<PAGE>
FORM 10-Q
_______________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________
(Mark one)
[x] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended: December 31, 1995
-----------------
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number: 0-15056
-------
COMMNET CELLULAR INC.
---------------------
(Exact name of registrant as specified in its charter)
Colorado 84-0924904
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8350 East Crescent Parkway, Suite 400
Englewood, Colorado 80111
-------------------------
(Address of principal executive offices)
(Zip Code)
303/694-3234
------------
(Registrant's telephone number, including area code)
5990 Greenwood Plaza Boulevard, Suite 300
Englewood, Colorado 80111
-------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No _____
-------
The number of shares of the registrant's Common Stock outstanding as of February
9, 1996 was 13,699,604.
<PAGE>
COMMNET CELLULAR INC.
FORM 10-Q - DECEMBER 31, 1995
INDEX
<TABLE>
<CAPTION>
Part I Financial Information Page
- ------ --------------------- ----
<S> <C> <C>
Item 1 Financial Statements
Consolidated Condensed Balance Sheets -
December 31, 1995 and September 30, 1995 1
Consolidated Condensed Statements of Operations -
Three Months Ended December 31, 1995
and December 31, 1994 3
Consolidated Condensed Statements of Cash Flows -
Three Months Ended December 31, 1995
and December 31, 1994 4
Notes to Consolidated Condensed Financial
Statements 6
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of
Operations 8
</TABLE>
<PAGE>
COMMNET CELLULAR INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, September 30,
Assets 1995 1995
- ---------------------------------------- -------------- -----------------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $41,940,810 $41,017,845
Available-for-sale securities 891,367 -
Accounts receivable, net of allowance
for doubtful accounts of $2,216,525
and $1,957,810 at December 31, 1995
and September 30, 1995, respectively 12,546,135 13,673,168
Inventory and other 3,276,224 2,931,155
------------ ------------
Total current assets 58,654,536 57,622,168
Investment in and advances to affiliates 57,440,534 56,918,738
Investment in cellular system equipment 10,416,608 5,426,686
Property and equipment, at cost:
Cellular system equipment 106,666,125 107,433,095
Land, buildings and improvements 24,135,765 23,183,361
Furniture and equipment 19,797,074 18,636,304
------------ ------------
150,598,964 149,252,760
Less accumulated depreciation 45,393,998 43,963,285
------------ ------------
Net property and equipment 105,204,966 105,289,475
Other assets, less accumulated
amortization of $29,763,209 and
$28,616,576 at December 31, 1995 and
September 30, 1995, respectively:
FCC licenses and filing rights 93,816,216 92,349,639
Deferred loan costs and other 7,966,587 8,061,250
------------ ------------
Total other assets 101,782,803 100,410,889
------------ ------------
$333,499,447 $325,667,956
============ ============
</TABLE>
See accompanying notes.
- 1 -
<PAGE>
COMMNET CELLULAR INC.
CONSOLIDATED CONDENSED BALANCE SHEETS (CONTINUED)
<TABLE>
<CAPTION>
December 31, September 30,
Liabilities and Stockholders' Equity 1995 1995
- ---------------------------------------- ---------------- ----------------
(unaudited)
<S> <C> <C>
Current liabilities:
Accounts payable $ 11,272,484 $ 9,266,607
Accrued liabilities 6,940,918 4,861,608
Accrued interest 5,477,052 3,264,934
Obligation under capital leases due
within one year 317,055 318,188
------------ ------------
Total current liabilities 24,007,509 17,711,337
Long-term debt:
Secured bank financing 36,262,558 36,262,558
Obligation under capital leases due
after one year 374,572 449,230
11 3/4% senior subordinated discount notes 130,328,916 126,644,799
11 1/4% subordinated notes 80,000,000 80,000,000
8.75% convertible subordinated notes 3,000,000 3,000,000
Minority interests 3,191,493 2,944,370
Commitments
Stockholders' equity:
Preferred Stock, $.01 par value; 1,000,000
shares authorized; no shares issued - -
Common Stock, $.001 par value; 40,000,000
shares authorized; 13,489,875 and
13,442,967 shares issued at December 31,
1995 and September 30, 1995, respectively 13,490 13,443
Capital in excess of par value 160,414,714 159,381,589
Accumulated deficit (104,093,805) (100,739,370)
------------ ------------
Total stockholders' equity 56,334,399 58,655,662
------------ ------------
$333,499,447 $325,667,956
============ ============
</TABLE>
See accompanying notes.
- 2 -
<PAGE>
COMMNET CELLULAR INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 1995 AND 1994
(UNAUDITED)
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Revenues:
Cellular service $ 18,059,100 $ 12,901,224
In-roaming 5,719,512 3,807,440
Equipment sales 1,292,167 2,566,799
------------- -------------
25,070,779 19,275,463
Costs and expenses:
Cellular operations:
Cost of cellular service 4,819,665 3,835,135
Cost of equipment sales 2,214,726 2,628,119
General and administrative 5,885,876 4,842,894
Marketing and selling 5,551,049 5,451,690
Depreciation and amortization 4,412,730 3,397,202
Corporate:
General and administrative 1,581,794 1,920,014
Depreciation and amortization 705,628 576,663
Less amounts allocated to
nonconsolidated affiliates (1,636,957) (1,554,870)
------------- -------------
23,534,511 21,096,847
------------- -------------
Operating income (loss) 1,536,268 (1,821,384)
Equity in net loss of affiliates (1,010,971) (1,081,833)
Minority interest in net income of
consolidated affiliates (207,632) (123,483)
Gain on sales of affiliates and other - 67,247
Interest expense (7,211,844) (6,270,842)
Interest income 3,539,744 2,792,616
------------- -------------
Net loss $ (3,354,435) $ (6,437,679)
============= =============
Net loss per common share $ (0.25) $ (0.55)
============= =============
Weighted average shares outstanding 13,461,154 11,743,513
============= =============
</TABLE>
See accompanying notes.
- 3 -
<PAGE>
COMMNET CELLULAR INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED DECEMBER 31, 1995 AND 1994
(UNAUDITED)
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Operating activities:
Net loss $(3,354,435) $(6,437,679)
Adjustments to reconcile net loss to
net cash used by operating activities:
Minority interest 207,632 123,483
Depreciation and amortization 5,118,358 3,973,865
Equity in net loss of affiliates 1,010,971 1,081,833
Gains on sales of affiliates and
other - (67,247)
Loss on sale of available-for-sale
securities - 221,598
Interest expense on 11 3/4% senior
discount notes 3,684,115 3,286,599
Accrued interest on advances to
affiliates (2,922,165) (2,855,547)
Change in operating assets and
liabilities, net of effects from
consolidating acquired interests:
Accounts receivable 1,124,778 (472,878)
Inventory and other (346,081) 42,769
Accounts payable and accrued
liabilities 4,112,942 (648,985)
Accrued interest 2,212,118 1,586,149
----------- -----------
Net cash provided (used) by operating
activities 10,848,233 (166,040)
Investing activities:
Purchase of available-for-sale
securities (891,367) -
Sale of available-for-sale securities - 9,927,411
Additions to investments in and
advances to affiliates (461,319) (964,956)
Additions to investment in cellular
system equipment (3,978,402) (5,388,680)
Additions to property and equipment (5,094,769) (1,715,378)
Additions to other assets (328,988) (8,934)
Proceeds from sales of interests in
affiliates 613,700 50,000
Purchase of interests in affiliates,
net of cash acquired and net of
assets and liabilities recorded due
to consolidation (6,147) (1,600,000)
----------- -----------
Net cash provided (used) by investing
activities (10,147,292) 299,463
</TABLE>
See accompanying notes.
- 4 -
<PAGE>
COMMNET CELLULAR INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (CONTINUED)
THREE MONTHS ENDED DECEMBER 31, 1995 AND 1994
(UNAUDITED)
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Financing activities:
Proceeds from secured bank financing $ - $ 13,408,741
Payments of secured bank financing - (272,719)
Reduction of obligation under capital
leases (75,791) (161,574)
Issuance of Common Stock, net of
offering costs 297,815 108,470
----------- -----------
Net cash provided by financing
activities 222,024 13,082,918
----------- -----------
Net increase in cash and cash
equivalents 922,965 13,216,341
Cash and cash equivalents at beginning
of period 41,017,845 2,081,591
----------- -----------
Cash and cash equivalents at end of
period $41,940,810 $15,297,932
=========== ===========
Supplemental schedule of additional
cash flow information and noncash
activities:
Cash paid during the three-month
period for interest $ 1,315,611 $ 1,388,261
Purchase of cellular system equipment
through accounts payable 4,213,340 4,732,692
Purchases of interests in affiliates
financed with Common Stock 735,357 -
Conversion of convertible subordinated
debentures to Common Stock - 2,983
</TABLE>
See accompanying notes.
- 5 -
<PAGE>
COMMNET CELLULAR INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
1. Basis of presentation
---------------------
CommNet Cellular Inc. and its majority-owned affiliates (the
"Company"), in its opinion, has included all adjustments (consisting only of
normal recurring accruals) necessary for a fair presentation of the results of
operations for the periods presented. The consolidated condensed financial
statements and notes thereto should be read in conjunction with the financial
statements and notes for the years ended September 30, 1993, 1994 and 1995
included in the Company's Annual Report on Form 10-K for the fiscal year ended
September 30, 1995. The results of operations for the three months ended
December 31, 1995 are not necessarily indicative of the results for a full year.
Certain amounts relating to December 31, 1994 have been reclassified to
correspond to the December 31, 1995 classification.
2. Business acquisitions and sales
-------------------------------
During the three months ended December 31, 1995, the Company acquired
interests in several markets. In certain of these transactions, the Company
issued shares of its Common Stock. As a result of these transactions, capital
increased by approximately $735,000 and other assets increased by approximately
$2,417,000. In addition, the Company disposed of its interest in one managed
market. As a result of this transaction, other assets decreased by
approximately $457,000.
3. Stockholders' equity
--------------------
Changes to Common Stock during the three months ended December 31,
1995 were as follows:
<TABLE>
<CAPTION>
Common Stock Capital in
------------------------------------ Excess of
Shares Amount Par Value
------------------------------------ -------------------
<S> <C> <C> <C>
Balance at September 30, 1995 13,442,967 $13,443 $159,381,589
Issuance of Common Stock:
Aggregate shares issued in unrelated
nonsignificant acquisitions 28,283 28 735,329
Exercise of options 18,625 19 297,796
---------- ------- ------------
Balance at December 31, 1995 13,489,875 $13,490 $160,414,714
========== ======= ============
</TABLE>
- 6 -
<PAGE>
COMMNET CELLULAR INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
4. Income taxes
------------
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 December
31, 1995, the Company had a substantial net deferred tax asset that has been
reserved with a valuation allowance of 100%. Therefore, no deferred tax expense
was necessary.
5. Subsequent events
-----------------
On December 7, 1995, the Company called for redemption all outstanding
8.75% Convertible Senior Subordinated Notes ("Notes") with a carrying amount of
$3,000,000 at a price of 105 15/32%. During January 1996, all Notes were
converted into 200,000 shares of the Company's Common Stock.
- 7 -
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
- -------
The Company generated operating income during the first fiscal quarter of
1996 as growth in penetration and subscriber usage continued. In addition, the
Company expects that operating income before depreciation and amortization
("EBITDA"), which was positive during the quarter ended December 31, 1995, will
also be positive in future fiscal periods (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, all of which were consolidated for the
entire quarter, are included in the consolidated results for the quarter ended
December 31, 1995. The results of operations of 42 markets, all of which were
consolidated for the entire quarter, are included in the consolidated results
for the quarter ended December 31, 1994. The increase in the number of markets
included in consolidated results is due to acquisitions consummated subsequent
to December 31, 1994. Consolidated results of operations also include the
operations of Cellular, Inc. Financial Corporation ("CIFC"), the Company's
wholly-owned financing subsidiary, as well as the operations of Cellular Inc.
Network Corporation ("CINC"), a wholly-owned subsidiary through which the
Company holds interests in certain cellular licenses.
Equity in net loss of affiliates includes the Company's share of net loss
in the markets in which the Company's interest is 50% or less but 20% or
greater. For the quarter ended December 31, 1995, 20 markets were accounted for
under the equity method, compared to 34 such markets for the quarter ended
December 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 each of the quarters ended December 31, 1995 and 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, ACB,
as agent for a syndicate of lenders ("CoBank") and from the Company and bear
interest at a rate 1% above CIFC's average borrowing 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 generate positive cash flow, the cash is
used to repay borrowings by the affiliates from CIFC and thereafter will be used
to make cash distributions to equity holders, including the Company.
- 8 -
<PAGE>
Results of Operations
- ---------------------
Three Months Ended December 31, 1995 and 1994. Cellular service revenues,
---------------------------------------------
including in-roaming revenues, increased 42% from $16,709,000 for the quarter
ended December 31, 1994 to $23,779,000 for the quarter ended December 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
quarter from 42 during the quarter ended December 31, 1994 to 44 during the
quarter ended December 31, 1995. Growth in subscribers accounted for 77% of the
increase, and the number of consolidated markets accounted for 23% of the
increase. In-roaming revenues increased by 50%, or $1,913,000, from $3,807,000,
for the quarter ended December 31, 1994 to $5,720,000 for the quarter ended
December 31, 1995 due to increased coverage in cellular markets and to industry-
wide subscriber increases. In-roaming revenues are expected to increase in the
future as a result of further industry-wide growth in subscribers and 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 in-roaming revenues,
decreased from $69 for the quarter ended December 31, 1994 to $61 for the
quarter ended December 31, 1995, reflecting the benefit of declining prices to
the consumer and lower usage by new subscribers which is consistent with an
overall industry trend. However, in-roaming revenues per subscriber decreased
only $1, from $16 to $15, reflecting the larger scale benefit of the Company's
cell site expansion program.
Cost of service decreased as a percentage of service revenues from 23% for
the quarter ended December 31, 1994 to 20% for the quarter ended December 31,
1995, as revenues derived from the growing subscriber base outpaced the fixed
components of cost of service.
Equipment sales decreased 50% from $2,567,000 for the quarter ended
December 31, 1994 to $1,292,000 for the quarter ended December 31, 1995 due to
the Company discontinuing the distribution of phones and accessories to its
indirect sales channel. In addition, the Company reduced equipment prices in
response to competitive factors. Cost of equipment sales decreased 16% from
$2,628,000 for the quarter ended December 31, 1994 to $2,215,000 for the quarter
ended December 31, 1995. The large loss on equipment sales was due to equipment
promotions during the quarter to stimulate subscriber growth. The Company
expects similar negative equipment margins in the future as the Company
subsidizes use of equipment in order to shift consumer focus to the value of the
cellular service. However, reductions in other components of acquisition costs
per new subscriber, such as advertising, may occur.
General and administrative costs of cellular operations increased 22% from
$4,843,000 for the quarter ended December 31, 1994 to $5,886,000 for the quarter
ended December 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. General and administrative
costs as a percentage of service revenues decreased from 29% for the quarter
ended December 31, 1994 to 25% for the quarter ended December 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 2% from $5,452,000 for the quarter
ended December 31, 1994 to $5,551,000 for the quarter ended December 31, 1995,
primarily as a result of the number of subscribers added in consolidated
markets. The majority of these costs were incremental sales commissions offset
by reductions in advertising costs and marketing overhead. Marketing costs per
net new subscriber decreased 9% from $453 for the quarter ended December 31,
1994 to $412 for the quarter ended December 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.
- 9 -
<PAGE>
Depreciation and amortization relating to cellular operations increased
from $3,397,000 for the quarter ended December 31, 1994 to $4,413,000 for the
quarter ended December 31, 1995, primarily related to increased fixed asset
balances.
Corporate costs and expenses for the quarter ended December 31, 1994 were
$942,000, which represented gross expenses of $2,497,000 less amounts allocated
to nonconsolidated affiliates of $1,555,000. Corporate costs and expenses for
the quarter ended December 31, 1995 were $650,000, which represented gross
expenses of $2,287,000 less amounts allocated to nonconsolidated affiliates of
$1,637,000. The decrease in corporate costs and expenses is due to a reduction
in costs attributable to general corporate initiatives such as financing
activities.
Equity in net loss of affiliates decreased 7% from $1,082,000 for the
quarter ended December 31, 1994 to $1,011,000 for the quarter ended December 31,
1995. The decrease is due to decreased losses in nonconsolidated affiliates.
Operating results of the markets that continue to be accounted for under the
equity method are expected to improve consistently. However, such improvement
may not be apparent in comparison to prior periods which included the results of
profitable markets that were sold in July 1995.
Interest expense increased 15% from $6,271,000 for the quarter ended
December 31, 1994 to $7,212,000 for the quarter ended December 31, 1995 due to
the higher interest rate on the subordinated notes than on the convertible
subordinated notes which were redeemed with the proceeds of the subordinated
notes and the higher accreted discount note and secured bank financing balances.
Cash paid for interest decreased 5% from $1,388,000 for the quarter ended
December 31, 1994 to $1,315,000 for the quarter ended December 31, 1995.
Interest income increased 27% from $2,793,000 for the quarter ended
December 31, 1994 to $3,540,000 for the quarter ended December 31, 1995. The
increase is related to higher cash balances and an increase in note receivable
balances from nonconsolidated affiliates.
Acquisitions and Sales
- ----------------------
In November 1995, the Company purchased additional interests ranging from
18% to 19% in three managed markets for 28,283 shares of the Company's Common
Stock.
Also in November 1995, the Company entered into a series of agreements
pursuant to which the Company agreed to acquire interests in one MSA and one RSA
market in exchange for its interest in one RSA market, plus cash, common stock
and forgiveness of certain obligations, all of which aggregate $988,000. The
sale portion of the transaction was consummated in November, and the acquisition
portion will be consummated upon receipt of requisite regulatory approvals.
The Company also has entered into agreements to purchase additional
interests ranging from 43% to 44% in two managed RSA markets. The aggregate
purchase price of $2,209,000 is payable in shares of the Company's Common Stock.
In January 1996, the Company entered into a series of agreements to
partition the New Mexico 1 RSA, to sell its interest in the southern portion of
the market and to acquire the interest of U S West NewVector Group in the
northern portion of the market. The transaction is expected to be consummated
during the second fiscal quarter of 1996.
The Company continues to pursue acquisitions to the extent they enhance or
extend its network or increase shareholder value, although there can be no
assurance any such acquisition will be consummated.
- 10 -
<PAGE>
Changes in Financial Condition
- ------------------------------
Net cash provided by operating activities was $10,848,000 during the
quarter ended December 31, 1995. This was primarily due to the increase in
EBITDA of $4,502,000, an increase to accrued interest and accounts payable of
$6,325,000 and decreases of $1,125,000 to accounts receivable. Working capital
increases will likely require cash in future periods as growth in the subscriber
base continues.
Net cash used by investing activities was $10,147,000 for the quarter ended
December 31, 1995. This was due primarily to $5,095,000 required to fund the
purchase of property and equipment and $3,978,000 to increase the investment in
cellular system equipment.
Net cash provided by financing activities was $222,000 for the quarter
ended December 31, 1995. These proceeds include $298,000 of cash from the
issuance of Common Stock upon exercise of options.
Liquidity and Capital Resources
- -------------------------------
General. CommNet Cellular Inc. (referred to herein as the "parent
-------
company") is effectively a holding company and, accordingly, must rely on
distributions, loan repayments and other intercompany cash flows from its
affiliates and subsidiaries to generate the funds necessary to satisfy the
parent company's capital requirements. On a consolidated basis, the Company's
principal source of liquidity is the Credit Agreement, pursuant to which CoBank
has agreed to lend up to $165,000,000 to CIFC (the "credit facility"). Of the
$165,000,000, $140,000,000 may be reloaned by CIFC to the Company's affiliates
for the construction, operation and expansion of cellular telephone systems
including up to $5,000,000 for the construction and operation of a paging
network. The remaining $25,000,000 is reserved for acquisitions by CINC. Of
the $140,000,000, up to $80,000,000 is available to be borrowed by CIFC to be
repaid to the parent company and used for general corporate purposes, including
capital expenditures, debt service and acquisitions. The Credit Agreement
restricts the ability of the Company's affiliates and subsidiaries, a
substantial number of which are consolidated for financial statement purposes,
to make distributions to the parent company until such affiliates and
subsidiaries have repaid all outstanding debt to CIFC. As a result, a portion
of the Company's consolidated cash flows and cash balances is not available to
satisfy the parent company's capital and debt service requirements.
The Company's budgeted capital requirements consist primarily of (i) parent
company capital expenditures, working capital, 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, and to the extent the Company
consummates future acquisitions, additional capital may be required.
As of December 31, 1995, the Company had unused commitments under the
Credit Agreement of $128,737,000, of which approximately $60,225,000 was
available to be repaid to the parent company for general corporate purposes. In
addition to the liquidity provided by the Credit Agreement, at December 31, 1995
the Company, on a consolidated basis, had available $42,832,000 of cash, cash
equivalents and available-for-sale securities. In September 1995, holders of
the Company's 8.75% Convertible Senior Subordinated Notes elected to convert
$1,950,000 of the $4,950,000 outstanding notes into 130,004 shares of the
Company's Common Stock. On December 7, 1995 the Company notified the remaining
noteholders of its intent to call for redemption on January 15, 1996 the
outstanding notes. Subsequent to December 31, 1995 but prior to January 15,
1996, the remaining $3,000,000 in notes were converted into 200,000 shares of
the Company's Common Stock.
- 11 -
<PAGE>
On a consolidated basis, the Company's capital expenditures for the twelve
months ended September 30, 1995 and the quarter ended December 31, 1995 were
$31,919,000 and $9,052,000, respectively. The Company plans to make parent
company capital expenditures and fund working capital and acquisition
requirements for the balance of fiscal year 1996 of $31,567,000, 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 $38,459,000 for the balance of fiscal 1996, to fund working
capital requirements, channel expansion and additional cell sites.
The Company's near-term debt service requirements will consist primarily of
interest payments on the indebtedness incurred under the Credit Agreement and
interest payments on the Notes. Interest on the Company's 11 3/4% Senior
Subordinated Discount Notes is payable in cash commencing March 1, 1999. The
Company anticipates its cash interest expense for the balance of fiscal year
1996 will be $12,500,000. Revolving loan indebtedness outstanding under the
Credit Agreement will be converted to term loan indebtedness at December 31,
1996 and will be amortized over the next four years. See "The Credit Agreement"
below.
The Company believes operating cash flow, existing cash balances and
borrowing availability under the Credit Agreement, will be sufficient to meet
all future anticipated capital requirements of the parent company and its
affiliates and debt service requirements of the Company at both the parent
company level and on a consolidated basis.
Although the Company believes that the foregoing sources of liquidity will
be sufficient to meet budgeted capital expenditures and debt service
requirements of the parent company and the affiliates, there can be no assurance
that this will be the case. In such event, the Company believes it will be able
to satisfy its capital expenditure and debt service requirements with
unrestricted operating cash flow; however, the Company may be required to reduce
discretionary capital spending. To the extent the Company's cash flow is not
sufficient to satisfy such requirements, the Company will be required to raise
funds through additional financings or asset sales.
The Company continually evaluates the acquisition of cellular properties.
Acquisitions are likely to require capital in addition to the budgeted capital
requirements described above, and such requirements may in turn require the
issuance of additional debt or equity securities. The Company's ability to
finance the acquisition of additional cellular properties with debt financing
may be constrained by certain restrictions contained in its existing debt
instruments. In such event, the Company would be required to seek amendments to
such instruments. There can be no assurance that such amendments could be
obtained on terms acceptable to the Company.
The Credit Agreement. Pursuant to the Credit Agreement, CoBank has agreed
--------------------
to loan up to $165,000,000 to CIFC to be reloaned by CIFC to affiliates of the
Company for the construction, operation and expansion of cellular telephone
systems including $25,000,000 to fund acquisitions of additional cellular
systems, subject to certain conditions. As of December 31, 1995, $60,225,000
was available under the Credit Agreement to be borrowed from CoBank by CIFC and
repaid to the parent company for general corporate purposes. As of December 31,
1995, the outstanding balance under the Credit Agreement was approximately
$36,210,000. The Credit Agreement provides, at the Company's option, for
interest at 1.00% over prime (9.50% at December 31, 1995) or 2.50% over LIBOR
(8.08% at December 31, 1995). The Credit Agreement is a revolving loan which
converts to a four-year term loan on December 31, 1996. The loan is secured by
a first lien upon all of the assets of CIFC and each of the affiliates to which
funds are advanced by CIFC. In addition, the Company has guaranteed the
obligations of CIFC to CoBank and has granted CoBank a first lien on all of the
assets of the Company as security for such guaranty.
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 fixed interest rates on approximately $35,090,000 of its
long-term debt payable to CoBank at an average rate of 10.8% which matures
during 1996. Additionally, CIFC has entered into a prime-based interest rate
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<PAGE>
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 (8.50% at December 31, 1995). The weighted average interest rate
of borrowings under the Credit Agreement, after giving effect to the swap, was
10.68% at December 31, 1995.
The Credit Agreement prohibits the payment of cash dividends, limits the
use of borrowings, prohibits any other senior borrowings, restricts expenditures
for certain investments, requires positive working capital and requires the
maintenance of certain liquidity, capitalization, debt, debt service and cash
interest ratios. The requirements of the Credit Agreement were established in
relation to the anticipated capital and financing needs of the Company's
affiliates and their anticipated results of operations. The Company is currently
in compliance with all covenants and anticipates it will continue to meet the
requirements of the Credit Agreement. Approval may be required from the
syndicate for waivers or other amendments to the Credit Agreement requested by
CIFC or the Company.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMMNET CELLULAR INC. (Registrant)
Date: MAY 3, 1996 By: /s/Daniel P. Dwyer
-------------------------------------
Daniel P. Dwyer
Executive Vice President, Treasurer &
Chief Financial Officer
Date: MAY 3, 1996 By: /s/Andrew J. Gardner
-------------------------------------
Andrew J. Gardner
Senior Vice President and Controller
(Principal Accounting Officer)
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