<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: June 30, 1997
-------------
[ ] 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 August
8, 1997 was 13,766,340.
<PAGE>
COMMNET CELLULAR INC.
FORM 10-Q - JUNE 30, 1997
INDEX
<TABLE>
<CAPTION>
Part I Financial Information Page
- ------ --------------------- ----
<C> <S> <C>
Item 1 Financial Statements
Consolidated Condensed Balance Sheets -
June 30, 1997 and September 30, 1996 1
Consolidated Condensed Statements of Operations -
Three Months Ended June 30, 1997 and
June 30, 1996 3
Consolidated Condensed Statements of Operations -
Nine Months Ended June 30, 1997 and
June 30, 1996 4
Consolidated Condensed Statements of Cash Flows -
Nine Months Ended June 30, 1997 and
June 30, 1996 5
Notes to Consolidated Condensed Financial
Statements 7
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Part II Other Information
- ------- -----------------
Item 6 Exhibits and Reports on Form 8-K 22
</TABLE>
<PAGE>
COMMNET CELLULAR INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(Amounts in thousands)
<TABLE>
<CAPTION>
June 30, September 30,
Assets 1997 1996
- --------------------------------------- ----------- -------------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 9,925 $ 11,492
Accounts receivable, net of
allowance for doubtful accounts
of $3,471 and $1,947 at June 30,
1997 and September 30, 1996,
respectively 22,650 19,933
Inventory and other 3,834 3,949
-------- --------
Total current assets 36,409 35,374
Investment in and advances to affiliates 54,814 57,245
Investment in cellular system equipment 16,729 11,809
Property and equipment, at cost:
Cellular system equipment 143,034 126,305
Land, buildings and improvements 29,971 25,977
Furniture and equipment 19,094 17,144
-------- --------
192,099 169,426
Less accumulated depreciation 63,112 51,327
-------- --------
Net property and equipment 128,987 118,099
Other assets, less accumulated amortization
of $31,077 and $33,166 at June 30, 1997
and September 30, 1996, respectively:
FCC licenses and filing rights 100,738 103,251
Deferred loan costs and other 6,102 6,059
-------- --------
Total other assets 106,840 109,310
-------- --------
$343,779 $331,837
======== ========
</TABLE>
See accompanying notes.
-1-
<PAGE>
COMMNET CELLULAR INC.
CONSOLIDATED CONDENSED BALANCE SHEETS (CONTINUED)
(Amounts in thousands, except share data)
<TABLE>
<CAPTION>
June 30, September 30,
Liabilities and Stockholders' Equity 1997 1996
- --------------------------------------------- ----------- -------------
(unaudited)
<S> <C> <C>
Current liabilities:
Accounts payable - trade $ 7,193 $ 5,584
Accrued commissions 953 1,197
Accrued interconnect costs 1,107 650
Accrued operating taxes 2,398 2,334
Accrued income taxes 191 330
Other accrued liabilities 4,569 2,794
Interest payable 37 2,556
Current portion of secured bank
financing and other long-term debt 1,666 3,683
--------- ---------
Total current liabilities 18,114 19,128
Long-term debt:
Secured bank financing 26,641 20,825
Note payable and other long-term debt 2,916 3,057
11 3/4% senior subordinated discount notes 154,675 141,963
11 1/4% subordinated notes 80,000 80,000
Minority interests 6,140 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; 13,766,340 and 13,859,740
shares issued at June 30, 1997 and
September 30, 1996, respectively 14 14
Capital in excess of par value 165,330 168,103
Accumulated deficit (110,051) (105,135)
--------- ---------
Total stockholders' equity 55,293 62,982
--------- ---------
$ 343,779 $ 331,837
========= =========
</TABLE>
See accompanying notes.
-2-
<PAGE>
COMMNET CELLULAR INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1997 AND 1996
(Amounts in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Revenues:
Cellular service $ 27,671 $ 22,000
In-roaming 9,400 7,247
Equipment sales 1,047 518
-------- --------
38,118 29,765
Costs and expenses:
Cellular operations:
Cost of cellular service 6,834 5,668
Cost of equipment sales (Note 4) 3,186 2,798
General and administrative 7,998 5,462
Marketing and selling 5,535 5,230
Depreciation and amortization 5,124 4,597
Corporate:
General and administrative 2,147 2,749
Depreciation and amortization 685 515
Less amounts allocated to nonconsolidated
affiliates (1,648) (1,573)
-------- --------
29,861 25,446
-------- --------
Operating income 8,257 4,319
Equity in net loss of affiliates (2,652) (82)
Minority interest in net income of consolidated
affiliates (730) (304)
Gain on sales of affiliates and other 349 --
Interest expense (7,389) (6,972)
Interest income 1,538 2,071
-------- --------
Net loss $ (627) $ (968)
======== ========
Net loss per common share $ (0.05) $ (0.07)
======== ========
Weighted average shares outstanding 13,766 13,860
======== ========
</TABLE>
See accompanying notes.
-3-
<PAGE>
COMMNET CELLULAR INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED JUNE 30, 1997 AND 1996
(Amounts in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Revenues:
Cellular service $ 77,509 $ 58,260
In-roaming 24,244 18,055
Equipment sales 2,595 2,111
--------- ---------
104,348 78,426
Costs and expenses:
Cellular operations:
Cost of cellular service 20,096 15,024
Cost of equipment sales (Note 4) 9,430 7,325
General and administrative 22,170 16,606
Marketing and selling 17,346 16,003
Depreciation and amortization 15,029 13,372
Corporate:
General and administrative 5,300 6,491
Depreciation and amortization 1,775 2,596
Less amounts allocated to nonconsolidated
affiliates (4,651) (4,806)
--------- ---------
86,495 72,611
--------- ---------
Operating income 17,853 5,815
Equity in net loss of affiliates (4,584) (1,525)
Minority interest in net income of consolidated
affiliates (1,591) (673)
Gain (loss) on sales of affiliates and other 349 (250)
Interest expense (22,064) (20,963)
Interest income 5,121 8,540
--------- ---------
Net loss $ (4,916) $ (9,056)
========= =========
Net loss per common share $ (0.36) $ (0.66)
========= =========
Weighted average shares outstanding 13,767 13,679
========= =========
</TABLE>
See accompanying notes.
-4-
<PAGE>
COMMNET CELLULAR INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED JUNE 30, 1997 AND 1996
(Amounts in thousands)
(unaudited)
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Operating activities:
Net loss $(4,916) $(9,056)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Minority interest 1,591 673
Depreciation and amortization 16,804 15,968
Equity in net loss of affiliates 4,584 1,525
Loss (gain) on sales of affiliates and others (349) 250
Interest expense on 11 3/4% senior subordinated
discount notes 12,712 11,341
CoBank patronage income (99) (289)
Accrued interest on advances to affiliates (4,251) (7,042)
Change in operating assets and liabilities, net of effects from
consolidating acquired interests:
Accounts receivable (2,717) (1,760)
Inventory and other 115 (813)
Accounts payable and accrued liabilities 2,231 (1,692)
Accrued interest (2,519) 1,679
------- -------
Net cash provided by operating activities 23,186 10,784
Investing activities:
Purchase of available-for-sale securities -- (987)
Sale of available-for-sale securities -- 987
Reductions in (additions to) investments in and advances to
affiliates 1,230 (1,498)
Additions to investment in cellular system equipment (4,920) (3,304)
Additions to property and equipment (23,503) (19,634)
Reductions in (additions to) other assets (915) 123
Proceeds from sales of interests in affiliates 829 614
Purchase of interests in affiliates, net of cash acquired and
net of assets and liabilities recorded due to
consolidation (924) (2,876)
------- -------
Net cash used by investing activities (28,203) (26,575)
</TABLE>
See accompanying notes.
-5-
<PAGE>
COMMNET CELLULAR INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (CONTINUED)
NINE MONTHS ENDED JUNE 30, 1997 AND 1996
(Amounts in thousands)
(unaudited)
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Financing activities:
Proceeds from secured bank financing $ 43,336 $ 9,250
Payments of secured bank financing (39,484) (15,066)
Distributions to minority interests (1,545) --
Capital contributions from minority
interests 4,111 --
Reduction of obligation under capital
leases (195) (230)
Issuance of Common Stock, net of
offering costs 159 949
Repurchases of Common Stock (2,932) --
-------- --------
Net cash provided (used) by financing
activities 3,450 (5,097)
-------- --------
Net decrease in cash and cash
equivalents (1,567) (20,888)
Cash and cash equivalents at beginning
of period 11,492 41,018
-------- --------
Cash and cash equivalents at end of
period $ 9,925 $ 20,130
======== ========
Supplemental schedule of additional
cash flow information and noncash
activities:
Cash paid during the nine-month
period for interest $ 12,013 $ 8,357
Purchase of cellular system
equipment through accounts payable 3,408 4,322
Purchases of interests in
affiliates financed with Common Stock -- 5,529
Conversion of convertible subordinated
debentures to Common Stock -- 2,909
</TABLE>
See accompanying notes.
-6-
<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 nine months ended June
30, 1997 are not necessarily indicative of the results for a full year. Certain
amounts relating to June 30, 1996 have been reclassified to correspond to the
June 30, 1997 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 nine months ended June 30, 1997
were as follows (amounts in thousands, except share data):
<TABLE>
<CAPTION>
Common Stock Capital in
-------------------------- Excess of
Shares Amount Par Value
-------------------------- -----------
<S> <C> <C> <C>
Balance at September 30, 1996 13,859,740 $ 14 $168,103
Issuance of Common Stock:
Exercise of options 8,600 -- 159
Common Stock repurchased (102,000) -- (2,932)
---------- ---- --------
Balance at June 30, 1997 13,766,340 $ 14 $165,330
========== ==== ========
</TABLE>
At June 30, 1997 the Company had 1,909,400 options outstanding at
a weighted average exercise price of $23.82.
-7-
<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 nine months ended June
30, 1997 and 1996 giving effect to the costs associated with the program
described above (amounts in thousands).
<TABLE>
<CAPTION>
Nine Months Nine Months
ended ended
June 30, 1997 June 30, 1996
------------- -------------
<S> <C> <C>
Cost of equipment sales $2,358 $3,260
Cost of equipment owned by the
Company, but provided to
subscribers to use:
New subscribers 5,418 2,978
Existing subscribers 1,654 1,087
------ ------
$9,430 $7,325
====== ======
</TABLE>
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 June 30,
1997, 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.
-8-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
- -------
The Company generated operating income during the nine months ended
June 30, 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
June 30, 1997. The results of operations of 46 markets, 44 of which were
consolidated for the entire period, are included in the consolidated results for
the quarter ended June 30, 1996. 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 losses related to the
Company's investment in TVX, Inc. and the Company's share of net loss in the
markets in which the Company's interest is 50% or less but 20% or greater.
Eighteen markets were accounted for under the equity method for the quarter
ended June 30, 1997 and June 30, 1996. 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 June 30, 1997 and June
30, 1996.
Interest income is 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 June 30, 1997, 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.
"Safe Harbor" Statement under the Private Securities Litigation Reform
Act of 1995: All statements included herein, other than statements of
historical facts, that address activities, events or developments that the
Company expects or anticipates will or may occur in the future, including such
things as future capital expenditures (including the amount and nature thereof),
business strategy and measures to implement strategy, competitive strengths,
goals, expansion and growth of the Company's business and operations, plans,
references to future success and other such matters are forward-looking
statements. 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.
-9-
<PAGE>
Results of Operations
- ---------------------
Three Months Ended June 30, 1997 and 1996. Cellular service revenues,
-----------------------------------------
including in-roaming revenues, increased by 27%, or $7,824,000, from
$29,247,000 for the quarter ended June 30, 1996 to $37,071,000 for the quarter
ended June 30, 1997. 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 June 30,
1996 to 46 during the quarter ended June 30, 1997. Growth in subscribers
accounted for 94% of the increase, and the number of consolidated markets
accounted for 6% of the increase. In-roaming revenues increased by 30%, or
$2,153,000, from $7,247,000 for the quarter ended June 30, 1996 to $9,400,000
for the quarter ended June 30, 1997 due to increased coverage in cellular
markets and to industry-wide subscriber increases. In-roaming revenues are
expected to increase in the future as a result of further industry-wide growth
in subscribers and expansion of the Company's coverage, particularly along
highway corridors; however, roaming rates are expected to decline, consistent
with industry trends.
Average monthly revenue per subscriber, including in-roaming,
decreased from $64 for the quarter ended June 30, 1996 to $58 for the quarter
ended June 30, 1997, reflecting the benefit of declining prices to the consumer
which is consistent with an overall industry trend. In-roaming revenues per
subscriber per month decreased from $16 to $15, again reflecting declining
prices to the consumer.
Cost of cellular service as a percentage of service revenues decreased
to 18% for the quarter ended June 30, 1997 from 19% for the quarter ended June
30, 1996. The Company has renegotiated some interconnect agreements for lower
prices and is in the process of renegotiating others. The Company expects cost
of cellular service to continue to decline as a percentage of service revenues
as further negotiations are completed.
Equipment sales increased 102% from $518,000 for the quarter ended
June 30, 1996 to $1,047,000 for the quarter ended June 30, 1997 due primarily to
increases in sales of accessories and subscriber additions. Cost of equipment
sales increased 14% from $2,798,000 for the three months ended June 30, 1996 to
$3,186,00 for the three months ended June 30, 1997. Approximately $1,618,000 and
$287,000 of the three months ended June 30, 1997 cost of equipment sales related
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.
General and administrative costs of cellular operations increased 46%
from $5,462,000 during the quarter ended June 30, 1996 to $7,998,000 during the
quarter ended June 30, 1997, due to a nonrecurring adjustment that reduced
property tax expense during the quarter ended June 30, 1996 and the growth in
the customer base. The nonrecurring property tax adjustment accounted for 19% of
the increase and incremental expenses related to growth in the customer base
accounted for 27% of the increase. The majority of these costs were incremental
customer billing expense, bad debt expense and customer service support staff.
Excluding the property tax adjustment general and administrative costs as a
percentage of service revenues decreased from 23% for the quarter ended June 30,
1996 to 22% for the quarter ended June 30, 1997.
Marketing and selling costs increased 6% from $5,230,000 for the
quarter ended June 30, 1996 to $5,535,000 for the quarter ended June 30, 1997,
primarily as a result of increased advertising costs offset by reductions in
commission costs. Marketing costs per gross new subscriber decreased 3% from
$234 for the quarter ended June 30, 1996 to $228 for the quarter ended June 30,
1997, as a result of increased gross 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.
-10-
<PAGE>
Depreciation and amortization relating to cellular operations
increased 11% from $4,597,000 for the quarter ended June 30, 1996 to $5,124,000
for the quarter ended June 30, 1997, primarily related to increased property and
equipment balances.
Corporate costs and expenses for the quarter ended June 30, 1996 were
$1,691,000, which represented gross expenses of $3,264,000 less amounts
allocated to nonconsolidated affiliates of $1,573,000. Corporate costs and
expenses for the quarter ended June 30, 1997 were $1,184,000, which represented
gross expenses of $2,832,000 less amounts allocated to nonconsolidated
affiliates of $1,648,000. The decrease in corporate costs and expenses was due
primarily to the reversal of a charge related to the paging company. This
reserve was deemed unnecessary due to the Company's recent partnering agreement
with AirTouch Paging to provide nationwide paging services.
Equity in net loss of affiliates increased from $82,000 for the
quarter ended June 30, 1996 to $2,652,000 for the quarter ended June 30, 1997.
The increase was primarily due to recognition of the entire $2,150,000 net loss
of TVX, Inc. which was $952,000 higher than the Company's proportionate share of
the net loss based upon ownership. This accounting reflects that the Company is
currently the sole source of funding of TVX, Inc. In addition, during the
quarter ended June 30, 1997, the Company recorded an approximate $1,000,000
reserve related to its investment in TVX, Inc. which is reflected in equity in
net loss of affiliates. After giving effect to the reserve, the Company's
carrying value of its investment is approximately $2,900,000. Currently, TVX,
Inc. is being offered for sale by a business broker, and the Company believes
that its investment will be realized upon such sale.
Interest expense increased 6% from $6,972,000 for the quarter ended
June 30, 1996 to $7,389,000 for the quarter ended June 30, 1997. Cash paid for
interest increased 307% from $1,338,000 during the quarter ended June 30, 1996
to $5,439,000 during the quarter ended June 30, 1997 due to the semi-annual
payment of the Company's 11 1/4% subordinated notes during the quarter ended
June 30, 1997. The second semi-annual payment of 1996 occurred during the fourth
fiscal quarter of that year.
Interest income decreased 26% from $2,071,000 for the quarter ended
June 30, 1996 to $1,538,000 for the quarter ended June 30, 1997. The decrease
was due to lower average cash and cash equivalent balances and lower notes
receivable balances from nonconsolidated affiliates.
Nine Months Ended June 30, 1997 and 1996. Cellular service revenues,
----------------------------------------
including in-roaming revenues, increased by 33%, or $25,438,000, from
$76,315,000 for the nine months ended June 30, 1996 to $101,753,000 for the nine
months ended June 30, 1997. 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 nine months from 44 during the nine months ended
June 30, 1996 to 46 during the nine months ended June 30, 1997. 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
34%, or $6,189,000, from $18,055,000 for the nine months ended June 30, 1996 to
$24,244,000 for the nine months ended June 30, 1997 due to increased coverage in
cellular markets and to industry-wide subscriber increases. In-roaming revenues
are expected to increase in the future as a result of further industry-wide
growth in subscribers and expansion of the Company's coverage, particularly
along highway corridors; however, roaming rates are expected to decline,
consistent with industry trends.
Average monthly revenue per subscriber, including in-roaming,
decreased from $60 for the nine months ended June 30, 1996 to $57 the nine
months ended June 30, 1997, 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 remained unchanged at $14 for the nine
months ended June 30, 1997 and 1996.
Cost of cellular service remained unchanged as a percentage of service
revenues at 20% for the nine months ended June 30, 1996 and for the nine months
ended June 30, 1997. The Company has renegotiated some interconnect agreements
for lower prices and is in the process of renegotiating others. The Company
expects cost of cellular service to continue to decline as a percentage of
service revenues as further negotiations are completed.
-11-
<PAGE>
Equipment sales increased 23% from $2,111,000 for the nine months
ended June 30, 1996 to $2,595,000 for the nine months ended June 30, 1997 due
primarily to increases in sales of accessories. This increase was partially
offset by the effects of the Company's customer satisfaction and pricing program
which was introduced in February 1996 allowing subscribers to use handsets and
accessories at virtually no fee. Cost of equipment sales increased 29% from
$7,325,000 for the nine months ended June 30, 1996 to $9,430,000 for the nine
months ended June 30, 1997. Approximately $5,418,000 and $1,654,000 of the nine
months ended June 30, 1997 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.
General and administrative costs of cellular operations increased 34%
from $16,606,000 during the nine months ended June 30, 1996 to $22,170,000
during the nine months ended June 30, 1997, 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. In addition, bad debt expense increased from 1.01% of total
revenues during the nine months ended June 30, 1996, to 2.84% of total revenues
during the nine months ended June 30, 1997. Consequently, general and
administrative costs as a percentage of service revenues remained unchanged at
22% for the nine months ended June 30, 1996 and the nine months ended June 30,
1997.
Marketing and selling costs increased 8% from $16,003,000 for the nine
months ended June 30, 1996 to $17,346,000 for the nine months ended June 30,
1997, primarily as a result of increased advertising costs offset by reductions
in commission costs. Marketing costs per gross new subscriber decreased 6% from
$246 for the nine months ended June 30, 1996 to $231 for the nine months ended
June 30, 1997, as a result of increased gross 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 12% from $13,372,000 for the nine months ended June 30, 1996 to
$15,029,000 for the nine months ended June 30, 1997, primarily related to
increased property and equipment balances.
Corporate costs and expenses for the nine months ended June 30, 1996
were $4,282,000, which represented gross expenses of $9,088,000 less amounts
allocated to nonconsolidated affiliates of $4,806,000. Corporate costs and
expenses for the nine months ended June 30, 1997 were $2,424,000, which
represented gross expenses of $7,075,000 less amounts allocated to
nonconsolidated affiliates of $4,651,000. The decrease in corporate costs and
expenses was due primarily to the reversal of a charge related to the paging
company. This reserve was deemed unnecessary due to the Company's recent
partnering agreement with AirTouch Paging to provide nationwide paging
services. In addition, the decrease is due to the write-off of certain assets
related to the Company's corporate office move during the nine months ended June
30, 1996 which did not recur during the nine months ended June 30, 1997.
Equity in net loss of affiliates increased 201% from $1,525,000 for
the nine months ended June 30, 1996 to $4,584,000 for the nine months ended June
30, 1997. The increase was due primarily to decreased losses in nonconsolidated
affiliates, offset by recognition of the entire $4,662,000 net loss of TVX, Inc.
which was $2,176,000 higher than the Company's proportionate share of the net
loss based upon ownership. This accounting reflects that the Company is
currently the sole source of funding of TVX, Inc. In addition, during the
quarter ended June 30, 1997, the Company recorded an approximate $1,000,000
reserve related to its investment in TVX, Inc. which is reflected in equity in
net loss of affiliates. After giving effect to the reserve, the Company's
carrying value of its investment is approximately $2,900,000. Currently, TVX,
Inc. is being offered for sale by a business broker, and the Company believes
that its investment will be realized upon such sale.
Interest expense increased 5% from $20,963,000 for the nine months
ended June 30, 1996 to $22,064,000 for the nine months ended June 30, 1997.
Cash paid for interest increased 44% from $8,357,000 during the nine months
ended June 30, 1996 to $12,013,000 during the nine months ended June 30, 1997
due to the semi-annual payment of the Company's 11 1/4% subordinated notes
during the quarter ended June 30, 1997. This payment occurred during the fourth
fiscal quarter of 1996.
-12-
<PAGE>
Interest income decreased 40% from $8,540,000 for the nine months
ended June 30, 1996 to $5,121,000 for the nine months ended June 30, 1997. The
decrease was due to lower average cash and cash equivalent balances and lower
notes receivable balances from nonconsolidated affiliates.
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.
In April 1997, the Company sold 10% of one of its managed MSA markets
to a partner in such market for approximately $436,000 in cash, pursuant to an
option granted at the time of the Company's purchase of such market. In June
1997 the Company sold an additional 9% of this market for approximately $393,000
in cash.
On May 27, 1997, the Company entered into an Agreement and Plan of
Merger (the "Merger Agreement") with AV Acquisition Corp. ("Newco"), a
wholly-owned subsidiary of Blackstone CCI Capital Partners L.P. ("Blackstone"),
providing for the merger of Newco with and into the Company (the "Merger").
Pursuant to the Merger each share of the Company's common stock, par value $.001
per share (including each associated Right, "CommNet Common Stock"), issued and
outstanding immediately prior to the effective time of the Merger will be
converted, at the election of the holder, into either (a) the right to receive
$36.00 in cash or (b) the right to retain one share of CommNet Common Stock.
Because 588,611 shares of CommNet Common Stock must be retained by existing
CommNet shareholders either through election or proration, the right to receive
$36.00 in cash for each share of CommNet Common Stock or to retain that share
of CommNet Common Stock is subject to proration, as set forth in the Merger
Agreement and described in the Company's Proxy Statement dated August 12, 1997.
A copy of the Merger Agreement was filed as an exhibit to the Company's current
report on Form 8-K dated May 29, 1997 and is attached to the Proxy Statement as
Annex I.
In order to consummate the Merger, the Federal Communications
Commission ("FCC") must approve the transfer of control of the Company to
affiliates of Blackstone. Applications seeking these approvals were filed with
the FCC on June 20, 1997, were put on public notice on July 12, 1997 and came
off public notice on August 11, 1997. On August 11, 1997, five petitions to
dismiss or deny the applications were filed with the FCC. The Company intends to
object vigorously to the petitions. The Company is currently reviewing the
matter and is not yet able to predict the potential impact of the petitions on
the Merger.
Changes in Financial Condition
- ------------------------------
Net cash provided by operating activities was $23,186,000 during the
nine months ended June 30, 1997, composed primarily of $26,076,000 from the net
loss after adjustments to reconcile net cash provided by operating activities
and cash used by changes in working capital of $2,890,000.
Net cash used by investing activities was $28,203,000 for the nine
months ended June 30, 1997, consisting primarily of $28,423,000 required to fund
the purchase of property and equipment and investment in cellular system
equipment.
Net cash provided by financing activities was $3,540,000 for the nine
months ended June 30, 1997 from proceeds from long-term debt of $3,852,000 and
net capital contributions from minority interests of $2,566,000. These amounts
were offset by 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 June 30, 1997, the Company had unused commitments under the
Credit Agreement of $136,957,000, of which $48,250,000 was available to be
repaid to the parent company for general corporate
-13-
<PAGE>
purposes. In addition to the liquidity provided by the Credit Agreement, at June
30, 1997, the Company, on a consolidated basis, had available $9,925,000 of cash
and cash equivalents.
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 nine months ended June 30, 1997 were approximately $29,276,000. These
expenditures were primarily for 42 new cell sites, channel expansion, paging
infrastructure and corporate assets. The Company expects capital expenditures
for the remainder of fiscal year 1997 to be $20,200,000 to optimize coverage,
upgrade switching capacity, increase 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 $574,000. 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. From August 1996 to October 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 Company has discontinued this program.
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 June 30, 1997,
$48,250,000 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 $28,043,000 at
June 30, 1997. The Credit Agreement provides, at the Company's option, for
interest at a margin over prime or LIBOR (.25% and 1.75% at June 30, 1997,
respectively). The interest rate margin is determined based upon the
maintenance of certain debt to cash flow ratios. At October 1, 1996 the
interest rate margin was 1.00% over prime and 2.50% over LIBOR. 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 and on May 16, 1997, the interest rate margins were
reduced to .25% and 1.75% over prime and 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
-14-
<PAGE>
funds are advanced by CIFC. In addition, the Company has guaranteed the
obligations of CIFC to CoBank and has granted CoBank a first lien on all of the
assets of the Company as security for such guaranty.
The Credit Agreement prohibits the payment of cash dividends, limits
the use of borrowings, prohibits any other senior borrowings, restricts
expenditures for certain investments, requires positive working capital and
requires the maintenance of certain liquidity, capitalization, debt, debt
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.
-15-
<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 3,579,000 net Company pops in 82 markets located in 14 states.
These markets consist of 72 RSA markets having a total of 6,561,000 pops and 10
MSA markets having a total of 1,315,000 pops, of which the Company's interests
represent 2,897,000 net Company pops and 682,000 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
June 30, 1997, the Company had net advances of $251,363,000 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 $206,186,000. In
addition, the Company had proportionate obligations of additional debt of its
affiliates from other financing sources of $2,468,000. The assets of the
affiliates in which the Company has investments or advances as of June 30, 1997,
represent 4,308,000 pops, which include 3,570,000 net Company pops and 738,000
pops attributable to parties other than the Company. Advances related to pops
attributable to parties other than the Company total $45,177,000. 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 4,330,000 total pops
and 3,208,000 net Company pops. As of June 30, 1997, the RSA and MSA managed
markets had 191,269 and 66,004 subscribers, respectively.
Information regarding the Company's net interest in each cellular
licensee and the market subject to such license, as of August 8, 1997, is
summarized in the following table.
<TABLE>
<CAPTION>
Net
Company
MSA or Interest in 1996 Net Company
RSA Code (1) State Licensee (2) Population (3)(6) Pops (4)
- ------------ ------------ ------------- ----------------- -----------
<S> <C> <C> <C> <C>
MSAs:
141 Minnesota 16.34% 240,234 39,254
185 Indiana 16.67% 170,755 28,465
241*(5) Colorado 73.99% 130,921 96,868
253*(5) Iowa 74.50% 120,902 90,072
267*(5) South Dakota 51.00% 137,742 70,248
268*(5) Montana 91.63% 126,711 116,105
279 Maine 11.11% 103,721 11,522
289*(5) South Dakota 100.00% 111,904 111,904
297*(5) Montana 91.63% 81,568 74,741
298*(5) North Dakota 51.00% 90,439 46,124
--------- -------
Total MSA 1,314,897 685,303
</TABLE>
-16-
<PAGE>
<TABLE>
<CAPTION>
Net
Company
MSA or Interest in 1996 Net Company
RSA Code (1) State Licensee (2) Population (3)(6) Pops (4)
- ------------ ------------ ------------ ----------------- -----------
<S> <C> <C> <C> <C>
RSAs:
348* Colorado 10.00% 47,002 4,700
349*(5) Colorado 61.75% 62,939 38,865
351*(5) Colorado 61.75% 74,044 45,722
352*(5) Colorado 66.00% 30,019 19,813
353*(5) Colorado 100.00% 72,920 72,920
354*(5) Colorado(B1) 69.40% 47,604 33,037
355* Colorado 49.00% 45,762 22,423
356* Colorado(B1) 49.00% 25,426 12,459
389 Idaho 50.00% 71,284 35,642
390 Idaho 33.33% 17,602 5,867
392*(5) Idaho(B1) 100.00% 141,031 141,031
393*(5) Idaho 91.64% 293,120 268,615
415 Iowa 10.11% 155,178 15,694
416 (5) Iowa 78.57% 109,023 85,659
417*(5) Iowa 100.00% 155,268 155,268
419* Iowa 44.92% 54,745 24,591
420*(5) Iowa 100.00% 63,302 63,302
424* Iowa 50.00% 66,929 33,465
425* Iowa 13.28% 107,809 14,321
426* Iowa 49.14% 83,580 41,070
427* Iowa 49.17% 103,912 51,090
428 Kansas 3.07% 27,741 852
429 Kansas 3.07% 30,523 937
430 Kansas 3.07% 53,026 1,628
431 Kansas 3.07% 137,928 4,234
432 Kansas 3.07% 31,040 953
433 Kansas 3.07% 20,123 618
434 Kansas 3.07% 80,524 2,472
435 Kansas 3.07% 131,254 4,029
436 Kansas 3.07% 58,858 1,807
437 Kansas 3.07% 109,008 3,347
438 Kansas 3.07% 84,143 2,583
439 Kansas 3.07% 43,831 1,346
440 Kansas 3.07% 29,677 911
441 Kansas 3.07% 175,260 5,380
442 Kansas 3.07% 155,007 4,759
512 Missouri(B1) 14.70% 56,464 8,300
523*(5) Montana(B1) 91.63% 72,719 66,632
523*(5) Montana(B2) 91.63% 78,894 72,291
524*(5) Montana(B1) 91.63% 34,780 31,869
526*(5) Montana(B1) 91.63% 21,753 19,932
527*(5) Montana 91.63% 189,151 173,319
528*(5) Montana 91.63% 65,206 59,748
529*(5) Montana 91.63% 30,030 27,516
530*(5) Montana 91.63% 92,780 85,014
531*(5) Montana 91.63% 33,426 30,628
532*(5) Montana 91.63% 20,078 18,397
</TABLE>
-17-
<PAGE>
<TABLE>
<CAPTION>
Net Company
MSA or Interest in 1996 Net Company
RSA Code(1) State Licensee(2) Population(3)(6) Pops(4)
- --------------- ----------------- ------------- ---------------- -----------
<C> <S> <C> <C> <C>
553*(5) New Mexico(B2) 58.36% 113,473 66,223
555 New Mexico 12.25% 89,939 11,018
557 New Mexico 16.33% 59,835 9,772
580*(5) North Dakota 53.36% 103,812 55,393
581* North Dakota 49.00% 60,895 29,839
582 North Dakota 41.45% 90,709 37,598
583* North Dakota 49.00% 63,305 31,019
584*(5) North Dakota 61.75% 48,606 30,014
634*(5) South Dakota 100.00% 37,096 37,096
635*(5) South Dakota 100.00% 23,000 23,000
636*(5) South Dakota 100.00% 53,557 53,557
638*(5) South Dakota(B1) 100.00% 17,069 17,069
638*(5) South Dakota(B2) 100.00% 9,102 9,102
639*(5) South Dakota(B1) 100.00% 36,886 36,886
639*(5) South Dakota(B2) 100.00% 3,233 3,233
640*(5) South Dakota 64.49% 67,096 43,270
641*(5) South Dakota 61.13% 73,887 45,167
642* South Dakota 49.00% 96,725 47,395
675*(5) Utah 100.00% 56,209 56,209
676*(5) Utah 100.00% 107,882 107,882
677*(5) Utah(B3) 100.00% 39,506 39,506
678*(5) Utah 80.00% 28,326 22,661
718*(5) Wyoming 66.00% 50,273 33,180
719*(5) Wyoming 100.00% 76,440 76,440
720*(5) Wyoming 100.00% 147,595 147,595
--------- ---------
Total RSA 5,246,179 2,885,180
--------- ---------
Total MSA and RSA 6,561,076 3,570,483
========= =========
</TABLE>
- ----------
(1) MSA ranking is based on population as established by the FCC. RSAs have
been numbered by the FCC alphabetically by state.
(2) Represents the net ownership interest of the Company in the licensee for a
cellular telephone system in the respective market. Net ownership of
greater than 50% does not necessarily represent a controlling interest in
such licensee.
(3) Derived from the Demographics On-Call 1996 population estimates.
(4) Net Company Pops represents net Company interest in licensee multiplied by
1996 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 (*).
-18-
<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)
March 31, 1997 56 7 49 4,171,993 792,913(7) 3,379,080(7) 244,453 63,454 180,999 6.07%
June 30, 1997 56 7 49 4,329,904 798,807(9) 3,537,369(9) 257,273 66,004 191,269 5.24%
</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.
(9) Derived from 1996 Demographics On-Call population estimates.
-19-
<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.
(All amounts in thousands, except subscriber count and markets)
<TABLE>
<CAPTION>
Nine Months ended June 30,
---------------------------------------------------------------
1997 1996 1997 1996 1997 1996
------------------- ------------------- -------------------
Financed Company
Combined (1) Proportionate (2) Proportionate (3)
------------------- ------------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
MANAGED MARKETS
Revenues:
Cellular service $ 91,466 $ 70,871 $ 84,887 $ 65,831 $ 69,323 $ 52,191
In-roaming 28,414 22,824 26,292 21,134 21,876 16,896
Equipment sales 2,803 2,366 2,615 2,163 2,273 1,756
------- ------- -------- -------- -------- --------
Total revenues 122,683 96,061 113,794 89,128 93,472 70,843
Costs and expenses
involving cash:
Cost of sales:
Cellular service
(including
in-roaming) 21,829 18,517 20,558 17,312 17,031 13,682
Equipment sales 10,515 8,329 9,726 7,534 8,323 6,146
General and
administrative 26,103 20,306 24,190 18,773 19,799 14,847
Marketing and selling 20,989 19,744 19,522 18,275 15,813 14,454
------- ------- -------- -------- -------- --------
Total cash costs
and expenses 79,436 66,896 73,996 61,894 60,966 49,129
------- ------- -------- -------- -------- --------
EBITDA $ 43,247 $ 29,165 $ 39,798 $ 27,234 $ 32,506 $ 21,714
======== ======== ======== ======== ======== ========
Capital expenditures $ 29,276 $ 25,889 $ 27,491 $ 24,848 $ 24,271 $ 22,892
Subscriber count 257,273 195,386 233,333 178,410 191,499 143,654
Total markets 56 55 56 55 56 55
NONMANAGED MARKETS
Revenues:
Cellular service
(including
in-roaming) $ 90,875 $ 66,044 $ 13,959 $ 10,427 $ 10,338 $ 6,704
Equipment sales 5,584 5,309 518 538 416 407
------- ------- -------- -------- -------- --------
Total revenues 96,459 71,353 14,477 10,965 10,754 7,111
Costs and expenses
involving cash:
Cost of sales:
Cellular service 19,671 15,703 3,287 3,003 2,466 1,931
Equipment sales 7,290 5,768 914 664 686 480
General and
administrative 18,950 13,268 3,259 2,414 2,299 1,496
Marketing and selling 19,614 14,691 3,058 2,270 2,397 1,575
------- ------- -------- -------- -------- --------
Total cash costs
and expenses 65,525 49,430 10,518 8,351 7,848 5,482
------- ------- -------- -------- -------- --------
EBITDA $ 30,934 $ 21,923 $ 3,959 $ 2,614 $ 2,906 $ 1,629
======= ======= ======== ======== ======== ========
Capital expenditures $ 13,267 $ 14,812 $ 1,772 $ 2,024 $ 1,127 $ 1,414
Subscriber count 189,208 141,344 29,465 21,704 21,801 16,141
Total markets 26 27 26 27 26 27
</TABLE>
-20-
<PAGE>
<TABLE>
<CAPTION>
Nine Months ended June 30,
--------------------------
1997 1996
-------- ---------
<S> <C> <C>
Reconciliation From Company Proportionate EBITDA to Consolidated Reporting
Total proportionate EBITDA (managed and nonmanaged markets) $35,412 $23,343
Proportionate depreciation and amortization (13,074) (11,668)
Proportionate interest expense (7,527) (7,085)
Equity in nonlicensee affiliates (7,009) (2,421)
Minority interests 1,781 896
Intercompany interest 6,710 6,317
Amortization of license costs not owned by affiliates (2,011) (1,906)
Unallocated corporate expenses (2,424) (4,281)
Gain (loss) on sales of affiliates 349 (250)
Interest expense (net) and other (17,123) (12,001)
-------- --------
Consolidated net loss $ (4,916) $ (9,056)
======== ========
</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.
-21-
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
- ------ -----------------
On May 29, 1997 (the day after the proposed Merger was publicly
announced), the Company and each of its five directors (two of whom are
executive officers of the Company) were named as defendants in a complaint filed
in the Colorado District Court, County of Arapahoe, by Brickell Partners, an
entity claiming to be a shareholder of the Company, individually and purportedly
as a class action on behalf of shareholders of the Company. In general, the
complaint alleges that the Company's directors have breached their fiduciary
duties by, among other things, resolving to approve the Merger at an allegedly
inadequate price and by allegedly failing to take all reasonable steps to insure
maximization of shareholder value. The complaint seeks injunctive relief
prohibiting the Company from, among other things, consummating the Merger. The
complaint also seeks unspecified damages, attorney's fees and other relief.
The Company believes that the allegations contained in the complaint are
without merit and intends to contest the action vigorously, on behalf of itself
and its directors, if the plaintiff elects to proceed with its action.
On July 8, 1997, Dakota Systems, Inc., the minority general partner in
the Sioux Falls Cellular Limited Partnership ("Sioux Falls"), and Splitrock
Telecom Cooperative, Inc., Union Telephone Company, Sioux Valley Telephone
Company and Baltic Cooperative Telephone Company, the limited partners in Sioux
Falls (collectively, the minority general partner and the limited partners are
referred to herein as "plaintiffs"), filed a lawsuit in the Circuit Court,
County of Minnehaha, State of South Dakota, against CINC, the Company, and Sioux
Falls. CINC is the general partner of Sioux Falls and a wholly-owned subsidiary
of the Company. The lawsuit alleges, among other things, that the Merger
triggers plaintiff's alleged right of first refusal to purchase CINC's interest
in Sioux Falls under the Certificate and Agreement Establishing Sioux Falls
Limited Partnership. The lawsuit seeks, among other things, a declaratory
judgement concerning the terms of plaintiff's alleged right of first refusal to
purchase CINC's interest in Sioux Falls, a temporary and permanent injunction
prohibiting the Merger until plaintiff's rights are clarified, and damages. The
lawsuit also seeks to enjoin a proposed sale of a telecommunications switch by
Sioux Falls to the Company and to void certain amendments to the switch user
agreements. The Company intends to defend the lawsuit vigorously if the
plaintiffs elect to proceed with the litigation.
Item 6. Exhibits and Reports on Form 8-K.
- ------ --------------------------------
(a) Exhibits
None.
(b) Reports on Form 8-K filed during the nine months ended June
30, 1997:
Date of Report Item Reported Financial Statements Filed
-------------- ------------- --------------------------
May, 29, 1997 Item S None
-22-
<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: August 15, 1997 By: /s/Daniel P. Dwyer
------------------
Daniel P. Dwyer
Executive Vice President, Treasurer &
Chief Financial Officer
Date: August 15, 1997 By: /s/Andrew J. Gardner
--------------------
Andrew J. Gardner
Senior Vice President and Controller
(Principal Accounting Officer)
-23-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 9,925
<SECURITIES> 0
<RECEIVABLES> 26,121
<ALLOWANCES> 3,471
<INVENTORY> 3,834
<CURRENT-ASSETS> 36,409
<PP&E> 183,127
<DEPRECIATION> 54,140
<TOTAL-ASSETS> 343,779
<CURRENT-LIABILITIES> 18,114
<BONDS> 264,232
0
0
<COMMON> 165,344
<OTHER-SE> (110,051)
<TOTAL-LIABILITY-AND-EQUITY> 343,779
<SALES> 104,348
<TOTAL-REVENUES> 104,348
<CGS> 29,526
<TOTAL-COSTS> 86,495
<OTHER-EXPENSES> 705
<LOSS-PROVISION> 2,959
<INTEREST-EXPENSE> 22,064
<INCOME-PRETAX> (4,916)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,916)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,916)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0<F1><F2><F3>
<FN>
<F1>(Sales) Includes both Cellular and Equipment Revenue.
<F2>(EPS-Primary) Primary EPS is not presented as the difference between basic
EPS and Primary EPS is not material.
<F3>(EPS- Fully Diluted) Fully diluted EPS is not presented as all CS
equivalents are antidilutive.
</FN>
</TABLE>
