<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: March 31, 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 May 9,
1997 was 13,765,965.
<PAGE>
COMMNET CELLULAR INC.
FORM 10-Q - MARCH 31, 1997
INDEX
<TABLE>
<CAPTION>
Part I Financial Information Page
- ------ --------------------- ----
<C> <S> <C>
Item 1 Financial Statements
Consolidated Condensed Balance Sheets -
March 31, 1997 and September 30, 1996 1
Consolidated Condensed Statements of Operations -
Three Months Ended March 31, 1997 and
March 31, 1996 3
Consolidated Condensed Statements of Operations -
Six Months Ended March 31, 1997 and
March 31, 1996 4
Consolidated Condensed Statements of Cash Flows -
Six Months Ended March 31, 1997 and
March 31, 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>
March 31, September 30,
Assets 1997 1996
- --------------------------------------- ---------- -------------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 23,281 $ 11,492
Accounts receivable, net of
allowance for doubtful accounts
of $2,169 and $1,947 at March 31,
1997 and September 30, 1996,
respectively 19,281 19,933
Inventory and other 4,140 3,949
-------- --------
Total current assets 46,702 35,374
Investment in and advances to affiliates 58,667 57,245
Investment in cellular system equipment 18,308 11,809
Property and equipment, at cost:
Cellular system equipment 135,268 126,305
Land, buildings and improvements 27,691 25,977
Furniture and equipment 18,051 17,144
-------- --------
181,010 169,426
Less accumulated depreciation 58,779 51,327
-------- --------
Net property and equipment 122,231 118,099
Other assets, less accumulated
amortization of $34,956 and $33,166 at
March 31, 1997 and September 30, 1996,
respectively:
FCC licenses and filing rights 100,029 103,251
Deferred loan costs and other 5,818 6,059
-------- --------
Total other assets 105,847 109,310
$351,755 $331,837
======== ========
</TABLE>
See accompanying notes.
-1-
<PAGE>
COMMNET CELLULAR INC.
CONSOLIDATED CONDENSED BALANCE SHEETS (CONTINUED)
(Amounts in thousands, except share data)
<TABLE>
<CAPTION>
March 31, September 30,
Liabilities and Stockholders' Equity 1997 1996
- --------------------------------------- ----------- -------------
(unaudited)
<S> <C> <C>
Current liabilities:
Accounts payable $ 9,782 $ 7,431
Accrued liabilities 7,862 5,458
Accrued interest 2,460 2,556
Current portion of secured bank
financing and other long-term debt 319 3,683
-------- -------
Total current liabilities 20,423 19,128
Long-term debt:
Secured bank financing 36,608 20,825
Note payable and other long-term debt 2,916 3,057
11 3/4% senior subordinated discount
notes 150,303 141,963
11 1/4% subordinated notes 80,000 80,000
Minority interests 5,590 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 March 31, 1997 and
September 30, 1996, respectively 14 14
Capital in excess of par value 165,324 168,103
Accumulated deficit (109,423) (105,135)
-------- --------
Total stockholders' equity 55,915 62,982
-------- --------
$351,755 $331,837
======== ========
</TABLE>
See accompanying notes.
-2-
<PAGE>
COMMNET CELLULAR INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(Amounts in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Revenues:
Cellular service $24,506 $18,201
In-roaming 6,561 5,088
Equipment sales 667 301
------- -------
31,734 23,590
Costs and expenses:
Cellular operations:
Cost of cellular service 6,509 4,536
Cost of equipment sales (Note 4) 3,305 2,312
General and administrative 6,708 5,258
Marketing and selling 5,372 5,222
Depreciation and amortization 5,097 4,362
Corporate:
General and administrative 1,268 2,161
Depreciation and amortization 563 1,376
Less amounts allocated to
nonconsolidated affiliates (1,491) (1,596)
------- -------
27,331 23,631
------- -------
Operating income (loss) 4,403 (41)
Equity in net loss of affiliates (1,324) (431)
Minority interest in net income of (464) (162)
consolidated affiliates
Loss on sales of affiliates and other - (250)
Interest expense (7,500) (7,192)
Senior lender patronage income 142 413
Interest income 1,830 2,929
------- -------
Net loss $(2,913) $(4,734)
======= =======
Net loss per common share $(0.21) $(0.35)
======= =======
Weighted average shares outstanding 13,766 13,719
======= =======
</TABLE>
See accompanying notes.
-3-
<PAGE>
COMMNET CELLULAR INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED MARCH 31, 1997 AND 1996
(Amounts in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Revenues:
Cellular service $ 49,838 $ 36,260
In-roaming 14,844 10,808
Equipment sales 1,548 1,593
-------- --------
66,230 48,661
Costs and expenses:
Cellular operations:
Cost of cellular service 13,262 9,356
Cost of equipment sales (Note 4) 6,244 4,526
General and administrative 14,172 11,144
Marketing and selling 11,811 10,773
Depreciation and amortization 9,905 8,775
Corporate:
General and administrative 3,153 3,743
Depreciation and amortization 1,090 2,082
Less amounts allocated to
nonconsolidated affiliates (3,003) (3,233)
-------- --------
56,634 47,166
-------- --------
Operating income 9,596 1,495
Equity in net loss of affiliates (1,932) (1,443)
Minority interest in net income of (861) (369)
consolidated affiliates
Loss on sales of affiliates and other - (250)
Interest expense (14,817) (14,404)
Senior lender patronage income 142 413
Interest income 3,583 6,469
-------- --------
Net loss $ (4,289) $ (8,089)
======== ========
Net loss per common share $(0.31) $(0.60)
======== ========
Weighted average shares outstanding 13,770 13,589
======== ========
</TABLE>
See accompanying notes.
-4-
<PAGE>
COMMNET CELLULAR INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED MARCH 31, 1997 AND 1996
(Amounts in thousands)
(unaudited)
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Operating activities:
Net loss $ (4,289) $ (8,089)
Adjustments to reconcile net loss to
net cash provided by operating
activities:
Minority interest 861 369
Depreciation and amortization 10,995 10,857
Equity in net loss of affiliates 1,932 1,443
Loss (gain) on sales of affiliates
and others - 250
Interest expense on 11 3/4% senior
subordinated discount notes 8,340 7,440
CoBank patronage income (99) (289)
Accrued interest on advances to
affiliates (2,986) (5,389)
Change in operating assets and
liabilities, net of effects
from consolidating acquired
interests:
Accounts receivable 652 1,351
Inventory and other (191) (1,340)
Accounts payable and accrued 2,009 196
liabilities (96) (55)
Accrued interest -------- --------
Net cash provided by operating
activities 17,128 6,744
Investing activities:
Purchase of available-for-sale
securities - (986)
Sale of available-for-sale securities - 986
Reductions in (additions to)
investments in and advances to
affiliates 173 (2,738)
Additions to investment in cellular
system equipment (6,499) (2,257)
Additions to property and equipment (10,418) (14,389)
Reductions in (additions to) other
assets (298) 127
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 (924) (6)
-------- --------
Net cash used by investing activities (17,966) (18,649)
</TABLE>
See accompanying notes.
-5-
<PAGE>
COMMNET CELLULAR INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (CONTINUED)
SIX MONTHS ENDED MARCH 31, 1997 AND 1996
(Amounts in thousands)
(unaudited)
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Financing activities:
Proceeds from secured bank financing $ 34,000 $ 1,750
Payments of secured bank financing (21,582) (2,563)
Distributions to minority interests (983) -
Capital contributions from minority
interests 4,111 -
Reduction of obligation under capital
leases (140) (152)
Issuance of Common Stock, net of
offering costs 153 939
Repurchases of Common Stock (2,932) -
-------- --------
Net cash provided (used) by financing
activities 12,627 (26)
-------- --------
Net increase (decrease) in cash and
cash equivalents 11,789 (11,931)
Cash and cash equivalents at beginning
of period 11,492 41,018
-------- --------
Cash and cash equivalents at end of
period $ 23,281 $ 29,087
======== ========
Supplemental schedule of additional
cash flow information and noncash
activities:
Cash paid during the six-month period
for interest $ 6,573 $ 7,019
Purchase of cellular system equipment
through accounts payable 4,863 3,655
Purchases of interests in affiliates
financed with Common Stock - 2,922
Conversion of convertible
subordinated debentures to
Common Stock - 2,909
</TABLE>
See accompanying notes.
-6-
<PAGE>
COMMNET CELLULAR INC.
NOTES TO CONSOLIDATED 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 six months ended March
31, 1997 are not necessarily indicative of the results for a full year. Certain
amounts relating to March 31, 1996 have been reclassified to correspond to the
March 31, 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 six months ended March 31, 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 8,125 - 153
Common Stock repurchased (102,000) - (2,932)
---------- ------ --------
Balance at March 31, 1997 13,765,865 $14 $165,324
========== ====== ========
</TABLE>
At March 31, 1997 the Company had 1,915,900 options outstanding at a
weighted average exercise price of $23.82.
-7-
<PAGE>
COMMNET CELLULAR INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaduited)
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 six months ended March
31, 1997 and 1996 giving effect to the costs associated with the program
described above (amounts in thousands).
<TABLE>
<CAPTION>
Six Months Six Months
ended ended
March 31, 1997 March 31, 1996
---------------- --------------
<S> <C> <C>
Cost of equipment sales $1,077 $2,953
Cost of equipment owned by the
Company, but provided to
subscribers to use:
New subscribers 3,800 1,153
Existing subscribers 1,367 420
------ ------
$6,244 $4,526
====== ======
</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 March
31, 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.
6. Subsequent events
-----------------
Subsequent to March 31, 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.
-8-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
- -------
The Company generated operating income during the six months ended
March 31, 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
March 31, 1997. 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 March 31, 1996. The increase in the number of markets
included in consolidated results is due to acquisitions consummated subsequent
to March 31, 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 the net loss of 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. For the quarter ended March 31,
1997, 18 markets were accounted for under the equity method, compared to 20 such
markets for the quarter ended March 31, 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 both quarters ended March
31, 1997 and March 31, 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 March 31, 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.
-9-
<PAGE>
"Safe Harbor" Statement under the Private Securities Litigation Reform
Act of 1995: 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 March 31, 1997 and 1996. Cellular service
------------------------------------------
revenues, including in-roaming revenues, increased by 33%, or $7,778,000, from
$23,289,000 for the quarter ended March 31, 1996 to $31,067,000 for the quarter
ended March 31, 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 March 31,
1996 to 46 during the quarter ended March 31, 1997. Growth in subscribers
accounted for 82% of the increase, and the number of consolidated markets
accounted for 18% of the increase. In-roaming revenues increased by 29%, or
$1,473,000, from $5,088,000 for the quarter ended March 31, 1996 to $6,561,000
for the quarter ended March 31, 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 may decline, consistent with industry
trends.
Average monthly revenue per subscriber, including in-roaming,
decreased from $55 for the quarter ended March 31, 1996 to $51 for the quarter
ended March 31, 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 $12 to $11, again reflecting declining
prices to the consumer.
Cost of cellular service as a percentage of service revenues increased
to 21% for the quarter ended March 31, 1997 from 19% for the quarter ended March
31, 1996. The Company has negotiated some interconnect agreements and is in the
process of renegotiating others. Once negotiations are completed, the Company
expects cost of cellular service as a percentage of service revenues to decline.
Equipment sales increased 122% from $301,000 for the quarter ended
March 31, 1996 to $667,000 for the quarter ended March 31, 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. 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. Cost of equipment sales increased 43% from $2,312,000 for the
three months ended March 31, 1996 to $3,305,000 for the three months ended March
31, 1997. Approximately $1,916,000 and $644,000 of the three months ended March
31, 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.
-10-
<PAGE>
General and administrative costs of cellular operations increased 28%
from $5,258,000 during the quarter ended March 31, 1996 to $6,708,000 during the
quarter ended March 31, 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.
General and administrative costs as a percentage of service revenues decreased
from 23% for the quarter ended March 31, 1996 to 22% for the quarter ended March
31, 1997. The decrease was primarily due to revenues increasing at a faster
rate than incremental general and administrative costs.
Marketing and selling costs increased 3% from $5,222,000 for the
quarter ended March 31, 1996 to $5,372,000 for the quarter ended March 31, 1997,
primarily as a result of increased advertising costs offset by reductions in
commission costs. Marketing costs per gross new subscriber decreased 16% from
$262 for the quarter ended March 31, 1996 to $225 for the quarter ended March
31, 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 17% from $4,362,000 for the quarter ended March 31, 1996 to $5,097,000
for the quarter ended March 31, 1997, primarily related to increased property
and equipment balances.
Corporate costs and expenses for the quarter ended March 31, 1996 were
$1,941,000, which represented gross expenses of $3,537,000 less amounts
allocated to nonconsolidated affiliates of $1,596,000. Corporate costs and
expenses for the quarter ended March 31, 1997 were $340,000, which represented
gross expenses of $1,831,000 less amounts allocated to nonconsolidated
affiliates of $1,491,000. The decrease in corporate costs and expenses was due
primarily to the elimination of a reserve related to the paging company which
was not allocated to affiliates. This reserve was deemed unnecessary due to the
Company's recent partnering agreement with AirTouch Cellular 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
three months ended March 31, 1996 which did not recur during the three months
ended March 31, 1997.
Equity in net loss of affiliates increased 207% from $431,000 for the
quarter ended March 31, 1996 to $1,324,000 for the quarter ended March 31, 1997.
The increase was due to recognition of the entire $1,100,000 net loss of TVX,
Inc. which was $450,000 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.
Interest expense increased 4% from $7,192,000 for the quarter ended
March 31, 1996 to $7,500,000 for the quarter ended March 31, 1997. Cash paid
for interest decreased 3% from $5,703,000 during the quarter ended March 31,
1996 to $5,520,000 during the quarter ended March 31, 1997.
Interest income decreased 38% from $2,929,000 for the quarter ended
March 31, 1996 to $1,830,000 for the quarter ended March 31, 1997. The decrease
was due to lower average cash and cash equivalent balances and lower notes
receivable balances from nonconsolidated affiliates.
Six Months Ended March 31, 1997 and 1996. Cellular service revenues,
----------------------------------------
including in-roaming revenues, increased by 37%, or $17,614,000, from
$47,068,000 for the six months ended March 31, 1996 to $64,682,000 for the six
months ended March 31, 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 six months from 44 during the six months ended March
31, 1996 to 46 during the six
-11-
<PAGE>
months ended March 31, 1997. Growth in subscribers accounted for 83% of the
increase, and the number of consolidated markets accounted for 17% of the
increase. In-roaming revenues increased by 37%, or $4,036,000, from $10,808,000
for the six months ended March 31, 1996 to $14,844,000 for the six months ended
March 31, 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 may decline, consistent with industry trends.
Average monthly revenue per subscriber, including in-roaming,
decreased from $58 for the six months ended March 31, 1996 to $56 for the six
months ended March 31, 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 $13 for the six
months ended March 31, 1997 and 1996.
Cost of cellular service increased as a percentage of service revenues
from 20% for the six months ended March 31, 1996 to 21% for the six months ended
March 31, 1997. The Company has negotiated some interconnect agreements and is
in the process of renegotiating others. Once negotiations are completed, the
Company expects cost of cellular service as a percentage of service revenues to
decline.
Equipment sales decreased 3% from $1,593,000 for the six months ended
March 31, 1996 to $1,548,000 for the six months ended March 31, 1997 due
primarily to the effects of the Company's customer satisfaction and pricing
program which was introduced in February 1996 which was offset by increased
accessory sales. Cost of equipment sales increased 38% from $4,526,000 for the
six months ended March 31, 1996 to $6,244,000 for the six months ended March 31,
1997. Approximately $3,800,000 and $1,367,000 of the six months ended March 31,
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 27%
from $11,144,000 during the six months ended March 31, 1996 to $14,172,000
during the six months ended March 31, 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. General and administrative costs as a percentage of service
revenues decreased from 24% for the six months ended March 31, 1996 to 22% for
the six months ended March 31, 1997. The decrease was primarily due to revenues
increasing at a faster rate than incremental general and administrative costs.
Marketing and selling costs increased 10% from $10,773,000 for the six
months ended March 31, 1996 to $11,811,000 for the six months ended March 31,
1997, primarily as a result of increased advertising costs offset by reductions
in commission costs. Marketing costs per gross new subscriber decreased 8% from
$252 for the six months ended March 31, 1996 to $233 for the six months ended
March 31, 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 13% from $8,775,000 for the six months ended March 31, 1996 to
$9,905,000 for the six months ended March 31, 1997, primarily related to
increased property and equipment balances.
Corporate costs and expenses for the six months ended March 31, 1996
were $2,592,000, which represented gross expenses of $5,825,000 less amounts
allocated to nonconsolidated affiliates
-12-
<PAGE>
of $3,233,000. Corporate costs and expenses for the six months ended March 31,
1997 were $1,240,000, which represented gross expenses of $4,243,000 less
amounts allocated to nonconsolidated affiliates of $3,003,000. The decrease in
corporate costs and expenses was due primarily to the elimination of a reserve
related to the paging company which was not allocated to affiliates. This
reserve was deemed unnecessary due to the Company's recent partnering agreement
with AirTouch Cellular 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 six months ended March 31, 1996 which did not
recur during the six months ended March 31, 1997.
Equity in net loss of affiliates increased 34% from $1,443,000 for the
six months ended March 31, 1996 to $1,932,000 for the six months ended March 31,
1997. The increase was due primarily to decreased losses in nonconsolidated
affiliates, offset by recognition of the entire $2,200,000 net loss of TVX, Inc.
which was $900,000 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.
Interest expense increased 3% from $14,404,000 for the six months
ended March 31, 1996 to $14,817,000 for the six months ended March 31, 1997.
Cash paid for interest decreased 6% from $7,019,000 during the six months ended
March 31, 1996 to $6,573,000 during the six months ended March 31, 1997.
Interest income decreased 45% from $6,469,000 for the six months ended
March 31, 1996 to $3,583,000 for the six months ended March 31, 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.
Subsequent to March 31, 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.
Changes in Financial Condition
- ------------------------------
Net cash provided by operating activities was $17,128,000 during the
six months ended March 31, 1997, composed primarily of $14,754,000 from the net
loss after adjustments to reconcile net cash provided by operating activities
and cash provided by changes to working capital of $2,374,000.
Net cash used by investing activities was $17,966,000 for the six
months ended March 31, 1997, including $16,917,000 required to fund the purchase
of property and equipment and investment in cellular system equipment, offset by
$924,000 to purchase of interests in affiliates.
Net cash provided by financing activities was $12,627,000 for the six
months ended March 31, 1997 from proceeds from long-term debt of $12,418,000 and
net capital contributions from minority interests of $3,128,000. These amounts
were offset by repurchases of Common Stock of $2,932,000.
-13-
<PAGE>
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 March 31, 1997, the Company had unused commitments under the
Credit Agreement of $127,666,000, 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 March 31, 1997, the Company, on a
consolidated basis, had available $23,281,000 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 six months ended March 31, 1997 were approximately $19,700,000. These
expenditures were primarily for 27 new cell sites, channel expansion, paging
infrastructure and corporate assets. The Company expects capital expenditures
for the remainder of fiscal year 1997 to be $31,200,000 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 $6,166,000. 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
-14-
<PAGE>
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 March 31, 1997, 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 March 31, 1997,
$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 $37,334,000 at
March 31, 1997. The Credit Agreement provides, at the Company's option, for
interest at a margin over prime or LIBOR (.50% and 2.00% at March 31, 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. 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 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 3,530,000 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 1,308,000 pops, of which the Company's interests
represent 2,854,000 net Company pops and 677,000 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
March 31, 1997, the Company had net advances of $259,145,000 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 $212,148,000. In
addition, the Company had proportionate obligations of additional debt of its
affiliates from other financing sources of $2,397,000. The assets of the
affiliates in which the Company has investments or advances as of March 31,
1997, represent 4,339,000 pops, which include 3,539,000 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 $46,997,000. 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 3,208,000 net Company pops. As of March 31, 1997, the RSA and MSA managed
markets had 180,999 and 63,454 subscribers, respectively.
Information regarding the Company's net interest in each cellular licensee
and the market subject to such license, as of May 9, 1997, is summarized in the
following table.
<TABLE>
<CAPTION>
Net Company
MSA or Interest in 1995 Net Company
RSA Code (1) State Licensee(2) Population (3)(6) Pops (4)
- ------------ -------------- ----------- ----------------- ------------
<C> <S> <C> <C> <C>
MSAs:
141 Minnesota 16.34% 241,467 39,456
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 60.00% 89,182 53,509
--------- -------
Total MSA 1,308,201 676,645
</TABLE>
-16-
<PAGE>
<TABLE>
<CAPTION>
Net Company
MSA or Interest in 1995 Net Company
RSA Code (1) State Licensee (2) Population (3)(6) Pops (4)
- ------------ ---------------- ------------ ----------------- -----------
<S> <C> <C> <C> <C>
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
27* 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
</TABLE>
-17-
<PAGE>
<TABLE>
<CAPTION>
Net Company
MSA or Interest in 1995 Net Company
RSA Code (1) State Licensee (2) Population (3)(6) Pops (4)
- ------------ ----------------- -------------- ----------------- ----------------
<S> <C> <C> <C> <C>
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 6,491,556 3,530,370
========= =========
- ----------
</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 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 (*).
-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 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%
- ---------------
</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.
-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>
Six Months ended March 31,
------------------------------------------------------------------------------------
1997 1996 1997 1996 1997 1996
------------------------------------------------------------------------------------
Combined (1) Financed Proportionate (2) Company Proportionate (3)
-------------------- ---------------------------- ---------------------------
<S> <C> <C> <C> <C> <C> <C>
MANAGED MARKETS
Revenues:
Cellular service $ 58,739 $ 44,085 $ 54,945 $ 40,890 $ 44,468 $ 32,112
In-roaming 17,381 13,891 16,258 12,818 13,365 10,103
Equipment sales 1,646 1,794 1,558 1,640 1,323 1,325
-------- -------- -------- -------- -------- --------
Total revenues 77,766 59,770 72,761 55,348 59,156 43,540
Costs and expenses
involving cash:
Cost of sales:
Cellular service
(including in-roaming) 14,447 11,565 13,759 10,767 11,311 8,380
Equipment sales 6,862 5,258 6,378 4,741 5,385 3,769
General and administrative 16,611 13,620 15,545 12,651 12,566 9,939
Marketing and selling 14,303 13,398 13,383 12,350 10,724 9,712
-------- -------- -------- -------- -------- --------
Total cash costs and
expenses 52,223 43,841 49,065 40,509 39,986 31,800
-------- -------- -------- -------- -------- --------
EBITDA $ 25,543 $ 15,929 $ 23,696 $ 14,839 $ 19,170 $ 11,740
======== ======== ======== ======== ======== ========
Capital expenditures $ 19,749 $ 16,635 $ 18,816 $ 15,845 $ 16,349 $ 14,731
Subscriber count 244,453 180,506 224,803 165,788 182,093 130,824
Total markets 56 55 56 55 56 55
NONMANAGED MARKETS
Revenues:
Cellular service
(including in-roaming) $ 61,825 $ 43,837 $ 9,765 $ 7,014 $ 7,288 $ 4,231
Equipment sales 3,750 3,575 405 384 302 276
-------- -------- -------- -------- -------- --------
Total revenues 65,575 47,412 10,170 7,398 7,590 4,507
Costs and expenses
involving cash:
Cost of sales:
Cellular service 13,908 10,324 2,370 1,942 1,833 1,132
Equipment sales 4,771 3,728 655 456 468 315
General and administrative 10,500 8,776 2,094 1,483 1,469 864
Marketing and selling 13,523 9,523 2,155 1,538 1,693 996
-------- -------- -------- -------- -------- --------
Total cash costs
and expenses 42,702 32,351 7,274 5,419 5,463 3,307
-------- -------- -------- -------- -------- --------
EBITDA $ 22,873 $ 15,061 $ 2,896 $ 1,979 $ 2,127 $ 1,200
======== ======== ======== ======== ======== ========
Capital expenditures $ 7,863 $ 4,216 $ 1,601 $ 1,583 $ 1,029 $ 963
Subscriber count 179,769 129,939 28,478 20,119 20,948 12,362
Total markets 26 27 26 27 26 27
</TABLE>
-20-
<PAGE>
<TABLE>
<CAPTION>
Six Months ended March 31,
--------------------------
1997 1996
---------- ----------
<S> <C> <C>
Reconciliation From Company
Proportionate EBITDA to Consolidated
Reporting
Total proportionate EBITDA (managed and
nonmanaged markets) $ 21,297 $12,940
Proportionate depreciation and
amortization (8,619) (7,688)
Proportionate interest expense (4,623) (5,151)
Equity in nonlicensee affiliates (3,311) (2,311)
Minority interests 1,719 (67)
Intercompany interest 4,072 4,621
Amortization of license costs not owned
by affiliates (1,978) (1,243)
Unallocated corporate expenses (1,240) (2,591)
Gain (loss) on sales of affiliates - (250)
Interest expense (net) and other (11,606) (6,349)
-------- -------
Consolidated net loss $ (4,289) $(8,089)
======== =======
</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 6. Exhibits and Reports on Form 8-K.
- ------- ---------------------------------
(a) Exhibits
10.1 Retirement and Consulting Agreement
(b) Reports on Form 8-K filed during the six months ended March 31,
1997:
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: May 15, 1997 By: /s/Daniel P. Dwyer
------------------------------------------------
Daniel P. Dwyer
Executive Vice President, Treasurer &
Chief Financial Officer
Date: May 15, 1997 By: /s/Andrew J. Gardner
------------------------------------------------
Andrew J. Gardner
Senior Vice President and Controller
(Principal Accounting Officer)
-23-
<PAGE>
EXHIBIT 10.1
RETIREMENT AND CONSULTING AGREEMENT
THIS RETIREMENT AND CONSULTING AGREEMENT (the "Agreement"), dated as March __,
1997 (the "Effective Date"), is between CommNet Cellular Inc., a Colorado
corporation (the "Company"), and Arnold C. Pohs (the "Executive").
WHEREAS, the Executive has been employed by the Company since January
5, 1986 and has been Chief Executive Officer of the Company since August 1989;
and
WHEREAS, the Executive will be retiring from the Company on a date
designated by the Executive (the "Retirement Date"); and
WHEREAS, the Company recognizes that the Executive's contribution to
the Company has been substantial and meritorious and, in consideration for the
Executive's dedicated service with the Company and his retirement from the
Company on his Retirement Date, the Executive and the Company have agreed to
enter into this Agreement; and
WHEREAS, the Executive possesses considerable experience and an
intimate knowledge of the business and affairs of the Company, its policies,
methods, personnel, and operations; and
WHEREAS, the Company recognizes that the Executive's years of service
with the Company and his experience with the Company's business make him
uniquely qualified to act in a consulting capacity for the Company; and
WHEREAS, the Company is desirous of assuring the consulting services
of the Executive in the above stated capacity, and the Executive is desirous of
having such assurance.
NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants and agreements of the parties set forth in this Agreement, and of
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto, intending to be legally bound, agree as
follows:
1. RETIREMENT BENEFITS. In consideration for the Executive's
dedicated service to the Company, the Executive shall receive the following upon
the Executive's retirement from the Company:
(a) A lump-sum payment, payable within thirty (30) days after the
Executive's Retirement Date, equal to the Executive's Supplemental Retirement
Benefits. For this purpose, Supplemental Retirement Benefits shall mean the
additional Employer Contributions and Matching Contribution under the CommNet
Cellular Inc. Retirement Savings Plan (the "Retirement Plan") and allocations of
Employer
<PAGE>
Contributions under the CommNet Cellular Inc. Employee Stock Ownership
Plan (the "ESOP") the Executive would have been entitled to under such plans had
such contributions and allocations been determined without regard to the
statutory limits applicable to such contributions and allocations under the
Internal Revenue Code for the period beginning five years prior to the
Executive's Retirement Date and ending on the Executive's Retirement Date. For
purposes of calculating the Executive's Supplemental Retirement Benefits, no
additional Deferral Contributions shall be assumed to have been made under the
Retirement Plan except for purposes of determining the Company Matching
Contribution, in which case it shall be assumed that the Executive had made the
maximum allowable Deferral Contributions under such plan. In addition, such
Supplemental Retirement Benefits shall also include interest on such amounts
equal to the interest which would have been credited on such contributions and
allocations had such amounts been credited annually with the prime lending rate
as announced from time to time in the Wall Street Journal.
(b) A lump-sum payment equal to the present value of five (5) times
the annual premium cost with respect to the Executive's coverage level and plan
option immediately prior to the Executive's Retirement Date of the CommNet
Cellular Inc. health plan and the Exec-U-Care Medical Reimbursement Insurance.
Such amount shall be payable within thirty (30) days after the Executive's
Retirement Date. The discount rate used to determine the present value of this
benefit shall be the prime lending rate, on the Executive's Retirement Date.
Further, the Company shall procure for the Executive a suitable Medicare
supplement policy, which the Executive will pay for.
(c) Immediately prior to the Executive's Retirement Date, a grant of
50,000 shares of Restricted Stock under the CommNet Cellular Inc. Omnibus Stock
and Incentive Plan (the "Stock Plan"), or such other incentive plan applicable
to the Executive. Such shares shall vest and shall become immediately
transferable upon the earlier to occur of (i) the Executive's death, (ii) the
Executive's Disability (as defined in the Stock Plan), (iii) the occurrence of a
Change in Control of the Company as described in Section 3(b)(ii) hereof, or
(iv) the last day of the Consulting Term described in Section 2(a), without
regard to any extension of such term thereof, provided that the Executive has
continued to provide consulting services as required under this Agreement
throughout the entire Consulting Term or until the Executive's earlier death or
Disability or the Company's termination of this Agreement under Section 2(g). In
the event this Agreement is terminated by the Company pursuant to Section 2(g)
hereof, or the Executive voluntarily terminates this Agreement, all shares of
Restricted Stock which have not vested shall be immediately forfeited. Prior to
the date such shares become freely transferable, the Executive shall be entitled
to receive cash payment equal to any cash dividends or other distributions paid
with respect to any corresponding number of shares of Company stock from time to
time, as and when dividends or other distributions may be paid with respect to
the Company's stock. Any shares of stock distributed to the Executive with
respect to the Restricted Stock shall be subject to the same terms and
conditions which apply to the
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Restricted Stock. Except to the extent provided in this Agreement, the grant of
Restricted Stock provided hereunder will be subject to the provisions of the
Stock Plan.
2. CONSULTING SERVICES. The Company hereby retains the Executive to
consult with and advise the Company, effective as of the Executive's Retirement
Date, and the Executive hereby accepts such engagement and agrees to consult
with and advise the Company, in accordance with the terms and conditions
hereinafter set forth.
(a) TERM. The term of this consulting engagement shall commence on the
Executive's Retirement Date and shall continue until the sixth anniversary of
the Executive's Retirement Date (the "Consulting Term"). The Executive and the
Company may negotiate the extension of such term at any time. Any references to
such Consulting Term herein shall not include any extension thereof unless
explicitly so provided.
(b) DUTIES AND RESPONSIBILITIES. The Executive hereby agrees to
consult with and advise the Company on such matters as may be referred to him
from time to time by the Board of Directors of the Company (the "Board") or by
the Chairman and Chief Executive Officer of the Company. It is agreed that the
Company maintains no right of control as to the method or means of accomplishing
the work which is so referred to the Executive.
(c) STATUS AS INDEPENDENT CONTRACTOR. The Executive is, and shall be
deemed for all purposes of this Agreement to be, an independent contractor, and
nothing in this Agreement shall be deemed to create or imply an agency or
employment relationship between the Executive and the Company. The Executive
shall be responsible for all taxes, withholding, and other payments and filings
required as a result thereof.
(d) COMPENSATION. For all consulting services rendered by the
Executive under this Agreement, the Company shall pay to the Executive a
consulting fee equal to fifty percent (50%) of the Executive's final annualized
base salary plus final year's annualized bonus per year. The consulting fee
shall be payable in a manner mutually agreed upon by the Executive and the
Company.
(e) OFFICE SPACE AND SUPPORT. The Company shall furnish the Executive
with office space, secretarial assistance, and such other facilities and
services as shall be convenient and adequate for the performance of his duties
as set forth in this Agreement.
(f) EXPENSES. The Company shall reimburse the Executive for all
ordinary and reasonable out-of-pocket business expenses incurred by him in
connection with the discharge of his duties and responsibilities hereunder.
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(g) TERMINATION. Except in the event of the Executive's failure to
satisfactorily perform the consulting services required herein, this Agreement
shall continue in effect until the end of the Consulting Term established in
Section 2(a) hereof. Upon such a termination, no further obligations will exist
under this Agreement except for the payment of consulting fees accrued but
unpaid at the date of termination.
3. CHANGE IN CONTROL BENEFITS. Upon the occurrence of the first,
and no other, Change in Control (as defined in Section 5 hereof) of the Company
which occurs after the effective date of this Agreement, the Executive shall be
entitled to benefits under this Article 3 depending upon the time at which such
Change in Control occurs.
(a) CHANGE IN CONTROL AFTER EFFECTIVE DATE BUT BEFORE CONSULTING
SERVICES COMMENCE. Upon the occurrence of a Change in Control of the Company
after the Effective Date of this Agreement and prior to the commencement of the
Consulting Term, the Executive must elect either (i) to receive the benefits
provided to the Executive under the Change-in-Control Agreement entered by and
between the Executive and the Company on July 9, 1993, as amended (the "Change-
in-Control Agreement"), or (ii) to retire from the Company and receive the
benefits provided under this Section 3(a). If the Executive elects to retire
from the Company and receive the benefits provided under this Section 3(a), the
Executive shall receive:
(i) All benefits under Section 1 hereof determined as if the Executive
had retired immediately prior to the Change in Control; provided, however, that
in lieu of the shares of Restricted Stock to be granted pursuant to Section 1(c)
hereof, the Executive shall be granted an equal number of shares of stock of the
Company or an equivalent number of shares of any successor company, in either
case, with no such restrictions; and
(ii) A lump-sum payment within thirty (30) days after a Change in
Control of the Company equal to the Consulting fees not yet paid under the
Agreement for the entire Consulting Term.
The receipt of benefits pursuant to this Section 3(a) is contingent
upon the Executive's election to forego any benefits under the Change-in-Control
Agreement. As such, no benefits will be payable under this Section 3(a) if any
benefits are payable to the Executive under the Change-in-Control Agreement.
(b) CHANGE IN CONTROL AFTER CONSULTING SERVICES COMMENCE. Upon the
occurrence of a Change in Control of the Company after the commencement of the
Consulting Term, no benefits shall be payable to the Executive under the Change
in control Agreement and the Executive shall be entitled to:
(i) A lump-sum payment payable within thirty (30) days after a Change
in Control of the Company equal to the consulting fees not yet paid under the
remaining portion of the Consulting Term; and
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(ii) All restrictions with respect to the shares of Restricted Stock
granted pursuant to Section 1(c) hereof shall lapse upon the occurrence of the
Change in Control.
4. TAX GROSS-UP PAYMENT. If any of the payments under Article 3
hereof (the "Change-in-Control Payments") are at any time determined to be
subject to the tax (the "Excise Tax") imposed by Section 4999 of the Code (or
any similar tax that may hereafter be imposed), the Company shall pay to the
Executive in cash an additional amount (the "Gross-up Payment") such that the
net amount retained by the Executive after deduction of any Excise Tax on
Change-in-Control Payments and any federal, state, and local income tax or
employment tax and Excise Tax upon the Gross-up Payment provided for by this
Section 4, shall be equal to the Change-in-Control Payment.
5. CHANGE IN CONTROL DEFINED. For the purposes of this Agreement, a
Change in Control will be deemed to have occurred if:
(a) Any "person" (as defined in Sections 13(d) and 14(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) is or becomes
the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of securities of the Company representing thirty percent
(30%) or more of the combined voting power of the Company's then outstanding
securities;
(b) The shareholders of the Company approve a merger or consolidation
of the Company with any other corporation, other than a merger or consolidation
which results in the voting securities of the Company outstanding immediately
prior thereto continuing to represent (either by remaining outstanding or by
being converted into voting securities of the surviving entity) at least seventy
percent (70%) of the combined voting power of the voting securities of the
Company or such surviving entity outstanding immediately after such merger or
consolidation, or the shareholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or disposition by the
Company of all or substantially all of the Company's assets; or
(c) During any period of two (2) consecutive years (not including any
period prior to the execution of this Agreement) there ceases to be a majority
of the Board comprised as follows: individuals who at the beginning of such
period constitute the Board and any new director(s) whose election by the Board
or nomination for election by the Company's stockholders was approved by a vote
of at least two-thirds (2/3) of the directors then still in office who either
were directors at the beginning of the period or whose election or nomination
for election was previously so approved.
6. NONSOLICITATION OF EMPLOYEES; CONFIDENTIALITY; NONCOMPETITION.
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(a) The Executive covenants and agrees that at no time during the
Consulting Term, or in the event of a Change in Control of the Company, the six
(6) year period beginning on the Executive's Retirement Date, will the Executive
directly or indirectly (i) employ or seek to employ any person or entity
employed at that time by the Company or otherwise encourage or entice any such
person or entity to leave such employment; (ii) become employed by, enter into a
consulting arrangement with or otherwise agree to perform personal services for
a Competitor (as defined below); (iii) acquire an ownership or interest in a
Competitor; or (iv) solicit any customers of the Company on behalf of or for the
benefit of a Competitor. Executive further covenants and agrees that at no time
following the Executive's retirement from the Company will the Executive
communicate, furnish, divulge or disclose in any manner to any person or entity
confidential business information or trade secrets of the Company, without the
prior express written consent of the Company. For purposes of this Section 6,
"Competitor" means any entity which, at any relevant time, engages in the
wireless telecommunications business or any other business in which the Company
is then engaged (or any business which, at the Retirement Date was anticipated
to be engaged in by the Company) or which is directly competitive with the
business (or anticipated business) of the Company within any state in the United
States or any foreign country in which the Company is doing business, attempting
to do business or anticipated to do business. For purposes of this Section 6,
all references to the Company include the subsidiaries and affiliates of the
Company.
(b) The Company and the Executive acknowledge and agree that damages
cannot adequately compensate the Company in the event of a violation of any of
the restrictive covenants in this Section 6 and that injunctive relief shall be
essential for the protection of the Company and its respective successors and
assigns. Accordingly, the Company and the Executive agree and consent that, in
the event of a violation or breach of any of the restrictive covenants herein,
the Company shall be entitled to obtain injunctive relief against the Executive,
without bond but upon due notice, in addition to such other relief as may
appertain at law or in equity. Obtaining an injunction by the Company shall not
be considered an election of remedies it may have at law or in equity.
(c) If it is determined by a court of competent jurisdiction in any
state that any restriction in this Section 6 is excessive in duration or scope
or is unreasonable or unenforceable under the laws of that state, it is the
intention of the parties that such restriction may be modified or amended by the
court to render it enforceable to the maximum extend permitted by the law of
that state.
7. CONTENTS OF AGREEMENT, PARTIES IN INTEREST, ASSIGNMENT, ETC.
This Agreement sets forth the entire understanding of the parties hereto with
respect to the subject matter hereof. All of the terms and provisions of this
Agreement shall be binding upon and inure to the benefit of and be enforceable
by the respective heirs, representatives, successors and assigns of the parties
hereto, except that the duties and responsibilities of the Executive hereunder
which are of a personal nature shall neither be assigned nor delegated in whole
or in part by the Executive. This
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Agreement shall not be amended except by a written instrument duly executed by
the Company and the Executive.
8. SEVERABILITY. If any term or provision of this Agreement shall
be held to be invalid or unenforceable for any reason, such term or provision
shall be ineffective to the extent of such invalidity or unenforceability
without invalidating the remaining terms and provisions hereof, and this
Agreement shall be construed as if such invalid or unenforceable term or
provision had not been contained herein.
9. GOVERNING LAW. This Agreement shall be construed and interpreted
in accordance with the laws of the state of Colorado.
10. NOTICES. All notices, and other communications hereunder shall
be given in writing and delivered personally or by registered or certified mail,
return receipt requested, postage prepaid, as follows (or to such other
addressee or address as shall be set forth in a notice given in the same
manner):
If to the Company:
CommNet Cellular Inc.
8350 East Crescent Parkway
Suite 400
Englewood, CO 80111
If to the Executive:
Arnold C. Pohs
6333 S. Jackson Street
Littleton, CO 80121
All such notices shall be deemed to have been given on the date delivered or
mailed in the manner provided above.
11. COUNTERPARTS. This Agreement may be executed in counterparts,
each of which shall be deemed to be an original, but all of which together will
constitute one and the same instrument.
IN WITNESS WHEREOF, this Agreement has been executed as of March __,
1997.
COMMNET CELLULAR INC.
______________________________ By: ________________________
Arnold C. Pohs Its: _________________________
7
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 23,281
<SECURITIES> 0
<RECEIVABLES> 21,450
<ALLOWANCES> 2,169
<INVENTORY> 4,140
<CURRENT-ASSETS> 46,702
<PP&E> 181,010
<DEPRECIATION> 58,779
<TOTAL-ASSETS> 351,755
<CURRENT-LIABILITIES> 20,423
<BONDS> 269,827
0
0
<COMMON> 165,338
<OTHER-SE> (109,423)
<TOTAL-LIABILITY-AND-EQUITY> 351,755
<SALES> 66,230 <F1>
<TOTAL-REVENUES> 66,230
<CGS> 19,506
<TOTAL-COSTS> 56,634
<OTHER-EXPENSES> (932)
<LOSS-PROVISION> 1,617
<INTEREST-EXPENSE> 14,817
<INCOME-PRETAX> (4,289)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,289)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,289)
<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>
