<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, 1996
-----------------
[ ] 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)
N/A
---
(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
7, 1997 was 13,741,378.
<PAGE>
COMMNET CELLULAR INC.
FORM 10-Q - DECEMBER 31, 1996
INDEX
<TABLE>
<CAPTION>
Part I Financial Information Page
- ------ --------------------- ----
<S> <C> <C>
Item 1 Financial Statements
Consolidated Condensed Balance Sheets -
December 31, 1996 and September 30, 1996 1
Consolidated Condensed Statements of Operations -
Three Months Ended December 31, 1996 and
December 31, 1995 3
Consolidated Condensed Statements of Cash Flows -
Three Months Ended December 31, 1996 and
December 31, 1995 4
Notes to Consolidated Condensed Financial
Statements 6
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Part II Other Information
- ------- -----------------
Item 6 Exhibits and Reports on Form 8-K 20
</TABLE>
<PAGE>
COMMNET CELLULAR INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(Amounts in thousands)
<TABLE>
<CAPTION>
December 31, September 30,
Assets 1996 1996
- ------------------------------------------ ------------ -------------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 39,542 $ 11,492
Accounts receivable, net of allowance
for doubtful accounts of $2,595 and
$1,947 at December 31, 1996 and
September 30, 1996, respectively 18,290 19,933
Inventory and other 4,534 3,949
-------- --------
Total current assets 62,366 35,374
Investment in and advances to affiliates 56,883 57,245
Investment in cellular system equipment 15,004 11,809
Property and equipment, at cost:
Cellular system equipment 131,256 126,305
Land, buildings and improvements 26,940 25,977
Furniture and equipment 17,623 17,144
-------- --------
175,819 169,426
Less accumulated depreciation 55,774 51,327
-------- --------
Net property and equipment 120,045 118,099
Other assets, less accumulated amortization of
$33,902 and $33,166 at December 31, 1996
and September 30, 1996, respectively:
FCC licenses and filing rights 100,759 103,251
Deferred loan costs and other 5,811 6,059
-------- --------
Total other assets 106,570 109,310
-------- --------
$360,868 $331,837
======== ========
</TABLE>
See accompanying notes.
-1-
<PAGE>
COMMNET CELLULAR INC.
CONSOLIDATED CONDENSED BALANCE SHEETS (CONTINUED)
(Amounts in thousands, except share data)
<TABLE>
<CAPTION>
December 31, September 30,
Liabilities and Stockholders' Equity 1996 1996
- ------------------------------------------- ------------- --------------
(unaudited)
<S> <C> <C>
Current liabilities:
Accounts payable $ 11,198 $ 7,431
Accrued liabilities 7,328 5,458
Accrued interest 4,690 2,556
Current portion of secured bank
financing and other long-term debt 1,703 3,683
--------- ---------
Total current liabilities
24,919 19,128
Long-term debt:
Secured bank financing 42,902 20,825
Note payable and other long-term debt 2,983 3,057
11 3/4% senior subordinated discount notes 146,092 141,963
11 1/4% subordinated notes 80,000 80,000
Minority interests 5,144 3,882
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; 13,765,865
and 13,859,740 shares issued at
December 31, 1996 and September 30, 14 14
1996, respectively 165,324 168,103
Capital in excess of par value (106,510) (105,135)
Accumulated deficit --------- ---------
Total stockholders' equity 58,828 62,982
--------- ---------
$ 360,868 $ 331,837
========= =========
</TABLE>
See accompanying notes.
-2-
<PAGE>
COMMNET CELLULAR INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 1996 AND 1995
(Amounts in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Revenues:
Cellular service $25,331 $18,059
In-roaming 8,284 5,720
Equipment sales 881 1,292
------- -------
34,496 25,071
Costs and expenses:
Cellular operations:
Cost of cellular service 6,752 4,819
Cost of equipment sales 2,939 2,215
General and administrative 7,464 5,886
Marketing and selling 6,439 5,551
Depreciation and amortization 4,808 4,413
Corporate:
General and administrative 1,885 1,582
Depreciation and amortization 527 706
Less amounts allocated to nonconsolidated
affiliates (1,512) (1,637)
------- -------
29,302 23,535
------- -------
Operating income 5,194 1,536
Equity in net loss of affiliates (608) (1,011)
Minority interest in net income of consolidated affiliates (397) (207)
Interest expense (7,317) (7,212)
Interest income 1,753 3,540
------- -------
Net loss $(1,375) $(3,354)
======= =======
Net loss per common share $ (0.10) $ (0.25)
======= =======
Weighted average shares outstanding 13,774 13,461
======= =======
</TABLE>
See accompanying notes.
-3-
<PAGE>
COMMNET CELLULAR INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED DECEMBER 31, 1996 AND 1995
(Amounts in thousands)
(unaudited)
<TABLE>
<CAPTION>
1996 1995
-------- ---------
<S> <C> <C>
Operating activities:
Net loss $(1,375) $ (3,354)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Minority interest 397 207
Depreciation and amortization 5,335 5,119
Equity in net loss of affiliates 608 1,011
Interest expense on 11 3/4% senior subordinated discount notes
Accrued interest on advances to affiliates 4,130 3,684
(1,489) (2,922)
Change in operating assets and liabilities, net of
effects from consolidating acquired interests:
Accounts receivable 1,643 1,125
Inventory and other (584) (346)
Accounts payable and accrued liabilities 1,915 4,113
Accrued interest 2,134 2,211
------- --------
Net cash provided by operating activities 12,714 10,848
Investing activities:
Purchase of available-for-sale securities - (891)
Reductions in (additions to) investments in and advances to affiliates 1,123 (461)
Additions to investment in cellular system equipment (3,195) (3,979)
Additions to property and equipment (2,696) (5,095)
Reduction in (additions to) other assets 58 (329)
Proceeds from sales of interests in affiliates - 614
Purchase of interests in affiliates, net of cash acquired and net of
assets and liabilities recorded due to consolidation (48) (6)
------- --------
Net cash used by investing activities (4,758) (10,147)
</TABLE>
See accompanying notes.
-4-
<PAGE>
COMMNET CELLULAR INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (CONTINUED)
THREE MONTHS ENDED DECEMBER 31, 1996 AND 1995
(Amounts in thousands)
(unaudited)
1996 1995
-------- --------
Financing activities:
Proceeds from secured bank financing $24,000 $ -
Payments of secured bank financing (3,903) -
Distributions to minority interests (98) -
Capital contributions from minority interests 2,949 -
Reduction of obligation under capital leases (75) (76)
Issuance of Common Stock, net of offering costs 153 298
Repurchases of Common Stock (2,932) -
------- -------
Net cash provided by financing activities 20,094 222
------- -------
Net increase in cash and cash equivalents 28,050 923
Cash and cash equivalents at beginning of period 11,492 41,018
------- -------
Cash and cash equivalents at end of period $39,542 $41,941
======= =======
Supplemental schedule of additional cash flow
information and noncash activities:
Cash paid during the three-month period for interest $ 1,053 $ 1,316
Purchase of cellular system equipment through
accounts payable 5,838 4,213
Purchases of interests in affiliates financed with
Common Stock - 735
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, 1994, 1995 and 1996 included in the Company's
Annual Report on Form 10-K for the fiscal year ended September 30, 1996. The
results of operations for the three months ended December 31, 1996 are not
necessarily indicative of the results for a full year. Certain amounts relating
to December 31, 1995 have been reclassified to correspond to the December 31,
1996 classification.
2. Impairment of long-lived assets
-------------------------------
Effective October 1, 1996, the Company adopted Financial Accounting
Standards Board Statement No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of " ("Statement No. 121"),
which requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present. The implementation of
Statement No. 121 had an immaterial effect on the financial statements of the
Company.
3. Stockholders' equity
--------------------
Changes to Common Stock during the three months ended December 31, 1996
were as follows (amounts in thousands, except share data):
Common Stock Capital in
-------------------------- Excess of
Shares Amount Par Value
-------------------------- ---------
Balance at September 30, 1996 13,859,740 $14 $168,103
Issuance of Common Stock:
Exercise of options 8,125 - 153
Common Stock repurchased (102,000) - (2,932)
---------- ---------- --------
Balance at December 31, 1996 13,765,865 $14 $165,324
========== ========== ========
At December 31, 1996 the Company had 1,918,500 options outstanding at
a weighted average exercise price of $23.83.
-6-
<PAGE>
COMMNET CELLULAR INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
4. Cost of equipment sales
-----------------------
During 1996, the Company introduced a new customer service program
whereby a handset is provided to the customer and returned to the Company at the
end of the service agreement. The cost of providing the handset to the customer
is included in cost of equipment sales, with no corresponding recognition of
equipment revenue, as any revenue related to the program is recognized in
cellular service revenue.
The following table reflects activity in the three months ended
December 31, 1996 giving effect to the costs associated with the program
described above (amounts in thousands).
Three Months
ended
December 31, 1996
-----------------
Cost of equipment sales $ 332
Cost of equipment owned by
the Company, but provided to
subscribers to use:
New subscribers 1,884
Existing subscribers 723
------
$2,939
======
5. 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, 1996, 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.
6. Subsequent events
-----------------
In January 1997, the Company purchased an additional 15% in one
previously nonmanaged RSA for approximately $876,000 in cash. The Company
assumed management of this market upon consummation of the transaction.
In February 1997, TVX, Inc., an affiliate of the Company in the
security and surveillance industry, filed a registration statement on Form S-1
with the Securities and Exchange Commission covering an initial public offering
of its common stock and a concomitant acquisition of another company in the same
industry. If the offering is successful, the Company's ownership will be
substantially diluted, but the market value of the Company's investment will be
significantly greater than the current carrying value of approximately $5.2
million.
-7-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
- -------
The Company generated operating income during the first quarter of fiscal
1997 and the fiscal years ended September 30, 1996 and 1995 and focused on
increasing penetration and subscriber usage. In addition, the Company expects
that operating income before depreciation and amortization ("EBITDA"), which was
positive during the fiscal years ended September 30, 1996 and 1995, will
continue to be positive and will increase in future fiscal years (although there
can be no assurance that this will be the case). Certain financial analysts
consider EBITDA a meaningful measure of an entity's ability to meet long-term
financial obligations, and growth in EBITDA a meaningful barometer of future
profitability, especially in a capital-intensive industry such as cellular
telecommunications. However, EBITDA should not be considered in isolation to,
or be construed as having greater significance than, other indicators of an
entity's performance. The results discussed below may not be indicative of
future results.
Consolidated results of operations include the revenues and expenses of
those markets in which the Company holds a greater than 50% interest. The
results of operations of 46 markets, all of which were consolidated for the
entire period, are included in the consolidated results for the quarter ended
December 31, 1996. The results of operations of 44 markets, all of which were
consolidated for the entire period, are included in the consolidated results for
the quarter ended December 31, 1995. The increase in the number of markets
included in consolidated results is due to acquisitions consummated subsequent
to December 31, 1995. Consolidated results of operations also include the
operations of Cellular, Inc. Financial Corporation ("CIFC"), the Company's
wholly-owned financing subsidiary, as well as the operations of Cellular Inc.
Network Corporation ("CINC"), a wholly-owned subsidiary through which the
Company holds interests in certain cellular licenses.
Equity in net loss of affiliates includes the Company's share of net loss
in the markets in which the Company's interest is 50% or less but 20% or
greater. For the quarter ended December 31, 1996, 18 markets were accounted for
under the equity method, compared to 20 such markets for the quarter ended
December 31, 1995. Markets in which the Company's interest is less than 20% are
accounted for under the cost method. Eighteen markets were accounted for under
the cost method for both quarters ended December 31, 1996 and December 31, 1995.
Interest income reflects interest income derived from the financing
activities of CIFC and the Company with nonconsolidated affiliates, as well as
interest income derived from cash and short-term investments of the Company and
its consolidated affiliates. CIFC has entered into loan agreements with the
majority of the Company's affiliates pursuant to which CIFC makes loans to such
entities for the purpose of financing or refinancing the affiliates' costs of
construction and operation of cellular telephone systems. Such loans are
financed with funds borrowed by CIFC from CoBank, ACB, as agent for a syndicate
of lenders ("CoBank") and from the Company. At December 31, 1996, loans bore
interest at the average cost of CIFC borrowings. From time to time, the Company
advances funds on an interim basis to affiliates. These advances typically are
refinanced through CIFC. To the extent that the cellular markets in which the
Company holds an interest generate positive cash flow, the cash is generally
used to repay borrowings by the affiliates from CIFC and thereafter will be used
to make cash distributions to equity holders, including the Company.
There exists a seasonality in both service revenues, which tend to increase
more rapidly in the third and fourth quarters, and operating expenses, which
tend to be highest in the first quarter due to increased marketing activities
and customer growth, which may cause operating income to vary from quarter to
quarter.
-8-
<PAGE>
In addition to historical information, this report includes certain
forward-looking statements regarding events and financial trends which may
affect the Company's future operating results and financial position. Such
statements represent the Company's reasonable judgment on the future and are
subject to risks and uncertainties that could cause the Company's actual results
and financial position to differ materially. Such factors include, but are not
limited to: a change in economic conditions in the Company's markets which
adversely affects the level of demand for wireless services; greater than
anticipated competition resulting in price reductions, new product offerings or
higher customer acquisition costs; better than expected customer growth
necessitating increased investment in network capacity; negative economies that
could result if one or more agreements to manage markets are not renewed;
increased cellular fraud; the impact of new business opportunities requiring
significant initial investments; and the impact of deployment of new
technologies on capital spending.
Results of Operations
- ---------------------
Three Months Ended December 31, 1996 and 1995. Cellular service revenues,
---------------------------------------------
including in-roaming revenues, increased 41% from $23,779,000 for the quarter
ended December 31, 1995 to $33,615,000 for the quarter ended December 31, 1996.
The growth was primarily due to the increase in the number of subscribers in
consolidated markets. In addition to increases in market penetration, growth
resulted from an increase in the number of markets consolidated for the entire
quarter from 44 during the quarter ended December 31, 1995 to 46 during the
quarter ended December 31, 1996. Growth in subscribers accounted for 84% of the
increase, and the number of consolidated markets accounted for 16% of the
increase. In-roaming revenues increased by 45%, or $2,564,000, from $5,720,000
for the quarter ended December 31, 1995 to $8,284,000 for the quarter ended
December 31, 1996 due to increased coverage in cellular markets and to industry-
wide subscriber increases. In-roaming revenues are expected to increase in the
future as a result of further industry-wide growth in subscribers and expansion
of the Company's coverage, particularly along highway corridors; however,
roaming rates may decline, consistent with industry trends.
Average monthly revenue per subscriber, including in-roaming, decreased
from $61 for the quarter ended December 31, 1995 to $60 for the quarter ended
December 31, 1996, reflecting the benefit of declining prices to the consumer
which is consistent with an overall industry trend. However, in-roaming
revenues per subscriber per month was unchanged at $15, reflecting the larger
scale benefit of the Company's cell site expansion program.
Cost of cellular service as a percentage of service revenues remained at
20% for the quarter ended December 31, 1996, unchanged from the quarter ended
December 31, 1995. The Company expects cost of cellular service to decline as a
result of renegotiated interconnect agreements, the first of which became
effective in January 1997.
Equipment sales decreased 32% from $1,292,000 for the quarter ended
December 31, 1995 to $881,000 for the quarter ended December 31, 1996 due to the
Company's customer satisfaction and pricing program which was introduced in
February 1996. The program packages the use of a handset, airtime and long-
distance within one area code for one monthly fee, which results in no handset
revenue. However, certain customers are charged additional monthly fees, which
are classified as service revenues, for use of higher-end equipment. Such fees
are not significant currently but are expected to increase in the future. After
January 1996, sales of accessories accounted for the majority of the Company's
equipment sales. Cost of equipment sales increased 33% from $2,215,000 for the
quarter ended December 31, 1995 to $2,939,000 for the quarter ended December 31,
1996. Approximately $1,884,000 and $723,000 of the quarter ended December 31,
1996 cost of equipment sales relates to equipment provided to new and existing
customers, respectively, which the customers are required to return to the
Company if service is terminated. Although the Company retains ownership of the
equipment, it carries such equipment at no value on its balance sheet. The
Company expects negative equipment margins in the future as the Company
subsidizes use of handsets to shift consumer focus to the value of cellular
service.
-9-
<PAGE>
However, the Company implemented a refurbishment program in December 1996
whereby returned handsets are reconditioned at a nominal cost and placed back
into service.
General and administrative costs of cellular operations increased 27% from
$5,886,000 during the quarter ended December 31, 1995 to $7,464,000 during the
quarter ended December 31, 1996, due to the growth in the customer base and the
number of consolidated markets. The majority of these costs were incremental
customer billing expense, bad debt expense and customer service support staff.
General and administrative costs as a percentage of service revenues decreased
from 25% for the quarter ended December 31, 1995 to 22% for the quarter ended
December 31, 1996. The decrease was primarily due to revenues increasing at a
faster rate than incremental general and administrative costs.
Marketing and selling costs increased 16% from $5,551,000 for the quarter
ended December 31, 1995 to $6,439,000 for the quarter ended December 31, 1996,
primarily as a result of increased advertising costs offset by reductions in
commission costs. Marketing costs per net new subscriber decreased 2% from $412
for the quarter ended December 31, 1995 to $404 for the quarter ended December
31, 1996, as a result of increased net subscriber additions which outpaced
increases in costs incurred. In addition, the Company continues to expand its
retail presence to capitalize on retail trade while driving down commission
costs.
Depreciation and amortization relating to cellular operations increased 9%
from $4,413,000 for the quarter ended December 31, 1995 to $4,808,000 for the
quarter ended December 31, 1996, primarily related to increased property and
equipment balances.
Corporate costs and expenses for the quarter ended December 31, 1995 were
$651,000, which represented gross expenses of $2,288,000 less amounts allocated
to nonconsolidated affiliates of $1,637,000. Corporate costs and expenses for
the quarter ended December 31, 1996 were $900,000, which represented gross
expenses of $2,412,000 less amounts allocated to nonconsolidated affiliates of
$1,512,000. The increase in corporate costs and expenses was due primarily to
expenses related to paging activities which were not allocated to affiliates.
Equity in net loss of affiliates decreased 40% from $1,011,000 for the
quarter ended December 31, 1995 to $608,000 for the quarter ended December 31,
1996. Management expects operating results of the markets that are accounted for
under the equity method to continue to improve. The decrease was due primarily
to decreased losses in nonconsolidated affiliates, offset by recognition of the
entire approximate $1,097,000 net loss of TVX, Inc. which was approximately
$451,000 higher than the Company's proportionate share of the net loss based
upon ownership. This accounting results from the Company's indication, in
September 1996, of its intent to finance the ongoing operating and capital
requirements of TVX, Inc. until the earlier of September 30, 1997 or the
completion of an initial public offering of common stock (an "IPO").
In February 1997, TVX, Inc. filed a registration statement on Form S-1 with
the Securities and Exchange Commission covering an IPO of its common stock and a
concomitant acquisition of another company in the same industry. If the IPO is
successful, the market value of the Company's investment in TVX, Inc.
immediately after the IPO will be approximately $32 million based upon the
financial information contained in the registration statement compared to a
current carrying value of approximately $5.2 million.
Interest expense increased 1% from $7,212,000 for the quarter ended
December 31, 1995 to $7,317,000 for the quarter ended December 31, 1996. Cash
paid for interest decreased 20% from $1,316,000 during the quarter ended
December 31, 1995 to $1,053,000 during the quarter ended December 31, 1996.
Interest income decreased 50% from $3,540,000 for the quarter ended
December 31, 1995 to $1,753,000 for the quarter ended December 31, 1996. The
decrease was due to lower notes receivable balances from nonconsolidated
affiliates.
-10-
<PAGE>
Acquisitions and Sales
- ----------------------
In January 1997, the Company purchased an additional 15% in one previously
nonmanaged RSA for approximately $876,000 in cash. The Company assumed
management of this market upon consummation of the transaction.
Changes in Financial Condition
- ------------------------------
Net cash provided by operating activities was $12,714,000 during the three
months ended December 31, 1996. This was due primarily to net loss after
adjustments to reconcile net cash provided by operating activities of $7,606,000
and cash provided by changes to working capital of $5,108,000.
Net cash used by investing activities was $4,758,000 for the three months
ended December 31, 1996. This was due primarily to $5,891,000 required to fund
the purchase of property and equipment and investment in cellular system
equipment, offset by a decrease of $1,123,000 to investments in and advances to
affiliates.
Net cash provided by financing activities was $20,094,000 for the three
months ended December 31, 1996. This was primarily due to increases in long-
term debt of $20,097,000, capital contributions from minority interests of
$2,949,000 less repurchases of Common Stock of $2,932,000.
Liquidity and Capital Resources
- -------------------------------
General. CommNet Cellular Inc. (referred to herein as the "parent
-------
company") is effectively a holding company and, accordingly, must rely on
distributions, loan repayments and other intercompany cash flows from its
affiliates and subsidiaries to generate the funds necessary to satisfy the
parent company's capital requirements. On a consolidated basis, the Company's
principal source of financing is the loan facility with CoBank (the "Credit
Agreement"), pursuant to which CoBank has agreed to lend up to $165,000,000 to
CIFC. Of the $165,000,000, $140,000,000 may be reloaned by CIFC to the
Company's affiliates for the construction, operation and expansion of cellular
telephone systems including up to $5,000,000 for the construction and operation
of a paging network. The remaining $25,000,000 is reserved for acquisitions by
CINC. Of the $140,000,000, $80,000,000 is available to be borrowed by CIFC to
be repaid to the parent company and used for general corporate purposes,
including capital expenditures, debt service and acquisitions. The Credit
Agreement restricts the ability of the Company's affiliates and subsidiaries, a
substantial number of which are consolidated for financial statement purposes,
to make distributions to the parent company until such affiliates and
subsidiaries have repaid all outstanding debt to CIFC. As a result, a portion
of the Company's consolidated cash flows and cash balances is not available to
satisfy the parent company's capital and debt service requirements.
The Company's budgeted capital requirements consist primarily of (i) parent
company capital expenditures, working capital and debt service and (ii) the
capital expenditures, working capital, other operating and debt service
requirements of the affiliates. In addition to budgeted capital requirements,
the Company is constantly evaluating the acquisition of additional cellular
properties, and to the extent the Company consummates future acquisitions,
additional capital may be required.
As of December 31, 1996, the Company had unused commitments under the
Credit Agreement of $120,713,000, of which $40,250,000 was available to be
repaid to the parent company for general corporate purposes. In addition to the
liquidity provided by the Credit Agreement, at December 31, 1996, the Company,
on a consolidated basis, had available $39,542,000 of cash and cash equivalents.
-11-
<PAGE>
Capital expenditures in managed markets including corporate capital,
reflected as additions to investments in and advances to affiliates, and
additions to property and equipment and investment in cellular system equipment,
for the three months ended December 31, 1996 were approximately $10,200,000.
These expenditures were primarily for 15 new cell sites, channel expansion,
paging sites, call center systems and other computer equipment. The Company
expects capital expenditures for the remainder of fiscal year 1997 to be
$40,800,000 to optimize coverage, upgrade switching capacity, increased channel
capacity and for paging infrastructure.
The Company's near-term debt service requirements will consist primarily of
interest payments on the indebtedness incurred under the Credit Agreement and
interest payments on the 11 1/4% Subordinated Notes due 2005. Interest on the
Company's 11 3/4% Senior Subordinated Discount Notes is payable in cash
commencing March 1, 1999. The Company anticipates its cash interest expense for
the remainder of fiscal year 1997 will be $12,108,000. Revolving loan
indebtedness outstanding under the Credit Agreement will convert to term loan
indebtedness at December 31, 1997 and will be amortized over the next three
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. To the extent the foregoing
sources of liquidity are not sufficient to satisfy such requirements, the
Company will be required to raise funds through additional financings or asset
sales.
The Company continually evaluates the acquisition of cellular properties.
Acquisitions are likely to require capital in addition to the budgeted capital
requirements described above, and such requirements may in turn require the
issuance of additional debt or equity securities. The Company's ability to
finance the acquisition of additional cellular properties with debt financing
may be constrained by certain restrictions contained in its existing debt
instruments. In such event, the Company would be required to seek amendments to
such instruments. There can be no assurance that such amendments could be
obtained on terms acceptable to the Company.
In August 1996, the Company announced a program to repurchase, from time to
time, up to $20,000,000 of its outstanding Common Stock using available
liquidity to fund the repurchases. At December 31, 1996, the Company had
repurchased 149,500 shares at prices ranging from $27.75 to $29.125 for an
aggregate price of $4,310,938.
The Credit Agreement. Pursuant to the Credit Agreement, CoBank has agreed
--------------------
to loan up to $165,000,000 to CIFC to be reloaned by CIFC to affiliates of the
Company for the construction, operation and expansion of cellular telephone
systems including $25,000,000 to fund the acquisitions of additional cellular
systems, subject to certain conditions. As of December 31, 1996, $40,250,000 was
available under the Credit Agreement to be borrowed from CoBank by CIFC and
repaid to the parent company for general corporate purposes. The outstanding
balance under the Credit Agreement was approximately $44,287,000 at December 31,
1996. The Credit Agreement provides, at the Company's option, for interest at
1.00% over prime (9.25% at December 31, 1996) or 2.50% over LIBOR (8.13% at
December 31, 1996), subject to reduction upon the maintenance of certain debt to
cash flow ratios. On January 1, 1997 the interest rate margin was reduced to
.75% over prime and 2.25% over LIBOR. On January 30, 1997, the interest rate
margin was reduced to .50% over prime and 2.00% over LIBOR, respectively.
Effective January 1, 1997 CIFC and CoBank amended the Credit Agreement to extend
the term period of the facility to December 31, 1997 with a three-year principal
amortization upon the loan termination. 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
-12-
<PAGE>
addition, the Company has guaranteed the obligations of CIFC to CoBank and has
granted CoBank a first lien on all of the assets of the Company as security for
such guaranty.
The Credit Agreement prohibits the payment of cash dividends, limits the
use of borrowings, prohibits any other senior borrowings, restricts expenditures
for certain investments, requires positive working capital and requires the
maintenance of certain liquidity, capitalization, debt, debt 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.
-13-
<PAGE>
SUPPLEMENTAL INFORMATION
General. 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 3,537,000 net Company pops in 82 markets located in 14 states.
These markets consist of 72 RSA markets having a total of 5,183,000 pops and 10
MSA markets having a total of 1,295,000 pops, of which the Company's interests
represent 2,854,000 net Company pops and 683,000 net Company pops, respectively.
The Company currently manages 56 of the 82 markets in which it holds an interest
and owns a greater than 50% interest in 45 of its 56 managed markets. As of
December 31, 1996, the Company had net advances of $312,449,000 to RSA and MSA
affiliates. Based on its proportionate ownership interests in these affiliates,
the Company's share of total affiliate loans and advances was $264,364,000. The
assets of the affiliates in which the Company has investments or advances
represent 4,337,000 pops, which include 3,537,000 net Company pops and 800,000
pops attributable to parties other than the Company. Advances related to pops
attributable to parties other than the Company total $48,085,000. Pops refers
to the estimated population of a market as initially licensed by the Federal
Communications Commission ("FCC"). Systems in which the Company holds an
interest constitute one of the largest geographic collections of contiguous
cellular markets in the United States.
The Company has concentrated on creating an integrated network of
contiguous cellular systems comprised of markets which are managed by the
Company. The network currently consists of 56 markets (49 RSA and 7 MSA
markets) spanning nine states and represents approximately 4,172,000 total pops
and 3,217,000 net Company pops. As of December 31, 1996, the RSA and MSA
managed markets had 170,646 and 60,421 subscribers, respectively.
Information regarding the Company's net interest in each cellular licensee
and the market subject to such license, as of February 7, 1997, is summarized in
the following table.
Net Company
MSA or Interest in 1995 Net Company
RSA Code (1) State Licensee (2) Population (3)(6) Pops (4)
- ----------- ----------- ------------ ---------------- -----------
MSAs:
141 Minnesota 16.34% 228,599 37,353
185 Indiana 16.67% 169,996 28,338
241*(5) Colorado 73.99% 128,834 95,324
253*(5) Iowa 74.50% 120,090 89,467
267*(5) South Dakota 51.00% 136,948 69,843
268*(5) Montana 77.05% 124,991 96,306
279 Maine 11.11% 103,825 11,534
289*(5) South Dakota 100.00% 111,008 111,008
297*(5) Montana 100.00% 81,860 81,860
298*(5) North Dakota 70.00% 89,182 62,427
--------- -------
Total MSA 1,295,333 683,460
-14-
<PAGE>
Net Company
MSA or Interest in 1995 Net Company
RSA Code (1) State Licensee (2) Population (3)(6) Pops (4)
- ------------ -------- ------------- ---------------- ------------
RSAs:
348* Colorado 10.00% 45,735 4,574
349*(5) Colorado 61.75% 61,982 38,274
351*(5) Colorado 61.75% 69,660 43,015
352*(5) Colorado 66.00% 28,096 18,543
353*(5) Colorado 100.00% 70,398 70,398
354*(5) Colorado (B1) 69.40% 45,704 31,719
355* Colorado 49.00% 45,191 22,144
356* Colorado (B1) 49.00% 24,852 12,177
389 Idaho 50.00% 69,570 34,785
390 Idaho 33.33% 16,271 5,423
392*(5) Idaho (B1) 100.00% 138,640 138,640
393*(5) Idaho 91.64% 290,301 266,032
415 Iowa 10.11% 155,123 15,689
416 (5) Iowa 78.57% 108,909 85,570
417*(5) Iowa 100.00% 154,029 154,029
419* Iowa 44.92% 54,713 24,576
420*(5) Iowa 100.00% 63,639 63,639
424* Iowa 50.00% 66,874 33,437
425* Iowa 13.28% 107,540 14,286
426* Iowa 49.14% 84,145 41,347
427* Iowa 49.17% 104,222 51,242
428 Kansas 3.07% 28,100 863
429 Kansas 3.07% 30,793 945
430 Kansas 3.07% 52,838 1,622
431 Kansas 3.07% 139,000 4,267
432 Kansas 3.07% 30,818 946
433 Kansas 3.07% 20,322 624
434 Kansas 3.07% 80,841 2,482
435 Kansas 3.07% 130,085 3,994
436 Kansas 3.07% 58,827 1,806
437 Kansas 3.07% 107,888 3,312
438 Kansas 3.07% 83,409 2,561
439 Kansas 3.07% 43,269 1,328
440 Kansas 3.07% 29,648 910
441 Kansas 3.07% 174,109 5,345
442 Kansas 3.07% 154,451 4,742
512 Missouri (B1) 14.70% 55,832 8,207
523*(5) Montana (B1) 100.00% 71,238 71,238
523*(5) Montana (B2) 100.00% 76,396 76,396
524*(5) Montana (B1) 79.40% 34,534 27,420
526*(5) Montana (B1) 100.00% 21,606 21,606
527*(5) Montana 100.00% 185,108 185,108
528*(5) Montana 80.88% 64,763 52,377
529*(5) Montana 87.25% 29,470 25,713
530*(5) Montana 80.88% 90,681 73,338
531*(5) Montana 100.00% 33,158 33,158
532*(5) Montana 100.00% 20,150 20,150
-15-
<PAGE>
Net Company
MSA or Interest in 1995 Net Company
RSA Code (1) State Licensee (2) Population (3)(6) Pops (4)
- ------------ --------------- ------------ ----------------- -----------
553*(5) New Mexico (B2) 58.36% 112,118 65,432
555 New Mexico 12.25% 85,123 10,428
557 New Mexico 16.33% 58,288 9,519
580*(5) North Dakota 53.36% 102,631 54,763
581* North Dakota 49.00% 60,484 29,637
582 North Dakota 41.45% 90,761 37,620
583* North Dakota 49.00% 64,068 31,393
584*(5) North Dakota 61.75% 49,088 30,312
634*(5) South Dakota 100.00% 36,925 36,925
635*(5) South Dakota 100.00% 22,682 22,682
636*(5) South Dakota 100.00% 53,571 53,571
638*(5) South Dakota (B1) 100.00% 16,390 16,390
638*(5) South Dakota (B2) 100.00% 8,922 8,922
639*(5) South Dakota (B1) 100.00% 36,165 36,165
639*(5) South Dakota (B2) 100.00% 3,250 3,250
640*(5) South Dakota 64.49% 66,695 43,012
641*(5) South Dakota 61.13% 73,708 45,058
642* South Dakota 49.00% 95,097 46,598
675*(5) Utah 100.00% 54,892 54,892
676*(5) Utah 100.00% 101,360 101,360
677*(5) Utah (B3) 100.00% 39,137 39,137
678*(5) Utah 80.00% 27,699 22,159
718*(5) Wyoming 66.00% 49,619 32,749
719*(5) Wyoming 100.00% 75,369 75,369
720*(5) Wyoming 100.00% 146,385 146,385
--------- -------
Total RSA 5,183,355 2,853,725
--------- ---------
Total MSA and RSA 6,478,688 3,537,185
========= =========
- ----------
(1) MSA ranking is based on population as established by the FCC. RSAs
have been numbered by the FCC alphabetically by state.
(2) Represents the net ownership interest of the Company in the licensee
for a cellular telephone system in the respective market. Net ownership of
greater than 50% does not necessarily represent a controlling interest in
such licensee.
(3) Derived from the Demographics On-Call 1995 population estimates.
(4) Net Company Pops represents net Company interest in licensee multiplied
by 1995 population.
(5) The operations of these markets are currently reflected on a
consolidated basis in the Company's consolidated financial statements. The
operations of the other markets in which the Company holds an interest are
reflected in such financial statements on either an equity or a cost basis.
(6) Represents population within the market area initially licensed by the
FCC. The number of pops which are covered by radio signal in a market is
expected to be marginally lower than the market's total pops on a going-
forward basis.
Markets managed by the Company are denoted by an asterisk (*).
-16-
<PAGE>
Subscriber Growth Table
- -----------------------
Information regarding subscribers to the MSA and RSA cellular systems
managed by the Company is summarized by the following table:
<TABLE>
<CAPTION>
Number of Estimated Population Number of
Operating Systems of Operating Systems Subscribers
--------------------- ---------------------------------- --------------------------- Subscriber
Total MSA RSA Total MSA RSA Total MSA RSA Growth
----- --- --- ----- --- --- ----- --- --- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Sept. 30, 1987 0 0 0 0 0 0 0 0 0
Sept. 30, 1988 4 4 0 504,529 504,529 (1) 0 424 424 0
Sept. 30, 1989 4 4 0 500,804 500,804 (2) 0 1,362 1,362 0 221.23%
Sept. 30, 1990 18 4 14 1,687,481 500,804 (2) 1,186,677 (2) 6,444 3,513 2,931 373.13%
Sept. 30, 1991 49 5 44 3,509,779 566,722 (3) 2,943,057 (3) 17,952 6,387 11,565 178.58%
Sept. 30, 1992 49 5 44 3,509,779 566,722 (3) 2,943,057 (3) 35,884 11,119 24,765 99.89%
Sept. 30, 1993 50 6 44 3,665,758 644,526 (4) 3,021,232 (4) 60,381 17,898 42,483 68.27%
Sept. 30, 1994 55 7 48 3,906 063 771,660 (5) 3,134,403 (5) 99,002 30,711 68,291 63.96%
Sept. 30, 1995 56 7 49 4,220,975 785,866 (6) 3,435,109 (6) 151,482 42,401 109,081 53.01%
Sept. 30, 1996 55 7 48 4,105,119 792,913 (7) 3,312,206 (7) 211,278 55,896 155,382 39.47%
Dec. 31, 1996 56 (8) 7 49 (8) 4,171,993 (8) 792,913 (7) 3,379,080 (7)(8) 231,067 (8) 60,421 170,646 (8) 9.37% (8)
- ---------------
</TABLE>
(1) Derived from 1988 Donnelley Market Service population estimates.
(2) Derived from 1989 Donnelley Market Service population estimates.
(3) Derived from 1990 Census Report.
(4) Derived from 1992 Donnelley Market Service population estimates.
(5) Derived from 1993 Strategic Marketing, Inc. population estimates.
(6) Derived from 1994 Strategic Marketing, Inc. population estimates.
(7) Derived from 1995 Demographics On-Call population estimates.
(8) Includes pro forma impact of the acquisition of Iowa RSA No. 13.
-17-
<PAGE>
Supplemental Information:
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
ordinarily results in the same net income as consolidation; however, the net
operating results are reflected on one line below operating income. Operating
activity related to interests accounted for under the cost method are not
reflected at all in a GAAP operating statement.
<TABLE>
<CAPTION>
Three Months ended December 31,
-------------------------------------------------------------------------------------
1996 1995 1996 1995 1996 1995
------------------------- --------------------------- -----------------------------
Combined (1) Financed Proportionate (2) Company Proportionate (3)
------------------------- --------------------------- -----------------------------
MANAGED MARKETS
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Cellular service $ 29,775 $ 21,857 $ 27,895 $ 20,322 $ 22,513 $ 15,730
In-roaming 9,550 7,327 9,054 6,765 7,363 5,301
Equipment sales 929 1,410 833 1,298 740 1,044
--------- --------- --------- --------- --------- ---------
Total revenues 40,254 30,594 37,922 28,385 30,616 22,075
Costs and expenses
involving cash:
Cost of sales:
Cellular service
(including in-roaming) 7,259 5,941 6,989 5,556 5,722 4,264
Equipment sales 3,204 2,545 2,993 2,244 2,517 1,808
General and administrative 8,694 7,272 8,193 6,795 6,566 5,196
Marketing and selling 7,826 6,912 7,339 6,345 5,826 4,923
Total cash costs and --------- --------- --------- --------- --------- ---------
expenses 26,983 22,670 25,514 20,940 20,631 16,191
--------- --------- --------- --------- --------- ---------
EBITDA $ 13,271 $ 7,924 $ 12,408 $ 7,445 $ 9,985 $ 5,884
======== ========= ========= ========= ========= =========
Capital expenditures $ 10,166 $ 8,136 $ 9,840 $ 7,849 $ 8,664 $ 7,608
Subscriber count 229,879 168,465 214,049 154,921 171,439 119,849
Total markets 55 55 55 55 55 55
NONMANAGED MARKETS
Revenues:
Cellular service
(including in-roaming) $29,192 $24,662 $ 4,504 $ 4,406 $ 3,246 $ 2,410
Equipment sales 1,747 1,660 168 144 137 116
-------- ------- --------- --------- --------- ---------
Total revenues 30,939 26,322 4,672 4,550 3,383 2,526
Costs and expenses
involving cash:
Cost of sales:
Cellular service 6,367 5,736 1,040 1,224 756 629
Equipment sales 2,156 1,712 231 191 180 135
General and administrative 4,490 3,838 966 771 643 422
Marketing and selling 5,167 5,151 742 925 581 505
-------- ------- --------- --------- --------- ---------
Total cash costs
and expenses 18,180 16,437 2,979 3,111 2,160 1,691
-------- ------- --------- --------- --------- ---------
EBITDA $ 12,759 $ 9,885 $ 1,693 $ 1,439 $ 1,223 $ 835
======== ======== ========= ========= ========= =========
Capital expenditures $ 4,808 $ 6,203 $ 689 $ 920 $ 476 $ 609
Subscriber count 163,332 113,404 25,061 15,486 18,492 19,395
Total markets 27 27 27 27 27 27
</TABLE>
-18-
<PAGE>
<TABLE>
<CAPTION>
Three Months ended December 31,
------------------------------
1996 1995
-------- ---------
<S> <C> <C>
Reconciliation From Company Proportionate EBITDA to Consolidated Reporting
Total proportionate EBITDA (managed and nonmanaged markets) $11,208 $ 6,719
Proportionate depreciation and amortization (4,186) (3,767)
Proportionate interest expense (2,043) (2,475)
Equity in nonlicensee affiliates (1,666) (1,255)
Minority interests 796 115
Intercompany interest 1,706 1,701
Amortization of license costs not owned by affiliates (596) (618)
Unallocated corporate expenses (900) (650)
Interest expense (net) and other (5,694) (3,124)
------- -------
Consolidated net loss $(1,375) $(3,354)
======= =======
- ---------------
</TABLE>
(1) Includes 100% of the operating activity of all licensees, regardless of
the Company's owner-ship 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.
-19-
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
- ------ --------------------------------
(a) Exhibits
None.
(b) Reports on Form 8-K filed during the quarter ended
December 31, 1996:
None.
-20-
<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: February 14, 1997 By: /s/Daniel P. Dwyer
--------------------------------------
Daniel P. Dwyer
Executive Vice President, Treasurer &
Chief Financial Officer
Date: February 14, 1997 By: /s/Andrew J. Gardner
--------------------------------------
Andrew J. Gardner
Senior Vice President and Controller
(Principal Accounting Officer)
-21-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 39,542
<SECURITIES> 0
<RECEIVABLES> 20,885
<ALLOWANCES> 2,595
<INVENTORY> 4,534
<CURRENT-ASSETS> 62,366
<PP&E> 175,819
<DEPRECIATION> 55,774
<TOTAL-ASSETS> 360,868
<CURRENT-LIABILITIES> 24,919
<BONDS> 271,977
0
0
<COMMON> 165,338
<OTHER-SE> 106,510
<TOTAL-LIABILITY-AND-EQUITY> 0
<SALES> 34,496<F1>
<TOTAL-REVENUES> 34,496
<CGS> 9,691
<TOTAL-COSTS> 29,302
<OTHER-EXPENSES> (748)
<LOSS-PROVISION> 967
<INTEREST-EXPENSE> 7,317
<INCOME-PRETAX> (1,375)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,375)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,375)
<EPS-PRIMARY> 0<F2>
<EPS-DILUTED> 0<F3>
<FN>
<F1> Includes both cellular and equipment Revenue
<F2> Primary EPS is not presented as the difference between basic EPS and
primary EPS is not material
<F3> Fully diluted EPS is not presented as all CS equivalents are antidilutive
</FN>
</TABLE>
