company. Aggregate maturities of the secured bank financing for each of the next five years ending September 30 are as follows: 1995 -- $1,090,870; 1996 -- $4,819,063; 1997 -- $9,153,564; 1998 -- $9,419,608; 1999 -- $10,156,571; and thereafter -- $16,899,555. 6. CONVERTIBLE SUBORDINATED DEBENTURES AND SENIOR NOTES In August 1989, the Company completed a public offering of $74,750,000 aggregate principal amount of 6 3/4% Convertible Subordinated Debentures due 2009. The debentures are convertible at any time prior to maturity, unless previously redeemed or repurchased, into Common Stock of the Company at a conversion price of $27 5/8 per share, subject to adjustment under certain conditions. The 6 3/4% debentures are redeemable, in whole or in part, at any time, at the option of the Company at the redemption prices (together with accrued interest) of 106.75% if redeemed in 1989, decreasing to 100% of the principal amount in 1999. The debentures will also be redeemable through operation of a sinking fund at 100% of the principal amount thereof. Mandatory annual sinking fund payments, sufficient to retire 10% of the aggregate principal amount of the debentures issued, will be made on each July 15, commencing July 15, 2004. These payments are calculated to retire 50% of the issue prior to maturity. The debenture holders may require the Company to repurchase the debentures, in whole or in part, upon the occurrence of a change in control of the Company (as defined in the Indenture) prior to July 15, 1999. The debentures are unsecured and subordinated to all existing and future Senior Debt of the Company. In May 1990, the Company completed an offering of $40,000,000 in aggregate principal amount of 8% Convertible Subordinated Debentures due 2000. The 8% debentures were convertible at any time prior to maturity, unless previously redeemed or repurchased, into Common Stock of the Company at a conversion price of $14.95 per share, subject to adjustment under certain circumstances. On September 8, 1993, the Company called all outstanding 8% debentures for redemption. As of September 30, 1993, $2,127,800 of the F-18 COMMNET CELLULAR INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1994 IS UNAUDITED) 6. CONVERTIBLE SUBORDINATED DEBENTURES AND SENIOR NOTES (CONTINUED) debentures had been converted into 142,329 shares of the Company's Common Stock. In October 1993, the remaining $37,812,200 of 8% debentures were converted into 2,529,194 shares of the Company's Common Stock, and the Company paid approximately $60,000 to the remaining holders of the debentures. In January 1993, the Company completed a private placement of $4,950,000 of 8.75% Convertible Senior Subordinated Notes Due 2001. The Notes are general unsecured obligations of the Company and are subordinate in right of payment to all Senior Debt of the Company. The Notes may be redeemed at the option of the Company at the redemption prices (together with accrued interest) of 105 15/32% if redeemed in 1996 decreasing to 101 3/32% of the principal amount in 2001. The Note holders may convert the Notes into shares of the Company's Common Stock at the price of $15.00 per share. Subsequent to year end, the majority holder of Notes exercised its right to demand registration, which is expected to occur during the second fiscal quarter of 1995. 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 $96,739,604. The Notes are general unsecured obligations of the Company and are subordinate in right of payment to all Senior Debt of the Company. Commencing September 1, 1998, interest will accrue until maturity on the Notes at the rate of 11 3/4% per annum. Interest on the Discount Notes is payable semi-annually on March 1 and September 1, commencing March 1, 1999. The Discount Notes mature on September 1, 2003 and are redeemable, in whole at any time or in part from time to time, at the option of the Company at the redemption prices (together with accrued interest) of 105.87% if redeemed in 1998 decreasing to 101.46% of the principal amount in 2001. The Discount Note holders may require the Company to repurchase the Discount Notes, in whole or in part, in certain instances constituting a change of control of the Company. The Company has reserved the appropriate number of shares for any conversions prior to maturity on the convertible debt issues. 7. CAPITAL LEASES The Company leases assets, primarily computer equipment, under capital leases of $2,466,711 (less accumulated depreciation of $913,687) at September 30, 1994. Future minimum lease payments under capital leases at September 30, 1994 are as follows: 1995................................................................ $ 655,450 1996................................................................ 334,555 1997................................................................ 285,979 1998................................................................ 179,991 1999................................................................ -- ---------- 1,455,975 Less amount representing interest and sales tax..................... 82,868 ---------- 1,373,107 Obligation under capital leases due within one year................. 588,025 ---------- $ 785,082 ---------- ----------
F-19 COMMNET CELLULAR INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1994 IS UNAUDITED) 8. COMMITMENTS The Company leases office space and equipment under agreements which provide for rental payments based on lapse of time. Rent expense was $1,366,169, $1,135,849 and $1,172,115 for the years ended September 30, 1994, 1993 and 1992, respectively. The aggregate annual rental commitment as of September 30, 1994 is as follows: 1995............................................................... $ 1,694,418 1996............................................................... 1,163,884 1997............................................................... 826,727 1998............................................................... 753,762 1999............................................................... 410,417 Future years....................................................... 1,738,899 ----------- $ 6,588,107 ----------- -----------
On May 15, 1989, the Company adopted a retirement savings plan (pursuant to Section 401(k) under the Internal Revenue Code) providing for a deferred compensation and Company matching provision. Under the plan, eligible employees are permitted to contribute up to 15% of gross compensation into the retirement plan and the Company will match at the minimum 25% of each employee's contribution up to 3% of the employee's eligible compensation. The expense under the retirement savings plan was approximately $77,871, $55,920 and $52,480 for the years ended September 30, 1994, 1993 and 1992, respectively. 9. INCOME TAXES As permitted under SFAS No. 109, prior years' financial statements have not been restated. The adoption of SFAS No. 109 as of October 1, 1993 had no cumulative effect on net loss, and has no effect on operating loss and net loss for the year ended September 30, 1994. At September 30, 1994, the Company had cumulative net operating loss carryforwards of $54,725,000 for income tax purposes. If not offset against taxable income, the tax loss carryforwards will expire between 2001 and 2009. Prior net operating losses have been restated to reflect the impact of entities consolidated in 1994 that incurred NOLs prior to becoming part of the consolidated reporting group. The Company has no liability for regular tax expense due to tax net operating losses. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. As of F-20 COMMNET CELLULAR INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1994 IS UNAUDITED) 9. INCOME TAXES (CONTINUED) September 30, 1994 and 1993, 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 as of September 30, 1994 are as follows: Deferred tax assets: Equity method investments............................................ $ 2,953,000 Intangible asset differences......................................... 8,621,000 Inventory adjustments................................................ 456,000 Accrued liabilities.................................................. 700,000 Interest expense on zero coupon bonds................................ 4,932,000 Other -- net......................................................... 537,000 Net operating loss carryforwards..................................... 20,796,000 ----------- Total deferred tax assets.......................................... 38,995,000 ----------- Deferred tax liabilities: Difference in license costs.......................................... 21,573,000 Fixed asset differences.............................................. 3,599,000 ----------- Total deferred tax liabilities..................................... 25,172,000 ----------- Net deferred tax asset............................................... 13,823,000 Valuation allowance.................................................. (13,823,000) ----------- Net deferred taxes..................................................... $ -- ----------- -----------
10. COMMON STOCK OPTIONS In 1987, the Company adopted a Key Employees' Nonqualified Stock Option Plan whereby employees may be granted options to purchase up to 500,000 shares of the Company's Common Stock. All outstanding options were granted at an exercise price which represented at least 100% of the quoted market value of the Company's Common Stock at the date of grant and were exercisable for a period of five years from the date of grant. In November 1992, the Company terminated the Key Employees' Nonqualified Stock Option Plan as to future grants. The Company adopted an Omnibus Stock and Incentive Plan, effective November 1, 1991, pursuant to which 500,000 shares of the Company's Common Stock are reserved for issuance pursuant to Options, Stock Appreciation Rights, Stock Bonuses or Phantom Stock Rights. In February 1993, the Company's shareholders approved an increase of an additional 500,000 shares of the Company's Common Stock to be reserved for issuance pursuant to the Omnibus Stock and Incentive Plan plus 1% of the number of shares outstanding at the end of each fiscal year. F-21 COMMNET CELLULAR INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1994 IS UNAUDITED) 10. COMMON STOCK OPTIONS (CONTINUED) An analysis of options related to the Company's benefit plans is as follows:
KEY EMPLOYEES' OMNIBUS STOCK NONQUAL. STOCK AND INCENTIVE EXERCISE PRICE OPTION PLAN PLAN RANGE -------------- -------------- ----------------- Outstanding options at September 30, 1992........... 133,500 216,500 $ 7.00 - $26.00 Granted............................................. -- 296,000 $13.00 - $14.88 Forfeitures......................................... (24,000) (188,000) Exercised........................................... (10,000) -- $ 8.50 ------- -------------- Outstanding options at September 30, 1993........... 99,500 324,500 $ 7.00 - $26.00 Granted............................................. -- 261,000 $19.50 - $19.63 Forfeitures......................................... (2,500) (28,875) Exercised........................................... (8,000) (12,000) $ 8.50 - $15.75 ------- -------------- Outstanding options at September 30, 1994........... 89,000 544,625 $ 7.00 - $26.00 ------- -------------- Options available for grant at September 30, 1994... -- 615,217 ------- -------------- Options exercisable at September 30, 1994........... 67,625 110,500 ------- -------------- ------- --------------
Subsequent to September 30, 1994, the Company granted 689,000 options to officers and employees of the Company at an exercise price of $25.625 pursuant to the Company's Omnibus Stock and Incentive Plan. Contemporaneously, the Board of Directors authorized 750,000 additional shares for grant pursuant to the Omnibus Stock and Incentive Plan, subject to approval by the shareholders at the 1994 Annual Meeting to be held February 28, 1995. In July 1993, the Company granted options to purchase 152,500 shares of Common Stock to two former officers at exercise prices ranging from $7.00 to $15.75. As a result, the Company recognized compensation expense of approximately $370,000. The options become exercisable at various intervals through November 1995 and expire on June 30, 1996. During the fiscal years ended September 30, 1994 and 1993, options to purchase 101,250 and 25,000 shares were exercised, respectively. As of September 30, 1994, none of the options were exercisable. Subsequent to year end, 7,500 of the options were exercised. 11. EMPLOYEE STOCK OWNERSHIP PLAN On October 1, 1988, the Company adopted an Employee Stock Ownership Plan ("ESOP"). The cost of the ESOP is borne by the Company through annual contributions to a Trustee in amounts determined by the Board of Directors. Employees are eligible to participate in the ESOP after one year of service. Shares of Common Stock acquired by the ESOP are to be allocated to each employee and held until the employee's retirement or death. The employee can also choose early partial withdrawal under certain circumstances. Each employee's account vests ratably over a period of five years. Contributions totaling approximately $478,000 (20,953 shares), $297,000 (17,232 shares) and $264,000 (21,798 shares) were made to the ESOP for the years ended September 30, 1994, 1993 and 1992, respectively. Shares are deemed issued for accounting purposes in the year that ESOP contributions expense is recognized. 12. STOCKHOLDERS' EQUITY In December 1990, the Board of Directors declared a dividend distribution of one right (a "Right") attached to each outstanding share of the Company's Common Stock at any point in time. Each Right, when exercisable, entitles the registered holder to purchase from the Company one one-hundredth of a share of Series A Preferred Stock, at a price of $45 per one one-hundredth of a share, subject to adjustment (the "Purchase Price"). F-22 COMMNET CELLULAR INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1994 IS UNAUDITED) 12. STOCKHOLDERS' EQUITY (CONTINUED) The Rights will detach from the Common Stock and a "Distribution Date" will occur upon the earliest of (i) ten days following a public announcement that a person or group has acquired, or obtained the right to acquire, beneficial ownership of 20% or more of the outstanding shares of the Company's Common Stock (the "Stock Acquisition Date"), (ii) ten business days following commencement of a tender offer or exchange offer that would result in a person or group beneficially owning 30% or more of the Company's Common Stock, or (iii) ten business days after the Board of Directors have made a determination that someone has become the beneficial owner of a substantial amount of the Company's Common Stock and that such ownership is adverse to the Company's interest. Should these events occur, each holder of a Right will thereafter have the right to receive, upon exercise, the Company's Common Stock (or, in certain circumstances, cash, property or other securities of the Company) having a value equal to two times the Purchase Price. Similarly, in the event that at any time following a Stock Acquisition Date, the Company is acquired in a merger or other business combination transaction in which the Company is not the surviving corporation or 50% or more of its assets, cash flow or earning power is sold or transferred, each holder of a Right shall thereafter have the right to receive, upon exercise, Common Stock of the acquiring entity having a value equal to two times the Purchase Price. Under certain circumstances, any Rights that are owned by the acquiring person or the adverse person will be null and void. In general, the Company may redeem the Rights in whole, but not in part, at a price of $.01 per Right, at any time until ten days following the acquisition by a person or group of 20% or more of the Company's outstanding Common Stock or the declaration by the Board of Directors that a person is an adverse person. The Rights will expire on December 24, 2000, unless earlier redeemed. In February 1992, the Company completed a public offering of 2,875,000 shares of Common Stock at $13.75 per share for aggregate proceeds of $39,531,000. The Company incurred $2,272,000 in underwriting discounts and commissions, and $656,000 in other costs associated with this offering. 13. SUBSEQUENT EVENTS Subsequent to September 30, 1994, the Company acquired an additional interest in an affiliated corporation for $1,600,000 in cash. Pursuant to the terms of a shareholder's agreement, the Company has offered to (i) sell the interest to the other shareholders on a pro rata basis and (ii) buy the interests of such shareholders at the same price per share. 14. FAIR VALUES OF FINANCIAL INSTRUMENTS SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires disclosure of fair value information about financial instruments for which it is practicable to estimate that value, whether or not recognized in the balance sheet. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Statement 107 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts do not represent the underlying value of the Company. The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments: ADVANCES TO AFFILIATES: The fair value of advances to and receivables from affiliates are estimated using discounted cash flow analyses, based on the Company's borrowing rate at September 30, 1994, plus 1%. LONG AND SHORT-TERM DEBT: The carrying amounts of the Company's variable rate borrowings under its credit agreements approximate their fair value. The fair value of the Company's fixed rate debt is estimated using discounted cash flow analyses, based on the Company's current incremental borrowing rates. Other long-term debt is valued based on quoted market prices. F-23 COMMNET CELLULAR INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1994 IS UNAUDITED) 14. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED) The carrying amounts and fair values of the Company's financial instruments at September 30, 1994 are as follows:
CARRYING AMOUNT FAIR VALUE ---------------- ------------- Advances to affiliates................................................. $ 73,352,998 $ 57,589,914 Secured bank financing: Variable rate loans.................................................. 6,520,244 6,520,244 Fixed rate loans..................................................... 45,018,987 40,460,098 11 3/4% senior discount notes.......................................... 112,979,725 73,436,821 Convertible subordinated debentures.................................... 79,700,000 75,962,500
15. QUARTERLY FINANCIAL DATA (UNAUDITED) Quarterly financial data and per share data are presented below:
FIRST SECOND FOURTH QUARTERLY FINANCIAL DATA QUARTER QUARTER THIRD QUARTER QUARTER - ------------------------------------------ ------------- ------------- ------------- ------------- 1993 Revenues................................ $ 6,074,174 $ 6,378,024 $ 9,674,191 $ 11,562,922 Operating loss.......................... (3,681,022) (5,620,661) (4,493,216) (1,635,634) Loss before extraordinary charge........ (7,180,130) (5,268,089) (6,635,441) (590,879) Net loss................................ (7,180,130) (5,268,089) (6,635,441) (3,582,552) Loss per share: Loss before extraordinary charge...... (0.86) (0.62) (0.77) (0.07) Net loss.............................. (0.86) (0.62) (0.77) (0.41) 1994 Revenues................................ $ 12,770,278 $ 13,685,245 $ 15,305,934 $ 19,598,594 Operating loss.......................... (1,721,297) (3,388,686) (530,441) (28,911) Net loss................................ (4,713,227) (4,570,536) (2,966,006) (4,501,383) Net loss per share...................... (0.42) (0.39) (0.25) (0.39)
The Company capitalized $648,000 and $985,000 of corporate costs and expenses related to construction projects in process at September 30, 1994 and 1993, respectively. In addition, as described in Note 5, CIFC terminated all but $2.5 million of interest rate swap agreements previously entered into with CoBank, which resulted in an extraordinary charge of $2,992,000 in the fourth fiscal quarter of 1993. F-24 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER CONTAINED HEREIN, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR BY THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY, ANY SECURITIES IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS NOT LAWFUL TO MAKE ANY SUCH OFFER OR A SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF. ------------------- TABLE OF CONTENTS
PAGE --------- Incorporation of Certain Information by Reference..................................... 2 Certain Definitions............................ 2 Prospectus Summary............................. 3 Risk Factors................................... 12 Use of Proceeds................................ 15 Capitalization................................. 17 Selected Consolidated Financial Data........... 18 Selected Combined and Proportionate Operating Results of Cellular Licensees................. 20 Management's Discussion and Analysis of Financial Condition and Results of Operations.................................... 22 Business....................................... 32 Management..................................... 48 Description of Certain Indebtedness............ 50 Description of the Notes....................... 51 Underwriting................................... 68 Legal Matters.................................. 68 Experts........................................ 68 Additional Information......................... 69
$80,000,000 LOGO % SUBORDINATED NOTES DUE 2005 ------------------- P R O S P E C T U S ------------------- MERRILL LYNCH & CO. SMITH BARNEY INC. , 1995 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. Set forth below is an estimate of the approximate amount of the fees and expenses payable by the Company in connection with the issuance and distribution of the securities being registered hereby.
AMOUNT PAYABLE ITEM BY COMPANY - ---------------------------------------------------------------- -------------- S.E.C. Registration Fee......................................... $ 27,586.20 N.A.S.D. Filing Fee............................................. 8,500.00 State Securities Law (Blue Sky) Fees and Expenses............... 30,000.00 Printing and Engraving.......................................... 90,000.00 Legal Fees...................................................... 150,000.00 Accounting Fees and Expenses.................................... 85,000.00 Trustee's Fees and Expenses..................................... 8,000.00 Miscellaneous Expenses.......................................... 913.80 -------------- Total....................................................... $ 400,000.00 -------------- --------------
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Article IX of the Company's Amended and First Restated Articles of Incorporation provides in part: A. The Corporation shall, to the fullest extent permitted by applicable law, (i) indemnify, and (ii) advance litigation expenses prior to the final disposition of an action, to any person made or threatened to be made a party to an action or proceeding, whether criminal, civil, administrative or investigative, by reason of the fact that he or she is or was a director or officer of the Corporation or served any other enterprise as a director or officer at the request of the Corporation and such rights of indemnification and to advancement of litigation expenses shall also be applicable to the heirs, executors, administrators and legal representatives of such director or officer. B. The foregoing provisions of Article IX shall be deemed to be a contract between the Corporation and each director and officer who serves in such capacity at any time while this Article IX is in effect, and any repeal or modification hereof shall not affect the rights or obligations then or therefore existing or any action, suit or proceeding theretofore or thereafter brought based in whole or in part upon any such stated facts. C. The foregoing rights to indemnification and to advancement of litigation expenses shall not be deemed exclusive of any other rights to which a director or officer or his or her legal representatives may be entitled apart from the provisions of this Article IX. II-1 ITEM 16. EXHIBITS.
EXHIBIT NO. - ----------- *1.1 Form of Purchase Agreement. *4.1 Form of Indenture between the Registrant and American Bank National Association, as Trustee, relating to the Registrant's % Subordinated Notes due 2005. *4.2 Specimen Certificate for the Registrant's % Subordinated Notes due 2005 (included in Exhibit 4.1). *5.1 Opinion of Latham & Watkins regarding the legality of the Registrant's % Subordinated Notes due 2005. **12.1 Statement regarding computation of ratio of earnings to fixed charges. *23.1 Consent of Independent Auditors. *23.2 Consent of Latham & Watkins (included in the opinion filed as Exhibit 5.1). **24.1 Powers of Attorney (see page II-4). **25.1 Statement of eligibility on Form T-1 of American Bank National Association, as Trustee under the Indenture relating to the Registrant's % Subordinated Notes due 2005. - ------------------------ *Filed herewith. **Previously filed and unchanged.
ITEM 17. UNDERTAKINGS. The undersigned Registrant hereby undertakes that: (1) for purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial BONA FIDE offering thereof. (3) For purposes of determining any liability under the Securities Act, each filing of the Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 that is incorporated by reference in the Registration Statement shall be deemed to be a new registration statement relating to the securities offered herein, and the offering of such securities at that time shall be deemed to be the initial BONA FIDE offering thereof. (4) Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended (the "Securities Act") may be permitted to directors, officers and controlling persons of the registrant pursuant to the provision described under Item 15 above, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of such registrant in the successful defense of any action, suit or proceeding) is asserted against the registrant by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. II-2 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-3 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Englewood, State of Colorado, on June 28, 1995. CommNet Cellular Inc. /s/ ARNOLD C. POHS -------------------------------------- By: Arnold C. Pohs CHAIRMAN OF THE BOARD, PRESIDENT AND CHIEF EXECUTIVE OFFICER Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities and on the dates indicated. Chairman of the Board, * President and Chief Executive June 28, - ------------------------------------------- Officer (Principal Executive 1995 Arnold C. Pohs Officer) Executive Vice President, * Treasurer, Chief Financial June 28, - ------------------------------------------- Officer and Director (Principal 1995 Daniel P. Dwyer Financial Officer) * Senior Vice President and - ------------------------------------------- Controller (Principal June 28, Andrew J. Gardner Accounting Officer) 1995 * - ------------------------------------------- Director June 28, John E. Hayes, Jr. 1995 * - ------------------------------------------- Director June 28, Robert J. Paden 1995 * - ------------------------------------------- Director June 28, David E. Simmons 1995 */s/ AMY M. SHAPIRO - ------------------------------------------- ATTORNEY-IN-FACT
II-3 ANNEX A The map on the inside front cover displays the geographic coverage of the Company's managed markets as of June 1, 1995 and the proposed geographic coverage of the Company's managed markets as of August 31, 1995. The Company's managed markets are located in the states of Idaho, Montana, Wyoming, Utah, Colorado, North Dakota, South Dakota and Iowa. INDEX TO EXHIBITS ITEM 16. EXHIBITS.
EXHIBIT NO. - ----------- *1.1 Form of Purchase Agreement. *4.1 Form of Indenture between the Registrant and American Bank National Association, as Trustee, relating to the Registrant's % Subordinated Notes due 2005. *4.2 Specimen Certificate for the Registrant's % Subordinated Notes due 2005 (included in Exhibit 4.1). *5.1 Opinion of Latham & Watkins regarding the legality of the Registrant's % Subordinated Notes due 2005. **12.1 Statement regarding computation of ratio of earnings to fixed charges. *23.1 Consent of Independent Auditors. *23.2 Consent of Latham & Watkins (included in the opinion filed as Exhibit 5.1). **24.1 Powers of Attorney (see page II-4). **25.1 Statement of eligibility on Form T-1 of American Bank National Association, as Trustee under the Indenture relating to the Registrant's % Subordinated Notes due 2005. - ------------------------ *Filed herewith. **Previously filed and unchanged.
EX-1.1 2 EXHIBIT 1.1 COMMNET CELLULAR INC. (a Colorado corporation) $80,000,000 % Subordinated Notes due 2005 PURCHASE AGREEMENT , 1995 MERRILL LYNCH & CO. Merrill Lynch, Pierce, Fenner & Smith Incorporated SMITH BARNEY INC. c/o Merrill Lynch & Co. Merrill Lynch, Pierce, Fenner & Smith Incorporated Merrill Lynch World Headquarters North Tower World Financial Center New York, New York 10281 Dear Ladies and Gentlemen: CommNet Cellular Inc., a Colorado corporation (the "Company"), confirms its agreement with Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") and Smith Barney Inc., as Underwriters (the "Underwriters"), with respect to the sale by the Company and the purchase by the Underwriters, acting severally and not jointly, of $80,000,000 aggregate principal amount at maturity of the Company's % Subordinated Notes due 2005 (the "Securities"). The Securities are to be issued under an Indenture (the "Inden- ture") between the Company and American Bank National Association, as trustee (the "Trustee"). Prior to the purchase and public offering of the Securities by the several Underwriters, the Company and the Underwriters shall enter into an agreement substantially in the form of Exhibit A hereto (the "Pricing Agreement"). The Pricing Agreement may take the form of an exchange of any standard form of written telecommunication between the Company and the Underwriters and shall specify such applicable information as is indicated in Exhibit A hereto. The offering of the Securities will be governed by this Agreement, as supplemented by the Pricing Agreement. From and after the date of the execution and delivery of the Pricing Agreement, this Agreement shall be deemed to incorporate the Pricing Agreement. The Company has filed with the Securities and Exchange Commission (the "Commission") a registration statement on Form S-3 (No. 33-60393) and a related preliminary prospectus for the registration of the Securities under the Securities Act of 1933 (the "1933 Act"), has filed such amendments thereto, if any, and such amended preliminary prospectuses as may have been required to the date hereof, and will file such additional amendments thereto and such amended prospectuses as may hereafter be required. Such registration statement (as amended, if applicable) and the prospectus constituting a part thereof (including in each case all documents, if any incorporated by reference therein and the information, if any, deemed to be part thereof pursuant to Rule 430A(b) or Rule 434 of the rules and regulations of the Commission under the 1933 Act (the "1933 Act Regulations")), in each case as from time to time amended or supplemented pursuant to the 1933 Act, the Securities Exchange Act of 1934, as amended (the "1934 Act") or otherwise, are hereinafter referred to as the "Registration Statement" and the "Prospectus," respectively, except that if any revised prospectus shall be provided to the Underwriters by the Company for use in connection with the offering of the Securities which differs from the Prospectus on file at the Commission at the time the Registration Statement becomes effective (whether or not such revised prospectus is required to be filed by the Company pursuant to Rule 424(b) of the 1933 Act Regulations), the term "Prospectus" shall refer to such revised prospectus from and after the time it is first provided to the Underwriters for such use. All references in this Agreement to financial statements and schedules and other information which is "contained," "included" or "stated" in the Registration Statement or the Prospectus (and all other references of like import) shall be deemed to mean and include all such financial statements and schedules and other information which is or is deemed to be incorporated by reference in the Registration Statement or the Prospectus, as the case may be; and all references in this Agreement to amendments or supplements 2 to the Registration Statement or the Prospectus shall be deemed to mean and include the filing of any document under the 1934 Act which is or is deemed to be incorporated by reference in the Registration Statement or the Prospectus, as the case may be. The Company understands that the Underwriters propose to make a public offering of the Securities as soon as the Underwriters deem advisable after the Registration Statement becomes effective, the Pricing Agreement has been executed and delivered and the Indenture has been qualified under the Trust Indenture Act of 1939, as amended (the "1939 Act"). SECTION 1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. (a) The Company represents and warrants to each of the Underwriters as of the date hereof and as of the date of the Pricing Agreement (such latter date being hereinafter referred to as the "Representation Date") as follows: (i) The Company meets the requirements for use of Form S-3 under the 1933 Act. At the time the Registration Statement becomes effective and at the Representation Date, the Registration Statement will comply in all material respects with the requirements of the 1933 Act and the 1933 Act Regulations and will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading. The Prospectus, at the Representation Date (unless the term "Prospectus" refers to a prospectus which has been provided to the Underwriters by the Company for use in connection with the offering of the Securities which differs from the Prospectus on file at the Commission at the time the Registration Statement becomes effective, in which case at the time it is first provided to the Underwriters for such use) and at the Closing Time referred to in Section 2 hereof, will not include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that the representations and warranties in this subsection shall not apply to statements in or omissions from the Registration Statement or Prospectus made in reliance upon and in conformity with information furnished to the Company in writing by any Underwriter through Merrill Lynch expressly for use in the Registration Statement or 3 Prospectus or to the Statement of Eligibility and Qualification (Form T-1) under the 1939 Act and the rules and regulations of the Commission thereunder of the Trustee filed as an exhibit to the Registration Statement. (ii) The documents incorporated or deemed to be incorporated by reference in the Prospectus, at the time they were or hereafter are filed with the Commission, complied and will comply in all material respects with the requirements of the 1934 Act and the rules and regulations of the Commission thereunder (the "1934 Act Regulations"), and, when read together with the other information in the Prospectus, at the time the Registration Statement, and any amendments thereto, become effective and at the Closing Time, will not contain an untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. (iii) Ernst & Young LLP, the accountants who certified the financial statements and supporting schedules included in the Registration Statement, are independent public accountants as required by the 1933 Act and the 1933 Act Regulations. (iv) A true, complete and correct list of the corporations and partnerships which are, or which under generally accepted accounting principles should be, consolidated for purposes of the Company's financial reporting (collectively, the "Subsidiaries") is set forth on Exhibit B hereto, together with the Company's interest therein. The Company and each of its Subsidiaries that is a corporation have been duly incorporated, are validly existing and in good standing under the laws of their respective jurisdictions of incorporation. Each of the Subsidiaries that is a partnership (limited or general) has been duly formed and is validly existing under the laws of the jurisdiction of its formation. Each of the Subsidiaries is duly qualified to do business and in good standing in each jurisdiction in which its ownership or lease of property or the conduct of its businesses requires such qualification, except where the failure to so qualify would not have a material adverse effect on the condition, financial or otherwise, or the earnings, business affairs or business prospects of the Company and its Subsidiaries considered as one enterprise. The Company and each of the Subsidiaries have all power 4 and authority necessary to own or hold their respective properties and to conduct the respective businesses in which they are engaged. All of the issued and outstanding shares of capital stock of each Subsidiary that is a corporation are duly authorized, validly issued and outstanding, fully paid and non-assessable and, except as described in the Registration Statement and Prospectus or as set forth on Exhibit B hereto, are owned, directly or indirectly, by the Company and, where owned by the Company, are owned free and clear of any liens, claims, encumbrances, restrictions, preemptive rights or any other claims of any third party; and all of the partnership interests of each Subsidiary that is a partnership have been validly created pursuant to its respective partnership agreement and, except as described in the Registration Statement and Prospectus or as set forth on Exhibit B hereto, all of the partnership interests of each partnership Subsidiary are owned, directly or indirectly, by the Company and, where owned by the Company, are owned free and clear of any liens, claims, encumbrances, restrictions, preemptive rights or any other claims of any third party. (v) Each of the 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, which is not a Subsidiary (collectively, the "Affiliates"), are listed in Exhibit C hereto. Each of the Affiliates that is a corporation has been duly incorporated, is validly existing and in good standing under the laws of its respective jurisdiction of incorporation. Each of the Affiliates that is a partnership (limited or general) has been duly formed and is validly existing under the laws of the jurisdiction of its formation. Each of the Affiliates is duly qualified to do business and is in good standing in each jurisdiction in which its respective ownership or lease of property or the conduct of its respective business requires such qualification, except where the failure to so qualify would not have a material adverse effect on the condition, financial or otherwise, or the earnings, business affairs or business prospects of the Company and its Subsidiaries considered as one enterprise. Each of the Affiliates has all power and authority necessary to own or hold its respective properties and to conduct the businesses in which it is engaged. All of the issued and outstanding shares of capital stock of each corporate Affiliate owned by the Company or its Subsidiaries, are duly authorized, validly issued and 5 outstanding, fully paid and non-assessable and are owned, directly or indirectly, by the Company or its Subsidiaries, as applicable, free and clear of any liens, claims, encumbrances, restrictions, preemptive rights or any other claims of any third party (except as described in the Registration Statement and Prospectus or as set forth on Exhibit C hereto); and all of the partnership interests of each partnership Affiliate owned by the Company or its Subsidiaries have been validly created pursuant to its respective partnership agreement and all of the partnership interests of each partnership Affiliate are owned by the Company or its Subsidiaries, as applicable, are free and clear of any liens, claims, encumbrances, restrictions, preemptive rights or any other claims of any third party (except as described in the Registration Statement and Prospectus or as set forth on Exhibit C hereto). (vi) Except as set forth in the Prospectus, the Company, the Subsidiaries, the Affiliates for which the Company serves as managing agent (the "Managed Affiliates"), and the partnerships which hold Federal Communications Commission ("FCC") licenses to operate cellular telephone systems ("FCC Licenses") for which an Affiliate is the managing general partner (collectively, the "General Partner Licensees") and, to the knowledge of the Company, the Affiliates for which the Company does not serve as managing agent (the "Nonmanaged Affiliates") and the partnerships which hold FCC Licenses for which the Affiliates are non-managing general partners or limited partners (collectively, the "Limited Partner Licensees") each have all approvals, orders, franchises, licenses, permits and all other governmental authorizations (including all licenses required under the Communications Act of 1934, as amended (the "Communications Act"), and the rules and regulations thereunder) required for the present conduct of their respective businesses, and such franchises, licenses, permits and other governmental authorizations are in full force and effect, except where the failure to obtain or maintain any such franchise, license, permit or other governmental authorization would not, individually or in the aggregate, have a material adverse effect on the condition, financial or otherwise, or the earnings, business affairs or business prospects of the Company and its Subsidiaries considered as one enterprise. There is no proceeding pending or threatened (and no basis for any such proceeding exists) which might lead to the revocation, termination, suspension or non-renewal of any such franchise, license or permit; and the Company, 6 the Subsidiaries, the Managed Affiliates and the General Partner Licensees, and to the knowledge of the Company, the Nonmanaged Affiliates and the Limited Partner Licensees are not in violation of any such approval, order, franchise, license, permit or other governmental authorization, except for violations which would not, individually or in the aggregate, have a material adverse effect on the condition, financial or otherwise, or the earnings, business affairs or business prospects of the Company and its Subsidiaries considered as one enterprise. (vii) The authorized, issued and outstanding capital stock of the Company is as set forth in the Prospectus under "Capitalization" (except for subsequent issuances, if any, pursuant to reservations, agreements, employee benefit plans, acquisitions or the exercise of convertible securities referred to in the Prospectus); and the shares of issued and outstanding Common Stock have been duly authorized and validly issued and are fully paid and non-assessable. (viii) None of the Company, the Subsidiaries, the Managed Affiliates and the General Partner Licensees, and to the knowledge of the Company, the Nonmanaged Affiliates and the Limited Partner Licensees (a) are, in the case of such entities that are corporations, in violation of their charter or by-laws and, in the case of such entities that are partnerships, are in violation of their partnership agreements, or (b) are in default in the performance or observance of any material obligation, agreement, covenant or condition contained in any contract, indenture, mortgage, loan agreement, note, lease or other instrument to which the Company any such Subsidiary, any such Affiliate, any such General Partner Licensee or any such Limited Partner Licensee is a party or by which the Company, any such Subsidiary, any such Affiliate, any such General Partner Licensee or any such Limited Partner Licensee is bound or to which any of the property of the Company, any such Subsidiary, any such Affiliate, any such General Partner Licensee or any such Limited Partner Licensee is subject, except for such violations or defaults described in clauses (a) and (b) above which would not, individually or in the aggregate, have a material adverse effect on the condition, financial or otherwise, or the earnings, business affairs or business prospects of the Company and its Subsidiaries considered as one enterprise. 7 (ix) The execution, delivery and performance of this Agreement, the Pricing Agreement and the Indenture and the consummation of the transactions contemplated herein and therein and compliance by the Company with its obligations hereunder and thereunder have been duly authorized by all necessary corporate action and will not conflict with or constitute a breach of, or default under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company, the Subsidiaries, the Managed Affiliates and the General Partner Licensees, the Nonmanaged Affiliates and the Limited Partner Licensees pursuant to any contract, indenture, mortgage, loan agreement, note, lease or other instrument to which any of such entities is a party or by which any of them may be bound, or to which any of the property or assets of the Company the Subsidiaries, the Managed Affiliates and the General Partner Licensees, the Nonmanaged Affiliates and the Limited Partner Licensees is subject, except for such conflicts, defaults or creations or impositions of liens, charges or encumbrances which would not, individually or in the aggregate, have a material adverse effect on the condition, financial or otherwise, or the earnings, business affairs or business prospects of the Company and its Subsidiaries considered as one enterprise, nor will such action result in any violation of the provisions of the charter or by-laws of the Company or any of the Subsidiaries or Affiliates which is a corporation or, except with respect to the consent of CoBank, ACB which consent has been obtained and delivered to Merrill Lynch, any applicable law, administrative regulation or administrative or court decree, including, but not limited to the Communications Act, other applicable communications laws and the rules and regulations promulgated thereunder (collectively, "Communications Laws"), except for such violations which would not, individually or in the aggregate, have a material adverse effect on the condition, financial or otherwise, or the earnings, business affairs or business prospects of the Company and its Subsidiaries considered as one enterprise. (x) No labor dispute with the employees of the Company or any of its Subsidiaries or Affiliates exists, except for such disputes which would not, individually or in the aggregate, have a material adverse effect on the condition, financial or otherwise, or the earnings, business affairs or business prospects of the Company and its Subsidiaries considered as one enterprise or, to the knowledge 8 of the Company, is imminent; and the Company is not aware of any existing or imminent labor disturbance by the employees of any of its principal suppliers, manufacturers or contractors which might be expected to result in any material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Company and its Subsidiaries considered as one enterprise. (xi) Other than rulemaking or other proceedings of general applicability affecting the cellular telephone industry, there is no action, suit or proceeding before or by any court or governmental agency or body, domestic or foreign, now pending, or, to the knowledge of the Company, threatened, against or affecting the Company or any of its Subsidiaries or Affiliates, which is required to be disclosed in the Registration Statement (other than as disclosed therein), or which might result in any material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Company and its subsidiaries considered as one enterprise, or which might materially and adversely affect the properties or assets thereof or which might materially and adversely affect the consummation of this Agreement; and there are no contracts or documents of the Company or any of its Subsidiaries which are required to be filed as exhibits to the Registration Statement by the 1933 Act or by the 1933 Act Regulations which have not been so filed. (xii) The Company and each of the Subsidiaries and Affiliates own or possess, or can acquire on reasonable terms, the patents, patent rights, licenses, inventions, copyrights, know-how (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures), trademarks, service marks and trade names (collectively, "patent and proprietary rights") presently employed by them in connection with the business now operated by them, and neither the Company nor any of the Subsidiaries or Affiliates has received any notice or is otherwise aware of any infringement of or conflict with asserted rights of others with respect to any patent or proprietary rights, or of any facts which would render any patent and proprietary rights invalid or inadequate to protect the interests of the Company or any of its subsidiaries therein, and which infringement or conflict (if the subject 9 of any unfavorable decision, ruling or finding) or invalidity or inadequacy, singly or in the aggregate, would result in any material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Company and its Subsidiaries considered as one enterprise. (xiii) No authorization, approval or consent of any court or governmental authority or agency is necessary in connection with the sale of the Securities hereunder, except such as may be required under the 1933 Act or the 1933 Act Regulations, state securities laws and the qualification of the Indenture under the 1939 Act. (xiv) The Company and the Subsidiaries and Affiliates possess such certificates, authorities or permits issued by the appropriate state, federal or foreign regulatory agencies or bodies necessary to conduct the business now operated by them, and none of the Company, the Subsidiaries or Affiliates have received any notice of proceedings relating to the revocation or modification of any such certificate, authority or permit which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would materially and adversely affect the condition, financial or otherwise, or the earnings, business affairs or business prospects of the Company and its Subsidiaries considered as one enterprise. (xv) The Company has all necessary corporate power and authority to execute and deliver this Agreement and the Pricing Agreement, to issue and deliver the Securities and to perform its obligations hereunder and thereunder. This Agreement has been, and, at the Representation Date, the Pricing Agreement will have been, duly executed and delivered by the Company. (xvi) The Indenture has been duly authorized by the Company and, at the Closing Time, will have been duly qualified under the 1939 Act and duly executed and delivered by the Company and will constitute a valid and binding agreement of the Company, enforceable against the Company in accordance with its terms, except as the enforcement thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws 10 relating to or affecting creditor's rights generally or by general equitable principles. (xvii) The Securities have been duly authorized and, at the Closing Time, will have been duly executed by the Company and, when authenticated in the manner provided for in the Indenture and delivered against payment of the purchase price therefor specified in the Pricing Agreement, will constitute valid and binding obligations of the Company, enforceable against the Company in accordance with their terms, except as the enforcement thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting creditors' rights generally or by general equitable principles, and will be in the form contemplated by, and entitled to the benefits of, the Indenture. (xviii) The Securities and the Indenture will conform in all material respects to the respective statements relating thereto contained in the Prospectus and will be in substantially the respective forms filed or incorporated by reference, as the case may be, as exhibits to the Registration Statement. (xix) Neither the Company nor any of its Subsidiaries nor any of its Affiliates is in violation of any federal, state or local law relating to occupational safety and health or to the storage, handling or transportation of hazardous or toxic materials and the Company, each of its Subsidiaries and each of its Affiliates has obtained all permits, licenses or other approvals required under applicable federal and state occupational safety and health and environmental laws and regulations to conduct its businesses as described in the Prospectus, and the Company, and each of its Subsidiaries and each of its Affiliates is in compliance with all terms and conditions of any such required permit, license or approval, except any such violation of law or regulation, failure to receive required permits, licenses or other approvals or failure to comply with the terms of such permits, licenses or approvals which would not, individually or in the aggregate, have a material adverse effect on the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Company and its Subsidiaries considered as one enterprise. 11 (xx) The Company and each of its Subsidiaries and Affiliates has filed all necessary federal, state and foreign income and franchise tax returns, except where the failure to so file such returns would not have a material adverse effect on the earnings, business affairs or business prospects of the Company and its Subsidiaries considered as one enterprise, and has paid all taxes shown as due thereon; and other than tax deficiencies which the Company is contesting in good faith and for which the Company reasonably believes that it has provided adequate reserves, there is no tax deficiency that has been asserted against the Company, any of its Subsidiaries or any of its Affiliates that would have a material adverse effect on the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Company and its Subsidiaries considered as one enterprise. (xxi) Neither the Company nor any agent acting on its behalf has taken or will take any action that is likely to cause this Agreement or the sale of the Securities to violate Regulation G, T, U or X of the Board of Governors of the Federal Reserve System, in each case as in effect, or as the same may hereafter be in effect, at the Closing Time. (xxii) Except as set forth in the Prospectus, the Company, the Subsidiaries and the Affiliates have good and marketable title in fee simple to all real property and good and marketable title to all personal property owned by them, in each case free and clear of all liens, encumbrances and defects; and all real property and buildings held under lease by the Company, the Subsidiaries and the Affiliates are held by them under valid, subsisting and enforceable leases, except, in each case, for liens, encumbrances, defects or exceptions which, individually or in the aggregate, do not have a material adverse effect upon the value of, or the use or proposed use of, the properties, real and personal, and buildings (whether owned or held under lease) of the Company and its Subsidiaries considered as one enterprise. (xxiii) The Company and its Subsidiaries and Affiliates maintain insurance (including self insurance) against such losses and risks as are adequate in accordance with customary 12 industry practice to protect the Company, its Subsidiaries and its Affiliates and their businesses. Neither the Company nor any Subsidiary or Affiliate has received notice from any insurer or agent of such insurer that substantial capital improvements or other expenditures will have to be made in order to continue such insurance. All such insurance is outstanding and duly in force on the date hereof and will be outstanding and duly in force at the Closing Time. (xxiv) Except as set forth in the Prospectus, there are no contracts, agreements or understandings between the Company and any person granting such person the right to require the Company to include any securities of the Company owned or to be owned by such person in the securities registered pursuant to the Registration Statement. (xxv) The Company is not an "investment company" or "promoter" or "principal underwriter" for, an "investment company", as such terms are defined in the Investment Company Act of 1940, as amended, and the rules and regulations thereunder (the "1940 Act"). Cellular, Inc. Financial Corporation ("CIFC") is not an investment company within the meaning of the 1940 Act and is not required to register as an investment company under the 1940 Act. (xxvi) No default or event of default with respect to any Senior Indebtedness (as such term is defined in the Indenture) entitling the holders thereof to accelerate the maturity thereof exists or will exist as a result of the execution and delivery of this Agreement or the consummation of the transactions contemplated hereby and the Company has duly performed or observed all material obligations, agreements, covenants or conditions contained in any contract, indenture, mortgage, agreement or instrument relating to any Senior Indebtedness. (xxvii) The Company and the Subsidiaries maintain a system of internal accounting controls sufficient to provide reasonable assurances that (a) transactions are executed in accordance with management's general or specific authorization; (b) transactions are recorded as necessary to permit preparation of financial state- 13 ments in conformity with generally accepted accounting principles and to maintain accountability for assets; (c) access to assets is permitted only in accordance with management's general or specific authorization; and (d) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (xxviii) None of the Company, the Subsidiaries, the Affiliates, the General Partner Licensees or, to the best knowledge of the Company, the Limited Partner Licensees has sustained, since the date of the latest audited financial statements included or incorporated by reference in the Prospectus, any loss or interference with its business from fire, explosion, flood or other calamity, whether or not covered by insurance, or from any labor dispute or court or governmental action, order or decree (other than any such loss or interference which does not, individually or in the aggregate, involve a risk of a material adverse effect upon the Company and the Subsidiaries, considered as one enterprise), except as set forth in the Prospectus; and, since such date, there has not been any change in the capital stock or long-term debt of the Company or any of the Subsidiaries or any material adverse change, or any development involving a prospective material adverse change, in or affecting the general affairs, management, financial position, stockholders' equity or results of operations or prospects of the Company and the Subsidiaries, considered as one enterprise, otherwise than as set forth or contemplated in the Prospectus. (b) Any certificate signed by any officer of the Company and delivered to the Underwriters or to counsel for the Underwriters pursuant to this Agreement shall be deemed a representation and warranty by the Company to the Underwriters as to the matters covered thereby. SECTION 2. SALE AND DELIVERY TO UNDERWRITERS; CLOSING. (a) On the basis of the representations and warranties herein contained and subject to the terms and conditions herein set forth, the Company agrees to sell to each Underwriter, and each Underwriter agrees, severally and not jointly, to purchase from the Company, at the price set forth in the Pricing Agreement, the aggregate principal amount of Securities set forth in Schedule A opposite the name of such Underwriter (except as otherwise provided in the Pricing Agreement), plus any additional 14 principal amount of Securities which such Underwriter may become obligated to purchase pursuant to Section 10 hereof. (i) If the Company has elected not to rely upon Rule 430A under the 1933 Act Regulations, the initial public offering price to be paid by the several Underwriters for the Securities and the interest rate on the Securities and certain other principal terms of the Securities have each been determined and set forth in the Pricing Agreement, dated the date hereof, and an amendment to the Registration Statement and the Prospectus will be filed before the Registration Statement becomes effective. (ii) If the Company has elected to rely upon Rule 430A under the 1933 Act Regulations, the purchase price of the Securities to be paid by the several Underwriters shall be agreed upon and set forth in the Pricing Agreement. In the event that such price has not been agreed upon and the Pricing Agreement has not been executed and delivered by all parties thereto by the close of business on the fourteenth business day following the date of this Agreement, this Agreement shall terminate forthwith, without liability of any party to any other party, unless otherwise agreed to by the Company and the Underwriters. (b) Payment of the purchase price for, and delivery of the Securities shall be made at the offices of Merrill Lynch at Merrill Lynch World Headquarters, North Tower, World Financial Center, New York, New York 10281, or at such other place as shall be agreed upon by the Underwriters and the Company, at 10:00 A.M. on the third or fourth business day (as permitted under Rule 15c6-1 under the 1934 Act) following the date the Registration Statement becomes effective (or, if the Company has elected to rely upon Rule 430A of the 1933 Act Regulations, the third or fourth business day (as permitted under Rule 15c6-1 under the 1934 Act) after execution of the Pricing Agreement), or such other time not later than ten business days after such date as shall be agreed upon by the Underwriters and the Company (such time and date of payment and delivery being herein called the "Closing Time"). Payment shall be made to the Company by certified or official bank check or checks drawn in New York Clearing House funds or similar next day funds payable to the order of the Company or wire transfer of Federal (same-day) funds to an account or accounts previously designated in writing to Merrill Lynch by the Company; provided, however, that the Company shall pay all costs and expenses associated with obtaining such Federal funds, against delivery 15 to the Underwriters of the Securities. The Securities shall be in such denominations and registered in such names as the Underwriters may request in writing at least two business days before the Closing Time. The Securities will be made available for examination and packaging by the Underwriters not later than 10:00 A.M. on the last business day prior to the Closing Time at the above-mentioned offices of Merrill Lynch. SECTION 3. COVENANTS OF THE COMPANY. The Company covenants with each of the Underwriters as follows: (a) The Company will notify the Underwriters promptly after receiving notice of or obtaining knowledge of, and confirm such notice in writing (i) the effectiveness of the Registration Statement and any amendment thereto (including any post-effective amendment), (ii) the receipt of any comments from the Commission, (iii) any request by the Commission for any amendment to the Registration Statement or any amendment or supplement to the Prospectus or for additional information, and (iv) the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or the initiation of any proceedings for that purpose or (v) the suspension of the qualifications of the Securities for the offering or sale in any jurisdiction, or the initiation of any proceeding for such purpose. The Company will use its best efforts to prevent the issuance of any stop order and, if any stop order is issued, to obtain the lifting thereof at the earliest possible moment. (b) The Company will give the Underwriters notice of its intention to file or prepare any amendment to the Registration Statement (including any post-effective amendment) or any amendment or supplement to the Prospectus (including any revised prospectus which the Company proposes for use by the Underwriters in connection with the offering of the Securities which differs from the prospectus on file at the Commission at the time the Registration Statement becomes effective, whether or not such revised prospectuses are required to be filed pursuant to Rule 424(b) of the 1933 Act Regulations) or to file or prepare any document which, when filed, will be incorporated or deemed to be incorporated by reference into the Registration Statement or the Prospectus, will furnish the Underwriters with copies of any such amendment or supplement or document a reasonable amount of time prior to such proposed filing or use, as the case may be, and will not file any such amendment or supplement or document or use any such prospectus to which the Underwriters shall reasonably object. 16 (c) The Company will deliver to each of the Underwriters as many signed and conformed copies of the Registration Statement as originally filed and of each amendment thereto (including exhibits filed therewith or other documents incorporated or deemed to be incorporated by reference therein) as such Underwriter may reasonably request. (d) The Company will furnish to each Underwriter, from time to time during the period when the Prospectus is required to be delivered under the 1933 Act or the 1934 Act, such number of copies of the Prospectus (as amended or supplemented) as the Underwriters may reasonably request for the purposes contemplated by the 1933 Act or the 1934 Act or the respective applicable rules and regulations of the Commission thereunder. (e) If any event shall occur as a result of which it is necessary to amend or supplement the Prospectus in order to make the Prospectus not misleading in the light of the circumstances existing at the time it is delivered to a purchaser, the Company will promptly notify the Underwriters thereof and will forthwith amend or supplement the Prospectus (in form and substance reasonably satisfactory to the Underwriters) so that, as so amended or supplemented, the Prospectus will not include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances existing at the time it is delivered to a purchaser, not misleading, and the Company will furnish to the Underwriters a reasonable number of copies of such amendment or supplement. (f) The Company will endeavor, in cooperation with the Underwriters, to qualify the Securities for offering and sale under the applicable securities laws of such states and other jurisdictions of the United States as the Underwriters may designate; provided, however, that the Company shall not be obligated to qualify as a foreign corporation in any jurisdiction in which it is not so qualified or to execute a general consent to service of proceeds in any jurisdiction. In each jurisdiction in which the Securities have been so qualified, the Company will file such statements and reports as may be required by the laws of such jurisdiction to continue such qualification in effect for a period of not less than one year from the effective date of the Registration Statement. (g) The Company will make generally available to its security holders as soon as practicable, but not later than 60 days after the close of the period covered thereby, an earnings statement (in form complying with the provisions of Rule 158 of the 1933 Act Regulations) covering a twelve-month period beginning not later than the first day of the Company's fiscal quarter next following the "effective date" (as defined in said Rule 158) of the Registration Statement. (h) The Company will use the net proceeds received by it from the sale of the Securities in the manner specified in the Prospectus under "Use of Proceeds" and in a manner such that the Company will not become an "investment company" as the term is defined in the 1940 Act. 17 (i) If, at the time that the Registration Statement becomes effective, any information shall have been omitted therefrom in reliance upon Rule 430A or Rule 434 of the 1933 Act Regulations, then immediately following the execution of the Pricing Agreement, the Company will prepare, and file or transmit for filing with the Commission in accordance with such Rule 430A or Rule 434 and Rule 424(b) of the 1933 Act Regulations, copies of the amended Prospectus, or, if required by such Rule 430A or Rule 434, a post-effective amendment to the Registration Statement (including amended Prospectus), containing all information so omitted. (j) If the Company has elected to rely on Rule 430A or Rule 434, it will take such steps as it deems necessary to ascertain promptly whether the form of prospectus transmitted for filing under Rule 424(b) under the 1933 Act was actually received for filing by the Commission and in the event that it was not, it will promptly file such prospectus. (k) For a period of five years, the Company will furnish to you copies of all reports and communications delivered to its stockholders as a class and copies of all reports (excluding exhibits) filed with the Commission on Forms 8-K, 10-K and 10-Q. (l) The Company, during the period when the Prospectus is required to be delivered under the 1933 Act or the 1934 Act, will file all documents required to be filed with the Commission pursuant to Section 13, 14 or 15 of the 1934 Act within the time periods required by the 1934 Act and the 1934 Act Regulations. SECTION 4. PAYMENT OF EXPENSES. The Company will pay all expenses incident to the performance of its obligations under this Agreement, including (i) the printing and filing of the Registration Statement as originally filed and of each amendment thereto, (ii) the printing of the Indenture, this Agreement and the Pricing Agreement, (iii) the preparation, issuance and delivery of the Securities to the Underwriters, (iv) the reasonable fees and disbursements of the Company's counsel and accountants, (v) the qualification of the Securities under securities laws in accordance with the provisions of Section 3(f) hereof, including filing fees and the fees and disbursements of counsel for the Underwriters in connection therewith and in connection with the preparation of the Blue Sky Survey, (vi) the printing and delivery to the Underwriters of copies of the Registration Statement as originally filed and of each amendment thereto, of each preliminary prospectus, and of the Prospectus and any amendments or supplements thereto, (vii) the printing and delivery to the Underwriters of copies of the Blue Sky Survey, (viii) the fee of the NASD, (i) any fees charged by rating agencies for rating the Securities, (x) the fees and expenses of the Trustee, including the fees and disbursements of counsel for the Trustee, in connection with the Indenture and the Securities and (xi) any fees payable in connection with the rating of the Securities. 18 If this Agreement is terminated by the Underwriters in accordance with the provisions of Section 5 or Section 9(a)(i) hereof, the Company shall reimburse the Underwriters upon demand (accompanied by reasonable documentation) for all of its reasonable out-of-pocket expenses, including the reasonable fees and disbursements of counsel for the Underwriters. SECTION 5. CONDITIONS OF UNDERWRITER'S OBLIGATIONS. The obligations of the Underwriters hereunder are subject to the accuracy of the representations and warranties of the Company herein contained, to the performance by the Company of its obligations hereunder, and to the following further conditions: (a) The Registration Statement shall have become effective not later than 5:30 P.M. on the date hereof, or with the consent of the Underwriters, at a later time and date, not later, however, than 5:30 P.M. on the first business day following the date hereof, or at such later time and date as may be approved by the Underwriters; and at the Closing Time no stop order suspending the effectiveness of the Registration Statement shall have been issued under the 1933 Act or proceedings therefor initiated or threatened by the Commission. If the Company has elected to rely upon Rule 430A or Rule 434 of the 1933 Act Regulations, the price of and the interest rate on the Securities and any price-related information previously omitted from the effective Registration Statement pursuant to such Rule 430A or Rule 434 shall have been transmitted to the Commission for filing pursuant to Rule 424(b) of the 1933 Act Regulations within the prescribed time period, and prior to the Closing Time the Company shall have provided evidence satisfactory to the Underwriters of such timely filing, or a post-effective amendment providing such information shall have been promptly filed and declared effective in accordance with the requirements of Rule 430A of the 1933 Act Regulations. (b) At Closing Time, the Underwriters shall have received: (1) The favorable opinion, dated as of the Closing Time, of Amy M. Shapiro, Esq., General Counsel of the Company, in form and substance satisfactory to the Underwriters, to the effect that: (i) The Company and each of the Subsidiaries that is a Colorado corporation has been duly incorporated, is validly existing and in good standing under the laws of the State of Colorado and has full corporate power and authority necessary to own, lease and operate their respective properties and to conduct their respective businesses as described in the Registration Statement and, in the case of the Company, to enter into and perform its obligations under this Agreement and the Pricing Agreement; each of the Subsidiaries that is a Colorado limited partnership has been duly formed and is validly existing and in good standing under the laws of the jurisdiction of the State of Colorado and has full partnership power and authority necessary to own, lease and operate its respective properties and to conduct the businesses as described in the Registration Statement. 19 (ii) The Company is duly qualified as a foreign corporation to transact business and is in good standing in each jurisdiction in which such qualification is required. Each of the Subsidiaries is duly qualified as a foreign corporation or partnership, as the case may be, authorized to transact business and is in good standing in each jurisdiction in which such qualification is required. (iii) All of the issued and outstanding shares of capital stock of the Company have been duly authorized and validly issued and are fully paid and non-assessable. The authorized, issued and outstanding capital stock of the Company on March 31, 1993 is as set forth in the Prospectus in the column entitled "Actual" under the caption entitled "Capitalization." (iv) All of the issued and outstanding shares of capital stock of each of the Subsidiaries that is a Colorado corporation owned by the Company have been duly authorized and validly issued, are fully paid and non-assessable; and except as described in the Registration Statement, the Prospectus and Exhibits B and C hereto, and to the best of such counsel's knowledge, such shares of capital stock and the partnership interests owned by the Company in each Subsidiary that is a partnership are owned, directly or indirectly, by the Company or Subsidiaries, free and clear of any security interest, mortgage, lien, claim, or encumbrance. (v) The Company has the corporate power and authority to enter into this Agreement and the Pricing Agreement. This Agreement and the Pricing Agreement have been duly authorized, executed and delivered by the Company. (vi) The Indenture has been duly authorized, executed and delivered by the Company. (vii) The Securities have been duly authorized by the Company. (viii) To the best of such counsel's knowledge and information, there are no legal or governmental proceedings under any Communications Laws or otherwise, pending or threatened which are required to be disclosed in the Registration Statement, other than those disclosed therein to which the Company, any of the Subsidiaries, any of the Affiliates, or any of the General Partner Licensees or any of their assets is subject which, if determined adversely to such party might have a material adverse effect on the condition, financial or otherwise, or the earnings, business affairs or business prospects of the Company and its Subsidiaries considered as one enterprise. 20 (ix) There are no contracts or other documents which are required to be described in the Prospectus or filed as exhibits to the Registration Statement by the 1933 Act or by the 1933 Act Regulations or which were required to be filed as exhibits to any document incorporated by reference in the Prospectus pursuant to the 1934 Act or the rules or regulations thereunder which have not been described or filed as exhibits to the Registration Statement or incorporated therein by reference as permitted by the 1933 Act Regulations. (x) The execution and delivery of the Purchase Agreement, the Pricing Agreement and the Indenture by the Company and consummation of the transactions contemplated hereby and thereby do not (a) violate any Colorado statute, rule or regulation applicable to the Company or any of the Subsidiaries, except for violations which would not, individually or in the aggregate, have a material adverse effect on the condition, financial or otherwise, or the earnings, business affairs or business prospects of the Company and the Subsidiaries, considered as one enterprise, (b) violate the provisions of the corporate charter or by-laws of the Company or any Subsidiary that is a Colorado corporation or violate the partnership agreement of any Subsidiary that is a Colorado limited partnership, (c) violate, conflict with, or result in the creation of any claims, liens, encumbrances, restrictions, pre-emptive rights or any other claims of any third party upon the assets of the Company or any Subsidiary pursuant to the terms of, or result in the breach of or default under, any contract or other agreement to which the Company or any Subsidiary is a party, except for such violations, conflicts, claims, breaches, or defaults which would not, individually or in the aggregate, have a material adverse effect on the condition, financial or otherwise, or the earnings, business affairs or business prospects of the Company and the Subsidiaries, considered as one enterprise, or (d) require any consents, approvals, registrations, declarations or filings by the Company or any Subsidiary under any Colorado statute, rule or regulation applicable to the Company or any Subsidiary, except for consents, approvals, registrations, declarations or filings not obtained which would not, individually or in the aggregate, have a material adverse effect on the condition, financial or otherwise, or the earnings, business affairs or business prospects of the Company and the Subsidiaries, considered as one enterprise, except as required by state securities laws. In addition, such counsel shall state that such counsel participated in conferences with officers and other representatives of the Company, representatives of the independent public accountants for the Company, and the Underwriters' representatives, at which conferences the contents of the Registration Statement and the Prospectus and related matters were discussed, and no facts came to such counsel's attention that lead such counsel to believe (i) that the Registration 21 Statement (including all documents incorporated by reference therein) (except for Communication Matters (defined herein) the financial statements and schedules and other financial data included therein and the Statement of Eligibility of the Trustee on Form T-1, as to which such counsel need express no opinion), at the time it became effective, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or (ii) that the Prospectus or any amendment or supplement thereto (including all documents incorporated by reference therein) (except for the financial statements and schedules and other financial data included therein and the Statement of Eligibility of the Trustee on Form T-1, as to which such counsel need express no opinion), as of its date, at the time any such amended or supplemented prospectus was issued or at the Closing Time, contained or contains an untrue statement of a material fact or omitted or omits to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. In rendering her opinion, Amy M. Shapiro, Esq. may state that her opinion is limited to matters of Colorado and federal laws. Such counsel shall also state in her opinion that Skadden, Arps, Slate, Meagher & Flom, in delivering their opinion pursuant to Section 5(b)(5) hereof, may rely on her opinion as to matters concerning Colorado law. (2) The favorable opinion, dated as of the Closing Time, of Latham & Watkins, counsel for the Company, in form and substance satisfactory to the Underwriters, to the effect that: (i) Based solely on certificates from public officials, the Company and the Subsidiaries are qualified to do business in the states as set forth on Exhibit D; (ii) The Registration Statement was declared effective under the 1933 Act and, no stop order suspending the effectiveness of the Registration Statement has been issued under the 1933 Act or proceedings therefor initiated or, to the best of their knowledge and information, threatened by the Commission. (iii) At the time the Registration Statement became effective and at the Representation Date, the Registration Statement (other than the financial statements and supporting schedules included therein, as to which no opinion need be rendered) complied as to form in all material respects with the requirements of the 1933 Act and the 1933 Act Regulations, it being understood, however, that in passing upon the compliance as to form of the Registration Statement, such counsel may assume that the statements made and incorporated by reference therein are correct and complete. 22 (iv) Each document filed pursuant to the 1934 Act (other than the financial statements and supporting schedules included therein, as to which no opinion need be rendered) and incorporated or deemed to be incorporated by reference in the Prospectus complied when so filed as to form in all material respects with the 1934 Act and the 1934 Act Regulations, it being understood, however, that in passing upon the compliance as to form of the documents filed pursuant to the 1934 Act and incorporated or deemed to be incorporated by reference in the Prospectus, such counsel may assume that the statements made and incorporated by reference therein are correct and complete. (v) To the best of such counsel's knowledge and information, there are no legal or governmental proceedings under any Communications Laws or otherwise, pending or threatened which are required to be disclosed in the Registration Statement, other than those disclosed therein, to which the Company, any of the Subsidiaries, any of the Affiliates, any of the General Partner Licensees or any of the Limited Partner Licensees or any of their assets is subject which, if determined adversely to such party would have a material adverse effect on the condition, financial or otherwise, or the earnings, business affairs or business prospects of the Company and its Subsidiaries considered as one enterprise. (vi) The information in the Prospectus under the captions "Description of Certain Indebtedness", and the description in the Prospectus of matters relating to the FCC or any other federal governmental agency or body charged with the administration of any Communications Laws, or any rules or regulations of, or administrative proceedings before, the FCC or such other federal agency (collectively, "Communication Matters") to the extent that it constitutes matters of law, summaries of legal matters, documents or proceedings, or legal conclusions, has been reviewed by them and is correct in all material respects. (vii) To the best of their knowledge and information, there are no contracts, indentures, mortgages, loan agreements notes, leases or other instruments required to be described or referred to in the Registration Statement or to be filed as exhibits thereto other than those described or referred to therein or filed or incorporated by reference as exhibits thereto. (viii) The execution and delivery of this Agreement, the Indenture, the Securities and the Pricing Agreement by the Company and the consummation of the transactions contemplated herein and therein do not (a) violate any federal statute, rule or regulation (including Communications Laws) or any determination 23 of any arbitrator, court or governmental entity applicable to the Company or any of the Subsidiaries, (b) violate the provisions of the corporate charter or by-laws of the Company, CIFC or Cellular Inc. Network Corporation ("CINC"), (c) conflict with, or result in the creation of any claims, liens, encumbrances, restrictions, preemptive rights or any other claim of any third party upon the assets of the Company, CIFC or CINC pursuant to the terms of, or result in the breach of or a default under, the contracts or other documents filed as exhibits to the Registration Statement or incorporated by reference therein, except any such conflicts, claims, breaches or defaults that would not, individually or in the aggregate, have a material adverse effect on the condition, financial or otherwise, or the earnings, business affairs or business prospects of the Company and the Subsidiaries, considered as one enterprise or (d) require any consents, approvals, registrations, declarations or filings by the Company or any Subsidiary under any federal statute, rule or regulation (including Communications Laws) applicable to the Company or such Subsidiary, except as required by the 1933 Act and 1934 Act; (ix) To the best of their knowledge and information, there are no persons with registration or other similar rights to have any securities registered pursuant to the Registration Statement or otherwise registered by the Company under the 1933 Act. (x) The Indenture (assuming the due authorization, execution and delivery thereof by the Company and by the Trustee) constitutes a valid and binding agreement of the Company, enforceable against the Company in accordance with its terms, except as the enforcement thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting creditors' rights generally or by general equitable principles. (xi) The Securities are in the form contemplated by the Indenture, have been duly authorized by the Company and, when executed by the Company and authenticated by the Trustee in the manner provided in the Indenture (assuming the due authorization, execution and delivery of the Indenture by the Company and by the Trustee) and delivered against payment of the purchase price therefor specified in the Pricing Agreement, will constitute valid and binding obligations of the Company, enforceable against the Company in accordance with their terms, except as the enforcement thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting creditor's rights generally or by general equitable principles. 24 (xii) The Indenture has been qualified under the 1939 Act. (xiii) The Securities and the Indenture conform in all material respects to the descriptions thereof contained in the Prospectus. In addition, such counsel shall state that such counsel participated in conferences with officers and other representatives of the Company, representatives of the independent public accountants for the Company, and the Underwriters' representatives, at which conferences the contents of the Registration Statement and the Prospectus and related matters were discussed, and no facts came to such counsel's attention that lead such counsel to believe (i) that the Registration Statement (including all documents incorporated by reference therein) (except for the financial statements and schedules and other financial data included therein and the Statement of Eligibility of the Trustee on Form T-1, as to which such counsel need express no opinion), at the time it became effective, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or (ii) that the Prospectus or any amendment or supplement thereto (including all documents incorporated by reference therein) (except for the financial statements and schedules and other financial data included therein and the Statement of Eligibility of the Trustee on Form T-1, as to which such counsel need express no opinion), as of its date, at the time any such amended or supplemented prospectus was issued or at the Closing Time, contained or contains an untrue statement of a material fact or omitted or omits to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. (3) The favorable opinion, dated as of the Closing Time, of Latham & Watkins, as counsel to the Company, in form and substance satisfactory to the Underwriters, as to the 1940 Act. (4) The favorable opinion, dated as of the Closing Time, of Blooston, Mordkofsky, Jackson & Dickens, as special communications law counsel to the Company in form and substance satisfactory to the Underwriters. (5) The favorable opinion, dated as of the Closing Time, of Skadden, Arps, Slate, Meagher & Flom, as special counsel to the Underwriters in form and substance satisfactory to the Underwriters. (c) At the Closing Time, there shall not have been, since the date hereof or since the respective dates as of which information is given in the Prospectus, any material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Company and its Subsidiaries and Affiliates considered as one enterprise, whether or not arising in the ordinary course of business, and the Underwriters shall have received a certificate of the Chairman, President or a Vice President of the Company and of the chief 25 financial or chief accounting officer of the Company, dated as of the Closing Time, to the effect that (i) there has been no such material adverse change, (ii) the representations and warranties in Section 1 hereof are true and correct with the same force and effect as though expressly made at and as of the Closing Time, (iii) the Company has in all material respects complied with all agreements and satisfied all conditions on its part to be performed or satisfied at or prior to the Closing Time, and (iv) no stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been initiated or, to the best of the Company's knowledge, threatened by the Commission. As used in this Section 5(c), the term "Prospectus" means the Prospectus in the form first used to confirm sales of the Securities. (d) At the time of the execution of this Agreement, the Underwriters shall have received from Ernst & Young LLP a letter dated such date, in form and substance satisfactory to the Underwriters, to the effect that (i) they are independent public accountants with respect to the Company and its subsidiaries within the meaning of the 1933 Act and the 1933 Act Regulations; (ii) it is their opinion that the financial statements and supporting schedules included in the Registration Statement and covered by their opinions therein (and any other financial statements audited by them from which information included in the Registration Statement has been derived) comply as to form in all material respects with the applicable accounting requirements of the 1933 Act and the 1933 Act Regulations; (iii) based upon limited procedures set forth in detail in such letter, nothing has come to their attention which causes them to believe that (A) the unaudited financial statements and supporting schedules of the Company and its subsidiaries included in the Registration Statement do not comply as to form in all material respects with the applicable accounting requirements of the 1933 Act and the 1933 Act Regulations or are not presented in conformity with generally accepted accounting principles applied on a basis substantially consistent with that of the audited financial statements included in the Registration Statement, (B) the unaudited amounts set forth under "Selected Financial Data" in the Prospectus (including amounts for both full fiscal years and quarters of fiscal years) were not determined on a basis substantially consistent with that used in determining the corresponding amounts in the audited financial statements included in the Registration Statement, (C) any unaudited financial statements other than those referred to in (B) from which information in the Prospectus is derived are not presented in conformity with generally accepted accounting principles applied on a basis substantially consistent with that of the audited financial statements included in the Registration Statement, or (D) at a specified date not more than five days prior to the date of this Agreement, there has been any change in the capital stock of the Company or any increase in the consolidated long-term debt or consolidated net current liabilities of the Company and its subsidiaries or any decrease in consolidated net assets as compared with the amounts shown in the March 31, 1995 balance sheet included in the Registration Statement or, during the period from March 31, 1995 to a specified date not more than five days prior to the date of this Agreement, there were any decreases, as compared with the corresponding period in the preceding year, in consolidated revenues or gross profit, or any increase in consolidated operating loss, net loss or net loss per 26 share, of the Company and its subsidiaries, except in all instances for changes, increases or decreases which the Registration Statement and the Prospectus disclose have occurred or may occur; and (iv) in addition to the examination referred to in their opinions and the limited procedures referred to in clause (iii) above, they have carried out certain specified procedures, not constituting an audit, with respect to certain amounts, percentages and financial information which are included in the Registration Statement and the Prospectus and which are specified by the Underwriters, and have found such amounts, percentages and financial information to be in agreement with the audited financial statements, unaudited financial statements or other relevant accounting, financial and other records of the Company and its subsidiaries as requested by the Underwriters and as identified in such letter. (e) At the Closing Time, the Underwriters shall have received from Ernst & Young LLP a letter, dated as of the Closing Time, to the effect that they reaffirm the statements made in the letter furnished pursuant to subsection (d) of this Section, except that the specified date referred to shall be a date not more than five days prior to the Closing Time and, if the Company has elected to rely on Rule 430A of the 1933 Act Regulations, to the further effect that they have carried out procedures as specified in clause (iv) of subsection (d) of this Section with respect to certain amounts, percentages and financial information specified by the Underwriters and deemed to be a part of the Registration Statement pursuant to Rule 430A(b) and have found such amounts, percentages and financial information to be in agreement with the records specified in such clause (iv). (f) At the Closing Time, counsel for the Underwriters shall have been furnished with such documents and opinions as they may reasonably require for the purpose of enabling them to pass upon the issuance and sale of the Securities as herein contemplated and related proceedings, or in order to evidence the accuracy of any of the representations or warranties, or the fulfillment of any of the conditions, herein contained; and all proceedings taken by the Company in connection with the issuance and sale of the Securities as herein contemplated shall be satisfactory in form and substance to the Underwriters. (g) The NASD, upon review of the terms of the public offering of the Securities, shall not have objected to the participation by the Underwriters in such offering or asserted any violations of the By-laws of the NASD. (h) Subsequent to the execution and delivery of this Agreement and prior to the Closing Time, there shall not have occurred a downgrading in the rating assigned to any of the Company's debt securities, including the Securities, by any "nationally recognized statistical rating organization" as such term is defined for purposes of Rule 436(g)(2) under the 1933 Act. If any condition specified in this Section shall not have been fulfilled when and as required to be fulfilled, this Agreement may be terminated by the Underwriters by notice to the Company at any time at or prior to the Closing Time, 27 and such termination shall be without liability of any party to any other party except as provided in Section 4 hereof. SECTION 6. INDEMNIFICATION. (a) The Company agrees to indemnify and hold harmless each of the Underwriters and each person, if any, who controls any Underwriter within the meaning of Section 15 of the 1933 Act as follows: (i) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, arising out of any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (or any amendment thereto), including the information deemed to be part of the Registration Statement pursuant to Rule 430A(b) or Rule 434 of the 1933 Act Regulations, if applicable, or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein not misleading or arising out of any untrue statement or alleged untrue statement of a material fact contained in any preliminary prospectus or the Prospectus (or any amendment or supplement thereto) or the omission or alleged omission therefrom of a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; (ii) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, to the extent of the aggregate amount paid in settlement of any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or of any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission, if such settlement is effected with the written consent of the Company; and (iii) against any and all expense whatsoever, as incurred (including, subject to Section 6(c) hereof, the fees and disbursements of counsel chosen by Merrill Lynch), reasonably incurred in investigating, preparing or defending against any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission, to the extent that any such expense is not paid under (i) or (ii) above; provided, however, that this indemnity agreement shall not apply to any loss, liability, claim, damage or expense to the extent arising out of any untrue statement 28 or omission or alleged untrue statement or omission made in reliance upon and in conformity with written information furnished to the Company by the Underwriters expressly for use in the Registration Statement (or any amendment thereto) or any preliminary prospectus or the Prospectus (or any amendment or supplement thereto); and provided, further, that this indemnity agreement with respect to any preliminary prospectus shall not inure to the benefit of any Underwriter from whom the person asserting any such losses, liabilities, claims, damages or expenses purchased Securities, or any person controlling such Underwriter, if a copy of the Prospectus (as then amended or supplemented if the Company shall have furnished any such amendments or supplements thereto, but excluding documents incorporated or deemed to be incorporated by reference therein) was not sent or given by or on behalf of such Underwriter to such person, if such is required by law, at or prior to the written confirmation of the sale of such Securities to such person and if the Prospectus (as so amended or supplemented, but excluding documents incorporated or deemed to be incorporated by reference therein) would have corrected the defect giving rise to such loss, liability, claim, damage or expense, it being understood that this proviso shall have no application if such defect shall have been corrected in a document which is incorporated or deemed to be incorporated by reference in the Prospectus. (b) Each Underwriter agrees, severally and not jointly, to indemnify and hold harmless the Company, its directors, each of its officers who signed the Registration Statement, and each person, if any, who controls the Company within the meaning of Section 15 of the 1933 Act against any and all loss, liability, claim, damage and expense described in the indemnity contained in subsection (a) of this Section, as incurred, but only with respect to untrue statements or omissions, or alleged untrue statements or omissions, made in the Registration Statement (or any amendment thereto) or any preliminary prospectus or the Prospectus (or any amendment or supplement thereto) in reliance upon and in conformity with written information furnished to the Company by the Underwriters expressly for use in the Registration Statement (or any amendment thereto) or such preliminary prospectus or the Prospectus (or any amendment or supplement thereto). (c) Each indemnified party shall give notice as promptly as reasonably practicable to each indemnifying party of any action commenced against it in respect of which indemnity may be sought hereunder, but failure to so notify an indemnifying party shall not relieve such indemnifying party from any liability which it may have otherwise than on account of this indemnity agreement. An indemnifying party may participate at its own expense in the defense of any such action. In no event shall the indemnifying parties be liable for fees and expenses of more than one counsel (in addition to any local counsel) separate from their own counsel for all indemnified parties in connection with any one action or separate but similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances. SECTION 7. CONTRIBUTION. In order to provide for just and equitable contribution in circumstances in which the indemnity agreement provided for in 29 Section 6 hereof is for any reason held to be unenforceable by the indemnified parties although applicable in accordance with its terms, the Company and the Underwriters shall contribute to the aggregate losses, liabilities, claims, damages and expenses of the nature contemplated by said indemnity agreement incurred by the Company and one or more of the Underwriters, as incurred, in such proportions that the Underwriters are responsible for that portion represented by the percentage that the underwriting discount appearing on the cover page of the Prospectus bears to the initial public offering price appearing thereon and the Company is responsible for the balance; provided, however, that no person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of this Section, each person, if any, who controls an Underwriter within the meaning of Section 15 of the 1933 Act shall have the same rights to contribution as the Underwriters, and each director of the Company, each officer of the Company who signed the Registration Statement, and each person, if any, who controls the Company within the meaning of Section 15 of the 1933 Act shall have the same rights to contribution as the Company. SECTION 8. REPRESENTATIONS, WARRANTIES AND AGREEMENTS TO SURVIVE DELIVERY. All representations, warranties and agreements contained in this Agreement and the Pricing Agreement, or contained in certificates of officers of the Company submitted pursuant hereto, shall remain operative and in full force and effect, regardless of any investigation made by or on behalf of any Underwriters or controlling person, or by or on behalf of the Company, and shall survive delivery of the Securities to the Underwriter. SECTION 9. TERMINATION OF AGREEMENT. (a) The Underwriters may terminate this Agreement, by notice to the Company, at any time at or prior to the Closing Time (i) if there has been, since the date of this Agreement or since the respective dates as of which information is given in the Prospectus, any material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Company and its Subsidiaries considered as one enterprise, whether or not arising in the ordinary course of business, or (ii) if there has occurred any material adverse change in the financial markets in the United States or elsewhere or any outbreak of hostilities or escalation thereof or other calamity or crisis the effect of which is such as to make it, in the judgment of the Underwriters, impracticable to market the Securities or to enforce contracts for the sale of the Securities, or (iii) if trading in the common stock of the Company has been suspended by the Commission, or if trading generally on the American Stock Exchange, the New York Stock Exchange or the Nasdaq National Market has been suspended, or minimum or maximum prices for trading have been fixed, or maximum ranges for prices for securities have been required, by either of said Exchanges or the Nasdaq National Market or by order of the Commission or any other governmental authority, or if a banking moratorium has been declared by either Federal, New York or Colorado authorities. 30 (b) If this Agreement is terminated pursuant to this Section, such termination shall be without liability of any party to any other party except as provided in Section 4 hereof. SECTION 10. DEFAULT BY ONE OR MORE OF THE UNDERWRITERS. If one or more of the Underwriters shall fail at the Closing Time to purchase the Securities that it or they are obligated to purchase pursuant to this Agreement (the "Defaulted Securities"), you shall have the right, within 24 hours thereafter, to make arrangements for one or more of the non-defaulting Underwriters, or any other underwriters, to purchase all, but not less than all, of the Defaulted Securities in such amounts as may be agreed upon and upon the terms set forth in this Agreement; if, however, you have not completed such arrangements within such 24-hour period, then: (a) if the aggregate principal amount of Defaulted Securities does not exceed 10% of the aggregate principal amount of the securities to be purchased pursuant to this Agreement, the non-defaulting Underwriters shall be obligated generally and not jointly to purchase the full amount thereof in the proportions that their respective underwriting obligation proportions bear to the underwriting obligation proportions of all non-defaulting Underwriters, or (b) if the aggregate principal amount of Defaulted Securities exceeds 10% of the aggregate principal amount of the Securities to be purchased pursuant to this Agreement, this Agreement shall terminate without liability on the part of any non-defaulting Underwriter. No action taken pursuant to this Section 10 shall relieve any defaulting Underwriter from liability in respect of its default. In the event of any such default that does not result in a termination of this Agreement, either you or the Company shall have the right to postpone the Closing Time for a period not exceeding seven days in order to effect any required changes in the Registration Statement of Prospectus or in any other documents or arrangements. As used herein, the term "Underwriter" includes any person substituted for an Underwriter pursuant to this Section 10. SECTION 11. NOTICES. All notices and other communications hereunder shall be in writing and shall be deemed to have been duly given if mailed or transmitted by any standard form of telecommunication. Notices to the Underwriters shall be directed to it at Merrill Lynch World Headquarters, North Tower, World Financial Center, New York, New York 10281, attention of Robert Kramer, Director; notices to the Company shall be directed to it at 5990 Greenwood Plaza Boulevard, Suite 300, Englewood, Colorado 80111, attention of Amy M. Shapiro, Esq. 31 SECTION 12. PARTIES. This Agreement and the Pricing Agreement shall each inure to the benefit of and be binding upon the Underwriters and the Company and their respective successors. Nothing expressed or mentioned in this Agreement or the Pricing Agreement is intended or shall be construed to give any person, firm or corporation, other than the Underwriters and the Company and their respective successors and the controlling persons and officers and directors referred to in Sections 6 and 7 hereof and their heirs and legal representatives, any legal or equitable right, remedy or claim under or in respect of this Agreement or the Pricing Agreement or any provision herein or therein contained. This Agreement and the Pricing Agreement and all conditions and provisions hereof and thereof are intended to be for the sole and exclusive benefit of the Underwriters and the Company and their respective successors, and said controlling persons and officers and directors and their heirs and legal representatives, and for the benefit of no other person, firm or corporation. No purchaser of Securities from the Underwriters shall be deemed to be a successor by reason merely of such purchase. All of the obligations of the Underwriters hereunder are several and not joint. SECTION 13. GOVERNING LAW AND TIME. This Agreement and the Pricing Agreement shall be governed by and construed in accordance with the laws of the State of New York applicable to agreements made and to be performed in said State. Specified times of day refer to New York City time. 32 If the foregoing is in accordance with your understanding of our agreement, please sign and return to the Company a counterpart hereof, whereupon this instrument, along with all counterparts, will become a binding agreement between the Underwriters and the Company in accordance with its terms. Very truly yours, COMMNET CELLULAR INC. By: ------------------------------------- Name: Title: CONFIRMED AND ACCEPTED as of the date first above written: MERRILL LYNCH & CO. Merrill Lynch, Pierce, Fenner & Smith Incorporated SMITH BARNEY INC. By: MERRILL LYNCH & CO. Merrill Lynch, Pierce, Fenner & Smith Incorporated By: ------------------------- Name: Title: 33 Exhibit A COMMNET CELLULAR INC. (a Colorado corporation) $80,000,000 ____% Subordinated Notes due 2005 PRICING AGREEMENT , 1995 MERRILL LYNCH & CO. Merrill Lynch, Pierce, Fenner & Smith Incorporated SMITH BARNEY INC. c/o Merrill Lynch & Co. Merrill Lynch, Pierce, Fenner & Smith Incorporated Merrill Lynch World Headquarters North Tower World Financial Center New York, New York 10281 Dear Ladies and Gentlemen: Reference is made to the Purchase Agreement dated , 1995 (the "Purchase Agreement") relating to the purchase by Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated and Smith Barney Inc. (the "Underwriters"), of $80,000,000 principal amount of ____% Subordinated Notes due 2005 (the "Securities"), of CommNet Cellular Inc., a Colorado corporation (the "Company"). Pursuant to Section 2 of the Purchase Agreement, the Company agrees with each Underwriter as follows: 1. The initial public offering price for the Securities, determined as provided in said Section 2, shall be _____% of the principal amount thereof. 2. The purchase price for the Securities to be paid by the several Underwriters shall be ____% of the principal amount thereof. 3. The interest rate on the Notes shall be ____% per annum; provided however that in the event the Conversion Condition (as such term is defined in the Indenture) is satisfied, from and after the Convertible Redemption Date (as such term is defined in the Indenture), the interest rate on the Securities shall be % per annum. 4. The Closing Time shall be July , 1995. If the foregoing is in accordance with your understanding of our agreement, please sign and return to the Company a counterpart hereof, whereupon this instrument, along with all counterparts, will become a binding agreement between the Underwriters and the Company in accordance with its terms. Very truly yours, COMMNET CELLULAR INC. By ------------------------- Name: Title: CONFIRMED AND ACCEPTED, as of the date first above written: MERRILL LYNCH & CO. Merrill Lynch, Pierce, Fenner & Smith Incorporated SMITH BARNEY INC. By: MERRILL LYNCH & CO. Merrill Lynch, Pierce, Fenner & Smith Incorporated By ----------------------------------- Authorized Signatory Exhibit B SUBSIDIARIES Exhibit C AFFILIATES Exhibit D SUBSIDIARIES STATE OF FORMATION OR FOREIGN NAME OF ENTITY ORGANIZATION QUALIFICATION -------------- ------------ ------------- EX-4.1 3 EXHIBIT 4.1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- COMMNET CELLULAR INC. Issuer and AMERICAN BANK NATIONAL ASSOCIATION Trustee _______________________ INDENTURE Dated as of July , 1995 _______________________ $125,000,000 % Subordinated Notes due 2005 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- COMMNET CELLULAR INC. Reconciliation and tie between Trust Indenture Act of 1939 and Indenture, dated as of , 1995 Trust Indenture Act Section Indenture Section - --------------------------- ----------------- 310(a)(1) . . . . . . . . . . . . . . . . 607 (a)(2) . . . . . . . . . . . . . . . . 607 (a)(3) . . . . . . . . . . . . . . . . Not Applicable (a)(4) . . . . . . . . . . . . . . . . Not Applicable (b) . . . . . . . . . . . . . . . . 613 608 311(a) . . . . . . . . . . . . . . . . 614 (b) . . . . . . . . . . . . . . . . 614 312(a) . . . . . . . . . . . . . . . . 1301 1302 (b) . . . . . . . . . . . . . . . . 1302 313(a) . . . . . . . . . . . . . . . . 1303 (b) . . . . . . . . . . . . . . . . 1303 (c) . . . . . . . . . . . . . . . . 1303 (d) . . . . . . . . . . . . . . . . 1303 314(a) . . . . . . . . . . . . . . . . 1304, 1011 (b) . . . . . . . . . . . . . . . . Not Applicable (c)(1) . . . . . . . . . . . . . . . . 113 (c)(2) . . . . . . . . . . . . . . . . 113 (c)(3) . . . . . . . . . . . . . . . . Not Applicable (d) . . . . . . . . . . . . . . . . Not Applicable (e) . . . . . . . . . . . . . . . . 113 315(a) . . . . . . . . . . . . . . . . 601 (b) . . . . . . . . . . . . . . . . 612 . . . . . . . . . . . . . . . . 1303 (c) . . . . . . . . . . . . . . . . 601 (d) . . . . . . . . . . . . . . . . 601 (e) . . . . . . . . . . . . . . . . 514 316(a) . . . . . . . . . . . . . . . . 101 (a)(1)(A) . . . . . . . . . . . . . . . . 502 512 (a)(1)(B) . . . . . . . . . . . . . . . . 513 (a)(2) . . . . . . . . . . . . . . . . Not Applicable (b) . . . . . . . . . . . . . . . . 508 317(a)(1) . . . . . . . . . . . . . . . . 503 (b)(2) . . . . . . . . . . . . . . . . 504 (b) . . . . . . . . . . . . . . . . 1003 318(a) . . . . . . . . . . . . . . . . 114 Note: This reconciliation and tie shall not, for any purpose, be deemed to be a part of the Indenture. TABLE OF CONTENTS RECITALS OF THE COMPANY. . . . . . . . . . . . . . . . . . . . . . . . . . . 1 ARTICLE ONE Definitions and Other Provisions of General Application SECTION 101. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . 1 Acquired Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . 2 Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Affiliate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Asset Sale. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Associate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Attributable Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Authenticating Agent. . . . . . . . . . . . . . . . . . . . . . . . . . 2 Board of Directors. . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Board Resolution. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Business Day. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Capital Lease . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Capitalized Lease Obligation. . . . . . . . . . . . . . . . . . . . . . 3 Capital Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Cash Equivalents. . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Change in Control . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Commission. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Company Notice. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Company Request or Company Order. . . . . . . . . . . . . . . . . . . . 4 Consolidated Interest Expense . . . . . . . . . . . . . . . . . . . . . 4 Consolidated Net Income (Loss). . . . . . . . . . . . . . . . . . . . . 4 Conversion Condition. . . . . . . . . . . . . . . . . . . . . . . . . . 4 Convertible Redemption Date . . . . . . . . . . . . . . . . . . . . . . 5 Corporate Office. . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Covenant Defeasance . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Credit Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Defaulted Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Defeasance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Depository. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Disqualified Capital Stock. . . . . . . . . . . . . . . . . . . . . . . 6 Disqualified Pops . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Dollar or $ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 EBITDA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Enforcement Notice. . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Event of Default. . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Exchange Act. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Exchangeable Stock. . . . . . . . . . . . . . . . . . . . . . . . . . . 6 FCC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Financed Pops . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 GAAP. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Global Security . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Guarantee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Guaranty. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Incur . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Indebtedness. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Indenture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Intercompany Indebtedness . . . . . . . . . . . . . . . . . . . . . . . 8 Interest Payment Date . . . . . . . . . . . . . . . . . . . . . . . . . 8 Interest Swap and Hedging Obligations . . . . . . . . . . . . . . . . . 8 Investment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Issue Date. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Lien. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 MSA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Net Company Pops. . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Net Proceeds Offer. . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Officers' Certificate . . . . . . . . . . . . . . . . . . . . . . . . . 9 Opinion of Counsel. . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Pari Passu Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . 10 Paying Agent. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Permitted Indebtedness. . . . . . . . . . . . . . . . . . . . . . . . . 10 Permitted Investments . . . . . . . . . . . . . . . . . . . . . . . . . 11 Person. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Place of Payment. . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Pops. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Predecessor Security. . . . . . . . . . . . . . . . . . . . . . . . . . 11 Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Productive Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Qualified Capital Stock . . . . . . . . . . . . . . . . . . . . . . . . 12 Redemption Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Redemption Price. . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 ii Regular Record Date . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Repurchase Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Required Filing Dates . . . . . . . . . . . . . . . . . . . . . . . . . 12 Responsible Officer . . . . . . . . . . . . . . . . . . . . . . . . . . 12 RSA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Sale and Leaseback Transaction. . . . . . . . . . . . . . . . . . . . . 12 Securities Act. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Secured Pops. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Security Register and Security Registrar. . . . . . . . . . . . . . . . 13 Senior Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Senior Secured Credit Facility. . . . . . . . . . . . . . . . . . . . . 13 Special Record Date . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Stated Maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Subordinated Indebtedness . . . . . . . . . . . . . . . . . . . . . . . 13 Subsidiary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Surviving Person. . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Transfer Agent. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Trust Indenture Act . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 U.S. Government Obligations . . . . . . . . . . . . . . . . . . . . . . 14 Vendor Financing Indebtedness . . . . . . . . . . . . . . . . . . . . . 14 Vice President. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Weighted Average Life to Maturity . . . . . . . . . . . . . . . . . . . 14 Wholly Owned Subsidiary . . . . . . . . . . . . . . . . . . . . . . . . 14 SECTION 102. FORM OF DOCUMENTS DELIVERED TO TRUSTEE. . . . . . . . . . . . 14 SECTION 103. ACTS OF HOLDERS . . . . . . . . . . . . . . . . . . . . . . . 15 SECTION 104. NOTICES, ETC., TO TRUSTEE AND COMPANY . . . . . . . . . . . . 16 SECTION 105. NOTICE OF HOLDERS; WAIVER . . . . . . . . . . . . . . . . . . 16 SECTION 106. EFFECT OF HEADINGS AND TABLE OF CONTENTS. . . . . . . . . . . 17 SECTION 107. SUCCESSORS AND ASSIGNS. . . . . . . . . . . . . . . . . . . . 17 SECTION 108. SEPARABILITY CLAUSE . . . . . . . . . . . . . . . . . . . . . 17 SECTION 109. BENEFITS OF INDENTURE . . . . . . . . . . . . . . . . . . . . 17 SECTION 110. GOVERNING LAW . . . . . . . . . . . . . . . . . . . . . . . . 18 SECTION 111. LEGAL HOLIDAYS. . . . . . . . . . . . . . . . . . . . . . . . 18 SECTION 112. COMPLIANCE CERTIFICATES AND OPINIONS. . . . . . . . . . . . . 18 SECTION 113. CONFLICT WITH TRUST INDENTURE ACT . . . . . . . . . . . . . . 19 SECTION 114. NO RECOURSE AGAINST OTHERS. . . . . . . . . . . . . . . . . . 19 iii ARTICLE TWO Security Form SECTION 201. FORM GENERALLY. . . . . . . . . . . . . . . . . . . . . . . . 19 SECTION 202. FORM OF SECURITIES. . . . . . . . . . . . . . . . . . . . . . 20 SECTION 203. FORM OF TRUSTEE'S CERTIFICATE OF AUTHENTICATION . . . . . . . 24 SECTION 204. FORM OF REPURCHASE NOTICE . . . . . . . . . . . . . . . . . . 25 SECTION 205. SECURITIES IN THE FORM OF A GLOBAL SECURITY . . . . . . . . . 27 ARTICLE THREE The Securities SECTION 301. TITLE AND TERMS . . . . . . . . . . . . . . . . . . . . . . . 27 SECTION 302. DENOMINATIONS . . . . . . . . . . . . . . . . . . . . . . . . 27 SECTION 303. EXECUTION, AUTHENTICATION, DELIVERY AND DATING. . . . . . . . 27 SECTION 304. REGISTRATION, REGISTRATION OF TRANSFER AND EXCHANGE . . . . . 28 SECTION 305. MUTILATED, DESTROYED, LOST AND STOLEN SECURITIES. . . . . . . 29 SECTION 306. PAYMENT OF INTEREST; INTEREST RIGHTS PRESERVED. . . . . . . . 30 SECTION 307. PERSONS DEEMED OWNERS . . . . . . . . . . . . . . . . . . . . 31 SECTION 308. CANCELLATION. . . . . . . . . . . . . . . . . . . . . . . . . 31 SECTION 309. COMPUTATION OF INTEREST . . . . . . . . . . . . . . . . . . . 31 ARTICLE FOUR Satisfaction and Discharge SECTION 401. SATISFACTION AND DISCHARGE OF INDENTURE . . . . . . . . . . . 32 SECTION 402. APPLICATION OF TRUST MONEY. . . . . . . . . . . . . . . . . . 33 ARTICLE FIVE Remedies SECTION 501. EVENTS OF DEFAULT . . . . . . . . . . . . . . . . . . . . . . 33 SECTION 502. ACCELERATION OF MATURITY; RESCISSION AND ANNULMENT. . . . . . .35 SECTION 503. COLLECTION OF INDEBTEDNESS AND SUITS FOR ENFORCEMENT BY TRUSTEE. . . . . . . . . . . . . . . . . . . . . . . . . . .36 SECTION 504. TRUSTEE MAY FILE PROOFS OF CLAIM. . . . . . . . . . . . . . . .37 SECTION 505. TRUSTEE MAY ENFORCE CLAIMS WITHOUT POSSESSION OF SECURITIES . .38 SECTION 506. APPLICATION OF MONEY COLLECTED. . . . . . . . . . . . . . . . .38 iv SECTION 507. LIMITATION ON SUITS . . . . . . . . . . . . . . . . . . . . . 38 SECTION 508. UNCONDITIONAL RIGHT OF HOLDERS TO RECEIVE PRINCIPAL, PREMIUM ANDINTEREST . . . . . . . . . . . . . . . . . . . . . 39 SECTION 509. RESTORATION OF RIGHTS AND REMEDIES. . . . . . . . . . . . . . 39 SECTION 510. RIGHTS AND REMEDIES CUMULATIVE. . . . . . . . . . . . . . . . 39 SECTION 511. DELAY OR OMISSION NOT WAIVER. . . . . . . . . . . . . . . . . 40 SECTION 512. CONTROL BY HOLDERS. . . . . . . . . . . . . . . . . . . . . . 40 SECTION 513. WAIVER OF PAST DEFAULTS . . . . . . . . . . . . . . . . . . . 40 SECTION 514. UNDERTAKING FOR COSTS . . . . . . . . . . . . . . . . . . . . 41 SECTION 515. WAIVER OF STAY OR EXTENSION LAWS. . . . . . . . . . . . . . . 41 ARTICLE SIX The Trustee SECTION 601. CERTAIN DUTIES AND RESPONSIBILITIES . . . . . . . . . . . . . 42 SECTION 602. CERTAIN RIGHTS OF TRUSTEE . . . . . . . . . . . . . . . . . . 43 SECTION 603. NOT RESPONSIBLE FOR RECITALS OR ISSUANCE OF SECURITIES. . . . 44 SECTION 604. MAY HOLD SECURITIES . . . . . . . . . . . . . . . . . . . . . 44 SECTION 605. MONEY HELD IN TRUST . . . . . . . . . . . . . . . . . . . . . 44 SECTION 606. COMPENSATION AND REIMBURSEMENT. . . . . . . . . . . . . . . . 45 SECTION 607. CORPORATE TRUSTEE REQUIRED; ELIGIBILITY . . . . . . . . . . . 45 SECTION 608. RESIGNATION AND REMOVAL; APPOINTMENT OF SUCCESSOR . . . . . . 45 SECTION 609. ACCEPTANCE OF APPOINTMENT BY SUCCESSOR. . . . . . . . . . . . 47 SECTION 610. MERGER, CONVERSION, CONSOLIDATION OR SUCCESSION TO BUSINESS . 47 SECTION 611. APPOINTMENT OF AUTHENTICATING AGENT . . . . . . . . . . . . . 47 SECTION 612. NOTICE OF DEFAULTS. . . . . . . . . . . . . . . . . . . . . . 49 SECTION 613. DISQUALIFICATION; CONFLICTING INTERESTS . . . . . . . . . . . 49 SECTION 614. PREFERENTIAL COLLECTION OF CLAIMS AGAINST COMPANY . . . . . . 50 ARTICLE SEVEN Consolidation, Merger, Conveyance, Transfer or Lease SECTION 701. COMPANY MAY CONSOLIDATE, ETC. ONLY ON CERTAIN TERMS . . . . . 50 SECTION 702. SUCCESSOR SUBSTITUTED . . . . . . . . . . . . . . . . . . . . 50 ARTICLE EIGHT Supplemental Indentures v SECTION 801. SUPPLEMENTAL INDENTURES WITHOUT CONSENT OF HOLDERS. . . . . . 51 SECTION 802. SUPPLEMENTAL INDENTURES WITH CONSENT OF HOLDERS . . . . . . . 51 SECTION 803. EXECUTION OF SUPPLEMENTAL INDENTURES. . . . . . . . . . . . . 53 SECTION 804. EFFECT OF SUPPLEMENTAL INDENTURES . . . . . . . . . . . . . . 53 SECTION 805. REFERENCE IN SECURITIES TO SUPPLEMENTAL INDENTURES. . . . . . 53 SECTION 806. NOTICE OF SUPPLEMENTAL INDENTURES . . . . . . . . . . . . . . 53 SECTION 807. CONFORMITY WITH TRUST INDENTURE ACT . . . . . . . . . . . . . 53 ARTICLE NINE Meetings of Holders of Securities SECTION 901. PURPOSES FOR WHICH MEETINGS MAY BE CALLED . . . . . . . . . . 54 SECTION 902. CALL, NOTICE AND PLACE OF MEETINGS. . . . . . . . . . . . . . 54 SECTION 903. PERSONS ENTITLED TO VOTE AT MEETINGS. . . . . . . . . . . . . 54 SECTION 904. QUORUM; ACTION. . . . . . . . . . . . . . . . . . . . . . . . 55 SECTION 905. DETERMINATION OF VOTING RIGHTS; CONDUCT AND ADJOURNMENT OF MEETINGS.. . . . . . . . . . . . . 55 SECTION 906. COUNTING VOTES AND RECORDING ACTION OF MEETINGS . . . . . . . 56 SECTION 907. ACTION BY WRITTEN CONSENT . . . . . . . . . . . . . . . . . . 56 ARTICLE TEN Covenants SECTION 1001. PAYMENT OF PRINCIPAL, PREMIUM AND INTEREST. . . . . . . . . . 57 SECTION 1002. MAINTENANCE OF OFFICE OR AGENCY . . . . . . . . . . . . . . . 57 SECTION 1003. MONEY FOR SECURITIES; PAYMENTS TO BE HELD IN TRUST; NOTICE REGARDING PAYING AGENTS. . . . . . . . . . . 58 SECTION 1004. EXISTENCE . . . . . . . . . . . . . . . . . . . . . . . . . . 59 SECTION 1005. MAINTENANCE OF PROPERTIES . . . . . . . . . . . . . . . . . . 59 SECTION 1006. PAYMENT OF TAXES AND OTHER CLAIMS . . . . . . . . . . . . . . 60 SECTION 1007. LIMITATION ON TRANSACTIONS WITH AFFILIATES. . . . . . . . . . 60 SECTION 1008. LIMITATION ON INCURRENCE OF ADDITIONAL INDEBTEDNESS . . . . . 60 SECTION 1009. LIMITATION ON RESTRICTED PAYMENTS . . . . . . . . . . . . . . 61 SECTION 1010. LIMITATION ON DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES . . . . . . . . . . . . . 63 SECTION 1011. PROVISION OF FINANCIAL INFORMATION. . . . . . . . . . . . . . 64 SECTION 1012. INVESTMENT COMPANY ACT. . . . . . . . . . . . . . . . . . . . 64 SECTION 1013. NOTICE OF DEFAULT . . . . . . . . . . . . . . . . . . . . . . 64 SECTION 1014. PROHIBITION ON INCURRENCE OF SUBSIDIARY INDEBTEDNESS. . . . . 65 SECTION 1015. ANNUAL STATEMENTS BY OFFICERS AS TO DEFAULT . . . . . . . . . 65 vi SECTION 1016. WAIVER OF CERTAIN COVENANTS . . . . . . . . . . . . . . . . . 65 SECTION 1017. LIMITATION ON LIENS WITH RESPECT TO PARI PASSU OR SUBORDINATED INDEBTEDNESS. . . . . . . . . . . . . . . . . 65 ARTICLE ELEVEN Redemption of Securities SECTION 1101. RIGHT OF REDEMPTION . . . . . . . . . . . . . . . . . . . . . 66 SECTION 1102. APPLICABILITY OF ARTICLE. . . . . . . . . . . . . . . . . . . 66 SECTION 1103. ELECTION TO REDEEM; NOTICE TO TRUSTEE . . . . . . . . . . . . 66 SECTION 1104. SELECTION BY TRUSTEE OF SECURITIES TO BE REDEEMED . . . . . . 66 SECTION 1105. NOTICE OF REDEMPTION. . . . . . . . . . . . . . . . . . . . . 67 SECTION 1106. DEPOSIT OF REDEMPTION PRICE . . . . . . . . . . . . . . . . . 68 SECTION 1107. SECURITIES PAYABLE ON REDEMPTION DATE . . . . . . . . . . . . 68 SECTION 1108. SECURITIES REDEEMED IN PART . . . . . . . . . . . . . . . . . 68 ARTICLE TWELVE Subordination of Securities SECTION 1201. SECURITIES SUBORDINATE TO SENIOR INDEBTEDNESS . . . . . . . . 69 SECTION 1202. PAYMENT OVER OF PROCEEDS UPON DISSOLUTION, ETC. . . . . . . . 69 SECTION 1203. NO PAYMENT WHEN SENIOR INDEBTEDNESS IN DEFAULT. . . . . . . . 70 SECTION 1204. PAYMENT PERMITTED IF NO DEFAULT . . . . . . . . . . . . . . . 72 SECTION 1205. SUBROGATION TO RIGHTS OF HOLDERS OF SENIOR INDEBTEDNESS . . . 72 SECTION 1206. PROVISIONS SOLELY TO DEFINE RELATIVE RIGHTS . . . . . . . . . 73 SECTION 1207. TRUSTEE TO EFFECTUATE SUBORDINATION . . . . . . . . . . . . . 73 SECTION 1208. NO WAIVER OF SUBORDINATION PROVISIONS . . . . . . . . . . . . 73 SECTION 1209. NOTICE TO TRUSTEE . . . . . . . . . . . . . . . . . . . . . . 74 SECTION 1210. RELIANCE ON JUDICIAL ORDER OR CERTIFICATE OF LIQUIDATING AGENT 75 SECTION 1211. TRUSTEE NOT FIDUCIARY FOR HOLDERS OF SENIOR INDEBTEDNESS. . . 75 SECTION 1212. RIGHTS OF TRUSTEE AS HOLDER OF SENIOR INDEBTEDNESS; PRESERVATION OF TRUSTEE'S RIGHTS. . . . . . . . 75 SECTION 1213. ARTICLE APPLICABLE TO PAYING AGENTS . . . . . . . . . . . . . 75 SECTION 1214. CERTAIN CONVERSIONS DEEMED PAYMENT. . . . . . . . . . . . . . 76 SECTION 1215. OFFICER'S CERTIFICATE . . . . . . . . . . . . . . . . . . . . 76 vii ARTICLE THIRTEEN Holders' Lists and Reports by Trustee and Company SECTION 1301. COMPANY TO FURNISH TRUSTEE NAMES AND ADDRESSES OF HOLDERS . . 76 SECTION 1302. PRESERVATION OF INFORMATION; COMMUNICATIONS TO HOLDERS. . . . 77 SECTION 1303. REPORTS BY TRUSTEE. . . . . . . . . . . . . . . . . . . . . . 78 SECTION 1304. REPORTS BY COMPANY. . . . . . . . . . . . . . . . . . . . . . 78 ARTICLE FOURTEEN Repurchase of Securities at the Option of the Holder Upon Change in Control SECTION 1401. RIGHT TO REQUIRE REPURCHASE . . . . . . . . . . . . . . . . . 79 SECTION 1402. NOTICES; METHOD OF EXERCISING REPURCHASE RIGHT, ETC.. . . . . 79 SECTION 1403. CERTAIN DEFINITIONS . . . . . . . . . . . . . . . . . . . . . 81 ARTICLE FIFTEEN Defeasance and Covenant Defeasance SECTION 1501. COMPANY'S OPTION TO EFFECT DEFEASANCE OR COVENANT DEFEASANCE 82 SECTION 1502. DEFEASANCE AND DISCHARGE. 82 SECTION 1503. COVENANT DEFEASANCE. 83 SECTION 1504. CONDITIONS TO DEFEASANCE OR COVENANT DEFEASANCE 83 SECTION 1505. DEPOSITED MONEY AND U.S. GOVERNMENT OBLIGATIONS TO BE HELD IN TRUST; MISCELLANEOUS PROVISIONS 85 SECTION 1506. REINSTATEMENT 86 viii INDENTURE, dated as of July ___, 1995, between CommNet Cellular Inc., a corporation duly organized and existing under the laws of the State of Colorado (herein called the "Company"), having its principal office at 5990 Greenwood Plaza Boulevard, Suite 300, Engelwood, Colorado 80111, and American Bank National Association, a corporation duly organized and existing under the laws of the United States, as Trustee (herein called the "Trustee") having its principal office at 101 East Fifth Street, St. Paul, Minnesota 55101. RECITALS OF THE COMPANY The Company has duly authorized the creation of an issue of its Subordinated Notes due 2005 (hereinafter called the "Securities") of substantially the tenor and amount hereinafter set forth, and to provide therefor the Company has duly authorized the execution and delivery of this Indenture. All things necessary to make the Securities, when the Securities are executed by the Company and authenticated and delivered hereunder and duly issued by the Company, the valid obligations of the Company, and to make this Indenture a valid agreement of the Company, in accordance with their and its terms, have been done. NOW, THEREFORE, THIS INDENTURE WITNESSETH: For and in consideration of the premises and the purchase of the Securities by the Holders thereof, it is mutually covenanted and agreed, for the equal and proportionate benefit of all Holders of the Securities, as follows: ARTICLE ONE Definitions and Other Provisions of General Application SECTION 101. DEFINITIONS. For all purposes of this Indenture, except as otherwise expressly provided or unless the context otherwise requires: (1) the terms defined in this Article have the meanings assigned to them in this Article and include the plural as well as the singular; (2) the words "herein", "hereof" and "hereunder" and other words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other subdivision; and (3) certain terms, used principally within a particular Article of this Indenture, may be defined in that Article. All other terms used herein which are defined in the Trust Indenture Act, either directly or by reference therein, have the meanings assigned to them therein. "Acquired Indebtedness" means Indebtedness of a Person or any of its Subsidiaries existing at the time such Person becomes a Subsidiary of the Company or assumed in connection with the acquisition of assets from such Person and not incurred by such Person in connection with, or in anticipation or contemplation of, such Person becoming a Subsidiary of the Company or such acquisition. "Act", when used with respect to any Holder, has the meaning specified in Section 103. "Affiliate" of any specified Person means any other Person who directly or indirectly through one or more intermediaries controls, or is controlled by, or is under common control with such specified Person. For the purposes of this definition, the term "control" when used with respect to any specified Person, means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities, by contract or otherwise; and the terms "affiliated", "controlling" and "controlled" have meanings correlative to the foregoing. For purposes of Section 1007, the term "affiliate" shall include any Person who, as a result of any transaction described in Section 1007, would become an Affiliate. "Asset Sale" means the sale, lease (other than an operating lease), assignment or other disposition (including, without limitation, dispositions pursuant to Sale and Leaseback Transactions) by the Company or one of its Subsidiaries to any Person other than the Company or one of its Subsidiaries of (i) any capital stock of any Subsidiary or (ii) all or substantially all of the properties and assets of any division or line of business of the Company or any Subsidiary of the Company. For the purposes of this definition, the term "Asset Sale" shall not include the sale or other disposition of Capital Stock of the Company. "Associate" has the meaning specified in Section 1403. "Attributable Debt" in respect of a Sale and Leaseback Transaction means, at the time of determination, the present value (discounted at the interest rate implicit in the lease, compounded semi-annually) of the obligation of the lessee of the property subject to such Sale and Leaseback Transaction for rental payments during the remaining term of the lease included in such transaction including any period for which such lease has been extended or may, at the option of the lessor, be extended or until the earliest date on which the lessee may terminate such lease without penalty or upon payment of penalty (in which case the rental payments shall include such penalty), after excluding all amounts required to be paid on account of maintenance and repairs, insurance, taxes, assessments, water, utilities and similar charges. 2 "Authenticating Agent" means any Person authorized by the Trustee to act on behalf of the Trustee to authenticate the Securities. "Board of Directors" means either the board of directors of the Company or any duly authorized committee of that board. "Board Resolution" means a copy of a resolution certified by the Secretary or an Assistant Secretary of the Company to have been duly adopted by the Board of Directors and to be in full force and effect on the date of such certification, and delivered to the Trustee. "Business Day", when used with respect to any Place of Payment, means each Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on which banking institutions in that Place of Payment are authorized or obligated by law or executive order to close. "Capital Lease" means, as applied to any Person, any lease of any property (whether real, personal or mixed) by that person as lessee which, in conformity with generally accepted accounting principles, is accounted for as a capital lease on the balance sheet of such Person. "Capitalized Lease Obligation" means the discounted present value of the rental obligations under any Capital Lease. "Capital Stock" means (i) with respect to any Person, any and all shares, interests, participations or other equivalents (however designated) of corporate stock, including each class of common stock and preferred stock of such Person and (ii) with respect to any other Person formed other than as a corporation, any and all partnership or other equity interest of such other Person. "Cash Equivalents" means (i) marketable direct obligations issued by, or unconditionally guaranteed by, the United States Government or issued by any agency thereof and backed by the full faith and credit of the United States, in each case maturing within one year from the date of acquisition thereof, (ii) marketable direct obligations issued by any state of the United States of America or any political subdivision of any such state or any public instrumentality thereof maturing within one year from the date of acquisition thereof and, at the time of acquisition, having one of the two highest ratings obtainable from either Standard & Poor's Corporation or Moody's Investors Service, (iii) commercial paper maturing no more than one year from the date of creation thereof and, at the time of acquisition, having a rating of at least A-1 from Standard & Poor's Corporation or at least P-1 from Moody's Investors Service, (iv) certificates of deposit or bankers' acceptances maturing within one year from the date of acquisition thereof issued by any commercial bank organized under the laws of the United States of America or any state thereof or the District of Columbia or any U.S. branch of a foreign bank having at the date of acquisition thereof combined capital and surplus of not less than $250 million, (v) repurchase obligations with a term of not more than seven days for underlying 3 securities of the types described in clause (i) above entered into with any bank meeting the qualifications specified in clause (iv) above, (vi) investments in money market funds which invest substantially all their assets in securities of the types described in clauses (i) through (v) above, and (vii) corporate debt obligations maturing within one year from the date of acquisition thereof and, at the time of acquisition, having an investment grade rating from Standard & Poor's Corporation and Moody's Investors Service. "Change in Control" has the meaning specified in Section 1403. "Commission" means the Securities and Exchange Commission, as from time to time constituted, created under the Securities Exchange Act of 1934, or, if at any time after the execution of this instrument such Commission is not existing and performing the duties now assigned to it under the Trust Indenture Act, then the body performing such duties at such time. "Company" means the Person named as the "Company" in the first paragraph of this instrument until a successor Person shall have become such pursuant to the applicable provisions of this Indenture, and thereafter "Company" shall mean such successor Person. "Company Notice" has the meaning specified in Section 1402. "Company Request" or "Company Order" means a written request or order signed in the name of the Company by its Chairman of the Board, its President or a Vice President, and by its Treasurer, an Assistant Treasurer, its Secretary or an Assistant Secretary, and delivered to the Trustee. "Consolidated Interest Expense" means, for any period, the amount of interest in respect of Indebtedness (including amortization of original issue discount, amortization of debt issuance costs, and non-cash interest payments on any Indebtedness and the interest portion of any deferred payment obligation, the interest component of rentals in respect of any Capitalized Lease Obligation paid, accrued or scheduled to be paid or accrued by such Person during such period), determined on a consolidated basis in accordance with GAAP. For purposes of this definition, interest on a Capitalized Lease Obligation shall be deemed to accrue at an interest rate reasonably determined by such Person to be the rate of interest implicit in such Capitalized Lease Obligation in accordance with GAAP consistently applied. "Consolidated Net Income (Loss)" means, with respect to any Person, for any period, the consolidated net income (or loss) of such Person on a consolidated basis for such period, as determined in accordance with GAAP consistently applied, adjusted, to the extent included in calculating such net income, by excluding, without duplication, (i) all extraordinary gains or losses (net of fees and expenses relating to the transaction giving rise thereto) and the non-recurring cumulative effect of accounting changes, (ii) the portion of net income (or loss) of such Person and its consolidated Persons allocable to minority interests in unconsolidated Persons to the extent that cash dividends or distributions have not actually been received by such Person or one of its consolidated Persons, (iii) net income (or loss) of any Person combined with 4 such Person or one of its consolidated Persons on a "pooling of interests" basis attributable to any period prior to the date of combination, (iv) gains or losses (on an after-tax basis) in respect of any Asset Sales by such Person or one of its consolidated Persons (net of fees and expenses relating to the transaction giving rise thereto), and (v) all management fees, or other income relating to services that are in the nature of management, corporate overhead or administrative services, to the extent cash is not actually received by such Person with respect to such services. "Conversion Condition" means the conversion of a majority in aggregate principal amount (i.e. not less than $37,374,000 aggregate principal amount) of the Company's outstanding 6 3/4% Convertible Subordinated Debentures due 2009 by the holders thereof on or prior to the Convertible Redemption Date into shares of the common stock of the Company. "Convertible Redemption Date" means 11:00 A.M. New York City time on July , 1995. "Corporate Office" means the principal office of the Trustee in the city of St. Paul, Minnesota, at which at any particular time its corporate trust business shall be administered, which office is on the date of this Indenture located at American Bank National Association, 101 East Fifth Street, St. Paul, Minnesota 55101, Attention: Corporate Trust Administration. "Corporation" means a corporation, association, company, joint-stock company or business trust. "Covenant Defeasance" has the meaning specified in Section 1503. "Credit Agreements" means the Amended and Second Restated Loan Agreement for RSAs, dated as of March 31, 1993, as amended by Amendment No. 1 thereto dated as of August 2, 1993 and Amendment No. 2 thereto dated as of February 22, 1994, between Cellular, Inc. Financial Corporation and National Bank for Cooperatives (now known as CoBank, ACB) and the Amended and Restated Loan Agreement for MSAs, dated as of March 31, 1993, as amended by Amendment No. 1 thereto dated as of August 2, 1993 and Amendment No. 2 thereto dated as of February 22, 1994 between Cellular, Inc. Financial Corporation and National Bank for Cooperatives (now known as CoBank, ACB) and any related notes, any related security agreements, any related letters of credit and any other related documents, as such agreements may be amended, supplemented or modified from time to time including any and all refinancings, modifications, replacements, renewals, restatements, refundings, deferrals, extensions, substitutions, supplements or reissuances, including any agreement increasing the amount of Indebtedness incurred thereunder or available to be borrowed thereunder, provided that on the date such Indebtedness is Incurred it would not be prohibited by Section 1008. "Default" means an event or condition the occurrence of which is, or with the lapse of time or the giving of notice or both would be, an Event of Default. 5 "Defaulted Interest" has the meaning specified in Section 306. "Defeasance" has the meaning specified in Section 1502. "Depository" means, unless otherwise specified by the Company pursuant to Section 205, with respect to Securities or issued as a Global Security, The Depository Trust Company, New York, New York, or any successor thereto registered as a clearing agency under the Exchange Act or other applicable statute or regulation. "Designated Senior Indebtedness" means (i) the Indebtedness outstanding under the Credit Agreements and the Guaranty, including letters of credit and reimbursement obligations in respect thereof, (ii) the Company's 11 3/4% Senior Subordinated Discount Notes due 2003 and (iii) any other Senior Indebtedness permitted under the Indenture having a principal amount of at least $20 million that is designated as "Designated Senior Indebtedness" by written notice from the Company to the Trustee. "Disqualified Capital Stock" means any Capital Stock which, by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable), or upon the happening of any event, matures or is mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or is redeemable at the sole option of the holder thereof, in whole or in part, on or prior to the final maturity date of the Securities. "Disqualified Pops" means Pops (to the extent such Pops are included in Net Company Pops) in those MSAs and RSAs in which the Company directly or indirectly has an ownership interest in the entity licensed by the FCC to operate a cellular telephone system in such MSAs and RSAs, to which entity a Person other than the Company, a Wholly Owned Subsidiary of the Company or the lender(s) under a Senior Secured Credit Facility as to which the Company or a Wholly Owned Subsidiary of the Company is acting as the primary obligor or guarantor of all obligations thereunder, as of the date of determination, directly or indirectly provides debt financing. Dollar or "$" means a dollar or other equivalent unit in such coin or currency of the United States of America as at the time shall be legal tender for the payment of public and private debts. "EBITDA" means, for any Person, for any period, an amount equal to: (A) the sum of (i) Consolidated Net Income (Loss) for such period, plus (ii) the provision for taxes for such period based on income or profits to the extent such income or profits were included in computing Consolidated Net Income (Loss) and any provision for taxes utilized in computing net loss under clause (i) hereof, plus (iii) Consolidated Interest Expense for such period, plus (iv) depreciation for such period on a consolidated basis, plus (v) amortization of intangibles for such period on a consolidated basis, plus (vi) any other non-cash items reducing Consolidated Net Income (Loss) for such period, all determined in accordance with GAAP consistently applied, minus 6 (B) the sum of (i) all non-cash items increasing Consolidated Net Income for such period and (ii) interest income for such period, all for such Person on a consolidated basis its determined in accordance with GAAP consistently applied. "Enforcement Notice" has the meaning specified in Section 1203. "Event of Default" has the meaning specified in Section 501. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Exchangeable Stock" of any issuer means any Capital Stock which is exchangeable or convertible into a debt security of such issuer or any of its Subsidiaries. "FCC" means the Federal Communications Commission. "Financed Pops" means the sum of, without duplication, (i) Net Company Pops, plus (ii) Secured Pops, minus (iii) Disqualified Pops. "GAAP" means generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Account Standards Board or in such other statements by such other entity as approved by a significant segment of the accounting profession which are in effect from time to time in the United States. "Global Security", when used with respect to any Securities issued hereunder, means a Security which is executed by the Company and authenticated and delivered by the Trustee to the Depository or pursuant to the Depository's instruction, all in accordance with this Indenture or Board Resolution and pursuant to a Company Request, which shall be registered in the name of the Depository or its nominee and which shall represent, and shall be denominated in an amount equal to the aggregate principal amount of, all the then Outstanding Securities or any portion thereof, in either case having the same terms, including the same date or dates on which principal is due and interest rate or method of determining interest. "Guarantee" means, as applied to any obligation, (i) a guarantee (other than by endorsement of negotiable instruments for collection in the ordinary course of business), direct or indirect, in any manner, of any part or all of such obligation and (ii) an agreement, direct or indirect, contingent or otherwise, the practical effect of which is to assure in any way the payment or performance (or payment of damages in the event of non-performance) of all or any part of such obligation, including, without limiting the foregoing, the payment of amounts drawn down by letters of credit. "Guaranty" means the Amended and Second Restated Guaranty dated March 31, 1993, as amended by Amendment No. 1 thereto dated as of August 2, 1993 and Amendment No. 2 thereto dated as of February 22, 1994, given by the Company for National Bank for 7 Cooperatives (now known as CoBank, ACB) and any related security agreement, as in effect or amended from time to time, including any and all refinancings, modifications, replacements, renewals, restorations, deferrals, extensions, substitutions, supplements or reissuances, including any agreement increasing the amount of Indebtedness guaranteed thereunder or available to be guaranteed thereunder, provided that on the date such Indebtedness is Incurred it would not be prohibited by Section 1008. "Holders", when used with respect to any Security, means in the case of a Security the Person in whose name the Security is registered in the Security Register. "Incur" means, with respect to any Indebtedness or other obligation of any Person, to create, issue, incur (by conversion, exchange or otherwise), assume, Guarantee or otherwise become liable in respect of such Indebtedness or other obligation or the recording, as required pursuant to GAAP or otherwise, of any such Indebtedness or other obligation on the balance sheet of such Person (and "Incurrence", "Incurred", "Incurrable" and "Incurring" shall have meanings correlative to the foregoing); PROVIDED, HOWEVER, that a change in GAAP that results in an obligation of such Person that exists at such time becoming Indebtedness shall not be deemed an Incurrence of such Indebtedness. Indebtedness otherwise Incurred by a Person before it becomes a Subsidiary of the Company will be deemed to have been Incurred at the time it becomes such a Subsidiary. Neither the accrual of interest (including the issuance of "pay in kind" securities or similar instruments in respect of such accrued interest) pursuant to the terms of Indebtedness incurred in compliance with Section 1008, nor the accretion of original issue discount, nor the mere extension of the maturity of any Indebtedness shall be deemed to be an Incurrence of Indebtedness. "Indebtedness" of a Person means, without duplication, (a) all debt of such Person which is (i) for money borrowed or (ii) evidenced by a note or similar instrument given in connection with the acquisition of any businesses, properties or assets of any kind, but excluding any other trade accounts payable or accrued liabilities arising in the ordinary course of business, (b) Capitalized Lease Obligations, (c) Attributable Debt, (d) all obligations of such Person under Interest Swap and Hedging Obligations, (e) Disqualified Capital Stock of such Person, (f) any debt or obligation of others secured by a Lien on the assets of such Person, whether or not such debt or obligation is assumed or guaranteed by such Person, (g) any debt or obligations assumed or guaranteed by such Person (but only to the extent assumed or guaranteed by such Person) if the debt or obligation of the other Person is of the type referred to in clause (a), (b), (c), (d), (e) and (h) amendments, renewals, extensions, modifications and refundings of any debt or obligations referred to in clause (a), (b), (c), (d) or (e). The outstanding principal amount on any date of any Indebtedness issued with original issue discount is the face amount of such Indebtedness less the remaining unamortized portion of the original issue discount of such Indebtedness on such date. With respect to clause (e), the amount of Indebtedness shall equal the liquidation preference. 8 "Indenture" means this instrument as originally executed or as it may from time to time be supplemented or amended by one or more indentures supplemental hereto entered into pursuant to the applicable provisions hereof. "Intercompany Indebtedness" means (i) Indebtedness Incurred by the Company or a Subsidiary from Cellular, Inc. Financial Corporation, (ii) loans and advances from the Company to a Subsidiary made in the ordinary course of business and (iii) loans and advances from the Company to a Wholly Owned Subsidiary of the Company. "Interest Payment Date" means the Stated Maturity of an installment of interest on the Securities. "Interest Swap and Hedging Obligations" means any obligations of any Person pursuant to any interest rate swaps, caps, collars and similar arrangements providing protection against fluctuations in interest rates. For purposes of the Indenture, the amount of such obligations shall be the amount determined in respect thereof as of the end of the then most recently ended fiscal quarter of such Person, based on the assumption that such obligation had terminated at the end of such fiscal quarter, and in making such determination, if any agreement relating to such obligation provides for the netting of amounts payable by and to such Person thereunder or if any such agreements provides for the simultaneous payment of amounts by and to such Person, then in each such case, the amount of such obligations shall be the net amount so determined, plus any premium due upon default by such Person. "Investment" means any transfer or delivery of cash, stock or other property of value in exchange for Indebtedness, stock or other security or ownership interest by way of loan, advance or capital contribution. The amount of any non-cash Investment shall be the fair market value of such Investment, as determined in good faith by management of the Company unless the fair market value of such Investment exceeds $5 million, in which case such fair market value shall also be determined in good faith by the Board of Directors or other equivalent governing body of the Company at the time such Investment is made. "Issue Date" means July __, 1995. "Lien" means any mortgage, charge, pledge, lien (statutory or otherwise), security interest, hypothecation or other encumbrance upon or with respect to any property of any kind, real or personal, movable or immovable, now owned or hereafter acquired. "MSA" means a Metropolitan Statistical Area, as initially licensed by the FCC. "Net Company Pops" means the aggregate number of Pops in those MSAs and RSAs in which the Company directly or indirectly has an ownership interest in the entity licensed by the FCC to operate a cellular telephone system in those MSAs or RSAs, multiplied by the Company's net ownership interest in such entity. 9 "Net Proceeds Offer" has the meaning specified in Section 1012. "Obligations" means all obligations for principal, premium, interest, penalties, fees, indemnifications, reimbursements, damages and other liabilities payable under the documentation governing any Indebtedness. "Officers' Certificate" means a certificate signed by the Chairman of the Board, the President or a Vice President, and by the Treasurer, an Assistant Treasurer, the Secretary or an Assistant Secretary, of the Company, and delivered to the Trustee. "Opinion of Counsel" means a written opinion of counsel, who may be counsel for the Company, and who shall be acceptable to the Trustee. "Outstanding", when used with respect to Securities, means, as of the date of determination, all Securities theretofore authenticated and delivered under this Indenture, EXCEPT: (i) Securities theretofore cancelled by the Trustee or delivered to the Trustee for cancellation; (ii) Securities, or portions thereof, for whose payment or redemption money in the necessary amount has been theretofore deposited with the Trustee or any Paying Agent (other than the Company) in trust or set aside and segregated in trust by the Company (if the Company shall act as its own Paying Agent) for the holders of such Securities; PROVIDED that, if such Securities are to be redeemed, notice of such redemption has been duly given pursuant to this Indenture or provision therefor satisfactory to the Trustee has been made; (iii) Securities which have been paid pursuant to Section 305 or in exchange for or in lieu of which other Securities have been authenticated and delivered pursuant to this Indenture, other than any such Securities in respect of which there shall have been presented to the Trustee proof satisfactory to it that such Securities are held by a bona fide purchaser in whose hands such Securities are valid obligations of the Company; and (iv) Securities, except to the extent provided in Sections 1502 and 1503, with respect to which the Company has effected defeasance and/or covenant defeasance as provided in Article Fifteen; PROVIDED, HOWEVER, that in determining whether the Holders of the requisite principal amount of the Outstanding Securities have given any request, demand, authorization, direction, notice, consent or waiver hereunder, Securities owned by the Company or any other obligor upon the Securities or any Affiliate of the Company or of such other obligor shall be disregarded and deemed not to be Outstanding, except that, in determining whether the Trustee shall be protected in relying upon any such request, demand, authorization, direction, notice, consent or waiver, only Securities which the Trustee knows to be so owned shall be so disregarded. Securities so 10 owned which have been pledged in good faith may be regarded as Outstanding if the pledgee certifies to the Trustee that it has the right so to act with respect to such Securities and that the pledgee is not the Company or any other obligor upon the Securities or any Affiliate of the Company or of such other obligor. "Pari Passu Indebtedness" means any Indebtedness of the Company that is PARI PASSU in right of payment to the Securities. "Paying Agent" means any Person authorized by the Company to pay the principal of or premium or interest on any Securities on behalf of the Company. "Permitted Indebtedness" means (i) the Securities issued pursuant to this Indenture in an aggregate principal amount not to exceed $125 million, (ii) Indebtedness of the Company and its Subsidiaries outstanding on the Issue Date reduced by the amount of any scheduled amortization payments or mandatory prepayments when actually paid or permanent reductions thereon, (iii) Indebtedness Incurred under or pursuant to the Credit Agreements in an aggregate principal amount at any time outstanding not to exceed $165 million, LESS the amount of Indebtedness under the Credit Agreements exchanged, extended, refinanced, renewed, replaced, substituted for or with the proceeds of Indebtedness Incurred pursuant to clause (v) below, (iv) additional Indebtedness incurred for any purpose not to exceed, at any time outstanding, $20 million (v) Indebtedness created, Incurred, issued, assumed or given in exchange for, or the proceeds of which are used substantially concurrently to, extend, refinance, renew, replace, substitute or refund such Indebtedness, including any additional Indebtedness Incurred to pay premiums and fees in connection therewith (the "Refinancing Indebtedness"); provided that (A) the principal amount of such Refinancing Indebtedness shall not exceed the outstanding principal amount of Indebtedness so extended, refinanced renewed replaced, substituted or refunded plus any amounts Incurred to pay premiums and fees in connection therewith; and (B) if the Weighted Average Life to Maturity of the Indebtedness so extended, refinanced, renewed, replaced, substituted or refunded is equal to or greater than the Weighted Average Life to Maturity of the Securities, then the Refinancing Indebtedness shall have no installments of principal (or redemption payment) scheduled to come due on or prior to the Stated Maturity of the Securities, provided that subclause (B) of this clause (v) will not apply to any refunding or refinancing of the Credit Agreements and (vi) Intercompany Indebtedness. "Permitted Investments" means in the case of the Company or its Subsidiaries, (i) an Investment related to the business of the Company and its Subsidiaries as it is conducted on the Issue Date, including, but not limited to, joint ventures existing on the Issue Date, (ii) Investments in the Company by any Subsidiary or Investments by the Company or any Subsidiary (including acquisitions) in any other Person, if after giving effect of any such Investment, such Person would be a Wholly Owned Subsidiary of the Company, (iii) Investments in cash and Cash Equivalents, and (iv) Investments in Productive Assets. "Person" means an individual, partnership, corporation, unincorporated organization, trust or joint venture, or a governmental agency or political subdivision thereof. 11 "Place of Payment" has the meaning specified in Section 301. "Pops" means the estimated total population of an MSA or a RSA, based upon the most recently available Strategic Marketing Inc. population estimates or, if Strategic Marketing Inc. no longer publishes such information, other similar market service of general acceptance in the cellular telephone industry. "Predecessor Security" of any particular Security means every previous Security evidencing all or a portion of the same debt as that evidenced by such particular Security; and, for the purposes of this definition, any Security authenticated and delivered under Section 305 in exchange for or in lieu of a mutilated, destroyed, lost or stolen Security shall be deemed to evidence the same debt as the mutilated, destroyed, lost or stolen Security. "Preferred Stock" means, with respect to any Person, any and all shares, interests, participations or other equivalents (however designated) of such Person's preferred or preference stock whether now outstanding or issued after the Issue Date, and including, without limitation, all classes and series of preferred or preference stock of such Person. "Productive Assets" means assets (including Capital Stock) of a kind used or usable in the business of the Company and its Subsidiaries as it is conducted on the Issue Date. "Purchase Money Obligations" means Indebtedness of any Person secured by Liens (i) on property purchased, acquired or constructed after the Issue Date and used in the ordinary course of business and (ii) securing the payment of all or any part of the purchase price or construction cost of such assets and limited to the property so acquired and improvements thereof; PROVIDED THAT the aggregate principal amount of Indebtedness secured thereby shall not, at the time such Indebtedness is Incurred, exceed 100% of the purchase price to such Person of the assets subject to such Lien . "Qualified Capital Stock" means any stock that is not Disqualified Capital Stock. "Redemption Date", when used with respect to any Security to be redeemed, means the date fixed for such redemption by or pursuant to this Indenture. "Redemption Price", when used with respect to any Security to be redeemed, means the price at which it is to be redeemed pursuant to this Indenture. "Regular Record Date" for the interest payable on any Interest Payment Date means the or (whether or not a Business Day), as the case may be, next preceding such Interest Payment Date. "Repurchase Date", when used with respect to any Security to be repurchased, means the date that is 45 days after the date that the Company gives notice of the Change in Control relating to such Repurchase Date. 12 "Required Filing Dates" has the meaning specified in Section 1011. "Responsible Officer", when used with respect to the Trustee, means any officer of the Trustee in its corporate trust department or similar group administering the trusts hereunder and also means, with respect to a particular corporate trust matter, any other officer to whom such matter is referred because of his or her knowledge of and familiarity with the particular subject. "RSA" means a Rural Service Area, as initially licensed by the FCC. "Sale and Leaseback Transaction" of any Person means any direct arrangement with any other Person or to which such other Person is a party providing for the leasing by such Person of any property, whether owned by such Person at the Issue Date or later acquired, which has been or is to be sold or transferred by such Person to such other Person or to any other Person from whom funds have been or are to be advanced by such other Person on the security of such property. The Stated Maturity of such arrangement shall be the date of the last payment of rent or any other amount due under such arrangement prior to the first date on which such arrangement may be terminated by the lessee without payment of a penalty. "Securities Act" means the Securities Act of 1933, as amended. "Secured Pops" means the aggregate number of Pops in those MSAs and RSAs in which the Company directly or indirectly has an ownership interest in the entity licensed by the FCC to provide cellular telephone service in such MSAs and RSAs and to which entity, as of the date of determination, any of (i) the Company, (ii) a Wholly Owned Subsidiary of the Company or (iii) the lender(s) pursuant to a Senior Secured Credit Facility pursuant to which the Company or a Wholly Owned Subsidiary of the Company is the primary obligor or guarantor of all obligations thereunder, directly or indirectly provides financing, and in which, in each case, all or substantially all of the assets (except assets which may be encumbered by Purchase Money Obligations) are pledged to the Company, a Wholly Owned Subsidiary of the Company or such lender(s) on a perfected first priority basis. "Security Register and Security Registrar" have the respective meanings specified in Section 304. "Senior Indebtedness" means all amounts payable under (a) the Credit Agreements; (b) the Company's obligations under the Guaranty; (c) Capitalized Lease Obligations of the Company; (d) Attributable Debt and (e) all other Indebtedness of the Company whether outstanding on the Issue Date or thereafter created, incurred or assumed, other than (i) the Securities, and (ii) any Indebtedness which provides or in respect of which any instrument creating or evidencing such Indebtedness or pursuant to which the same is outstanding it is provided that such Indebtedness is not superior in right of payment to the Securities. Notwithstanding anything to the contrary in the foregoing, Senior Indebtedness shall not include (i) Indebtedness that is represented by Disqualified Capital Stock, (ii) any liability for federal, 13 state, local or other taxes owed or owing by the Company, (iii) Indebtedness of the Company to any Subsidiary or other Affiliate of the Company, except for any such Indebtedness that is pledged to secure Indebtedness Incurred pursuant to the Credit Agreements, (iv) trade payables, (v) Indebtedness incurred in violation of the Indenture (other than Indebtedness outstanding under a Senior Secured Credit Facility), and (vi) Indebtedness which when incurred is without recourse to the Company or any Subsidiary. "Senior Secured Credit Facility" shall mean the Amended and Second Restated Loan Agreement for RSAs, dated as of March 31, 1993 as amended by Amendment No. 1 thereto dated as of August 2, 1993 and Amendment No. 2 thereto dated as of February 22, 1994 between Cellular, Inc. Financial Corporation and National Bank for Cooperatives (now known as CoBank, ACB) and the Amended and Second Restated Loan Agreement for MSAs dated as of March 31, 1993 as amended by Amendment No. 1 thereto dated as of August 2, 1993 and Amendment No. 2 thereto dated as of February 22, 1994 between Cellular, Inc. Financial Corporation and National Bank for Cooperatives (now known as CoBank, ACB) and any related notes, security agreements, letters of credit, as such documents may be amended, supplemented or modified from time to time and any successor senior secured credit agreement that may be entered into by the Company or the Subsidiaries. "Special Record Date" for the payment of any Defaulted Interest means a date fixed by the Trustee pursuant to Section 306. "Stated Maturity", when used with respect to any Security, any other Indebtedness or any installment of interest thereon, means the date specified in such Security or Indebtedness as the fixed date on which the principal of such Security or such installment of interest is due and payable. "Subordinated Indebtedness" means Indebtedness of the Company, subordinated in right of payment to the Securities. "Subsidiary," with respect to any Person, means (i) any corporation at least fifty percent of whose Capital Stock with voting power, under ordinary circumstances, to elect directors is at the time, directly or indirectly, owned by such Person, by such Person and one or more Subsidiaries of such Person or by one or more Subsidiaries of such Person, or (ii) a partnership in which such Person or a Subsidiary of such Person owns, at the time, a majority of the general partner interests in such partnership or (iii) any other Person of which at least a majority of the voting interest under ordinary circumstances is, at the time, directly or indirectly owned by such Person. "Surviving Person" has the meaning set forth in Section 701. "Transfer Agent" means any Person, which may be the Company, authorized by the Company to receive the Securities for exchange or registration of transfer of Securities. 14 "Trust Indenture Act" means the United States Trust Indenture Act of 1939 as in force at the date as of which this instrument was executed, except as provided in Section 807. "Trustee" means the Person named as the "Trustee" in the first paragraph of this instrument until a successor Trustee shall have become such pursuant to the applicable provisions of this Indenture, and thereafter "Trustee" shall mean such successor Trustee. "U.S. Government Obligations" has the meaning set forth in Section 1504. "Vendor Financing Indebtedness" means, with respect to any Person, an obligation owed by such Person to a vendor of any property or materials used in such Person's business, or to a bank or other financial institution that has financed or refinanced the purchase or lease of such property or materials from such a vendor, in each case solely in respect of the purchase price or lease of such property or materials, or of any services provided by such vendor (and only, in the case of any such obligation owed to such a bank or financial institution, to the extent and for as long as such obligation is guaranteed by, or secured by property or assets of such vendor). "Vice President", when used with respect to the Company or the Trustee, means any vice president, whether or not designated by a number or a word or words added before or after the title "vice president." "Weighted Average Life to Maturity" means, when applied to any Indebtedness at any date, the number of years obtained by dividing (a) the then outstanding aggregate principal amount of such Indebtedness into (b) the total of the product obtained by multiplying (i) the amount of each then remaining installment, sinking fund, serial maturity or other required payment of principal, including payment at final maturity, in respect thereof, by (ii) the number of years (calculated to the nearest one-twelfth) which will elapse between such date and the making of such payment. "Wholly Owned Subsidiary" means a Subsidiary of the Company, all of the outstanding equity interests of which are owned by the Company or another wholly owned Subsidiary. SECTION FORM OF DOCUMENTS DELIVERED TO TRUSTEE. In any case where several matters are required to be certified by, or covered by an opinion of, any specified Person, it is not necessary that all such matters be certified by, or covered by the opinion of, only one such Person, or that they be so certified or covered by only one document, but one such Person may certify or give an opinion with respect to some matters and one or more other such Persons as to other matters, and any such Person may certify or give an opinion as to such matters in one or several documents. 15 Any certificate or opinion of an officer of the Company may be based, insofar as it relates to legal matters, upon a certificate or opinion of, or representations by, counsel, unless such officer knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to the matters upon which his certificate or opinion is based are erroneous. Any such certificates or Opinion of Counsel may be based, insofar as it relates to factual matters, upon a certificate or opinion of, or representations by, an officer or officers of the Company stating that the information with respect to such factual matters is in the possession of the Company, unless such counsel knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to such matters are erroneous. Where any Person is required to make, give or execute two or more applications, requests, consents, certificates, statements, opinions or other instruments under this Indenture, they may, but need not, be consolidated and form one instrument. SECTION 103. ACTS OF HOLDERS. (a) Any request, demand, authorization, direction, notice, consent, waiver or other action provided by this Indenture to be given or taken by Holders of Securities may be embodied in and evidenced by (1) one or more instruments of substantially similar tenor signed by such Holders in person or by agent or proxy duly appointed in writing, (2) the record of Holders of Securities voting in favor thereof, either in person or by proxies duly appointed in writing, at any meeting of Holders of Securities duly called and held in accordance with the provisions of Article Nine, or (3) a combination of such instruments and any such record. Except as herein otherwise expressly provided, such action shall become effective when such instrument or instruments or record or both are delivered to the Trustee and, where it is hereby expressly required, to the Company. Such instrument or instruments and record (and the action embodied therein and evidenced thereby) are herein sometimes referred to as the "Act" of the Holders of Securities signing such instrument or instruments and so voting at such meeting. Proof of execution of any such instrument or of a writing appointing any such agent or proxy, or of the holding by any Person of a Security, shall be sufficient for any purpose of this Indenture and (subject to Section 601) conclusive in favor of the Trustee and the Company if made in the manner provided in this Section. The record of any meeting of Holders of Securities shall be proved in the manner provided in Section 906. (b) The fact and date of the execution by any Person of any such instrument or writing may be proved by the affidavit of a witness of such execution or by a certificate of a notary public or other officer authorized by law to make acknowledgments of deeds, certifying that the individual signing such instrument or writing acknowledged to him the execution thereof. Where such execution is by a signer acting in a capacity other than his individual capacity, such certificate or affidavit shall also constitute sufficient proof of his authority. The fact and date of the execution of any such instrument or writing, or the authority of the Person executing the same, may also be proved in any other manner which the Trustee deems sufficient. 16 (c) The principal amount and serial numbers of Securities held by any Person and the date of his holding the same, shall be proved by the Security Register. (d) Any request, demand, authorization, direction, notice, consent, waiver or other Act of the Holder of any Security shall bind every future Holder of the same Security and the Holder of every Security issued upon the registration of transfer thereof or in exchange therefor or in lieu thereof in respect of anything done, omitted or suffered to be done by the Trustee or the Company in reliance thereon, whether or not notation of such action is made upon such Security. SECTION 104. NOTICES, ETC., TO TRUSTEE AND COMPANY. Any request, demand, authorization, direction, notice, consent, waiver or Act of Holders or other document provided or permitted by this Indenture to be made upon, given or furnished to, or filed with, (1) the Trustee by any Holder or by the Company shall be sufficient for every purpose hereunder if first class postage prepaid in writing and mailed to or with the Trustee at its Corporate Office, Attention: Corporate Trust Department, or telecopied and confirmed by mail, first-class postage prepaid as provided above, or by overnight delivery, to the Trustee at Corporate Trust Department, American Bank National Association, 101 East Fifth Street, St. Paul, Minnesota 55101 telecopy: (612-229-6415) or (2) the Company by the Trustee or by any Holder shall be sufficient for every purpose hereunder (unless otherwise herein expressly provided) if in writing and mailed, first-class postage prepaid, or telecopied to: (303-694-3293) and confirmed by mail, first-class postage prepaid, to the Company addressed to it at the address of its principal office specified in the first paragraph of this instrument or at any other address previously furnished in writing to the Trustee by the Company. SECTION 105. NOTICE OF HOLDERS; WAIVER. Except as otherwise expressly provided herein, where this Indenture provides for notice to Holders of Securities of any event, such notice shall be sufficiently given to Holders of Securities if in writing and mailed, first- class postage prepaid, to each Holder of a Security affected by such event, at his address as it appears in the Security Register, not later than the latest date, and not earlier than the earliest date, prescribed for the giving of such notice. In any case where notice to Holders of Securities is given by mail, neither the failure to mail such notice, nor any defect in any notice so mailed, to any particular Holder of a Security shall affect the sufficiency of such notice with respect to other Holders of Securities. 17 In case by reason of the suspension of regular mail service or by reason of any other cause it shall be impracticable to give such notice by mail, then such notification to Holders of Securities as shall be made with the approval of the Trustee shall constitute a sufficient notification to such Holders for every purpose hereunder. Where this Indenture provides for notice in any manner, such notice may be waived in writing by the Person entitled to receive such notice, either before or after the event, and such waiver shall be the equivalent of such notice. Waivers of notice by Holders shall be filed with the Trustee, but such filing shall not be a condition precedent to the validity of any action taken in reliance upon such waiver. SECTION EFFECT OF HEADINGS AND TABLE OF CONTENTS. The Article and Section headings herein and the Table of Contents are for convenience only and shall not affect the construction hereof. SECTION 107. SUCCESSORS AND ASSIGNS. All covenants and agreements in this Indenture by the Company shall bind its successors and assigns, whether so expressed or not. SECTION 108. SEPARABILITY CLAUSE. In case any provision in this Indenture or in the Securities shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. SECTION 109. BENEFITS OF INDENTURE. Nothing in this Indenture or in the Securities, express or implied, shall give to any Person, other than the parties hereto and their successors hereunder, the holders of Senior Indebtedness and the Holders of Securities, any benefit or any legal or equitable right, remedy or claim under this Indenture. 18 SECTION 110. GOVERNING LAW. THIS INDENTURE AND THE SECURITIES SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, AS APPLIED TO CONTRACTS MADE AND PERFORMED WITHIN THE STATE OF NEW YORK, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW. THE COMPANY HEREBY IRREVOCABLY SUBMITS TO THE JURISDICTION OF ANY NEW YORK STATE COURT SITTING IN THE BOROUGH OF MANHATTAN IN THE CITY OF NEW YORK OR ANY FEDERAL COURT SITTING IN THE BOROUGH OF MANHATTAN IN THE CITY OF NEW YORK IN RESPECT OF ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS INDENTURE AND THE SECURITIES AND IRREVOCABLY ACCEPTS FOR ITSELF AND IN RESPECT OF ITS PROPERTY, GENERALLY AND UNCONDITIONALLY, JURISDICTION OF THE AFORESAID COURTS. THE COMPANY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT IT MAY EFFECTIVELY DO SO UNDER APPLICABLE LAW, TRIAL BY JURY AND ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF THE VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT AND ANY CLAIM THAT ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. NOTHING HEREIN SHALL AFFECT THE RIGHT OF THE TRUSTEE OR ANY HOLDER OF SECURITIES TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO COMMENCE LEGAL PROCEEDINGS OR OTHERWISE PROCEED AGAINST THE COMPANY IN ANY OTHER JURISDICTION. SECTION 111. LEGAL HOLIDAYS. In any case where any Interest Payment Date, Redemption Date or Repurchase Date or Stated Maturity of any Security shall not be a Business Day at any Place of Payment, then (notwithstanding any other provision of this Indenture or of the Securities) payment of interest or principal (and premium, if any) of the Securities need not be made at such Place of Payment on such date, but may be made on the next succeeding Business Day at such Place of Payment with the same force and effect as if made on the Interest Payment Date or Redemption Date or Repurchase Date, or at the Stated Maturity, provided that no interest shall be paid on such Business Day for the intervening period. SECTION 112. COMPLIANCE CERTIFICATES AND OPINIONS. Upon any application or request by the Company to the Trustee to take any action under any provision of this Indenture, the Company shall furnish to the Trustee an Officers' Certificate stating that all conditions precedent, if any, provided for in this Indenture relating to the proposed action have been complied with and an Opinion of Counsel stating that in the opinion of such counsel all such conditions precedent, if any, have been complied with, except 19 that in the case of any such application or request as to which the furnishing of such documents is specifically required by any provision of this Indenture relating to such particular application or request, no additional certificate or opinion need be furnished. Unless expressly otherwise specified with respect to any certificate or opinion provided for in this Indenture, every certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture shall include: (1) a statement that each individual signing such certificate or opinion has read such covenant or condition and the definitions herein relating thereto; (2) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (3) a statement that, in the opinion of each such individual, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with; and (4) a statement as to whether or not, in the opinion of each such individual, such condition or covenant has been complied with. SECTION 113. CONFLICT WITH TRUST INDENTURE ACT. If any provision hereof limits, qualifies or conflicts with another provision hereof which is required to be included in this Indenture by any of the provisions of the Trust Indenture Act, such required provision shall control. SECTION 114. NO RECOURSE AGAINST OTHERS. A director, officer, employee, stockholder or incorporator, as such, of the Company shall not have any liability for any obligations of the Company under the Securities or this Indenture or for any claim based on, in respect of or by reason of such obligations or their creations. Each Holder by accepting a Security waives and releases all such liability. Such waiver and release are part of the consideration for the issuance of the Securities. 20 ARTICLE TWO Security Form SECTION 201. FORM GENERALLY. The Securities shall be in substantially the form set forth in this Article, with such appropriate insertions, omissions, substitutions and other variations as are required or permitted by this Indenture, and may have such letters, numbers or other marks of identification and such legends or endorsements placed thereon as may be required to comply with the rules of any securities exchange or as may, consistently herewith, be determined by the officers executing such Securities, as evidenced by their execution of the Securities. The Trustee's certificate of authentication shall be in substantially the form set forth in this Article. Repurchase notices shall be in substantially the form set forth in this Article. The Securities shall be printed, lithographed or engraved or produced by any combination of these methods or may be produced in any other manner permitted by the rules of any securities exchange on which the Securities may be listed, all as determined by the officers executing such Securities, as evidenced by their execution thereof. 21 SECTION 202. FORM OF SECURITIES. Form of Face of Security COMMNET CELLULAR INC. ______% Subordinated Note due 2005 No. _____________________ $______________________ COMMNET CELLULAR INC., a corporation duly organized and existing under the laws of Colorado (herein called the "Company," which term includes any successor Person under the Indenture hereinafter referred to), for value received, hereby promises to pay to __________________________________, or registered assigns, the principal sum of __________________________________ Dollars on ___________, 2005, and to pay interest thereon on ____, 199X and semi-annually thereafter on and in each year, from ____, 199X, or from the most recent Interest Payment Date to which interest has been paid or duly provided for, at the rate of % per annum; PROVIDED, HOWEVER, that in the event that the Conversion Condition is satisfied on or prior to the Convertible Redemption Date, from and after the Convertible Redemption Date, the Securities will bear interest at the rate of % per annum, until the principal hereof is paid or duly provided for; and (to the extent lawful) to pay on demand interest on any overdue interest at the rate borne by the Securities from the date on which such overdue interest becomes payable to the date payment of such interest has been made or duly provided for. The interest so payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in such Indenture be paid to the Person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest, which shall be the ___________ or _________ (whether or not a Business Day), next preceding such Interest Payment Date. Interest shall be computed on the basis of a 360-day year of twelve 30-day months. Except as otherwise provided in the Indenture, any such interest not so punctually paid or duly provided for will forthwith cease to be payable to the Holder on such Regular Record Date and may either be paid to the Person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on a Special Record Date for the payment of such Defaulted Interest to be fixed by the Trustee, notice whereof shall be given to Holders of Securities not less than 15 days prior to such Special Record Date, or be paid at any time in any other lawful manner. Payment of the principal of (and premium, if any) on this Security will be made at the office of the Trustee, or at such other office or agency of the Company maintained for that purpose in the Borough of Manhattan, The City of New York, in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts; PROVIDED, HOWEVER, that at the option of the Company payment of interest on this 22 Security may be made by check mailed to the address of the Person entitled thereto as such address shall appear in the Security Register. Except as specifically provided herein and in the Indenture, the Company shall not be required to make any payment with respect to any tax, assessment or other governmental charge imposed by any government or any political subdivision or taxing authority thereof or therein. Reference is hereby made to the further provisions of this Security set forth on the reverse hereof, which further provisions shall for all purposes have the same effect as if set forth at this place. Unless the certificate of authentication hereon has been executed by the Trustee referred to on the reverse hereof by manual signature, this Security shall not be entitled to any benefit under the Indenture or be valid or obligatory for any purpose. IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed under its corporate seal. Dated as of _________________ COMMNET CELLULAR INC. By ---------------------------- Name: Title: (Corporate Seal) Attest: - ----------------------------- Name: Title: 23 [Form of Reverse] This Security is one of a duly authorized issue of Securities of the Company designated as its % Subordinated Notes due 2005 (herein called the "Securities"), limited in aggregate principal amount to $125,000,000 issued and to be issued under an Indenture, dated as of ___________, 1995 (herein called the "Indenture"), between the Company and American Bank National Association, as Trustee (herein called the "Trustee", which term includes any successor trustee under the Indenture), to which Indenture and all indentures supplemental thereto reference is hereby made for a statement of the respective rights, limitations of rights, duties and immunities thereunder of the Company, the Trustee, the holders of Senior Indebtedness and the Holders of the Securities and the terms upon which the Securities are, and are to be, authenticated and delivered. In the event that the Conversion Condition is satisfied, from and after the Convertible Redemption Date, the Securities shall be known and designated as the " % Subordinated Notes due 2005" of the Company and a notation shall be made hereon or an exchange hereof will be made by the Trustee in accordance with the Indenture. The Securities are issuable as registered Securities, without coupons, in denominations of $1,000 and any integral multiple thereof. As provided in the Indenture and subject to certain limitations therein set forth, Securities are exchangeable for a like aggregate principal amount of Securities of any authorized denominations as requested by the Holder surrendering the same upon surrender of the Security or Securities to be exchanged, at the office or agency of the Company in the Borough of Manhattan, The City of New York. The Company initially appoints the agent of the Trustee, to serve as such office. The Securities may be redeemed at the Company's option upon notice as described in the Indenture, in whole or in part from time to time, at any time on or after ___________, 2000 at the following Redemption Prices (expressed as a percentage of the principal amount) if redeemed during the 12-month period beginning ___________ on the year indicated, plus, in each case, accrued interest thereon to the date of redemption: Redemption Year Price ---- ----------- 2000 % 2001 % 2002 % and thereafter at a Redemption Price equal to 100% of the principal amount redeemed. If at any time there occurs a Change in Control (as defined in the Indenture) of the Company, then each Holder of a Security shall have the right, at the Holder's option, to require the Company to repurchase all or any portion of such Holder's Securities (in $1,000 denominations or integral multiples thereof), on the date (the "Repurchase Date") that is 45 days after the date of the Company Notice (as defined in the Indenture) of such Change in Control, at a purchase price equal to 101% of the principal amount of Securities to be repurchased (the "Repurchase Price"), together with accrued interest to the Repurchase Date. 24 To exercise a repurchase right, a Holder shall deliver to the Company (or an agent designated by the Company in the Company Notice) on or before the 30th day after the date of the Company Notice the Securities to be so repurchased duly endorsed for transfer to the Company and accompanied by the repurchase notice hereon duly completed and executed. Such written notice shall be irrevocable. The Securities are not subject to any sinking fund. In the case of a Change in Control, notice of the occurrence of the Change in Control and of the repurchase rights arising in connection therewith shall be given, in the manner prescribed above for notices of redemption, on or before the t day after the occurrence of a Change in Control. The Company shall not be required (i) to issue, register the transfer of or exchange any Security during a period beginning at the opening of business 15 days before any selection of Securities to be redeemed and ending at the close of business on the day of the mailing of the relevant notice of redemption, or (ii) to register the transfer of or exchange any Security so selected for redemption in whole or in part, except the unredeemed portion of any Security being redeemed in part. In the event of redemption or repurchase of this Security in part only, a new Security or Securities for the unredeemed or unrepurchased portion hereof will be issued in the name of the Holder hereof upon the cancellation hereof. The indebtedness evidenced by this Security is, to the extent provided in the Indenture, subordinate and subject in right of payment to the prior payment in full of all Senior Indebtedness, and this Security is issued subject to the provisions of the Indenture with respect thereto. Each Holder of this Security, by accepting the same, (a) agrees to and shall be bound by such provisions, (b) authorizes and directs the Trustee on his behalf to take such action as may be necessary or appropriate to effectuate the subordination so provided and (c) appoints the Trustee his attorney-in-fact for any and all such purposes. If an Event of Default shall occur and be continuing, the principal of all the Securities may be declared due and payable in the manner and with the effect provided in the Indenture. The Indenture contains provisions for defeasance at any time of the entire indebtedness of this Security or certain restrictive covenants and Events of Default with respect to this Security, in each case upon compliance with certain conditions set forth in the Indenture. The Indenture permits, with certain exceptions as therein provided, the amendment thereto and the modification of the rights and obligations of the Company and the rights of the Holders of the Securities under the Indenture at any time by the Company and the Trustee with the consent of the Holders of a majority in aggregate principal amount of the Securities at the 25 time Outstanding. The Indenture also contains provisions permitting the Holders of specified percentages in aggregate principal amount of the Securities at the time Outstanding, on behalf of the Holders of all the Securities, to waive compliance by the Company with certain provisions of the Indenture and certain past defaults under the Indenture and their consequences. Any such consent or waiver by the Holder of this Security shall be conclusive and binding upon such Holder and upon all future Holders of this Security and of any Security issued upon the registration of transfer hereof or in exchange herefor or in lieu hereof, whether or not notation of such consent or waiver is made upon this Security. No reference herein to the Indenture and no provision of this Security or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of (and premium, if any) and interest on this Security at the times, places and rate, and in the coin or currency, herein prescribed or to repurchase this Security as provided in the Indenture. As provided in the Indenture and subject to certain limitations therein set forth, the transfer of Securities is registrable in the Security Register, upon surrender of a Security for registration of transfer at the office or agency of the Company in the Borough of Manhattan, The City of New York, or subject to any laws or regulations applicable thereto and to the right of the Company to terminate the appointment of any such Transfer Agent, at the offices of the Transfer Agent described herein, or at such other offices or agencies as the Company may designate, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Company and the Security Registrar duly executed by, the Holder hereof or his attorney duly authorized in writing, and thereupon one or more new Securities, of authorized denominations and for the same aggregate principal amount, will be issued to the designated transferee or transferees. No service charge shall be made for any such registration of transfer or exchange, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith. The Company, the Trustee and any agent of the Company or the Trustee may treat, prior to due presentment for registration of transfer, the Person in whose name a Security is registered as the owner thereof for all purposes, whether or not the Security be overdue, and neither the Company, the Trustee nor any such agent shall be affected by notice to the contrary. A director, officer, employee, stockholder or incorporator, as such, of the Company shall not have any liability for any obligations of the Company under the Securities or the Indenture or for any claim based on, in respect of or by reason of such obligations or their creation. Each Holder of this Security by accepting this Security waives and releases all such liability. The waiver and release are part of the consideration for the issuance of this Security. 26 The Indenture and the Securities shall be governed by and construed in accordance with the laws of the State of New York as applied to contracts made and performed within the State of New York, without regard to principles of conflicts of law. All terms used in this Security which are defined in the Indenture shall have the meanings assigned to them in the Indenture. SECTION 203. FORM OF TRUSTEE'S CERTIFICATE OF AUTHENTICATION. This is one of the Securities referred to in the within-mentioned Indenture. AMERICAN BANK NATIONAL ASSOCIATION, As Trustee By________________________ Authorized Signatory SECTION 204. FORM OF REPURCHASE NOTICE. REPURCHASE NOTICE The undersigned Holder of this Security hereby irrevocably exercises the right of repurchase of this Security in accordance with the terms of the Indenture referred to in this Security, and directs the Company to repurchase the within Security pursuant and subject to its terms at a price equal to 101% of the principal amount of the portion of this Security to be repurchased, together with interest to the Repurchase Date to the undersigned. If Securities are to be registered in the name of a Person other than the undersigned, the undersigned will pay all transfer taxes payable with respect thereto. For this Security to be repurchased the Holder must deliver this Security with this "Repurchase Notice" form duly completed to the Company (or an agent of the Company designated by the Company in the Company Notice) on or before the 30th day after the date of mailing of the Company Notice (or if such 30th day is not a Business Day, the next succeeding Business Day). Dated:___________________________ Signature:____________________________ (Sign exactly as your name appears on the front of this Security) 27 Signature Guarantee*: _________________________________ * Participant in a recognized Signature Guarantee Medallion Program (or other such program acceptable to the Trustee) 28 If Securities are to be registered If only a portion of the Securities in the name of a Person other than is to be repurchased, please the Holder, please print such indicate: Person's name, address, and tax identification number, if any: _______ 1. Principal amount to be ______________________________________ repurchased:__________ ______________________________________ $__________ ______________________________________ 2. Amount and denomination of Securities represented unrepurchased principal amount to be issued: Amount: $_________ Denominations: $_________ ($1,000 or an integral multiple thereof) SECTION 205. SECURITIES ISSUABLE IN THE FORM OF A GLOBAL SECURITY. (a) If the Company shall establish that the Securities are to be issued in whole or in part in the form of one or more Global Securities, then the Company shall execute and the Trustee or its agent shall, in accordance with Section 303 and the Company Order delivered to the Trustee or its agent thereunder, authenticate and deliver, such Global Security or Securities, which (i) shall represent, and shall be denominated in an amount equal to the aggregate principal amount of, the Outstanding Securities to be represented by such Global Security or Securities, or such portion thereof as the Company shall specify in a Company Order, (ii) shall be registered in the name of the Depository for such Global Security or Securities or its nominee, (iii) shall be delivered by the Trustee or its agent to the Depository or pursuant to the Depository's instruction and (iv) shall bear a legend substantially to the following effect: "Unless this certificate is presented by an authorized representative of the Depository to the Company or its agent for registration of transfer, exchange, or payment, and any certificate issued is registered in the name of the nominee of the Depository or in such other name as is requested by an authorized representative of the Depository (and any payment is made to the nominee of the Depository or to such other entity as is requested by an authorized representative of the Depository), any transfer, pledge, or other use hereof for value or otherwise by or to any person is wrongful inasmuch as the registered owner hereof, the nominee of the Depository, has an interest herein." (b) Notwithstanding any other provisions of this Section 205 or of Section 304, and subject to the provisions of paragraph (c) below, unless the terms of a Global Security expressly permit such Global Security to be exchanged in whole or in part for individual Securities, a Global Security may be transferred, in whole but not in part and in the manner provided in Section 304, only to a nominee of the Depository for such Global Security, or to the Depository, or a successor Depository for such Global Security selected or approved by the Company, or to a nominee of such successor Depository. 29 (c) (i) If at any time the Depository for a Global Security notifies the Company that it is unwilling or unable to continue as Depository for such Global Security or if at any time the Depository for the Securities for such series shall not longer be eligible or in good standing under the Exchange Act or other applicable statute or regulation, the Company shall appoint a successor Depository with respect to such Global Security. If a successor Depository for such Global Security is not appointed by the Company within 90 days after the Company receives such notice or becomes aware of such ineligibility, the Company will execute, and the Trustee or its agent, upon receipt of a Company Request for the authentication and delivery of individual Securities in exchange for such Global Security, will authenticate and deliver, individual Securities of like tenor and terms in an aggregate principal amount equal to the principal amount of the Global Security in exchange for such Global Security. (ii) The Company may at any time and in its sole discretion determine that the Securities or portion thereof issued in the form of one or more Global Securities shall no longer be represented by such Global Security or Securities. In such event the Company will execute, and the Trustee, upon receipt of a Company Request for the authentication and delivery of individual Securities in exchange in whole or in part for such Global Security, will authenticate and deliver individual Securities of like tenor and terms in definitive form in an aggregate principal amount equal to the principal amount of such Global Security or Securities or portion thereof in exchange for such Global Security or Securities. (iii) If specified by the Company with respect to Securities issued in the form of a Global Security, the Depository for such Global Security may surrender such Global Security in exchange in whole or in part for individual Securities of such series of like tenor and terms in definitive form on such terms as are acceptable to the Company and such Depository. Thereupon the Company shall execute, and the Trustee or its agent shall authenticate and deliver, without service charge, (1) to each Person specified by such Depository a new Security or Securities of like tenor and terms and of any aggregate principal amount equal to and in exchange for such Person's beneficial interest as specified by such Depository in the Global Security; and (2) to such Depository a new Global Security of like tenor and terms and in an authorized denomination equal to the difference, if any, between the principal amount of the surrendered Global Security and the aggregate principal amount of Securities delivered to Holders thereof. (iv) In any exchange provided for in any of the preceding three paragraphs, the Company will execute and the Trustee or its agent will authenticate and deliver individual Securities in definitive registered form in authorized denominations. Upon the exchange of the entire principal amount of a Global Security for individual Securities, such Global Security shall be cancelled by the Trustee or its agent. Except as provided in the preceding paragraph, Securities issued in exchange for a Global Security pursuant to this Section shall be registered in such names and in such authorized denominations as the Depository for such Global Security, pursuant to instructions from its direct or indirect 30 participants or otherwise, shall instruct the Trustee or the Security Registrar. The Trustee or the Security Registrar shall deliver at its Corporate Office such Securities to the persons in whose names such Securities are so registered. ARTICLE THREE The Securities SECTION 301. TITLE AND TERMS. The aggregate principal amount of Securities which may be authenticated and delivered under this Indenture is limited to $125 million except for Securities authenticated and delivered upon registration of transfer of, or in exchange for, or in lieu of, other Securities pursuant to Section 304, 305, 805 or 1108. The Securities shall be known and designated as the " % Subordinated Notes due 2005" of the Company; provided, however, that in the event the Conversion Condition is satisfied, from and after the Convertible Redemption Date the Securities shall be known and designated as the " % Subordinated Notes due 2005" of the Company. The Stated Maturity of the Securities shall be ___________, 2005, and they shall bear interest at the rate of ______% per annum (i) with respect to Securities issued on the Issue Date, from _______, 1995 or the most recent Interest Payment Date on which interest has been paid or duly provided for and (ii) with respect to any subsequently issued Securities, from the most recent Interest Payment Date on which interest has been paid or provided for with respect to the Securities issued on the Issue Date, payable semi-annually in arrears on _______ and ___________, until the principal thereof is paid or made available for payment; PROVIDED, HOWEVER, that in the event that the Conversion Condition is satisfied on or prior to the Convertible Redemption Date, from and after the Convertible Redemption Date, the Securities will bear interest at the rate of % per annum. The principal of (and premium, if any) and interest on the Securities shall be payable as provided in the form of Securities set forth in Section 202 (any city in which any Paying Agent is located being herein called a "Place of Payment"). The Securities shall be redeemable as provided in Article Eleven. The Securities shall be subordinated in right of payment to Senior Indebtedness as provided in Article Twelve. The Securities shall be repurchased by the Company if required by the Holders thereof, as provided in Article Fourteen. 31 SECTION 302. DENOMINATIONS. The Securities shall be issuable in fully registered form, without coupons, in denominations of $1,000 and any integral multiple thereof. SECTION 303. EXECUTION, AUTHENTICATION, DELIVERY AND DATING. The Securities shall be executed on behalf of the Company by its Chairman of the Board, its President or one of its Vice Presidents, under its corporate seal reproduced thereon attested by its Secretary or one of its Assistant Secretaries. The signature of any of these officers on the Securities may be manual or facsimile. Securities bearing the manual or facsimile signatures of individuals who were at any time the proper officers of the Company, shall bind the Company, notwithstanding that such individuals or any of them have ceased to hold such offices prior to the authentication and delivery of such Securities or did not hold such offices at the date of such Securities. At any time and from time to time after the execution and delivery of this Indenture, the Company may deliver Securities executed by the Company to the Trustee for authentication, together with a Company Order for the authentication and delivery of such Securities; and the Trustee in accordance with such Company Order shall authenticate and deliver such Securities as in this Indenture provided and not otherwise. Each Security shall be dated the date of its authentication. No Security shall be entitled to any benefit under this Indenture or be valid or obligatory for any purpose unless there appears on such Security a certificate of authentication substantially in the form provided for herein executed by the Trustee by manual signature, and such certificate upon any Security shall be conclusive evidence, and the only evidence, that such Security has been duly authenticated and delivered hereunder. SECTION 304. REGISTRATION, REGISTRATION OF TRANSFER AND EXCHANGE. The Company shall cause to be kept at the Corporate Office of the Trustee a register (the "Security Register") in which, subject to such reasonable regulations as it may prescribe, the Company shall provide for the registration of Securities and of transfers of Securities. The Trustee is hereby appointed "Security Registrar" for the purpose of registering Securities and transfers of Securities as herein provided. Subject to Section 205 upon surrender for registration of transfer of any Security at an office or agency of the Company designated pursuant to Section 1002 for such purpose or 32 at the Corporate Office of the Trustee, the Company shall execute, and the Trustee shall authenticate and deliver, in the name of the designated transferee or transferees, one or more new Securities of any authorized denominations and of a like aggregate principal amount. Subject to Section 205 at the option of the Holder, Securities may be exchanged for other Securities of any authorized denominations and of a like aggregate principal amount, upon surrender of the Securities to be exchanged at any such office or agency. Whenever any Securities are so surrendered for exchange, the Company shall execute, and the Trustee shall authenticate and deliver, the Securities which the Holder making the exchange is entitled to receive. All Securities issued upon any registration of transfer or exchange of Securities shall be the valid obligations of the Company, evidencing the same debt, and entitled to the same benefits under this Indenture, as the Securities surrendered upon such registration of transfer or exchange. Every Security presented or surrendered for registration of transfer or for exchange shall (if so required by the Company or the Trustee) be duly endorsed and accompanied by such other documentation as the Company or the Security Registrar may reasonably require, or be accompanied by a written instrument of transfer in form satisfactory to the Company and the Security Registrar duly executed, by the Holder thereof or his attorney only authorized in writing. No service charge shall be made for any registration of transfer or exchange of Securities, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with any registration of transfer or exchange of Securities, other than exchanges pursuant to Section 805 or 1103 not involving any transfer. The Company shall not be required (i) to issue, register the transfer of or exchange any Security during a period beginning at the opening of business 15 days before any selection of Securities to be redeemed and ending at the close of business on the day of mailing of the relevant notice of redemption, or (ii) to register the transfer of or exchange any Security so selected for redemption in whole or in part, except the unredeemed portion of any Security being redeemed in part. SECTION 305. MUTILATED, DESTROYED, LOST AND STOLEN SECURITIES. If any mutilated Security is surrendered to the Trustee, the Company shall execute and the Trustee shall authenticate and deliver in exchange therefor a new Security of like tenor and principal amount and bearing a number not contemporaneously outstanding. If there shall be delivered to the Company and the Trustee (i) evidence to their satisfaction of the destruction, loss or theft of any Security, and (ii) such security or indemnity 33 as may be required by them to save each of them and any agent of either of them harmless, then, in the absence of notice to the Company or the Trustee that such Security has been acquired by a bona fide purchaser, the Company shall execute and upon its request the Trustee shall authenticate and deliver, in lieu of any such destroyed, lost or stolen Security, a new Security of like tenor and principal amount and bearing a number not contemporaneously outstanding. In case any such mutilated, destroyed, lost or stolen Security has become or is about to become due and payable, the Company in its discretion may, instead of issuing a new security, pay such Security on the Payment Date. Upon the issuance of any new Security under this Section, the Company may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses (including the fees and expenses of the Trustee) connected therewith. Every new Security issued pursuant to this Section in lieu of any destroyed, lost or stolen Security shall constitute an original additional contractual obligation of the Company, whether or not the destroyed, lost or stolen Security shall be at any time enforceable by anyone, and such new Security shall be entitled to all the benefits of this Indenture equally and proportionately with any and all other Securities duly issued hereunder. The provisions of this Section are exclusive and shall preclude (to the extent lawful) all other rights and remedies with respect to the replacement or payment of mutilated, destroyed, lost or stolen Securities. SECTION 306. PAYMENT OF INTEREST; INTEREST RIGHTS PRESERVED. Interest on any Security which is payable, and is punctually paid or duly provided for, on any Interest Payment Date shall be paid to the Person in whose name that Security (or one or more Predecessor Securities) is registered at the close of business in the Regular Record Date for such interest. If the Company defaults in a payment of interest on the Securities, it shall pay the defaulted interest, plus (to the extent lawful) any interest payable on the defaulted interest, to the persons who are Holders on a subsequent Special Record Date, which date shall be the 15th day next preceding the date fixed by the Company for the payment of defaulted interest, whether or not such day is a Business Day. At least 15 days before the subsequent Special Record Date, the Company shall mail to each Holder with a copy to the Trustee a notice that states the subsequent Special Record Date, the payment date and the amount of defaulted interest, and interest payable on such defaulted interest, if any, to be paid. 34 Subject to the foregoing provisions of this Section, each Security delivered under this Indenture upon registration of transfer of or in exchange for or in lieu of any other Security shall carry the rights to interest accrued and unpaid, and to accrue, which were carried by such other Security. SECTION 307. PERSONS DEEMED OWNERS. The Company, the Trustee and any agent of the Company or the Trustee may treat the Person in whose name the Security is registered as the owner of the Security for the purpose of receiving payment of principal of (and premium, if any) and (subject to Section 306) interest on such Security and for all other purposes whatsoever, whether or not such Security be overdue, and neither the Company, the Trustee nor any agent of the Company or the Trustee shall be affected by notice to the contrary. SECTION 308. CANCELLATION. All Securities surrendered for payment, redemption, registration of transfer or exchange shall, if surrendered to any Person other than the Trustee, be delivered to the Trustee and shall be promptly cancelled by it. The Company may at any time deliver to the Trustee for cancellation any Securities previously authenticated and delivered hereunder which the Company may have acquired in any manner whatsoever, and all Securities so delivered shall be promptly cancelled by the Trustee. No Securities shall be authenticated in lieu of or in exchange for any Securities cancelled as provided in this Section, except as expressly permitted by this Indenture. All cancelled Securities held by the Trustee may be destroyed and the Trustee shall furnish to the Company a certificate with respect to any such destruction upon the written request of the Company. SECTION 309. COMPUTATION OF INTEREST. Interest on the Securities shall be computed on the basis of a 360-day year comprised of twelve 30-day months. SECTION 310. CUSIP NUMBERS. The Company in issuing Securities under the Indenture may use a "CUSIP" number (if then generally in use) and, if so, the Trustee shall use "CUSIP" numbers in any repurchase notice as a convenience to Holders; PROVIDED, HOWEVER, that any such notice may state that no representation is made as to the correctness of such numbers either as printed on the Securities or as contained in any notice of a redemption and that reliance may be placed only on the other identification numbers printed on the Securities, and any such redemption shall not 35 be affected by any defect in or omission of such numbers. The Company shall use its best efforts to cause any Securities issued pursuant to this Indenture after the Issue Date to bear the same "CUSIP" number as the Securities issued on the Issue Date. ARTICLE FOUR Satisfaction and Discharge SECTION 401. SATISFACTION AND DISCHARGE OF INDENTURE. This Indenture shall cease to be of further effect (except as to any surviving rights of registration of transfer or exchange of Securities herein expressly provided for), and the Trustee, on demand of and at the expense of the Company, shall execute proper instruments acknowledging satisfaction and discharge of this Indenture, when (1) either (A) all Securities theretofore authenticated and delivered (other than (i) Securities which have been destroyed, lost or stolen and which have been replaced or paid as provided in Section 305 and (ii) Securities for whose payment money has theretofore been deposited in trust or segregated and held in trust by the Company and thereafter repaid to the Company or discharged from such trust, as provided in Section 1003); or (B) all such Securities not theretofore delivered to the Trustee for cancellation (i) have become due and payable, or (ii) will become due and payable at their Stated Maturity within one year, or (iii) are to be called for redemption within one year under arrangements satisfactory to the Trustee for the giving of notice of redemption by the Trustee in the name, and at the expense, of the Company; and the Company, in the case of (i), (ii) or (iii) above, has irrevocably deposited or caused to be deposited with the Trustee as trust funds in trust for the purpose an amount sufficient to pay and discharge the entire indebtedness on such Securities not theretofore delivered to the Trustee for cancellation, for principal (and premium, if any) and interest to the date of such deposit (in the case of Securities which have become due and payable) or to the Stated Maturity or Redemption Date, as the case may be together with irrevocable instructions to the Trustee from the Company directing 36 the Trustee to apply such funds to the payment thereof at maturity or redemption, as the case may be; (2) the Company has paid or caused to be paid all other sums payable hereunder by the Company; and (3) the Company has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent herein provided for relating to the satisfaction and discharge of this Indenture have been complied with. Notwithstanding the satisfaction and discharge of this Indenture, the obligations of the Company to the Trustee under Section 606, the obligations of the Trustee to any Authenticating Agent under Section 611, and, if money shall have been deposited with the Trustee pursuant to Subclause (B) of clause (1) of this Section, the obligations of the Trustee under Section 402 and the last paragraph of Section 1003 shall survive. SECTION 402. APPLICATION OF TRUST MONEY. Subject to the provisions of the penultimate paragraph of Section 1003, all money deposited with the Trustee pursuant to Section 401 shall be held in trust and applied by it, in accordance with the provisions of the Securities and this Indenture, to the payment, either directly or through any Paying Agent (including the Company acting as its own Paying Agent) as the Trustee may determine, to the Persons entitled thereto, of the principal (and premium, if any) and interest for whose payment such money has been deposited with the Trustee. ARTICLE FIVE Remedies SECTION 501. EVENTS OF DEFAULT. "Event of Default," wherever used herein, means any one of the following events (whatever the reason for such Event of Default and whether it shall be occasioned by the provisions of Article Twelve or be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body): (1) default in the payment of the principal of, or premium, if any, on any of the Securities, when due and payable (at its Stated Maturity, upon optional redemption, required repurchase or otherwise); or 37 (2) default in the payment of any installment of interest on any of the Securities, when due and payable for 30 days; or (3) (a) default in the performance, or breach, of any covenant or warranty of the Company in this Indenture (other than a default in the performance, or breach of a covenant or warranty which is specifically dealt with in clause (1), (2) or in clause (b) of this clause (3)), and continuance of such default or breach for a period of 30 days after there has been given, by registered or certified mail, to the Company by the Trustee or to the Company and the Trustee by the Holders of at least 25% in principal amount of the then Outstanding Securities a written notice specifying such default or breach and requiring it to be remedied and stating that such notice is a "Notice of Default" hereunder; or (b) the failure by the Company to comply with its obligations under Article Seven, or a default on the applicable Repurchase Date, in the purchase of Securities required to be purchased by the Company pursuant to the Company Notice as to which an offer of repurchase has been mailed to Holders or the failure to make the required repurchase offer as required hereunder; or (4) a default or defaults under any mortgage, indenture or instrument under which there may be issued or by which there may be secured or evidenced any Indebtedness of the Company (or the payment of which is guaranteed by the Company) whether such Indebtedness or Guarantee now exists or is created after the date of this Indenture which default (a) is caused by a failure to pay when due principal or interest on such Indebtedness within the grace period provided in such Indebtedness (a "Payment Default") or (b) results in the acceleration of such Indebtedness prior to its maturity and, in each case, the principal amount of any such Indebtedness, together with the principal amount of any other such Indebtedness under which there has been a Payment Default or the maturity of which has been so accelerated, aggregates $10 million and such Payment Default or acceleration of Indebtedness has not been rescinded or annulled within a period of 10 days after there has been given, by registered or certified mail, to the Company by the Trustee or to the Company and the Trustee by the Holders of at least 25% in principal amount of the then Outstanding Securities a written notice specifying such default and requiring the Company to cause such Payment Default to be discharged or cause such acceleration to be rescinded or annulled and stating that such notice is a "Notice of Default" hereunder; or (5) one or more judgments in an aggregate amount in excess of $10 million shall have been rendered against the Company or any of its Subsidiaries, and such judgments remain undischarged or unstayed for a period of 60 days after such judgment or judgments become final and nonappealable; or (6) the entry by a court having jurisdiction in the premises of (A) a decree or order for relief in respect of the Company in an involuntary case or proceeding under any applicable United States Federal or state bankruptcy, insolvency, reorganization or other similar law or (B) a decree or order adjudging the Company as bankrupt or 38 insolvent, or approving as properly filed a petition seeking reorganization, arrangement, adjustment or composition of or in respect of the Company under any applicable United States Federal or state law, or appointing a custodian, receiver, liquidator, assignee, trustee, sequestrator or other similar official of the Company or of any substantial part of its property, or ordering the winding up or liquidation of its affairs, and the continuance of any such decree or order for relief or any such other decree or order unstayed and in effect for a period of 60 consecutive days; or (7) the commencement by the Company of a voluntary case or proceeding under any applicable United States Federal or state bankruptcy, insolvency, reorganization or other similar law or of any other case or proceeding to be adjudicated a bankrupt or insolvent, or the consent by it to the entry of a decree or order for relief in respect of the Company in an involuntary case or proceeding under any applicable Federal or state bankruptcy, insolvency, reorganization or other similar law or to the commencement of any bankruptcy or insolvency case or proceeding against it, or the filing by it of a petition or answer or consent seeking reorganization or relief under any applicable United States Federal or state law, or the consent by it to the filing of such petition or to the appointment of or taking possession by a custodian, receiver, liquidator, assignee, trustee, sequestrator or similar official of the Company or of any substantial part of its property, or the making by it of an assignment for the benefit of creditors, or the admission by it in writing of its inability to pay its debts generally as they become due, or the taking of corporate action by the Company in furtherance of any such action. Subject to the provisions of Section 601, the Trustee shall not be deemed to have knowledge of a default under subsections (3), (4), (5), (6) or (7) hereunder unless either (A) a Responsible Officer of the Trustee shall have actual knowledge of any such default or (B) the Trustee shall have received written notice thereof from the Company, from any Holder of a Security, from the holder of any such indebtedness or from the trustee under any such mortgage, indenture or other instrument. SECTION 502. ACCELERATION OF MATURITY; RESCISSION AND ANNULMENT. (a) If an Event of Default (other than as specified in clause (6) or (7) of Section 501) occurs and is continuing, then and in every such case the Trustee or the Holders of not less than 25% in aggregate principal amount of the then Outstanding Securities may, and the Trustee, upon request of the Holders of not less than 25% in aggregate principal amount of the then Outstanding Securities, shall declare the Securities due and payable immediately at their principal amount (or the Repurchase Price if the Event of Default includes failure to pay the Repurchase Price) together with accrued and unpaid interest, if any, to the date the Securities become due and payable, by a notice in writing to the Company (and to the Trustee if given by Holders), and upon any such declaration such principal amount (or Repurchase Price) together with accrued and unpaid interest, if any, to the date the Securities become due and payable shall become immediately due and payable. If an Event of Default with respect to the Company specified in clause (6) or (7) of Section 501 occurs, all principal of, premium applicable to, and 39 accrued interest on all then Outstanding Securities, shall be immediately due and payable without any declaration or other act on the part of the Trustee or the Holders. (b) At any time after such a declaration of acceleration has been made and before a judgment or decree for payment of the money due has been obtained by the Trustee as hereinafter in this Article provided, the Holders of a majority in principal amount of the then Outstanding Securities, by written notice to the Company and the Trustee, may rescind and annul on behalf of all Holders, such declaration and its consequences if (1) the Company has paid or deposited with the Trustee a sum sufficient to pay (A) all overdue interest on all then Outstanding Securities, (B) the principal of (and premium, if any, on) any Securities which have become due otherwise than by such declaration of acceleration and interest thereon at the rate borne by the Securities, (C) to the extent that payment of such interest is lawful, interest upon overdue interest at the rate borne by the Securities, and (D) all sums paid or advanced by the Trustee hereunder and the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel; and (2) all Events of Default, other than the non-payment of the principal of Securities which have become due solely by such declaration of acceleration, have been cured or waived as provided in Section 513. No such rescission shall affect any subsequent default or impair any right consequent thereon. SECTION 503. COLLECTION OF INDEBTEDNESS AND SUITS FOR ENFORCEMENT BY TRUSTEE. The Company covenants that if: (1) a default is made in the payment of any interest on any Security when such interest becomes due and payable and such default continues for a period of 30 days, or (2) a default is made in the payment of the principal of (or premium, if any, on) any Security at the Stated Maturity thereof including the payment of the Repurchase Price, on the Repurchase Date, 40 the Company will, upon demand of the Trustee, pay to it, for the benefit of the Holders of such Securities, the whole amount then due and payable on such Securities, for principal (and premium, if any) and interest and, to the extent that payment of such interest shall be legally enforceable, interest on any overdue principal (and premium, if any) and on any overdue interest at the rate borne by the Securities and in addition thereto, such further amount as shall be sufficient to cover the costs and expenses of collection, including the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel. If the Company fails to pay such amounts forthwith upon such demand, the Trustee, in its own name and as trustee of an express trust, may institute a judicial proceeding for the collection of the sums so due and unpaid, may prosecute such proceeding to judgment or final decree and may enforce the same against the Company or any other obligor upon the Securities and collect the moneys adjudged or decreed to be payable in the manner provided by law out of the property of the Company or any other obligor upon the Securities, wherever situated. If an Event of Default occurs and is continuing, the Trustee may in its discretion proceed to protect and enforce its rights and the rights of the Holders of Securities by such appropriate judicial proceedings as the Trustee shall deem most effectual to protect and enforce any such rights, whether for the specific enforcement of any covenant or agreement in this Indenture or in aid of the exercise of any power granted herein, or to enforce any other proper remedy. SECTION 504. TRUSTEE MAY FILE PROOFS OF CLAIM. In case of the pendency of any receivership, insolvency, liquidation, bankruptcy, reorganization, arrangement, adjustment, composition or other judicial proceeding relative to the Company or any other obligor upon the Securities or the property of the Company or such other obligor or their creditors, the Trustee (irrespective of whether the principal of the Securities shall then be due and payable as therein expressed or by declaration or otherwise and irrespective of whether the Trustee shall have made any demand on the Company for the payment of overdue principal or interest) shall be entitled and empowered, by intervention in such proceeding or otherwise, (i) to file and prove a claim for the whole amount of principal (and premium, if any) and interest with respect to the Securities and to file such other papers or documents as may be necessary or advisable in order to have the claims of the Trustee (including any claim for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel) and of the Holders of Securities allowed in such judicial proceeding, and (ii) to collect and receive any moneys or other property payable or deliverable on any such claims and to distribute the same; 41 and any custodian, receiver, assignee, trustee, liquidator, sequestrator or other similar official in any such judicial proceeding is hereby authorized by each Holder of Securities to make such payments to the Trustee and, in the event that the Trustee shall consent to the making of such payments directly to the Holders of Securities, to pay to the Trustee any amount due it for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 606. Nothing herein contained shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Holder of a Security any plan of reorganization, agreement, adjustment or composition affecting the Securities or the rights of any Holder thereof or to authorize the Trustee to vote in respect of the claim of any Holder in any such proceeding. SECTION 505. TRUSTEE MAY ENFORCE CLAIMS WITHOUT POSSESSION OF SECURITIES. All rights of action and claims under this Indenture or the Securities may be prosecuted and enforced by the Trustee without the possession of any of the Securities or the production thereof in any proceeding relating thereto, and any such proceeding instituted by the Trustee shall be brought in its own name as trustee of an express trust, and any recovery of judgment shall, after provision for the payment of reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, be for the ratable benefit of the Holders of the Securities in respect of which such judgment has been recovered. SECTION 506. APPLICATION OF MONEY COLLECTED. Subject to Article Twelve, any money collected by the Trustee pursuant to this Article shall be applied in the following order, at the date or dates fixed by the Trustee and, in case of the distribution of such money on account of principal (or premium, if any) or interest, upon presentation of the Securities and the notation thereon of the payment if only partially paid and upon surrender thereof if fully paid: FIRST: To the payment of all amounts due the Trustee under Section 606; SECOND: To the payment of the amounts then due and unpaid for principal of (and premium, if any) and interest on the Securities in respect of which or for the benefit of which such money has been collected, ratably, without preference or priority of any kind, according to the amounts due and payable on such Securities for principal (and premium, if any) and interest, respectively; and THIRD: To the Company, the remainder, if any. 42 The Trustee may fix a record date and a payment date for any payment to Holders pursuant to this Section 506. SECTION 507. LIMITATION ON SUITS. No Holder of any Security shall have any right to institute any proceeding, judicial or otherwise, with respect to this Indenture, or for the appointment of a receiver or trustee, or for any other remedy hereunder, unless (1) such Holder has previously given written notice to the Trustee of a continuing Event of Default; (2) the Holders of not less than 25% in aggregate principal amount of the then Outstanding Securities shall have made written request to the Trustee to institute such proceedings in respect of such Event of Default in its own name as Trustee hereunder; (3) such Holder or Holders have offered to the Trustee reasonable indemnity satisfactory to the Trustee against the costs, expenses and liabilities to be incurred in compliance with such request; (4) the Trustee for 60 days after its receipt of such notice, request and offer of indemnity has failed to institute any such proceeding; and (5) no direction inconsistent with such written request has been given to the Trustee during such 60-day period by the Holders of a majority in principal amount of the then Outstanding Securities; it being understood and intended that no one or more Holders shall have any right in any manner whatever by virtue of, or by availing of, any provision of this Indenture to affect, disturb or prejudice the rights of any other Holders, or to obtain or to seek to obtain priority or preference over any other Holders or to enforce any right under this Indenture, except in the manner herein provided and for the equal and ratable benefit of all the Holders. SECTION 508. UNCONDITIONAL RIGHT OF HOLDERS TO RECEIVE PRINCIPAL, PREMIUM AND INTEREST. Notwithstanding any other provision in this Indenture, the Holder of any Security shall have the right, which is absolute and unconditional, to receive payment of the principal of (and premium, if any) and (subject to Section 306) interest, if any, on such Security on the respective Stated Maturities expressed in such Security (or, in the case of redemption or repurchase, on the Redemption Date or Repurchase Date) and to institute suit for the 43 enforcement of any such payment, and such rights shall not be impaired without the consent of such Holder. SECTION 509. RESTORATION OF RIGHTS AND REMEDIES. If the Trustee or any Holder of a Security has instituted any proceeding to enforce any right or remedy under this Indenture and such proceeding has been discontinued or abandoned for any reason, or has been determined adversely to the Trustee or to such Holder, then and in every such case, subject to any determination in such proceeding, the Company, the Trustee and the Holders of Securities shall be restored severally and respectively to their former positions hereunder and thereafter all rights and remedies of the Trustee and the Holders shall continue as though no such proceeding has been instituted. SECTION 510. RIGHTS AND REMEDIES CUMULATIVE. Except as otherwise provided with respect to the replacement or payment of mutilated, destroyed, lost or stolen Securities in the last paragraph of Section 305, no right or remedy herein conferred upon or reserved to the Trustee or to the Holders of Securities is intended to be exclusive of any other right or remedy, and every right and remedy shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other appropriate right or remedy. SECTION 511. DELAY OR OMISSION NOT WAIVER. No delay or omission of the Trustee or of any Holder of any Security to exercise any right or remedy accruing upon any Event of Default shall impair any such right or remedy or constitute a waiver of any such Event of Default or an acquiescence therein. Every right and remedy given by this Article or by law to the Trustee or to the Holders of Securities may be exercised from time to time, and as often as may be deemed expedient, by the Trustee or by the Holders of Securities, as the case may be. SECTION 512. CONTROL BY HOLDERS. The Holders of not less than a majority in principal amount of the then Outstanding Securities shall have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust or power conferred on the Trustee, PROVIDED that 44 (1) such direction shall not be in conflict with any rule of law or with this Indenture, (2) the Trustee may take any other action deemed proper by the Trustee which is not inconsistent with such direction, and (3) reasonable indemnity satisfactory to the Trustee against the costs, expenses (including reasonable fees of its counsel) and liabilities shall have been offered the Trustee. SECTION 513. WAIVER OF PAST DEFAULTS. The Holders of not less than a majority in principal amount of the then Outstanding Securities may on behalf of the Holders of all the Securities waive any past default hereunder and its consequences, except a default (1) in the payment of the principal of (or premium, if any) or interest on any Security, or (2) in respect of a covenant or provision hereof which under Article Eight cannot be modified or amended without the consent of the Holder of each then Outstanding Security affected. Upon any such waiver, such Default shall cease to exist, and any Event of Default arising therefrom shall be deemed to have been cured, for every purpose of this Indenture; but no such waiver shall extend to any subsequent or other default or impair any right consequent thereon. SECTION 514. UNDERTAKING FOR COSTS. All parties to this Indenture agree, and each Holder of a Security by his acceptance thereof shall be deemed to have agreed, that any court may in its discretion require, in any suit for the enforcement of any right or remedy under this Indenture, or in any suit against the Trustee for any action taken, suffered or omitted by it as Trustee, the filing by any party litigant in such suit of an undertaking to pay the costs of such suit, and that such court may in its discretion assess reasonable costs, including reasonable attorneys' fees, against any party litigant in such suit, having due regard to the merits and good faith of the claims or defenses made by such party litigant; but the provisions of this Section shall not apply to any suit instituted by the Company, to any suit instituted by the Trustee, to any suit instituted by any Holder, or group of Holders, holding in the aggregate more than 25% in principal amount of the then Outstanding Securities, or to any suit instituted by any Holder of any Security for the enforcement of the payment of the principal of (or premium, if any) or interest on any Security 45 on or after the respective Stated Maturities expressed in such Security (or, in the case of redemption, on or after the Redemption Date or, in the case of repurchase, on or after the Repurchase Date). SECTION 515. WAIVER OF STAY OR EXTENSION LAWS. The Company covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, or plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay or extension of law wherever enacted, now or at any time hereafter in force, which may affect the covenants or the performance of this Indenture; and the Company (to the extent that it may lawfully do so) hereby expressly waives all benefit or advantage of any such law and covenants that it will not hinder, delay or impede the execution of any power herein granted to the Trustee, but will suffer and permit the execution of every such power as though no such law had been enacted. ARTICLE SIX The Trustee SECTION 601. CERTAIN DUTIES AND RESPONSIBILITIES. (a) Except during the continuance of an Event of Default, (1) the Trustee undertakes to perform such duties and only such duties as are specifically set forth in this Indenture, and no implied covenants or obligations shall be read into this Indenture against the Trustee; and (2) in the absence of bad faith on its part, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture; but in the case of any such certificates or opinions which by any provision hereof are specifically required to be furnished to the Trustee, the Trustee shall be under a duty to examine the same to determine whether or not they conform to the requirements of this Indenture. (b) In case an Event of Default has occurred and is continuing, the Trustee shall exercise such of the rights and powers vested in it by this Indenture, and use the same degree of care and skill in their exercise, as a prudent man would exercise or use under the circumstances in the conduct of his own affairs. 46 (c) No provision of this Indenture shall be construed to relieve the Trustee from liability for its own negligent action, its own negligent failure to act, or its own wilful misconduct, EXCEPT that (1) this Subsection shall not be construed to limit the effect of Subsection (a) of this Section; (2) the Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer, unless it shall be proved that the Trustee was negligent in ascertaining the pertinent facts; (3) the Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith in accordance with the direction of the Holders of a majority in principal amount of the then Outstanding Securities, relating to the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred upon the Trustee, under this Indenture; and (4) no provision of this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder, or in the exercise of any of its rights or powers, if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. (d) Whether or not therein expressly so provided, every provision of this Indenture relating to the conduct or affecting the liability of or affording protection to the Trustee shall be subject to the provisions of this Section. SECTION 602. CERTAIN RIGHTS OF TRUSTEE. Subject to the provisions of Section 601: (a) the Trustee may rely and shall be protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties; (b) any request or direction of the Company mentioned herein shall be sufficiently evidenced by a Company Request or Company Order and any resolution of the Board of Directors may be sufficiently evidenced by a Board Resolution; (c) whenever in the administration of this Indenture the Trustee shall deem it desirable that a matter be proved or established prior to taking, suffering or omitting any 47 action hereunder, the Trustee (unless other evidence be herein specifically prescribed) may, in the absence of bad faith on its part, rely upon an Officers' Certificate; (d) the Trustee may consult with counsel and the written advice of such counsel or any Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon; (e) the Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request or direction of any of the Holders of Securities pursuant to this Indenture, unless such Holders shall have offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities which might be incurred by it in compliance with such request or direction; (f) the Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document, but the Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as it may see fit, and, if the Trustee shall determine to make such further inquiry or investigation, it shall be entitled to examine the books, records and premises of the Company, personally or by agent or attorney; (g) the Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents or attorneys and the Trustee shall not be responsible for any misconduct or negligence on the part of any agent or attorney appointed with due care by it hereunder; (h) matters shall not be deemed known to the Trustee unless such matters are known to a Responsible Officer of the Trustee; and (i) except with respect to Section 1001, the Trustee shall have no duty to inquire as to the performance of the Company's covenants in Article Ten hereof. In addition, the Trustee shall not be deemed to have knowledge of any Default or Event of Default except (i) any Event of Default occurring pursuant to Section 501(1), 501(2) or 1001, or (ii) any Default or Event of Default of which the Trustee shall have received written notification or obtained actual knowledge. SECTION 603. NOT RESPONSIBLE FOR RECITALS OR ISSUANCE OF SECURITIES. The recitals contained herein and in the Securities, except the Trustee's certificates of authentication, shall be taken as the statements of the Company, and the Trustee assumes no responsibility for their correctness. The Trustee makes no representations as to the validity or 48 sufficiency of this Indenture or of the Securities. The Trustee shall not be accountable for the use or application by the Company of Securities or the proceeds thereof. SECTION 604. MAY HOLD SECURITIES. The Trustee, any Authenticating Agent, any Paying Agent, any Transfer Agent, any Security Registrar or any other agent of the Company, in its individual or any other capacity, may become the owner or pledgee of Securities and may otherwise deal with the Company with the same rights it would have if it were not Trustee, Authenticating Agent, Paying Agent, Transfer Agent, Security Registrar or such other agent. SECTION 605. MONEY HELD IN TRUST. Money held by the Trustee in trust hereunder need not be segregated from other funds except to the extent required by law. The Trustee shall be under no liability for interest on any money received by it hereunder except as otherwise agreed with the Company. SECTION 606. COMPENSATION AND REIMBURSEMENT. The Company agrees (1) to pay to the Trustee from time to time such compensation as shall be agreed upon in writing for all services rendered by it hereunder (which compensation shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust); (2) except as otherwise expressly provided herein, to reimburse the Trustee upon its request for all reasonable expenses, disbursements and advances incurred or made by the Trustee in the administration of the trusts set forth in this Indenture (including the reasonable compensation and the expenses and disbursements of its agents and counsel), except any such expense, disbursement or advance as may be attributable to its negligence or bad faith; and (3) to indemnify the Trustee for, and to hold it harmless against, any loss, liability or expense incurred without negligence or bad faith on its part, arising out of or in connection with the acceptance or administration of this trust, including the costs and expenses (including the reasonable expenses and disbursements of its counsel) of defending itself against any claim or liability in connection with the exercise or performance of any of its powers or duties hereunder. SECTION 607. CORPORATE TRUSTEE REQUIRED; ELIGIBILITY. 49 There shall at all times be a Trustee hereunder which shall be a corporation organized and doing business under the laws of the United States of America, any State thereof or the District of Columbia, authorized under such laws to exercise corporate trust powers, having a combined capital and surplus of at least $50 million subject to supervision or examination by Federal or State authority. If such corporation publishes reports of condition at least annually, pursuant to law or to the requirements of said supervising or examining authority, then for the purposes of this Section, the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time the Trustee shall cease to be eligible in accordance with the provisions of this Section, it shall resign immediately in the manner and with the effect hereinafter specified in this Article. SECTION 608. RESIGNATION AND REMOVAL; APPOINTMENT OF SUCCESSOR. (a) No resignation or removal of the Trustee and no appointment of a successor Trustee pursuant to this Article shall become effective until the acceptance of appointment by the successor Trustee under Section 609. (b) The Trustee may resign at any time by giving written notice thereof to the company. If an instrument of acceptance by a successor Trustee shall not have been delivered to the Trustee within 30 days after the giving of such notice of resignation, the resigning Trustee may petition any court of competent Jurisdiction for the appointment of a successor Trustee. (c) The Trustee may be removed at any time by Act of the Holders of a majority in principal amount of the then Outstanding Securities delivered to the Trustee and to the Company. (d) If at any time: (1) the Trustee shall fail to comply with Section 613(a) after written request therefor by the Company or by any Holder of a Security who has been a bona fide Holder of a Security for at least six months, or (2) the Trustee shall cease to be eligible under Section 607 and shall fail to resign after written request therefor by the Company or by any such Holder of a Security, or (3) the Trustee shall become incapable of acting or shall be adjudged a bankrupt or insolvent or a receiver of the Trustee or of its property shall be appointed or any public officer shall take charge or control of the Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation, 50 then, in any such case, (i) the Company by a Board Resolution may remove the Trustee, or (ii) subject to Section 514, any Holder of a Security who has been a bona fide Holder of a Security for at least six months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. (e) If the Trustee shall resign, be removed or become incapable of acting, or if a vacancy shall occur in the office of Trustee for any cause, the Company, by a Board Resolution, shall promptly appoint a successor Trustee. If, within one year after such resignation, removal or incapability, or the occurrence of such vacancy, a successor Trustee shall be appointed by Act of the Holders of a majority in principal amount of the then Outstanding Securities delivered to the Company and the retiring Trustee, the successor Trustee so appointed shall, forthwith upon its acceptance of such appointment, become the successor Trustee and supersede the successor Trustee appointed by the Company. If no successor Trustee shall have been so appointed by the Company or the Holders of Securities and accepted appointment in the manner hereinafter provided, any Holder of a Security who has been a bona fide Holder of a Security for at least six months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the appointment of a successor Trustee. (f) The Company shall give notice of each resignation and each removal of the Trustee and each appointment of a successor Trustee to the Holders of Securities in the manner provided in Section 105. Each notice shall include the name of the successor Trustee and the address of its Corporate Office. SECTION 609. ACCEPTANCE OF APPOINTMENT BY SUCCESSOR. Every successor Trustee appointed hereunder shall execute, acknowledge and deliver to the Company and to the retiring Trustee an instrument accepting such appointment, and thereupon the resignation or removal of the retiring Trustee shall become effective and such successor Trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, trusts and duties of the retiring Trustee; but, on request of the Company or the successor Trustee, such retiring Trustee shall, upon payment of its fees and expenses in accordance with Section 606, execute and deliver an instrument transferring to such successor Trustee all the rights, powers and trusts of the retiring Trustee and shall duly assign, transfer and deliver to such successor Trustee all property and money held by such retiring Trustee hereunder. Upon request of any such successor Trustee, the Company shall execute any and all instruments for more fully and certainly vesting in and confirming to such successor Trustee all such rights, powers and trusts. No successor Trustee shall accept its appointment unless at the time of such acceptance such successor Trustee shall be qualified and eligible under this Article. 51 SECTION 610. MERGER, CONVERSION, CONSOLIDATION OR SUCCESSION TO BUSINESS. Any corporation into which the Trustee may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which the Trustee shall be a party, or any corporation succeeding to all or substantially all the corporate trust business of the Trustee, shall be the successor of the Trustee hereunder, provided such corporation shall be otherwise qualified and eligible under this Article, without the execution or filing of any paper or any further act on the part of any of the parties hereto. In case any Securities shall have been authenticated, but not delivered, by the Trustee then in office, any successor by merger, conversion or consolidation to such authenticating Trustee may adopt such authentication and deliver the Securities so authenticated with the same effect as if such successor Trustee had itself authenticated such Securities. SECTION 611. APPOINTMENT OF AUTHENTICATING AGENT. The Trustee may appoint an Authenticating Agent or Agents which shall be authorized to act on behalf of the Trustee to authenticate Securities issued upon original issue and upon exchange, registration of transfer or partial redemption or partial repurchase or pursuant to Section 305, and Securities so authenticated shall be entitled to the benefits of this Indenture and shall be valid and obligatory for all purposes as if authenticated by the Trustee hereunder. Wherever reference is made in this Indenture to the authentication and delivery of Securities by the Trustee or the Trustee's certificate of authentication, such reference shall be deemed to include authentication and delivery on behalf of the Trustee by an Authenticating Agent and a certificate of authentication executed on behalf of the Trustee by an Authenticating Agent. Each Authenticating Agent shall be acceptable to the Company and shall at all times be a corporation organized and doing business under the laws of the United States of America, any State thereof or the District of Columbia, authorized under such laws to act as Authenticating Agent, having a combined capital and surplus of not less than $50 million and subject to supervision or examination by Federal or State authority. If such Authenticating Agent publishes reports of condition at least annually, pursuant to law or to the requirements of said supervising or examining authority, then for the purposes of this Section, the combined capital and surplus of such Authenticating Agent shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time an Authenticating Agent shall cease to be eligible in accordance with the provisions of this Section, such Authenticating Agent shall resign immediately in the manner and with the effect specified in this Section. Any corporation into which an Authenticating Agent may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which such Authenticating Agent shall be a party, or any corporation succeeding to the corporate agency or corporate trust business of an Authenticating Agent, shall continue to be an Authenticating Agent, provided such corporation shall be otherwise eligible under this Section, without the execution or filing of any paper or any further act on the part of the Trustee or the Authenticating Agent. 52 An Authenticating Agent may resign at any time by giving written notice thereof to the Trustee and to the Company. The Trustee may at any time terminate the agency of an Authenticating Agent by giving written notice thereof to such Authenticating Agent and to the Company. Upon receiving such a notice of resignation or upon such a termination, or in case at any time such Authenticating Agent shall cease to be eligible in accordance with the provisions of this Section, the Trustee may appoint a successor Authenticating Agent which shall be acceptable to the Company and shall mail written notice of such appointment by first-class mail, postage prepaid, to all Holders as their names and addresses appear in the Security Register. Any successor Authenticating Agent upon acceptance of its appointment hereunder shall become vested with all the rights, powers and duties of its predecessor hereunder, with like effect as if originally named as an Authenticating Agent. No successor Authenticating Agent shall be appointed unless eligible under the provisions of this Section. The Trustee agrees to pay to each Authenticating Agent from time to time reasonable compensation for its services under this Section, and the Trustee shall be entitled to be reimbursed for such payments, subject to the provisions of Section 606. If an appointment is made pursuant to this Section, the Securities may have endorsed thereon, in addition to the Trustee's certificate of authentication, an alternate certificate of authentication in the following form: This is one of the Securities described in the within-mentioned Indenture. American Bank National Association ------------------------------ As Trustee By ---------------------------- As Authenticating Agent By ---------------------------- Authorized Officer SECTION 612. NOTICE OF DEFAULTS. Within 90 days after the occurrence of any Default hereunder, the Trustee shall give to the Holders of Securities notice as provided in Section 105 of such default hereunder known to the Trustee, unless such Default shall have been cured or waived; PROVIDED, HOWEVER, that, in the case of a Default in the payment of the principal of (or premium, if 53 any) or interest on any Security, the Trustee shall be protected in withholding such notice if and so long as the board of directors, the executive committee or a trust committee of directors or Responsible Officers of the Trustee in good faith determines that the withholding of such notice is in the interest of the Holders of Securities. SECTION 613. DISQUALIFICATION; CONFLICTING INTERESTS. If the Trustee has or shall acquire a conflicting interest within the meaning of the Trust Indenture Act, the Trustee shall either eliminate such interest or resign, to the extent and in the manner provided by, and subject to the provisions of, the Trust Indenture Act and this Indenture. SECTION 614. PREFERENTIAL COLLECTION OF CLAIMS AGAINST COMPANY. If and when the Trustee shall be or become a creditor of the Company or any other obligor upon the Securities), the Trustee shall be subject to the provisions of the Trust Indenture Act regarding the collection of claims against the Company (or any such other obligor). ARTICLE SEVEN Consolidation, Merger, Conveyance, Transfer or Lease SECTION 701. COMPANY MAY CONSOLIDATE, ETC. ONLY ON CERTAIN TERMS. The Company will not, in any transaction or series of transactions, consolidate with or merge with or into any other Person or convey, transfer or lease its properties and assets substantially as an entirety to any Person, and the Company may not permit any Person to consolidate with or merge into the Company or convey, transfer or lease its properties and assets substantially as an entirety to the Company, unless: (1) in case the Company will consolidate with or merge into another Person or convey, transfer or lease its properties and assets substantially as an entirety to any Person, such Person (any such surviving Person or transferee Person being the "Surviving Person") shall be a corporation or partnership, shall be organized and validly existing under the laws of the United States of America or any political subdivision thereof and shall expressly assume by supplemental indenture reasonably satisfactory to the Trustee the due and punctual payment of the principal of and premium, if any, and interest on all the Securities and the performance of every covenant of the Indenture on the part of the Company to be performed or observed; and 54 (2) immediately after giving effect to such transaction, no Default or Event of Default shall have happened and be continuing; and (3) the Company or the Surviving Person, as the case may be, after giving effect to such transactions or series of transactions on a pro forma basis (including any Indebtedness Incurred or anticipated to be Incurred in connection with or in respect of such transaction or series of transactions ) could Incur $1.00 of additional Indebtedness (other than Permitted Indebtedness) under Section 1008; provided, however, that this clause (3) shall not prohibit the merger of a Wholly Owned Subsidiary into the Company. SECTION 702. SUCCESSOR SUBSTITUTED. Upon any consolidation of the Company with, or merger of the Company into, any other Person or any conveyance, transfer or lease of the properties and assets of the Company substantially as an entirety in accordance with Section 701, the successor Person formed by such consolidation or into which the Company is merged or to which such conveyance, transfer or lease is made shall succeed to, and be substituted for, and may exercise every right and power of, the Company under this Indenture with the same effect as if such successor Person had been named as the Company herein. When such successor Person duly assumes all of the obligations of the Company pursuant hereto and pursuant to the Securities, the predecessor Person shall be relieved of all obligations and covenants under this Indenture and the Securities. ARTICLE EIGHT Supplemental Indentures SECTION 801. SUPPLEMENTAL INDENTURES WITHOUT CONSENT OF HOLDERS. Without the consent of any Holders of Securities, the Company, when authorized by a Board Resolution, and the Trustee, at any time and from time to time, may enter into one or more indentures supplemental hereto, in form satisfactory to the Trustee, for any of the following purposes: (1) to evidence the succession of another Person to the Company and the assumption by any such successor of the covenants of the Company herein and in the Securities in accordance with Article Seven; or (2) to add to the covenants of the Company for the benefit of the Holders of Securities, or to surrender any right or power herein conferred upon the Company; or (3) to secure the Securities; or 55 (4) to provide for uncertificated Securities, as well as, or in the place of certificated Securities; or (5) to make any change to this Indenture necessary to cause the Indenture to comply with the Trust Indenture Act even if such change is inconsistent with another provision hereof; or to cure any ambiguity, to correct or supplement any provision herein which may be inconsistent with any other provision herein, or to make any other provisions with respect to matters or questions arising under this Indenture, PROVIDED such action pursuant to this clause (5) shall not adversely affect the interests of the Holders in any material respect. SECTION 802. SUPPLEMENTAL INDENTURES WITH CONSENT OF HOLDERS. With the consent of the Holders of not less than a majority in principal amount of the then Outstanding Securities, by Act of said Holders delivered to the Company and the Trustee, the Company, when authorized by a Board of Resolution, and the Trustee may enter into an indenture or indentures supplemental hereto for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Indenture or of modifying in any manner the rights of the Holders of Securities under this Indenture; PROVIDED, HOWEVER, that no such supplemental indenture shall, without the consent of the Holder of each then Outstanding Security affected thereby, (1) change the Stated Maturity of the principal of, or any installment of interest on, any Security, or reduce the principal amount thereof or the rate of interest thereon or any premium payable upon the redemption thereof, or the Repurchase Price or change the Place of Payment where, or the coin or currency in which, any Security or any premium or the interest thereon is payable, or impair the right to institute suit for the enforcement of any such payment on or after the Stated Maturity thereof (or, in the case of a redemption or repurchase, on or after the Redemption Date or Repurchase Date), or modify the provisions of this Indenture with respect to the subordination of the Securities in a manner adverse to the Holders, or (2) reduce the percentage in principal amount of the then Outstanding Securities, the consent of whose Holders is required for any such supplemental indenture, or the consent of whose Holders is required for any waiver (of compliance with certain provisions of this Indenture or certain defaults hereunder and their consequences) provided for in this Indenture, or (3) change the obligation of the Company to maintain an office or agency in the Borough of Manhattan, The City of New York, or 56 (4) modify any of the provisions of this Section, Section 513 or Section 1016, except to increase any such percentage or to provide that certain other provisions of this Indenture cannot be modified or waived without the consent of the Holder of each then Outstanding Security affected thereby. It shall not be necessary for any Act of Holders of Securities under this Section to approve the particular form of any proposed supplemental indenture, but it shall be sufficient if such Act shall approve the substance thereof. Notwithstanding the foregoing, a supplemental indenture changing or adding any provision of this Indenture (whether entered into pursuant to Section 801 or Section 802) shall not make any change or addition that affects the rights under Article Twelve in a manner adverse to any holder of an issue of Senior Indebtedness unless the holders of such issue of Senior Indebtedness pursuant to its terms consent to the change or addition. SECTION 803. EXECUTION OF SUPPLEMENTAL INDENTURES. In executing, or accepting the additional trusts created by, any supplemental indenture permitted by this Article or the modifications thereby of the trusts created by this Indenture, the Trustee shall be entitled to receive, and (subject to Section 601) shall be fully protected in relying upon, an opinion of Counsel stating that the execution of such supplemental indenture is authorized or permitted by this Indenture. The Trustee may, but shall not be obligated to, enter into any such supplemental indenture which affects the Trustee's own rights, duties or immunities under this Indenture or otherwise. SECTION 804. EFFECT OF SUPPLEMENTAL INDENTURES. Upon the execution of any supplemental indenture under this Article, this Indenture shall be modified in accordance therewith, and such supplemental indenture shall form a part of this Indenture for all purposes; and every Holder of Securities theretofore or thereafter authenticated and delivered hereunder shall be bound thereby. SECTION 805. NOTATION ON OR EXCHANGE OF SECURITIES. (a) If an amendment, supplement or waiver changes the terms of a Security, the Trustee may require the Holder of the Security to deliver it to the Trustee or require the Holder to put an appropriate notation on the Security. The Trustee may place an appropriate notation on the Security about the changed terms and return it to the Holder. Alternatively, if the Company or the Trustee so determines, the Company in exchange for the Security shall issue and the Trustee shall authenticate a new Security that reflects the changed terms. Any failure 57 to make the appropriate notation or to issue a new Security shall not affect the validity of such amendment, supplement or waiver. (b) In the event the Conversion Condition is satisfied, if the Company or the Trustee so determines, the Holders shall deliver their Securities to the Trustee and the Company shall issue and the Trustee shall authenticate a new certificate in exchange for such Securities that reflects (i) the designation of the Securities as the " % Subordinated Notes due 2005" of the Company and (ii) the Satsifaction of the Conversion Condition. SECTION 806. NOTICE OF SUPPLEMENTAL INDENTURES. Promptly after the execution by the Company and the Trustee of any supplemental indenture pursuant to the provisions of Section 802, the Company shall give notice, setting forth in general terms the substance of such supplemental indenture, in the manner provided in Section 105. Any failure of the Company to give such notice, or any defect therein, shall not in any way impair or affect the validity of any such supplemental indenture. SECTION 807. CONFORMITY WITH TRUST INDENTURE ACT. Every supplemental indenture executed pursuant to this Article shall conform to the requirements of the Trust Indenture Act as then in effect. ARTICLE NINE Meetings of Holders of Securities SECTION 901. PURPOSES FOR WHICH MEETINGS MAY BE CALLED. A meeting of Holders of Securities may be called at any time and from time to time pursuant to this Article to make, give or take any request, demand, authorization, direction, notice, consent, election, waiver or other action provided by this Indenture to be made, given or taken by Holders of Securities. SECTION 902. CALL, NOTICE AND PLACE OF MEETINGS. (a) The Trustee may at any time call a meeting of Holders of Securities for any purpose specified in Section 901, to be held at such time and at such place in the Borough of Manhattan, The City of New York as the Trustee shall determine. Notice of every meeting of Holders of Securities, setting forth the time and the place of such meeting and in general terms the action proposed to be taken at such meeting, shall be given, in the manner provided 58 in Section 105, not less than 20 nor more than 60 days prior to the date fixed for the meeting. (b) In case at any time the Company, pursuant to a Board Resolution, or the Holders of at least 10% in principal amount of the then Outstanding Securities shall have requested the Trustee to call a meeting of the Holders of Securities for any purpose specified in section 901, by written request setting forth in reasonable detail the action proposed to be taken at the meeting, and the Trustee shall not have mailed the notice of such meeting within 20 days after receipt of such request or shall not thereafter proceed to cause the meeting to be held as provided herein, then the Company or the Holders of Securities in the amount above specified, as the case may be, may determine the time and the place in the Borough of Manhattan, The City of New York for such meeting and may call such meeting for such purposes by giving notice thereof as provided in subsection (a) of this Section. SECTION 903. PERSONS ENTITLED TO VOTE AT MEETINGS. To be entitled to vote at any meeting of Holders of Securities, a Person shall be (1) a Holder of one or more then Outstanding Securities, or (2) a Person appointed by an instrument as proxy for a Holder or Holders of one or more outstanding Securities by such Holder or Holders. The only Persons who shall be entitled to be present or to speak at such meeting of Holders shall be the Persons entitled to vote at such meetings and their counsel, any representatives of the Trustee and its counsel and any representatives of the Company and its counsel. SECTION 904. QUORUM; ACTION. The Persons entitled to vote a majority in principal amount of the then Outstanding Securities shall constitute a quorum. In the absence of a quorum within 30 minutes of the time appointed for any such meeting, the meeting shall, if convened at the request of Holders of Securities, be dissolved. In any other case the meeting may be adjourned for a period of not less than 10 days as determined by the chairman of the meeting prior to the adjournment of such meeting. In the absence of a quorum at any such adjourned meeting, such adjourned meeting may be further adjourned for a period of not less than 10 days as determined by the chairman of the meeting prior to the adjournment of such adjourned meeting. Notice of the reconvening of any adjourned meeting shall be given as provided in Section 902(a), except that such notice need be given only once not less than five days prior to the date on which the meeting is scheduled to be reconvened. Subject to the requirements of Section 802, any resolution passed or decision taken at any meeting of Holders of Securities duly held in accordance with this Section shall be binding on all the Holders of the Securities, whether or not present or represented at the meeting. 59 SECTION 905. DETERMINATION OF VOTING RIGHTS; CONDUCT AND ADJOURNMENT OF MEETINGS. (a) Notwithstanding any other provisions of this Indenture, the Trustee may make such reasonable regulations as it may deem advisable for any meeting of Holders of Securities in regard to proof of the holding of Securities and of the appointment of proxies and in regard to the appointment and duties of inspectors of votes, the submission and examination of proxies, certificates and other evidence of the right to vote, and such other matters concerning the conduct of the meeting as it shall deem appropriate. Except as otherwise permitted or required by any such regulations, the holding of Securities shall be proved in the manner specified in Section 103 and the appointment of any proxy shall be proved in the manner specified in Section 103. Such regulations may provide that written instruments appointing proxies, regular on their face, may be presumed valid and genuine without the proof specified in Section 103 or other proof. (b) The Trustee shall, by an instrument in writing, appoint a temporary chairman of the meeting, unless the meeting shall have been called by the Company or by Holders of Securities as provided in Section 902(b), in which case the Company or the Holders of Securities calling the meeting, as the case may be, shall in like manner appoint a temporary chairman. A permanent chairman and a permanent secretary of the meeting shall be elected by vote of the Persons entitled to vote a majority in principal amount of the then Outstanding Securities represented at the meeting. (c) At any meeting each Holder of a Security or proxy shall be entitled to one vote for each $1,000 principal amount of Securities held or represented by him; PROVIDED, HOWEVER, that no vote shall be cast or counted at any meeting in respect of any Security challenged as not outstanding and ruled by the chairman of the meeting to be not Outstanding. The chairman of the meeting shall have no right to vote, except as a Holder of a Security or proxy. (d) Any meeting of Holders of Securities duly called pursuant to Section 902 at which a quorum is present may be adjourned from time to time by Persons entitled to vote a majority in principal amount of the then Outstanding Securities represented at the meeting; and the meeting may be held as so adjourned without further notice. SECTION 906. COUNTING VOTES AND RECORDING ACTION OF MEETINGS. The vote upon any resolution submitted to any meeting of Holders of Securities shall be by written ballots on which shall be subscribed the signature of the Holders of Securities or of their representatives by proxy and the principal amounts and serial numbers of the Outstanding Securities held or represented by them. The permanent chairman of the meeting shall appoint two inspectors of votes who shall count all votes cast at the meeting for or against any resolution and who shall make and file with the secretary of the meeting their verified writ- 60 ten reports in duplicate of all votes cast at the meeting. A record, at least in duplicate, of the proceedings of each meeting of Holders of Securities shall be prepared by the secretary of the meeting and there shall be attached to said record the original reports of the inspectors of votes on any vote by ballot taken thereat and affidavits by one or more persons having knowledge of the facts setting forth a copy of the notice of the meeting and showing that said notice was given a provided in Section 902 and, if applicable, Section 904. Each copy shall be signed and verified by the affidavits of the permanent chairman and secretary of the meeting and one such copy shall be delivered to the Company and another to the Trustee to be preserved by the Trustee, the latter to have attached thereto the ballots voted at the meeting. Any record so signed and verified shall be conclusive evidence of the matters therein stated. SECTION 907. ACTION BY WRITTEN CONSENT. Notwithstanding any other provisions of this Article Nine, holders may take any action permitted to be taken pursuant to Section 901 herein by written consent. ARTICLE TEN Covenants SECTION 1001. PAYMENT OF PRINCIPAL, PREMIUM AND INTEREST. The Company will duly and punctually pay the principal of (and premium, if any) and interest on the Securities in accordance with the terms of the Securities and this Indenture. SECTION 1002. MAINTENANCE OF OFFICE OR AGENCY. The Company hereby appoints the corporate office of the Trustee as its agent in the Borough of Manhattan, The City of New York, where Securities may be presented or surrendered for payment, and for registration of transfer or exchange and where notices and demands to or upon the Company in respect of the Securities and this Indenture may be served. The Company may at any time and from time to time vary or terminate the appointment of any such agent or appoint any additional agents for any or all of such purposes; PROVIDED, HOWEVER, that the Company will maintain in the Borough of Manhattan, The City of New York, an office or agency where Securities may be presented or surrendered for payment, where Securities may be surrendered for registration of transfer or exchange, and where notices and demands to or upon the Company in respect of the Securities and this Indenture may be served. The Company will give prompt written notice to the Trustee and the Holders of the appointment or termination of any such agent and of the location and any change in the location of any such office or agency. 61 If at any time the Company shall fail to maintain any such required office or agency in the Borough of Manhattan, The City of New York or shall fail to furnish the Trustee with the address thereof, presentations and surrenders may be made (subject to the limitations described in the preceding paragraph) at and notices and demands may be served on the Corporate Office of the Trustee, and the Company hereby appoints the same as its agent to receive such respective presentations, surrenders, notices and demands. SECTION 1003. MONEY FOR SECURITIES; PAYMENTS TO BE HELD IN TRUST; NOTICE REGARDING PAYING AGENTS. If the Company shall at any time act as its own Paying Agent, it will, on or before each due date of the principal of (and premium, if any) or interest, if any, on any of the Securities, segregate and hold in trust for the benefit of the Persons entitled thereto a sum sufficient to pay the principal (and premium, if any) or interest so becoming due until such sums shall be paid to such Persons or otherwise disposed of as herein provided and will promptly notify the Trustee of its actions or failure so to act. Whenever the Company shall have one or more Paying Agents, it will, prior to each due date of the principal of (and premium, if any) or interest, if any, on any Securities, deposit with a Paying Agent a sum sufficient to pay the principal (and premium, if any) or interest so becoming due, such sum to be held in trust for the benefit of the Persons entitled to such principal, premium or interest, and (unless such Paying Agent is the Trustee) the Company will promptly notify the Trustee of its action or failure so to act. The Company will cause each Paying Agent other than the Trustee to execute and deliver to the Trustee an instrument in which such Paying Agent shall agree with the Trustee, subject to the provisions of this Section, that such Paying Agent will: (1) hold all sums held by it for the payment of the principal of (and premium, if any) or interest, if any, on Securities in trust for the benefit of the Persons entitled thereto until such sums shall be paid to such Persons or otherwise disposed of as herein provided; (2) give the Trustee written notice of any default by the Company (or any other obligor upon the Securities) in the making of any payment of principal (and premium, if any) or interest, if any; and (3) at any time during the continuance of any such default, upon the written request of the Trustee, forthwith pay to the Trustee all sums so held in trust by such Paying Agent. The Company may at any time, for the purpose of obtaining the satisfaction and discharge of this Indenture or for any other purpose, pay, or by Company Order direct any Pay- 62 ing Agent to pay, to the Trustee all sums held in trust by the Company or such Paying Agent, such sums to be held by the Trustee upon the same trusts as those upon which such sums were held by the Company or such Paying Agent; and, upon such payment by any Paying Agent to the Trustee, such Paying Agent shall be released from all further liability with respect to such money. Any money deposited with the Trustee or any Paying Agent, or then held by the Company, in trust for the payment of the principal of (and premium, if any) or interest, if any, on any Security and remaining unclaimed for two years after such principal (and premium, if any) or interest has become due and payable shall be paid to the Company on Company Request, or (if then held by the Company) shall be discharged from such trust; and any Holder shall thereafter, as an unsecured general creditor, look only to the Company for payment thereof, and all liability of the Trustee or such Paying Agent with respect to such trust money, and all liability of the Company as trustee thereof, shall thereupon cease. Prior to the appointment of any Paying Agent (other than the Trustee) by the Company, the Company shall give written notice of such appointment (which notice shall include the address for purposes of notice hereunder of such Paying Agent) to the holders of each issue of Senior Indebtedness in accordance with the terms of each such issue. SECTION 1004. EXISTENCE. Subject to Article Seven, the Company will do or cause to be done all things necessary to preserve and keep in full force and effect its existence, rights (charter and statutory) and franchise; PROVIDED, HOWEVER, that the Company shall not be required to preserve any such right or franchise if the Board of Directors shall determine that the preservation thereof is no longer desirable in the conduct of the business of the Company and that the loss thereof is not disadvantageous in any material respect to the Holders. SECTION 1005. MAINTENANCE OF PROPERTIES. The Company will cause all properties used or useful in the conduct of its business or the business of any Subsidiary to be maintained and kept in good condition, repair and working order and supplied with all necessary equipment and will cause to be made all necessary repairs, renewals, replacements, betterments and improvements thereof, all as in the judgment of the Company may be necessary so that the business carried on in connection therewith may be properly and advantageously conducted at all times; PROVIDED, HOWEVER, that nothing in this Section shall prevent the Company from discontinuing the operation or maintenance of any of such properties if such discontinuance is, in the judgment of the Company, desirable in the conduct of its business or the business of any Subsidiary and not disadvantageous in any material respect to the Holders. 63 SECTION 1006. PAYMENT OF TAXES AND OTHER CLAIMS. The Company will pay or discharge or cause to be paid or discharged, before the same shall become delinquent, (1) all taxes, assessments and governmental charges levied or imposed upon the Company or any Subsidiary or upon the income, profits or property of the Company or any Subsidiary, and (2) all lawful claims for labor, materials and supplies which, if unpaid, might by law become a Lien upon the property of the Company or any Subsidiary; PROVIDED, HOWEVER, that the Company shall not be required to pay or discharge or cause to be paid or discharged any such tax, assessment, charge or claim whose amount, applicability or validity is being contested in good faith by appropriate proceedings. SECTION 1007. LIMITATION ON TRANSACTIONS WITH AFFILIATES. The Company will not, and will not permit any of its Subsidiaries to, directly or indirectly, enter into or permit to exist any transaction (including, without limitation, the purchase, sale, lease or exchange of any property or the rendering of any service) with or for the benefit of, an Affiliate of the Company or any Subsidiary (other than transactions between the Company and a Wholly Owned Subsidiary of the Company) (an "Affiliate Transaction"), other than Affiliate Transactions on terms that are no less favorable in the aggregate than those that might reasonably have been obtained in a comparable transaction on an arm's length basis from a Person that is not an Affiliate; PROVIDED that neither the Company nor any of its Subsidiaries shall enter into an Affiliate Transaction or series of related Affiliate Transactions involving a value of $10 million or more, unless a majority of the disinterested members of the Board of Directors of the Company determines in good faith as evidenced by a Board Resolution that the terms are no less favorable in the aggregate to the Company than those that might reasonably have been obtained in a comparable transaction on an arm's length basis from a Person that is not an Affiliate. SECTION 1008. LIMITATION ON INCURRENCE OF ADDITIONAL INDEBTEDNESS. (a) Except as set forth in this Section 1008, the Company will not, and will not permit any of its Subsidiaries to, Incur any Indebtedness (including Acquired Indebtedness) other than Permitted Indebtedness. (b) Notwithstanding Section 1008(a), the Company and its Subsidiaries may Incur Indebtedness if (i) no Default or Event of Default shall have occurred and be continuing at the time of or as a consequence of the Incurrence of such Indebtedness and (ii) after giving effect to the Incurrence of such Indebtedness (and all other Indebtedness Incurred since the end of the most recently completed fiscal quarter of the Company preceding the date of determination), Indebtedness of the Company calculated on a consolidated basis in accordance with GAAP, shall not be more than the greater of (x) the product of the EBITDA of the Company for the four most recent fiscal quarters for which financial information is available, 64 multiplied by ten (10) for the period beginning with the Issue Date through July __, 1997 and multiplied by eight thereafter and (y) the product of Financed Pops as of the last day of such four fiscal quarter period multiplied by $70. The calculations in the preceding sentence shall be made assuming in the case of acquisitions or dispositions which occurred during such four-quarter period or subsequent to such four-quarter period and on or prior to the date of the transaction giving rise to the calculations referred to in the preceding sentence, that such acquisitions or dispositions occurred (on a pro forma basis) on the first day of such four-quarter period. SECTION 1009. LIMITATION ON RESTRICTED PAYMENTS. The Company will not, directly or indirectly: (i) declare or pay any dividend on, or make any distribution to the holders of, any shares of the Company's Capital Stock (other than dividends or distributions payable in its Capital Stock (other than Disqualified Capital Stock) or in options, warrants or other rights to purchase Capital Stock (other than Disqualified Capital Stock)), or (ii) purchase, redeem or otherwise acquire or retire for value, Capital Stock of the Company (including options, warrants or other rights to acquire such Capital Stock), or (iii) make any Investment other than a Permitted Investment; (each of the foregoing actions set forth in clauses (i) through (iii) being referred to as a "Restricted Payment") unless, at the time of such Restricted Payment, and after giving effect thereto: (a) no Default or Event of Default shall have occurred and be continuing; (b) after giving effect to such Restricted Payment (and all other Restricted Payments made since the end of the most recently completed fiscal quarter of the Company preceding the date of determination) and the Incurrence of any Indebtedness the net proceeds of which are used to finance such Restricted Payment (and such other Restricted Payments), the Company could incur $1.00 of additional Indebtedness under Section 1008(b), other than Permitted Indebtedness; and (c)(1) after giving effect to such Restricted Payment, the aggregate amount of all Restricted Payments (including those made pursuant to clause (c)(2) below) made on or after July 1, 1995 shall not exceed the sum of (i) the amount determined by subtracting (x) 1.5 times the Consolidated Interest Expense of the 65 Company for the period (taken as one accounting period) from July 1, 1995 to the last day of the fiscal quarter preceding the date of the Restricted Payment (the "Computation Period") from (y) EBITDA of the Company for the Computation Period, plus (ii) the aggregate net proceeds, including the fair market value of property other than cash (as determined by the Board of Directors, whose good faith determination shall be evidenced by a resolution filed with the Trustee), received by the Company from the issuance or sale on or after the Issue Date of any shares of its Capital Stock (excluding Disqualified Capital Stock, but including Capital Stock issued upon the conversion of, or exchange for, any Indebtedness convertible into or exchangeable for Capital Stock of the Company (other than Disqualified Capital Stock) or options, warrants or rights to purchase Capital Stock of the Company (other than Disqualified Capital Stock)) to any Person (other than a Subsidiary of the Company); provided, however, that in the event the Conversion Condition is satisfied, the aggregate net proceeds received by the Company from the issuance of its Capital Stock in respect of the conversion of the 6 3/4% Convertible Subordinated Debentures due 2009 shall be excluded from the aggregate net proceeds received by the Company pursuant to this clause (ii). For purposes of clause (c)(ii) above, the value of the aggregate net proceeds received by the Company from the issuance or sale of its Capital Stock upon the conversion or exercise of any other securities convertible into or exchangeable for Capital Stock of the Company will be deemed to be an amount equal to (a) the sum of (i) (x) in the case of Indebtedness convertible into shares of Capital Stock, the principal amount or accreted value (whichever is less) of such Indebtedness on the date of such conversion or exchange or (y) in the case of options, warrants or other rights to purchase shares of Capital Stock, the cash proceeds, if any, received by the Company upon issuance of such options, warrants or other rights, and (ii) the additional cash consideration, if any, received by the Company upon conversion or exchange, less any payment on account of fractional shares, MINUS (b) all expenses incurred in connection with such issuance or sale. (2) The Company may make Restricted Payments not subject to clauses (b) and (c)(1) above in an aggregate amount not to exceed $10 million on or after July 1, 1995. Notwithstanding the foregoing, these provisions do not prohibit: (1) the payment of any dividend or making of any distribution within 60 days after the date of its declaration if the dividend or distribution would have been permitted on the date of declaration; (2) the acquisition of Capital Stock either (i) solely in exchange for shares of Qualified Capital Stock, or (ii) through the application of net proceeds of a substantially concurrent sale for cash (other 66 than to a Subsidiary of the Company) of shares of Qualified Capital Stock; (3) the elimination of fractional shares or warrants; and (4) the purchase for value of shares of Capital Stock of the Company held by directors, officers or employees upon death, disability, retirement, termination of employment not to exceed $1 million; PROVIDED that in the case of clauses (2), (3), and (4) no Default or Event of Default shall have occurred or be continuing at the time of such payment or as a result thereof. In determining the aggregate amount of Restricted Payments made subsequent to the Issue Date, amounts expended pursuant to clauses (1), 2(ii), (3) and (4) shall be included in such calculation. SECTION 1010. LIMITATION ON DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES. The Company will not, and will not permit any of its Subsidiaries to, directly or indirectly, create or otherwise cause or permit to exist, or become effective any encumbrance or restriction on the ability of any Subsidiary to (a) pay dividends or make any other distributions on its Capital Stock, (b) make loans or advances or to pay any Indebtedness or other obligation owed to the Company or a Subsidiary of the Company or (c) transfer any of its properties or assets to the Company, except for such encumbrances or restrictions existing under or by reason of: (1) applicable law; (2) the Indenture; (3) customary non-assignment provisions of any lease governing a leasehold interest of the Company or any Subsidiary of the Company; (4) any instrument governing Acquired Indebtedness, which encumbrance or restriction is not applicable to the Company or any Subsidiary of the Company, or the properties or assets of the Company or any Subsidiary of the Company, other than the Person, the properties or assets so acquired and which encumbrance or restriction was not put in place in anticipation of or in connection with such acquisition; (5) agreements existing on the Issue Date; (6) security agreements permitted by the Indenture securing Indebtedness permitted by the Indenture to the extent such security agreements restrict the transfer of the property subject thereto; (7) the Credit Agreements as in effect on the Issue Date; or (8) an agreement effecting a refinancing, modification, replacement, renewal, restatement, refunding, deferral, extension, substitution, supplement, reissuance or resale of Indebtedness issued, assumed or incurred pursuant to an agreement referred to in clause (2), (4), (5), (6) or (7) above; PROVIDED, HOWEVER, that the provisions relating to such encumbrance or restriction contained in any such refinancing, replacement or substitution agreement are not less favorable to the Company in any material respect in the reasonable judgment of the Board of Directors of the Company than the provisions relating to such encumbrance or restriction contained in agreements referred to in such clause (2), (4), (5), (6) or (7). SECTION 1011. PROVISION OF FINANCIAL INFORMATION. The Company shall deliver to the Trustee and mail to each Holder, within 15 days after it files them with the Commission, copies of its annual report and of the information, documents and other reports (or copies of such portions of any of the foregoing as the 67 Commission may by rules and regulations prescribe) which the Company is required to file with the Commission pursuant to Section 13 or 15(d) of the Exchange Act. Notwithstanding that the Company may not be required to remain subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act, the Company shall continue to file with the Commission and provide the Trustee and Holders with such annual reports and such information, documents and other reports (or copies of such portions of any of the foregoing as the Commission may be rules and regulations prescribe) which are specified in Section 13 and 15(d) of the Exchange Act. The Company also shall comply with the other provisions of Section 314(a) of the Trust Indenture Act. SECTION 1012. INVESTMENT COMPANY ACT. The Company shall, and shall cause its Subsidiaries to, operate their respective businesses so as not to be required to register as investment companies under the Investment Company Act of 1940, as amended. SECTION 1013. NOTICE OF DEFAULT. The Company shall notify the Trustee and any Paying Agent in writing of each and every default or Event of Default as soon as practicable after the occurrence thereof is known to the Company. SECTION 1014. PROHIBITION ON INCURRENCE OF SUBSIDIARY INDEBTEDNESS. After the Issue Date, the Company shall not permit any of its Subsidiaries to incur any Indebtedness other than (i) Indebtedness incurred pursuant to a Senior Secured Credit Facility, (ii) Vendor Financing Indebtedness and (iii) Intercompany Indebtedness. After the Issue Date, the Company shall not permit any of its Subsidiaries to issue any Preferred Stock (other than to the Company or a Wholly Owned Subsidiary of the Company). SECTION 1015. ANNUAL STATEMENTS BY OFFICERS AS TO DEFAULT. The Company will deliver to the Trustee, within 120 days after the end of each fiscal year of the Company ending after the date hereof, an Officers' Certificate, stating whether or not to the best knowledge of the signers thereof the Company is in default in the performance and observance of any of the terms, provisions and conditions of Sections 1001 to 1015, inclusive, and if the Company shall be in default, specifying all such defaults and the nature and status thereof of which they may have knowledge. SECTION 1016. LIMITATION ON LIENS WITH RESPECT TO PARI PASSU 68 OR SUBORDINATED INDEBTEDNESS. The Company will not, and will not permit any Subsidiary of the Company to Incur as security for any Pari Passu Indebtedness or Subordinated Indebtedness (including any assumption, Guarantee or other liability with respect thereto by any Subsidiary of the Company), any Lien of any kind upon any property or assets (including any intercompany notes) of the Company or any Subsidiary of the Company, or any income or profits therefrom, unless the Securities are directly secured equally and ratably with (or prior to in the case of Subordinated Indebtedness) the obligation or liability secured by such Lien, except for any Lien securing Acquired Indebtedness; provided that any such Lien only extends to the assets that were subject to such Lien securing such Acquired Indebtedness prior to the related acquisition by the Company. SECTION 1017. WAIVER OF CERTAIN COVENANTS. The Company may omit in any particular instance to comply with any covenant or condition set forth in Sections 1001 to 1016, inclusive, if before the time for such compliance the Holders of at least a majority in principal amount of the then Outstanding Securities shall, by Act of such Holders, either waive such compliance in such instance or generally waive compliance with such covenant or condition, but no such waiver shall extend to or affect such covenant or condition except to the extent so expressly waived, and, until such waiver shall become effective, the obligations of the Company and the duties of the Trustee in respect of any such covenant or condition, if any, shall remain in full force and effect. ARTICLE ELEVEN Redemption of Securities SECTION 1101. RIGHT OF REDEMPTION. The Securities may be redeemed at the Company's option, in whole or in part from time to time, at any time on or after _________, 2000 at the Redemption Prices (expressed as a percentage of the principal amount) specified in the form of Securities hereinbefore set forth in Section 202, together with accrued interest to the Redemption Date. 69 SECTION 1102. APPLICABILITY OF ARTICLE. Redemption of Securities at the election of the Company, as permitted by any provision of this Indenture, shall be made in accordance with such provision and this Article. SECTION 1103. ELECTION TO REDEEM; NOTICE TO TRUSTEE. The election of the Company to redeem any Securities pursuant to Section 1101 shall be evidenced by a Board Resolution. In case of any redemption at the election of the Company of less than all the Securities, the Company shall, at least 60 days prior to the Redemption Date fixed by the Company (unless a shorter notice shall be satisfactory to the Trustee), notify the Trustee of such Redemption Date and of the principal amount of Securities to be redeemed. In the event of a redemption at the election of the Company of all the Securities, the Company shall, at least 10 days prior to the date on which notice of such redemption is given to the Holders (unless a shorter notice shall be satisfactory to the Trustee), notify the Trustee of such redemption (including the proposed Redemption Date). SECTION 1104. SELECTION BY TRUSTEE OF SECURITIES TO BE REDEEMED. If less than all the Securities are to be redeemed, the particular Securities to be redeemed shall be selected not more than 45 days prior to the Redemption Date by the Trustee, from the then Outstanding Securities not previously called for redemption, in compliance with the requirements of the principal national securities exchange, if any, on which the Securities are listed or, if the Securities are not then listed on a national securities exchange, on a PRO RATA basis, by lot or by such method as the Trustee shall deem fair and appropriate and which may provide for the selection for redemption of portions of the principal amount of Securities; PROVIDED, HOWEVER, that no such partial redemption shall reduce the principal amount of a Security not redeemed to less than $1,000. The Trustee shall promptly notify the Company and each Security Registrar in writing of the Securities selected for redemption and, in the case of any Securities selected for partial redemption, the principal amount thereof to be redeemed. For all purposes of this Indenture, unless the context otherwise requires, all provisions relating to the redemption of Securities shall relate, in the case of any Securities redeemed or to be redeemed only in part, to the portion of the principal amount of such Securities which has been or is to be redeemed. SECTION NOTICE OF REDEMPTION. (a) Notice of redemption shall be given to the Holders of the Securities to be redeemed in the manner provided in Section 105 not less than 30 nor more than 60 days prior to the Redemption Date. All notice of redemption shall state: (1) the Redemption Date, (2) the Redemption Price, 70 (3) if less than all the then Outstanding Securities are to be redeemed, the identification (and, in the case of partial redemption, the principal amounts) of the particular Securities to be redeemed, and the aggregate principal amount of Securities which will be Outstanding after such partial redemption, (4) that on the Redemption Date the Redemption Price will become due and payable upon each such Security to be redeemed and that interest thereon will cease to accrue on and after said date, (5) the place or places where such Securities are to be surrendered for payment of the Redemption Price, and (6) the CUSIP Number, if any, applicable to the Securities. In the case of partial redemption, the notice shall specify the last date on which exchanges or transfers of Securities may be made pursuant to Section 304, and the serial numbers and the portions thereof called for redemption. (b) The Trustee, or the Company, as the case may be, shall also concurrently with giving the notice referred to in Section 1105(a) mail a copy of such notice to holders of Designated Senior Indebtedness. (c) Notice of redemption of Securities to be redeemed at the election of the Company shall be given by the Company or, at the Company's request, by the Trustee in the name and at the expense of the Company. SECTION 1106. DEPOSIT OF REDEMPTION PRICE. At least one Business Day prior to any Redemption Date, the Company shall deposit with the Trustee or with a Paying Agent (or, if the Company is acting as its own Paying Agent, segregate and hold in trust as provided in Section 1003) an amount of money sufficient to pay the Redemption Price of, and (except if the Redemption Date shall be an Interest Payment Date) accrued interest on, all the Securities which are to be redeemed on that date, together with an Officers' Certificate to the effect that such redemption is not prohibited by the terms of any outstanding issue of Senior Indebtedness. SECTION 1107. SECURITIES PAYABLE ON REDEMPTION DATE. 71 Notice of redemption having been given as aforesaid, the Securities so to be redeemed shall, on the Redemption Date, become due and payable at the Redemption Price therein specified, and from and after such date (unless the Company shall default in the payment of the Redemption Price and accrued interest) such Securities shall cease to bear interest. Upon surrender of any such Security for redemption in accordance with said notice, such Security shall be paid by the Company at the Redemption Price, together with accrued interest to the Redemption Date; PROVIDED, HOWEVER, that installments of interest on Securities whose Stated Maturity is on or prior to the Redemption Date shall be payable to the Holders of such Securities registered as such at the close of business on the relevant Record Date according to their terms and the provisions of Section 306. If any Security called for redemption shall not be so paid upon surrender thereof for redemption, the principal (and premium, if any) shall, until paid, bear interest from the Redemption Date at the rate borne by the Security. SECTION 1108. SECURITIES REDEEMED IN PART. Any Security which is to be redeemed only in part shall be surrendered at an office or agency of the Company designated for that purpose pursuant to Section 1002 (with, if the Company or the Trustee so requires, due endorsement by, or a written instrument of transfer in form satisfactory to the Company and the Trustee duly executed by, the Holder thereof or his attorney duly authorized in writing), and the Company shall execute, and the Trustee shall authenticate and deliver to the Holder of such Security without service charge, a new Security or Securities, of any authorized denomination as requested by such Holder, in aggregate principal amount equal to and in exchange for the unredeemed portion of the principal of the Security so surrendered. ARTICLE TWELVE Subordination of Securities SECTION 1201. SECURITIES SUBORDINATE TO SENIOR INDEBTEDNESS. The Company covenants and agrees, and each Holder of a Security, by his acceptance thereof, likewise covenants and agrees, that, to the extent and in the manner hereinafter set forth in this Article, the Indebtedness represented by the Securities, the payment of the principal of (and premium, if any) and interest on each and all of the Securities are hereby expressly made subordinate and subject in right of payment to the prior payment in full of all Senior Indebtedness of the Company and shall rank PARI PASSU in right of payment with the Company's 8.75% Convertible Senior Subordinated Notes due 2001. 72 SECTION 1202. PAYMENT OVER OF PROCEEDS UPON DISSOLUTION, ETC. In the event of any payment or distribution of assets to creditors upon (a) any insolvency or bankruptcy case or proceeding, or any receivership, liquidation, reorganization or other similar case or proceeding in connection therewith, relative to the Company or to its creditors, as such, or to its assets, or (b) any liquidation, dissolution or other winding up of the Company, whether voluntary or involuntary and whether or not involving insolvency or bankruptcy, or (c) any assignment for the benefit of creditors or any other marshalling of assets and liabilities of the Company, then and in any such event the Holders of Senior Indebtedness shall be first entitled to receive payment in full of all amounts due or to become due on or in respect of all Senior Indebtedness in cash or Cash Equivalents (including, without limitation, interest accruing after commencement of any case or proceeding referenced in clause (a)), or provision shall be made for such payment, before the Holders of the Securities are entitled to receive any payment with respect to the principal of or premium, if any, or interest on the Securities or the Trustee is entitled to receive any payment hereunder, and to that end the holders of Senior Indebtedness shall be entitled to receive, for application to the payment thereof, any payment or distribution of any kind or character, whether in cash, property or securities, which may be payable or deliverable in respect of the Securities in any such case, proceeding, dissolution, liquidation or other winding up or event. In the event that, notwithstanding the foregoing provisions of this Section, the Trustee or the Holder of any Security shall have received any payment or distribution of assets of the Company of any kind or character, whether in cash, property or securities when such payment or distribution is prohibited by the first paragraph of this Section 1202, before all Senior Indebtedness is paid in full or payment thereof provided for, and if either (a) such fact shall, at or prior to the time of such payment or distribution, have been made known to the Trustee or, as the case may be, such Holder, or (b) the Trustee has not received notice from the Company that all Senior Indebtedness has been paid in full or payment thereof provided for, then and in such event such payment or distribution shall be paid over or delivered forthwith to the trustee in bankruptcy, receiver, liquidating trustee, custodian, assignee, agent or other Person making payment or distribution of assets of the Company for application to the payment of all Senior Indebtedness remaining unpaid, to the extent necessary to pay all Senior Indebtedness in full, after giving effect to any concurrent payment or distribution to or for the holders of Senior Indebtedness. For purposes of this Article only, the words "cash, property or securities" shall not be deemed to include shares of stock of the Company as reorganized or readjusted, or securities of the Company or any other corporation provided for by a plan of reorganization or readjustment which are subordinated in right of payment to all Senior Indebtedness which may at the time be outstanding to the same extent as, or to a greater extent than, the Securities are so subordinated as provided in this Article. The consolidation of the Company with, or the merger of the Company into, another Person or the liquidation or dissolution of the Company following the conveyance or transfer of its properties and assets substantially as an entirety to another Person upon the terms and conditions set forth in Article Seven shall not be deemed a 73 dissolution, winding up, liquidation, reorganization, assignment for the benefit of creditors or marshalling of assets and liabilities of the Company for the purposes of this Section if the Person formed by such consolidation or into which the Company is merged or the Person which acquires by conveyance or transfer such properties and assets substantially as an entirety, as the case may be, shall, as a part of such consolidation, merger, conveyance or transfer, comply with the conditions set forth in Article Seven. SECTION 1203. NO PAYMENT WHEN SENIOR INDEBTEDNESS IN DEFAULT. In the event that (a) any default in the payment of principal of (or premium, if any) or interest on any Senior Indebtedness beyond any applicable grace period with respect thereto has occurred and is continuing, or (b) an event of default with respect to any Senior Indebtedness shall have occurred and shall have resulted in such Senior Indebtedness becoming or being declared due and payable prior to the date on which it otherwise would have become due and payable, unless and until such event of default shall have been cured or waived or shall have ceased to exist and such acceleration shall have been rescinded or annulled, or (c) an event of default in respect to any Designated Senior Indebtedness shall have occurred permitting the holders of such Designated Senior Indebtedness (or a trustee on behalf of the holders thereof) to declare such Designated Senior Indebtedness due and payable prior to the date on which it would otherwise have become due and payable, which shall be the subject of an Enforcement Notice (as defined below) given to the Trustee by any holders of such Designated Senior Indebtedness, unless and until the Enforcement Notice shall have been withdrawn or such event of default shall have been cured or waived or shall have ceased to exist, or (d) any judicial proceeding shall be pending with respect to any such Default in (a), (b), or (c), or (e) any of the Securities become or are declared due and payable prior to the date on which they otherwise would have become due and payable because of a default under this Indenture and such default or acceleration under this Indenture constitutes a default with respect to any outstanding issue of Designated Senior Indebtedness and such default in respect of Designated Senior Indebtedness is not cured or waived or does not cease to exist, then no payment shall be made by the Company on account of principal of or premiums, if any, or interest on, the Securities, on account of any obligations to make payments to the Trustee hereunder or on account of the repurchase or other acquisition of Securities. In the event that, notwithstanding the foregoing, the Trustee or the Holder of any Security shall have received any payment prohibited by the foregoing provisions of this Section 1203 then and in such event such payment shall be held in trust for the holders of Senior Indebtedness and shall be paid over and delivered forthwith to the Company or as a court or competent jurisdiction shall direct for application to the payment of any due and unpaid Senior Indebtedness to the extent necessary to pay all such due and unpaid Senior Indebtedness in cash or Cash Equivalents, after giving effect to any concurrent payment to or for the holder of Senior Indebtedness. "Enforcement Notice" for purposes of this Section shall mean a written notice delivered by any holder of an issue of Designated Senior Indebtedness which shall state that facts constituting an event of default (other than a default in payment) have occurred, describe in reasonable detail the nature of the event of default and any facts constituting any other event of default (other than a default in payment) then known to the holder of such Designated Senior Indebtedness delivering such notice and shall indicate the intention of such holder of Designated Senior Indebtedness, subject to such holder's right to withdraw such notice, to initiate judicial proceedings with respect to any of the events of default so identified. An Enforcement Notice may be withdrawn by the holder of such Designated Senior Indebtedness at any time. An Enforcement Notice shall be deemed to have been withdrawn and shall not affect any payments on the Securities if the holder of such Designated Senior Indebtedness within 150 days of giving the Enforcement Notice to the Trustee does not commence and diligently pursue a judicial proceeding with respect to the events of default identified in such Enforcement Notice. After an Enforcement Notice is withdrawn or deemed withdrawn, the Company shall promptly resume making any and all payments on the Securities, including missed payments. The holders of any issue of Designated Senior Indebtedness shall not be entitled to give more than one Enforcement Notice with respect to all defaults known to such holders at the time of giving any such Enforcement Notice during any consecutive twelve-month period; PROVIDED, HOWEVER, that if an event of default with respect to such Designated Senior Indebtedness has resulted in an Enforcement Notice and such event of default has been waived or been cured by an amendment to the Designated Senior Indebtedness, an Enforcement Notice may be given by any holder of such issue of Designated Senior Indebtedness within such twelve-month period with respect to an event of default relating to any term or condition of such waiver or amendment. The provisions of this Section shall not apply to any payment with respect to which Section 1202 would be applicable. 75 SECTION 1204. PAYMENT PERMITTED IF NO DEFAULT. Nothing contained in this Article or elsewhere in this Indenture or in any of the Securities shall prevent (a) the Company, at any time except during the pendency of any case, proceeding, dissolution, liquidation or other winding up, assignment for the benefit of creditors or other marshalling of assets and liabilities of the Company referred to in Section 1202 or under the conditions described in Section 1203, from making payment at any time of principal (and premium, if any) or interest on the Securities, or making payments to the Trustee hereunder, or (b) the application by the Trustee of any money deposited with it hereunder to the payment of obligations hereunder to the Trustee or to the payment of or on account of the principal of (and premium, if any) or interest on, the Securities or the retention of such payment by the Holders, unless, at the time of such application by the Trustee, the Trustee has knowledge of the existence of any facts which prohibit the making of any payment by the Trustee. SECTION 1205. SUBROGATION TO RIGHTS OF HOLDERS OF SENIOR INDEBTEDNESS. Subject to the payment in full of all Senior Indebtedness, the Holders of the Securities shall be subrogated to the extent of the payments or distributions made to the holders of such Senior Indebtedness pursuant to the provisions of this Article (equally and ratably with the holders of all indebtedness of the Company which by its express terms is subordinated to indebtedness of the Company to substantially the same extent as the Securities are subordinated and is entitled to like rights of subrogation) to the rights of the holders of such Senior Indebtedness to receive payments and distributions of cash, property and securities applicable to the Senior Indebtedness until the principal of (and premium, if any) and interest on the Securities shall be paid in full. For purposes of such subrogation, no payments or distributions to the holders of the Senior Indebtedness of any cash, property or securities to which the Holders of the Securities or the Trustee would be entitled except for the provisions of this Article, and no payments over pursuant to the provisions of this Article to the holders of Senior Indebtedness by Holders of the Securities or the Trustee, shall, as among the Company, its creditors (other than holders of Senior Indebtedness) and the Holders of the Securities, be deemed to be a payment or distribution by the Company to or on account of the Senior Indebtedness. SECTION 1206. PROVISIONS SOLELY TO DEFINE RELATIVE RIGHTS. The provisions of this Article are and are intended solely for the purpose of defining the relative rights of the Holders of the Securities on the one hand and the holders of Senior Indebtedness on the other hand. Nothing contained in this Article or elsewhere in this Indenture or in the Securities is intended to or shall (a) impair, as among the Company, its creditors (other than holders of Senior Indebtedness) and the Holders of the Securities, the obligation of the Company, which is absolute and unconditional (and which, subject to the rights under this Article of the holders of Senior Indebtedness, is intended to rank equally with all 76 other general obligations of the Company), to pay to the Holders of the Securities the principal of (and premium, if any) and interest on, the Securities as and when the same shall become due and payable in accordance with their terms; or (b) affect the relative rights against the Company of the Holders of the Securities and creditors of the Company other than the holders of Senior Indebtedness; or (c) prevent the Trustee or the Holder of any Security from exercising all remedies otherwise permitted by applicable law upon default under this Indenture, subject to the rights, if any, under this Article of the holders of Senior Indebtedness to receive cash, property and securities otherwise payable or deliverable to the Trustee or such Holder. SECTION 1207. TRUSTEE TO EFFECTUATE SUBORDINATION. Each Holder of a Security by his acceptance thereof authorizes and directs the Trustee on his behalf to take such action as may be necessary or appropriate to effectuate the subordination provided in this Article and appoints the Trustee his attorney-in-fact for any and all such purposes. SECTION 1208. NO WAIVER OF SUBORDINATION PROVISIONS. No right of any present or future holder of any Senior Indebtedness to enforce subordination as herein provided shall at any time in any way be prejudiced or impaired by any act or failure to act on the part of the Company or by any act or failure to act, in good faith, by any such holder, or by any non-compliance by the Company with the terms, provisions and covenants of this Indenture, regardless of any knowledge thereof any such holder may have or be otherwise charged with. Without in any way limiting the generality of the foregoing paragraph, the holders of Senior Indebtedness may, at any time and from time to time, without the consent of or notice to the Trustee or the Holders of the Securities, without incurring responsibility to the Holders of the Securities and without impairing or releasing the subordination provided in this Article or the obligations hereunder of the Holders of the Securities to the holders of Senior Indebtedness, do any one or more of the following: (i) change the manner, place or terms of payment or extend the time of payment of, or renew or alter, Senior Indebtedness or any security therefor, or increase the amounts outstanding thereunder or otherwise amend or supplement in any manner Senior Indebtedness or any instrument evidencing the same or any agreement under which Senior Indebtedness is outstanding or is secured; (ii) sell, exchange, release or otherwise deal with any property pledged, mortgaged or otherwise securing Senior Indebtedness; (iii) release any Person liable in any manner for the Senior Indebtedness, including, without limitation, any guarantor thereof; (iv) exercise or refrain from exercising any rights against the Company and any other Person; and (v) otherwise deal freely with the Company or any other Person. 77 SECTION 1209. NOTICE TO TRUSTEE. The Company shall give prompt written notice to the Trustee of any fact known to the Company which would prohibit the making of any payment to or by the Trustee in respect of the Securities. Notwithstanding the provisions of this Article or any other provision of this Indenture, the Trustee shall not be charged with knowledge of the existence of any facts which would prohibit the making of any payment to or by the Trustee in respect of the Securities, unless and until the Trustee shall have received written notice thereof from the Company or a holder of Senior Indebtedness or from any trustee therefor at least one business day prior to a payment date; and, prior to the receipt of any such written notice, the Trustee, subject to the provisions of Section 601, shall be entitled in all respects to assume that no such facts exist. Subject to the provisions of Section 601, the Trustee shall be entitled to rely on the delivery to it of a written notice by a Person representing himself to be a holder of Senior Indebtedness (or a trustee therefor) to establish that such notice has been given by a holder of Senior Indebtedness (or a trustee therefor). In the event that the Trustee determines in good faith that further evidence is required with respect to the right of any Person as a holder of Senior Indebtedness to participate in any payment or distribution pursuant to this Article, the Trustee may request such Person to furnish evidence to the reasonable satisfaction of the Trustee as to the amount of Senior Indebtedness held by such Person, the extent to which such Person is entitled to participate in such payment or distribution and any other facts pertinent to the rights of such Person under this Article, and if such evidence is not furnished, the Trustee may defer any payment to such Person pending judicial determination as to the right of such Person to receive such payment. SECTION 1210. RELIANCE ON JUDICIAL ORDER OR CERTIFICATE OF LIQUIDATING AGENT. Upon any payment or distribution of assets of the Company referred to in this Article, the Trustee, subject to the provisions of Section 601, and the Holders of the Securities shall be entitled to rely upon any order or decree entered by any court of competent jurisdiction in which such insolvency, bankruptcy, receivership, liquidation, reorganization, dissolution, winding up or similar case or proceeding is pending, or a certificate of the trustee in bankruptcy, receiver, liquidating trustee, custodian, assignee for the benefit of creditors, agent or other Person making such payment or distribution, delivered to the Trustee or to the Holders of Securities, for the purpose of ascertaining the Persons entitled to participate in such payment or distribution, the holders of the Senior Indebtedness and other indebtedness of the Company, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Article. SECTION 1211. TRUSTEE NOT FIDUCIARY FOR HOLDERS OF SENIOR INDEBTEDNESS. 78 The Trustee shall not be deemed to owe any fiduciary duty to the holders of Senior Indebtedness, but shall have only such obligations to such holders as are expressly set forth in this Article. SECTION 1212. RIGHTS OF TRUSTEE AS HOLDER OF SENIOR INDEBTEDNESS; PRESERVATION OF TRUSTEE'S RIGHTS. The Trustee in its individual capacity shall be entitled to all the rights set forth in this Article with respect to any Senior Indebtedness which may at any time be held by it, to the same extent as any other holder of Senior Indebtedness, and nothing in this Indenture shall deprive the Trustee of any of its rights as such holder. SECTION 1213. ARTICLE APPLICABLE TO PAYING AGENTS. In case at any time any Paying Agent other than the Trustee shall have been appointed by the Company and be then acting hereunder, the term "Trustee" as used in this Article shall in such case (unless the context otherwise requires) be construed as extending to and including such Paying Agent within its meaning as fully for all intents and purposes as if such Paying Agent were named in this Article in addition to or in place of the Trustee; PROVIDED, HOWEVER, that this Section shall not apply to the Company or any Affiliate of the Company if it or such Affiliate acts as Paying Agent. SECTION 1214. CERTAIN CONVERSIONS DEEMED PAYMENT. For the purposes of this Article only, (1) the issuance and delivery of junior securities upon repurchase or other acquisition of Securities pursuant to Article Fourteen shall not be deemed to constitute a payment or distribution on account of the principal of or premium or interest on, Securities or on account of the purchase or other acquisition of Securities, and (2) the payment, issuance or delivery of cash, property or securities (other than junior securities) upon repurchase or other acquisition of a Security shall be deemed to constitute payment on account of the principal of such Security. For the purposes of this Section, the term "junior securities" means (a) shares of any stock of any class of the Company and (b) securities of the Company which are subordinated in right of payment to all Senior Indebtedness which may be outstanding at the time of issuance or delivery of such securities to the same extent as, or to a greater extent than, the Securities are so subordinated as provided in this Article. SECTION 1215. OFFICER'S CERTIFICATE. If there occurs an event referred to in Section 1202 or 1203, the Company shall promptly give to the Trustee an Officers' Certificate (upon which the Trustee may conclusively 79 rely unless it has actual knowledge to the contrary) which identifies the holders of all Senior Indebtedness (or their trustee or other representative) and the principal amount of Senior Indebtedness then outstanding by each such holder. ARTICLE THIRTEEN Holders' Lists and Reports by Trustee and Company SECTION 1301. COMPANY TO FURNISH TRUSTEE NAMES AND ADDRESSES OF HOLDERS. The Company will furnish or cause to be furnished to the Trustee: (a) semiannually, not more than 15 days after each and a list, in such form as the Trustee may reasonably require, of the names and addresses of the Holders of Securities as of such Regular Record Date, as the case may be; and (b) at such other times as the Trustee may request in writing, within 30 days after the receipt by the Company of any such request, a list of similar form and content, such list to be dated as of a date not more than 15 days prior to the time such list is furnished; notwithstanding the foregoing subsections (a) and (b), at such times as the Trustee is the Security Registrar and Paying Agent, no such list shall be required to be furnished. SECTION 1302. PRESERVATION OF INFORMATION; COMMUNICATIONS TO HOLDERS. (a) The Trustee shall preserve, in as current a form as is reasonably practicable, the names and addresses of Holders contained in the most recent list furnished to the Trustee as provided in Section 1301 and the names and addresses of Holders received by the Trustee in any capacity as Security Registrar or Paying Agent. The Trustee may destroy any list furnished to it as provided in Section 1301 upon receipt of a new list so furnished. (b) The rights of Holders to communicate with other Holders with respect to their rights under this Indenture or under the Securities, and the corresponding rights and duties of the Trustee, shall be as provided by the Trust Indenture Act. (c) Every Holder of Securities, by receiving and holding the same, agrees with the Company and the Trustee that neither the Company nor the Trustee nor any agent of either of them shall be held accountable by reason of any disclosure of information as to the names and addresses of Holders made pursuant to the Trust Indenture Act. 80 SECTION 1303. REPORTS BY TRUSTEE. Within 60 days after May 15 of each year commencing with the year 1996, the Trustee shall transmit to Holders such reports concerning the Trustee and its actions under this Indenture to the extent required pursuant to the Trust Indenture Act at the times and in the manner provided pursuant thereto. A copy of each such report shall, at the time of such transmission to Holders, be filed by the Trustee with each stock exchange upon which the Securities are listed, with the Commission and with the Company. The Company will promptly notify the Trustee when the Securities are listed on any stock exchange. SECTION 1304. REPORTS BY COMPANY. The Company shall file with the Trustee and the Commission, and transmit to Holders, such information, documents and other reports, and such summaries thereof, as may be required pursuant to the Trust Indenture Act at the times and in the manner provided pursuant to such Act; provided that any such information, documents or reports required to be filed with the Commission pursuant to Section 13 or 15(d) of the Exchange Act shall be filed with the Trustee within 15 days after the same is so required to be filed with the Commission. ARTICLE FOURTEEN Repurchase of Securities at the Option of the Holder Upon Change in Control SECTION 1401. RIGHT TO REQUIRE REPURCHASE. In the event that there shall occur a Change in Control (as hereinafter defined) with respect the Company, then each Holder of a Security shall have the right, at the Holder's option, to require the Company to repurchase, and upon the exercise of such right the Company shall repurchase, all or any portion of such Holder's Securities (except that any Security must be repurchased in $1,000 denominations or integral multiples thereof on the date (the "Repurchase Date") that is 45 days after the date of the Company Notice (as defined in Section 1402(A)) at a purchase price equal to 101% of the principal amount of Securities to be repurchased (the "Repurchase Price"), together with accrued interest, if any, to the Repurchase Date. SECTION 1402. NOTICES; METHOD OF EXERCISING REPURCHASE RIGHT, ETC. (a) Unless the Company shall have theretofore called for redemption all the then Outstanding Securities pursuant to Article Eleven, on or before the 30th day after the occurrence of a Change in Control, the Company or, at the written request of the Company, the 81 Trustee, shall give at least once to all Holders in the manner provided in Section 105 notice (the "Company Notice") of the occurrence of the Change in Control and of the repurchase right set forth herein arising as a result thereof. The Company shall also (a) concurrently with giving the Company Notice referred to in the preceding sentence, mail a copy of such notice of a repurchase right to holders of Senior Indebtedness in the manner provided for in each such issue of Senior Indebtedness and (b) deliver a copy of such notice of a repurchase right to the Trustee. The Company will comply with the requirements of Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder to the extent such laws and regulations are applicable in connection with the repurchase of Securities pursuant to a Change of Control. All notices of a repurchase right shall state: (1) the Repurchase Date, (2) the date by which the repurchase right must be exercised, (3) the Repurchase Price, (4) a description of the procedure which a Holder must follow to exercise a repurchase right, and (5) the CUSIP Number applicable to the Securities. No failure of the Company to give the foregoing notice or defect therein shall limit any Holder's right to exercise a repurchase right or affect the validity of the proceedings for the repurchase of Securities, if any. (b) To exercise a repurchase right, a Holder shall deliver to the Company at any office or agency of the Company maintained for that purpose pursuant to Section 1002 on or before the 30th day after the date of the mailing of the Company Notice the Securities to be so repurchased, duly endorsed or assigned to the Company in blank, with the repurchase notice appearing on the Security duly completed and executed. Such written notice shall be irrevocable. (c) In the event a repurchase right shall be exercised in accordance with the terms hereof, the Company shall pay or cause to be paid the Repurchase Price in cash to the Holder on the Repurchase Date, together with accrued and unpaid interest to the Repurchase Date payable with respect to the Securities as to which the repurchase right has been exercised; provided, however, that installments of interest on Securities which Stated Maturity is on or prior to the Repurchase Date shall be payable to the Holders of such Securities, or one or more Predecessor Securities, registered as such at the close of business on the relevant Record Date according to their terms and the provisions of Section 306. 82 (d) If any Security surrendered for repurchase shall not be so paid on the Repurchase Date, the principal shall, until paid, bear interest to the extent permitted by applicable law from the Repurchase Date at the rate borne by the Security. (e) Any Security which is to be repurchased only in part shall be surrendered at any office or agency of the Company designated for that purpose pursuant to Section 1002 (with, if the Company or the Trustee so requires from Holders of Securities, due endorsement by, or a written instrument of transfer in form satisfactory to the Company and the Trustee duly executed by, the holder thereof or his attorney duly authorized in writing), and the Company shall execute, and the Trustee shall authenticate and deliver to the Holder of such Security without service charge, a new Security or Securities of any authorized denomination as requested by such Holder, in aggregate principal amount equal to and in exchange for the unrepurchased portion of the principal of the Security so surrendered. SECTION 1403. CERTAIN DEFINITIONS. For purposes of this Article: (a) the term "Associate" of any Person, means (1) any corporation or organization (other than the Company or a Subsidiary of the Company or any Person controlled directly or indirectly (as defined in the definitions of Affiliate in Section 101) by the Company or a Subsidiary of the Company) of which such Person is an officer or general partner or is, directly or indirectly, the beneficial owner of 10% or more of any class of equity securities, (2) any trust or other estate in which such Person has a substantial beneficial interest or as to which such Person serves as trustee or in a similar fiduciary capacity, and (3) any relative or spouse of such Person, or any relative of such spouse, who has the same home as such Person or who is a director or officer of the Company or any of its parents or Subsidiaries; (b) the term "beneficial owner" shall be determined in accordance with Rule 13d-3, as in effect on the Issue Date, promulgated by the Securities and Exchange Commission pursuant to the Exchange Act and for the purpose of this Article Fourteen, "Person" shall include any syndicate or group which would be deemed to be a "person" under Section 13(d)(3) of such Act as in effect on the date of the original execution of this Indenture, and beneficial ownership of any Person shall include beneficial ownership by any Associate of such Person; and (c) a "Change in Control" of the Company shall be deemed to have occurred at such time as (i) any Person (including any syndicate or group deemed to be a "person" under Section 13(d)(3) of the Exchange Act) is or becomes the beneficial owner, directly or indirectly, through a purchase, merger or other acquisition transaction or series of transactions, of more than 40% of the total voting power of all shares of Capital Stock of the Company entitled to vote in elections of directors, (ii) during any period of two 83 consecutive years, individuals who at the beginning of such period constituted the Board of Directors of the Company (together with any new directors whose election by such Board or whose nomination for election by the shareholders of the Company was approved by a vote of a majority of the directors of the Company still in office who were either directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the Board of Directors of the Company then in office, or (iii) the Company consolidates with or merges with or into another corporation or conveys, transfers or leases all or substantially all of its assets to any person, in either event pursuant to a transaction in which the outstanding shares of capital stock of the Company entitled to vote in the election of directors is changed into or exchanged for cash, securities or other property (excluding, however, any such transaction where the outstanding shares of the Company entitled to vote in the election of directors is changed into or exchanged for (x) voting stock of the surviving or transferee corporation which is neither Disqualified Capital Stock nor Exchangeable Stock or (y) cash, securities and other property in an amount which could be paid by the Company as a Restricted Payment (and such amount will be treated as a Restricted Payment for all purposes of the Indenture)). ARTICLE FIFTEEN Defeasance and Covenant Defeasance SECTION 1501. COMPANY'S OPTION TO EFFECT DEFEASANCE OR COVENANT DEFEASANCE. The Company may elect, at its option at any time, to have Section 1502 or Section 1503 applied to the Outstanding Securities (as a whole and not in part) upon compliance with the conditions set forth below in this Article. Any such election shall be evidenced by a Board Resolution. SECTION 1502 DEFEASANCE AND DISCHARGE. Upon the Company's exercise of its option to have this Section applied to the Outstanding Securities (as a whole and not in part), the Company shall be deemed to have been discharged from its obligations with respect to such Securities as provided in this Section on and after the date the conditions set forth in Section 1504 are satisfied (hereinafter called "Defeasance"), and thereafter such Securities shall not be subject to redemption pursuant thereto. For this purpose, such Defeasance means that the Company shall be deemed to have paid and discharged the entire indebtedness represented by such Securities and to have satisfied all its other obligations under such Securities and this Indenture insofar as such Securities are concerned (and the Trustee, at the expense of the Company, shall execute proper instruments acknowledging the same), subject to the following which shall survive until otherwise terminated 84 or discharged hereunder: (1) the rights of Holders of such Securities to receive, solely from the trust fund described in Section 1504 and as more fully set forth in such Section, payments in respect of the principal of and any premium and interest on such Securities when payments are due, (2) the Company's obligations with respect to such Securities under Sections 305, 306, 1002 and 1003, (3) the rights, powers, trusts, duties and immunities of the Trustee hereunder and (4) this Article. Subject to compliance with this Article, the Company may exercise its option to have this Section applied to the then Outstanding Securities (as a whole and not in part) notwithstanding the prior exercise of its option to have Section 1503 applied to such Securities. SECTION 1503. COVENANT DEFEASANCE. Upon the Company's exercise of its option to have this Section applied to the Outstanding Securities (as a whole and not in part), (1) the Company shall be released from its obligations under Sections 1005 through 1011, inclusive, Sections 1014 and 1016 and any covenant provided pursuant to Section 801(2) and (2) the occurrence of any event specified in Section 501(3)(a) (with respect to any of Sections 1005 through 1011, inclusive, Section 1014 and any such covenants provided pursuant to Section 801(2)) or Section 501(5) shall be deemed not to be or result in an Event of Default, in each case with respect to such Securities as provided in this Section on and after the date the conditions set forth in Section 1504 are satisfied (hereinafter called "Covenant Defeasance"). For this purpose, such Covenant Defeasance means that, with respect to such Securities, the Company may omit to comply with and shall have no liability in respect of any term, condition or limitation set forth in any such specified Section (to the extent so specified in the case of Section 501(5)), whether directly or indirectly, by reason of any reference elsewhere herein to any such Section or by reason of any reference in any such Section to any other provision herein or in any other document, but the remainder of this Indenture and such Securities shall be unaffected thereby. SECTION 1504. CONDITIONS TO DEFEASANCE OR COVENANT DEFEASANCE. The following shall be the conditions to the application of Section 1502 or Section 1503 to the Outstanding Securities: (1) The Company shall irrevocably have deposited or caused to be deposited with the Trustee (or another trustee which satisfies the requirements contemplated by Section 607 and agrees to comply with the provisions of this Article applicable to it) as trust funds in trust for the purpose of making the following payments, specifically pledged as security for, and dedicated solely to, the benefits of the Holders of such Securities, (A) money in an amount, or (B) U.S. Government Obligations which through the scheduled payment of principal and interest in respect thereof in accordance with their terms will provide, not later than one day before the due date of any payment, money in an amount, or (C) a combination thereof, in each case sufficient, in the opinion of a nationally recognized firm of independent public accountants expressed in a written 85 certification thereof delivered to the Trustee, to pay and discharge, and which shall be applied by the Trustee (or any such other qualifying trustee) to pay and discharge, the principal of and any instalment of interest on such Securities then outstanding, in accordance with the terms of this Indenture and such Securities. As used herein, "U.S. Government Obligation" means (x) any security which is (i) a direct obligation of the United States of America for the payment of which the full faith and credit of the United States of America is pledged or (ii) an obligation of a Person controlled or supervised by and acting as an agency or instrumentality of the United States of America the payment of which is unconditionally guaranteed as a full faith and credit obligation by the United States of America, which, in either case (i) or (ii), is not callable or redeemable at the option of the issuer thereof, and (y) any depositary receipt issued by a bank (as defined in Section 3(a) (2) of the Securities Act) as custodian with respect to any U.S. Government Obligation which is specified in clause (x) above and held by such bank for the account of the holder of such depositary receipt, or with respect to any specific payment of principal of or interest on any U.S. Government Obligation which is so specified and held, PROVIDED that (except as required by law) such custodian is not authorized to make any deduction from the amount payable to the holder of such depositary receipt from any amount received by the custodian in respect of the U.S. Government Obligation or the specific payment of principal or interest evidenced by such depositary receipt. (2) In the event of an election to have Section 1502 apply to the Outstanding Securities, the Company shall have delivered to the Trustee an Opinion of Counsel stating that (A) the Company has received from, or there has been published by, the Internal Revenue Service a ruling or (B) since the date of this instrument, there has been a change in the applicable Federal income tax law, in either case (A) or (B) to the effect that, and based thereon such opinion shall confirm that, the Holders of such Securities will not recognize gain or loss for Federal income tax purposes as a result of the deposit, Defeasance and discharge to be effected with respect to such Securities and will be subject to Federal income tax on the same amount, in the same manner and at the same times as would be the case if such deposit, Defeasance and discharge were not to occur. (3) In the event of an election to have Section 1503 apply to the Outstanding Securities, the Company shall have delivered to the Trustee an Opinion of Counsel to the effect that the Holders of such Securities will not recognize gain or loss for Federal income tax purposes as a result of the deposit and Covenant Defeasance to be effected with respect to such Securities and will be subject to Federal income tax on the same amount, in the same manner and at the same times as would be the case if such deposit and Covenant Defeasance were not to occur. (4) No Default with respect to the Outstanding Securities shall have occurred and be continuing at the time of such deposit or, with regard to any such event specified in Sections 501(6) and (7), at any time on or prior to the 90th day after the date of such 86 deposit (it being understood that this condition shall not be deemed satisfied until after such 90th day). (5) Such Defeasance or Covenant Defeasance shall not cause the Trustee to have a conflicting interest within the meaning of the Trust Indenture Act (assuming all Securities are in default within the meaning of such Act). (6) Such Defeasance or Covenant Defeasance shall not result in a breach or violation of, or constitute a default under, this Indenture or any other agreement or instrument to which the Company is a party or by which it is bound. (7) Such Defeasance or Covenant Defeasance shall not result in the trust arising from such deposit constituting an investment company within the meaning of the Investment Company Act of 1940 unless such trust shall be registered under such Act or exempt from registration thereunder. (8) The Company shall have delivered to the Trustee an Opinion of Counsel to the effect that (A) the trust funds will not be subject to any rights of holders of Senior Indebtedness, including, without limitation, those arising under this Indenture and (B) after the 91st day following the deposit, the trust funds will not be subject to the effect of any applicable bankruptcy, insolvency, reorganization or similar laws affecting creditors' rights generally. (9) No event or condition shall exist that would prevent the Company from making payments of the principal of and interest on the Securities on the date of such deposit or at any time ending on the 91st day after the date of such deposit. (10) The Company shall have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent with respect to such Defeasance or Covenant Defeasance have been complied with. In the event all or any portion of the Securities are to be redeemed through such irrevocable trust, the Company must make arrangements satisfactory to the Trustee, at the time of such deposit, for the giving of notice of such redemption or redemptions by the Trustee in the name and at the expense of the Company. In the event that the Company takes the necessary action to comply with the provisions described in this Section 1504 and the Securities are declared due and payable because of the occurrence of an Event of Default, the Company will remain liable for all amounts due on the Securities at the time of acceleration resulting from such Event of Default in excess of the amount of money and U.S. Government Obligations deposited with the Trustee pursuant to this Section 1504 at the time of such acceleration. 87 SECTION 1505. DEPOSITED MONEY AND U.S. GOVERNMENT OBLIGATIONS TO BE HELD IN TRUST; MISCELLANEOUS PROVISIONS. Subject to the provisions of the last paragraph of Section 1003, all money and U.S. Government Obligations (including the proceeds thereof) deposited with the Trustee or other qualifying trustee (solely for purposes of this Section and Section 1506, the Trustee and any such other trustee are referred to collectively as the ("Trustee") pursuant to Section 1504 in respect of the then Outstanding Securities shall be held in trust and applied by the Trustee, in accordance with the provisions of such Securities and this Indenture, to the payment, either directly or through any such Paying Agent (including the Company acting as its own Paying Agent) as the Trustee may determine, to the Holders of such Securities, of all sums due and to become due thereon in respect of principal and any premium and interest, but money so held in trust need not be segregated from other funds except to the extent required by law. The Company shall pay and indemnify the Trustee against any tax, fee or other charge imposed on or assessed against the U.S. Government Obligations deposited pursuant to Section 1504 or the principal and interest received in respect thereof other than any such tax, fee or other charge which by law is for the account of the Holders of Outstanding Securities. Anything in this Article to the contrary notwithstanding, the Trustee shall deliver or pay to the Company from time to time upon Company Request any money or U.S. Government Obligations held by it as provided in Section 1504 which, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, are in excess of the amount thereof which would then be required to be deposited to effect the Defeasance or Covenant Defeasance, as the case may be, with respect to the Outstanding Securities. SECTION 1506. REINSTATEMENT. If the Trustee or the Paying Agent is unable to apply any money in accordance with this Article with respect to any Securities by reason of any order or judgment of any court or governmental authority enjoining, restraining, or otherwise prohibiting such application, then the obligations under this Indenture and such Securities from which the Company has been discharged or released pursuant to Section 1502 or 1503 shall be revived and reinstated as though no deposit had occurred pursuant to this Article with respect to such Securities, until such time as the Trustee or Paying Agent is permitted to apply all money held in trust pursuant to Section 1505 with respect to such Securities in accordance with this Article; PROVIDED, HOWEVER, that if the Company makes any payment of principal of or any premium or interest on any such Security following such reinstatement of its obligations, the Company shall be subrogated to the rights (if any) of the Holders of such Securities to receive such payment from the money so held in trust. ____________________ 88 This instrument may be executed in any number of counterparts, each of which so executed shall be deemed to be an original, but all such counterparts shall together constitute but one and the same instrument. 89 IN WITNESS WHEREOF, the parties hereto have caused this indenture to be duly executed, and their respective corporate seals to be hereunto affixed and attested, all as of the day and year first above written. COMMNET CELLULAR INC. By ---------------------- Name: Title: Attest: - ------------------------- AMERICAN BANK NATIONAL ASSOCIATION as Trustee By ----------------------- Name: Title: Attest: - ------------------------- 90 EX-23.1 4 EXHIBIT 23.1 Exhibit 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the references to our firm under the captions "Summary Consolidated Financial Data", "Selected Consolidated Financial Data" and "Experts" in Amendment No. 1 to the Registration Statement (Form S-3 No. 33-60393) and related Prospectus of CommNet Cellular Inc. for the registration of Subordinated Notes Due 2005 and to the incorporation by reference therein of our report dated December 2, 1994, with respect to the consolidated financial statements and schedules of CommNet Cellular Inc. included in its Annual Report (Form 10-K) for the year ended September 30, 1994, as amended to date, filed with the Securities and Exchange Commission. ERNST & YOUNG LLP Denver, Colorado June 28, 1995 -----END PRIVACY-ENHANCED MESSAGE-----