<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, 1998
-------------
[_] 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
7, 1998 was 22,644,690.
<PAGE>
COMMNET CELLULAR INC.
FORM 10-Q JUNE 30, 1998
INDEX
Part I Financial Information Page
- ------ --------------------- ----
Item 1 Financial Statements
Consolidated Condensed Balance Sheets -
June 30, 1998 and September 30, 1997 1
Consolidated Condensed Statements of Operations -
Three Months Ended June 30, 1998 and
June 30, 1997 3
Consolidated Condensed Statements of Operations -
Nine Months Ended June 30, 1998 and
June 30, 1997 4
Consolidated Condensed Statements of Cash Flows -
Nine Months Ended June 30, 1998 and
June 30, 1997 5
Notes to Consolidated Condensed Financial
Statements 7
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Part II Other Information
- ------- -----------------
Item 6 Exhibits and Reports on Form 8-K 24
<PAGE>
COMMNET CELLULAR INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(Amounts in thousands)
<TABLE>
<CAPTION>
June 30, September 30,
Assets 1998 1997
- --------------------------------------------------------- ------------------------ ------------------------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 17,228 $ 14,132
Accounts receivable, net of allowance for doubtful
accounts of $1,915 and $2,122 at June 30, 1998 and
September 30, 1997, respectively 26,771 25,386
Current portion of advances to affiliates 5,695 2,873
Prepaid expenses and other 2,050 1,344
Inventory 5,521 3,214
-------- --------
Total current assets 57,265 46,949
Investment in and advances to affiliates 40,756 47,211
Investment in cellular system equipment 9,692 10,243
Property and equipment, at cost:
Cellular system equipment 173,589 159,436
Land, buildings and improvements 33,135 31,688
Furniture and equipment 20,770 19,505
-------- --------
227,494 210,629
Less accumulated depreciation 82,984 66,754
-------- --------
Net property and equipment 144,510 143,875
Other assets, less accumulated amortization of $35,346
and $36,883 at June 30, 1998 and
September 30, 1997, respectively:
FCC licenses and filing rights
Deferred loan costs and other 96,208 98,216
28,843 6,422
-------- --------
Total other assets 125,051 104,638
-------- --------
$377,274 $352,916
======== ========
</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' (Deficit) Equity 1998 1997
- --------------------------------------------------------- ------------------------ ------------------------
(unaudited)
<S> <C> <C>
Current liabilities:
Accounts payable $ 4,344 $ 7,695
Accounts payable property and equipment
purchases 5,443 8,228
Accrued commissions 766 1,118
Accrued interconnect costs 2,496 1,851
Accrued operating taxes 3,190 2,809
Other accrued liabilities 4,863 5,988
Interest payable 2,629 2,302
Current portion of secured bank financing and other
long-term debt 19 1,118
--------- ---------
Total current liabilities
23,750 31,109
Long-term debt:
Secured bank financing 680,000 8,803
Note payable and other long-term debt 2,916 2,916
11 3/4% senior subordinated discount notes 83 159,133
11 1/4% subordinated notes - 80,000
Minority interests 10,091 9,055
Commitments
Stockholders' (deficit) equity:
Preferred Stock, $.01 par value; 1,000,000 shares
authorized; no shares issued - -
Common Stock, $.001 par value; 40,000,000 shares
authorized; 22,644,280 and 68,926,055 shares issued
at June 30, 1998 and September 30, 1997, respectively
(Note 3) 5 14
Capital in excess of par value 306,777 165,989
Accumulated deficit (646,348) (104,103)
--------- ---------
Total stockholders' (deficit) equity (339,566) 61,900
--------- ---------
$ 377,274 $ 352,916
========= =========
</TABLE>
See accompanying notes.
-2-
<PAGE>
COMMNET CELLULAR INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1998 AND 1997
(Amounts in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Revenues:
Cellular service $ 30,729 $27,671
Paging service 93 -
In-roaming 11,040 9,400
Cellular equipment sales 872 1,047
Paging equipment sales 46 -
-------- -------
42,780 38,118
Costs and expenses:
Cellular operations:
Cost of cellular service 5,215 6,529
Cost of equipment sales (Note 4) 2,979 3,186
General and administrative 8,068 7,910
Marketing and selling 6,756 5,509
Depreciation and amortization 6,467 5,117
Paging operations:
Cost of paging service 406 305
Cost of equipment sales - -
General and administrative 170 88
Marketing and selling 31 26
Depreciation and amortization 372 7
Corporate:
General and administrative 12,477 2,147
Depreciation 10 405
Less amounts allocated to nonconsolidated affiliates (2,312) (1,648)
-------- -------
40,639 29,581
-------- -------
Operating income (loss) 2,141 8,537
Equity in net income (loss) of affiliates 897 (2,652)
Minority interest in net income of consolidated affiliates (1,178) (730)
Gain on sale of affiliates and other - 349
Amortization of deferred costs (1,019) (280)
Interest expense (15,121) (7,389)
Interest income 1,322 1,538
-------- -------
Net loss $(12,958) $ (627)
======== =======
Net loss per basic and diluted common share $(0.57) $(0.01)
======== =======
Weighted average shares outstanding 22,643 68,828
======== =======
</TABLE>
See accompanying notes.
-3-
<PAGE>
COMMNET CELLULAR INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED JUNE 30, 1998 AND 1997
(Amounts in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Revenues:
Cellular service $ 84,539 $ 77,509
Paging service 311 -
In-roaming 29,598 24,244
Cellular equipment sales 2,129 2,595
Paging equipment sales 46 -
-------- --------
116,623 104,348
Costs and expenses:
Cellular operations:
Cost of cellular service 16,268 19,190
Cost of equipment sales (Note 4) 10,866 9,430
General and administrative 24,979 21,759
Marketing and selling 20,026 17,263
Depreciation and amortization 17,821 15,008
Paging operations:
Cost of paging service 1,144 906
Cost of equipment sales 51 -
General and administrative 469 411
Marketing and selling 434 83
Depreciation and amortization 889 21
Corporate:
General and administrative 29,812 5,300
Depreciation 1,474 979
Less amounts allocated to nonconsolidated affiliates (6,810) (4,651)
-------- --------
117,423 85,699
-------- --------
Operating income (loss) (800) 18,649
Equity in net income (loss) of affiliates 2,700 (4,584)
Minority interest in net income of consolidated affiliates (3,149) (1,591)
Gain on sale of affiliates and other - 349
Amortization of deferred costs (2,043) (796)
Interest expense (33,858) (22,064)
Interest income 3,888 5,121
-------- --------
Loss before extraordinary charge (33,262) (4,916)
Extraordinary charge related to early extinguishment of long-term debt (33,500) -
-------- --------
Net loss $(66,762) $ (4,916)
======== ========
Loss per share:
Loss before extraordinary charge $(0.74) $(0.07)
Extraordinary charge (0.74) -
-------- --------
Net loss per basic and diluted common share $(1.48) $(0.07)
======== ========
Weighted average shares outstanding 45,041 68,836
======== ========
</TABLE>
See accompanying notes.
-4-
<PAGE>
COMMNET CELLULAR INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED JUNE 30, 1998 AND 1997
(Amounts in thousands)
(unaudited)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Operating activities:
Net loss $(66,762) $ (4,916)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Extraordinary charge related to early extinguishment of
long-term debt 33,500 -
Minority interest in net income of consolidated affiliates 3,149 1,591
Depreciation and amortization 22,227 16,804
Equity in net (income) loss of affiliates (2,700) 4,584
Gain on sale of affiliates and other - (349)
Interest expense on 11 3/4% senior subordinated
discount notes 6,611 12,712
Stock-based compensation expense 10,338 -
CoBank patronage income - (99)
Accrued interest on advances to affiliates (2,973) (4,251)
Change in operating assets and liabilities, net of effects
from consolidating acquired interests:
Accounts receivable (1,385) (2,717)
Prepaid expenses and other (304) 136
Inventory (2,307) (21)
Accounts payable and accrued liabilities (3,802) 2,231
Accrued interest 327 (2,519)
-------- --------
Net cash provided (used) by operating activities
(4,081) 23,186
Investing activities:
Reductions in investments in and advances to affiliates 10,128 1,230
Reductions in (additions to) investment in cellular system
equipment 551 (4,920)
Additions to property and equipment (21,590) (23,503)
Additions to other assets (236) (915)
Proceeds from sales of interests in affiliates - 829
Purchase of interests in affiliates, net of cash acquired and
net of assets and liabilities recorded due to consolidation - (924)
-------- --------
Net cash used by investing activities
(11,147) (28,203)
</TABLE>
See accompanying notes.
-5-
<PAGE>
COMMNET CELLULAR INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (CONTINUED)
NINE MONTHS ENDED JUNE 30, 1998 AND 1997
(Amounts in thousands)
(unaudited)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Financing activities:
Proceeds from secured bank financing $ 695,000 $ 43,336
Payments of secured bank financing (24,762) (39,484)
Payment of 11 3/4% senior subordinated discount notes (165,662) -
Payment of 11 1/4% subordinated notes (80,000) -
Extraordinary charge related to early extinguishment of long-
term debt (29,015) -
Loan fees and offering costs related to long-term debt (26,699) -
Distributions to minority interests (3,043) (1,545)
Capital contributions from minority interests - 4,111
Reduction of obligation under capital leases (139) (195)
Issuance of Common Stock, net of offering costs 128,140 159
Repurchases of Common Stock - (2,932)
Conversion of Common Stock as a condition of the Merger (475,496) -
--------- --------
Net cash provided by financing activities
18,324 3,450
--------- --------
Net increase (decrease) in cash and cash equivalents 3,096 (1,567)
Cash and cash equivalents at beginning of period 14,132 11,492
--------- --------
Cash and cash equivalents at end of period $ 17,228 $ 9,925
========= ========
Supplemental schedule of additional cash flow information and
noncash activities:
Cash paid during the nine-month period for interest $ 26,920 $ 12,013
Purchase of cellular system equipment through accounts payable
5,443 3,408
Write-off of offering costs included in extraordinary loss on
early extinguishment of long-term debt 4,485 -
</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, 1995, 1996 and 1997
included in the Company's Annual Report on Form 10-K for the fiscal year ended
September 30, 1997. The results of operations for the nine months ended June
30, 1998 are not necessarily indicative of the results for a full year. Certain
amounts relating to June 30, 1997 have been reclassified to correspond to the
June 30, 1998 classification.
2. Earnings per share
------------------
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share" ("Statement No.
128"). Statement No. 128 replaced the previously reported primary and fully
diluted earnings per share with basic and diluted earnings per share. Unlike
primary earnings per share, basic earnings per share excludes any dilutive
effects of options, warrants, and convertible securities. Diluted earnings per
share is very similar to the previously reported fully diluted earnings per
share. All earnings per share amounts for all periods have been presented to
conform to the Statement No. 128 requirements.
3. Stockholders' equity
--------------------
Changes to Common Stock during the nine months ended June 30, 1998
were as follows (amounts in thousands, except share data):
<TABLE>
<CAPTION>
Common Stock Capital in
------------------------------------------ Excess Accumulated
Shares Amount of Par Value Deficit
------------------------------------------ ------------------- -------------------
<S> <C> <C> <C> <C>
Balance at September 30, 1997 68,926,055 $ 14 $165,989 $(104,103)
Issuance of Common Stock:
Exercise of options 63,515 - 316 -
New shares issued in connection
with the Merger 19,695,835 4 141,806 -
Conversion of shares to cash in
connection with the Merger (66,041,125) (13) - (475,483)
Transaction costs charged to Capital
in Excess of Par Value - - (13,986) -
Stock-based compensation - - 12,652 -
Net loss - - - (66,762)
----------- ---- -------- ---------
Balance at June 30, 1998 22,644,280 $ 5 $306,777 $(646,348)
=========== ==== ======== =========
</TABLE>
At June 30, 1998 the Company had 1,722,385 options outstanding at a
weighted average exercise price of $1.42.
-7-
<PAGE>
COMMNET CELLULAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
3. Stockholders' equity (continued)
--------------------
As announced on April 9, 1998, the Company split its Common Stock 5
for 1, with shareholders receiving four additional shares for each share owned
as of April 20, 1998, the record date for the split. The payment date was May
7, 1998. Accordingly, all share and earnings per share information has been
restated to give effect to the split. Prior year issued shares are restated as
if the stock split occurred prior to September 30, 1997, although the Company's
Articles of Incorporation would not have permitted such an action.
During the third fiscal quarter of 1998, the Company and certain
option holders negotiated certain changes to the terms of option agreements
affecting most, but not all of the outstanding options. The expiration date of
options was extended from ten years after date of grant to February 5, 2008.
However, any appreciation in the value of an option due to increases in the
value of Common Stock over $36 per share (the value of a share of Common Stock
on February 10, 1998, the date of the Merger) became subjected to vesting over
six years, with a limit on vesting of 75% of such appreciation until a
liquidation event as defined in the replacement stock option agreements. In
addition, the number of options and exercise prices were reduced such that the
value of unexercised options on February 10, 1998 remained constant and the
number of shares subject to all options held by participants bore the same
relationship to the total number of shares of common stock outstanding on a
fully-diluted basis after the Merger. These changes created a new measurement
date for options in a transaction not involving cash, resulting in recognition
of $12,652,000 of compensation recorded as capital in excess of par value and
$10,338,000 recorded in the current fiscal quarter as compensation expense. The
excess $2,314,000 of compensation contributed has been recorded as a deferred
charge and will be recognized as compensation expense ratably over the vesting
period.
4. Cost of equipment sales
-----------------------
During 1996, the Company introduced a 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, 1998 and 1997 giving effect to the costs associated with the program
described above (amounts in thousands).
<TABLE>
<CAPTION>
June 30, 1998 June 30, 1997
--------------------- ---------------------
<S> <C> <C>
Cost of equipment sales $ 3,511 $2,358
Cost of equipment owned by the Company,
but provided to subscribers to use:
New subscribers 4,978 5,418
Existing subscribers 2,377 1,654
------- ------
$10,866 $9,430
======= ======
</TABLE>
-8-
<PAGE>
COMMNET CELLULAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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,
1998, 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. Contingencies
-------------
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 plaintiffs' 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
judgment concerning the terms of plaintiffs' alleged right of first refusal to
purchase CINC's interest in Sioux Falls, a temporary and permanent injunction
prohibiting the Merger until plaintiffs' 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. However, on July 22, 1998, the
plaintiffs executed a letter of intent to sell their interests. If consummated
consistent with the terms of the letter of intent, the litigation will also be
settled by the parties.
On October 22, 1997, The Rye Telephone Company ("Rye"), a shareholder
in Pueblo Cellular, Inc. ("Pueblo") filed an action in the District Court,
Pueblo County, State of Colorado, against the Company. The lawsuit alleges
intentional interference with contract, breach of contract and breach of
covenant of good faith in connection with a proposed sale of shares in Pueblo by
Rye and Pine Drive Telephone Company ("Pine Drive") and a related lawsuit filed
by the Company against Pine Drive in Arapahoe County court. The lawsuit seeks,
among other things, general and special damages of not less than $5,493,840,
exemplary damages, fees and costs. The Company has filed a motion to stay the
Pueblo lawsuit until adjudication of the Arapahoe County lawsuit. In December
1997, the court denied the motion to stay. The Company intends to defend the
lawsuit vigorously.
-9-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
- -------
The Company generated an operating loss during the nine months ended June
30, 1998 as a result of certain nonrecurring expenses related to the Merger (see
"Acquisitions and Sales"). However, the Company generated net income during the
fiscal year ended September 30, 1997 and operating income during the year ended
September 30, 1996 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 nine months ended June
30, 1998 and the fiscal years ended September 30, 1997 and 1996, 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 quarters ended
June 30, 1998 and 1997. Consolidated results of operations also include the
operations of Cellular, Inc. Financial Corporation ("CIFC"), the Company's
wholly-owned financing subsidiary, Cellular Inc. Network Corporation ("CINC"), a
wholly-owned subsidiary through which the Company holds interests in certain
cellular licenses, as well as CommNet Paging Inc. ("CPI"), a wholly-owned
subsidiary which provides paging services.
Equity in net income of affiliates includes the Company's share of net
income 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
quarters ended June 30, 1998 and 1997. 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 quarters ended June 30, 1998 and
1997.
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 Chase Manhattan Bank as administrative agent and collateral agent,
Chase Manhattan Bank Delaware as fronting bank, and a consortium of lenders
("Chase") and from the Company. At June 30, 1998, 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 service revenues, which tend to increase more
rapidly in the third and fourth quarters of a fiscal year. As a result, EBITDA
tends to be higher in the third and fourth fiscal quarters of a fiscal year as
compared to the first and second fiscal quarters.
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
-10-
<PAGE>
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; the impact of varying interest rates;
and the impact of deployment of new technologies on capital spending.
The Company has begun the planning process to implement a Year 2000
compliance program which will be designed to ensure the Company's computer
systems and applications will function properly beyond 1999. Such program
includes both systems and applications operated by the Company's businesses as
well as software licensed to or operated for third parties by CommNet. The
Company believes that it will have the ability to allocate adequate resources
for this purpose and expects its Year 2000 date conversion program to be
completed on a timely basis. The Company has commenced testing on certain
systems and applications and will continue to test the remainder of the systems
and applications throughout the course of the Year 2000 program. However, there
can be no assurance that the systems of other parties upon which the Company's
businesses also rely will be converted on a timely basis. The Company's
business, financial condition, or results of operations could be materially
adversely affected by the failure of its systems and applications, those
licensed to or operated for third parties, or those operated by other parties to
properly operate or manage dates beyond 1999.
As of June 30, 1998, the Company has incurred costs of approximately
$200,000 related to the upgrade of one of its significant systems to be Year
2000 compliant. The Company expects to incur an additional $400,000 during
fiscal 1999 related to infrastructure and facilities enhancements necessary to
prepare its remaining systems for the Year 2000, after which the Company expects
that all of its major systems will be Year 2000 compliant, although there can be
no assurance that this will be the case.
Results of Operations
- ---------------------
Three Months Ended June 30, 1998 and 1997. Cellular Operations. Cellular
----------------------------------------- -------------------
service revenues, including in-roaming revenues, increased 13% from $37,071,000
for the quarter ended June 30, 1997 to $41,769,000 for the quarter ended June
30, 1998. The growth was due to the increase in the number of subscribers in
consolidated markets. In-roaming revenues increased by 17%, or $1,640,000, from
$9,400,000 for the quarter ended June 30, 1997 to $11,040,000 for the quarter
ended June 30, 1998, 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 anticipated 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 quarter ended June 30, 1997 to $53 for the quarter ended June
30, 1998, 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 $15 to $14, also reflecting declining prices to the
consumer.
Cost of cellular service decreased as a percentage of service revenues from
18% for the quarter ended June 30, 1997 to 12% for the quarter ended June 30,
1998, as revenues derived from the growing subscriber base outpaced the fixed
components of cost of service. The Company has recently completed negotiations
for lower priced interconnect agreements. The Company expects cost of cellular
service to continue to decline as a percentage of service revenues as revenues
continue to outpace the fixed components of cost of service.
Cellular equipment sales decreased 17% from $1,047,000 for the quarter
ended June 30, 1997 to $872,000 for the quarter ended June 30, 1998, due to
decreases in the sale of accessories. Cost of cellular equipment sales
decreased 6% from $3,186,000 for the quarter ended June 30, 1997 to $2,979,000
for the quarter ended June 30, 1998 primarily due to lower per unit handset
costs and the benefit of the Company's refurbishment program. Approximately
$1,540,000 and $482,000 of the quarter ended June 30, 1998 cost of cellular
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 continues to subsidize
use of handsets to shift consumer focus to the value of cellular service.
-11-
<PAGE>
General and administrative costs of cellular operations increased 2% from
$7,910,000 during the quarter ended June 30, 1997 to $8,068,000 during the
quarter ended June 30, 1998, due to the growth in the customer base. The
majority of these costs were incremental customer billing services, offset by a
reduction of bad debt expense. General and administrative costs as a percentage
of service revenues decreased from 21% for the quarter ended June 30, 1997 to
19% for the quarter ended June 30, 1998.
Marketing and selling costs of cellular operations increased 23% from
$5,509,000 for the quarter ended June 30, 1997 to $6,756,000 for the quarter
ended June 30, 1998, primarily as a result of increased advertising costs and
increased commission costs as a result of higher subscriber activations.
Marketing costs per gross new subscriber remained unchanged at $228 for the
quarters ended June 30, 1997 and 1998.
Depreciation and amortization relating to cellular operations increased 26%
from $5,117,000 for the quarter ended June 30, 1997 to $6,467,000 for the
quarter ended June 30, 1998, primarily related to increased property and
equipment in service.
Paging Operations
-----------------
Paging service revenues were $93,000 for the quarter ended June 30, 1998.
Revenue producing activities commenced during fiscal 1998. Revenues are
expected to increase in the future as paging subscribers increase.
Paging costs and expenses increased 130% from $426,000 for the quarter
ended June 30, 1997 to $979,000 for the quarter ended June 30, 1998. This
increase is due to the introduction of commercial paging operations during
fiscal 1998. Costs and expenses are expected to increase in the future as
paging operations expand, but at a slower rate than revenue increases.
Other Costs and Expenses
------------------------
Corporate costs and expenses for the quarter ended June 30, 1997 were
$904,000, which represented gross expenses of $2,552,000 less amounts allocated
to nonconsolidated affiliates of $1,648,000. Corporate costs and expenses for
the quarter ended June 30, 1998 were $10,175,000, which represented gross
expenses of $12,487,000 less amounts allocated to nonconsolidated affiliates of
$2,312,000. Excluding nonrecurring costs related to changes to options,
corporate costs and expenses were $(163,000). The decrease is due primarily to
decreased depreciation related to certain corporate assets.
During the third fiscal quarter of 1998, the Company and certain option
holders negotiated certain changes to the terms of option agreements affecting
most, but not all of the outstanding options. The expiration date of options
was extended from ten years after date of grant to February 5, 2008. However,
any appreciation in the value of an option due to increases in the value of
Common Stock over $36 per share (the value of a share of Common Stock on
February 10, 1998, the date of the Merger) became subjected to vesting over six
years, with a limit on vesting of 75% of such appreciation until a liquidation
event as defined in the replacement stock option agreements. In addition, the
number of options and exercise prices were reduced such that the value of
unexercised options on February 10, 1998 remained constant and the number of
shares subject to all options held by participants bore the same relationship to
the total number of shares of common stock outstanding on a fully-diluted basis
after the Merger. These changes created a new measurement date for options in a
transaction not involving cash, resulting in recognition of $12,652,000 of
compensation recorded as capital in excess of par value and $10,338,000 recorded
in the current fiscal quarter as compensation expense. The excess $2,314,000 of
compensation contributed has been recorded as a deferred charge and will be
recognized as compensation expense ratably over the vesting period.
Equity in net income of affiliates for the quarter ended June 30, 1998 was
$897,000 compared to equity in net loss of affiliates of $2,652,000 for the
quarter ended June 30, 1997. The improvement was primarily due to increased
profitability of those markets accounted for under the equity method and the
absence of TVX, Inc. losses in the current period. TVX, Inc. operations ceased
in the third fiscal quarter of 1997.
-12-
<PAGE>
Amortization of deferred costs increased 264% from $280,000 for the quarter
ended June 30, 1997, to $1,019,000 for the quarter ended June 30, 1998, as a
result of increased deferred costs associated with the Merger.
Interest expense increased 105% from $7,389,000 for the quarter ended June
30, 1997 to $15,121,000 for the quarter ended June 30, 1998 due to higher
secured bank financing under the Chase Credit Agreement, offset by lower
interest rates. Cash paid for interest increased from $5,439,000 during the
quarter ended June 30, 1997 to $15,597,000 during the quarter ended June 30,
1998.
Interest income decreased 14% from $1,538,000 for the quarter ended June
30, 1997 to $1,322,000 for the quarter ended June 30, 1998. The decrease was
due to lower notes receivable as a result of repayment of outstanding debt from
nonconsolidated affiliates, and lower average cash balances.
Nine Months Ended June 30, 1998 and 1997. Cellular Operations. Cellular
---------------------------------------- -------------------
service revenues, including in-roaming revenues, increased 12% from
$101,753,000 for the nine months ended June 30, 1997 to $114,137,000 for the
nine months ended June 30, 1998. The growth was due to the increase in the
number of subscribers in consolidated markets offset by lower revenues per
subscriber. In-roaming revenues increased by 22%, or $5,354,000, from
$24,244,000 for the nine months ended June 30, 1997 to $29,598,000 for the nine
months ended June 30, 1998, 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 $57 for the nine months ended June 30, 1997 to $51 for the nine months
ended June 30, 1998, 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 $14 to $13, also reflecting declining prices
to consumer.
Cost of cellular service decreased as a percentage of service revenues from
19% for the nine months ended June 30, 1997 to 14% for the nine months ended
June 30, 1998, as revenues derived from the growing subscriber base outpaced the
fixed components of cost of service. The Company has recently completed
negotiations for lower priced interconnect agreements. The Company expects cost
of cellular service to continue to decline as a percentage of service revenues
as revenues continue to outpace the fixed components of cost of service.
Equipment sales decreased 18% from $2,595,000 for the nine months ended
June 30, 1997 to $2,129,000 for the nine months ended June 30, 1998, due to
decreases in the sale of accessories. Cost of equipment sales increased 15%
from $9,430,000 for the nine months ended June 30, 1997 to $10,866,000 for the
nine months ended June 30, 1998. Approximately $4,978,000 and $2,377,000 of the
nine months ended June 30, 1998 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 15% from
$21,759,000 during the nine months ended June 30, 1997 to $24,979,000 during the
nine months ended June 30, 1998, due to the growth in the customer base. The
majority of these costs were incremental customer billing services and unusual
consulting expenses, offset by a reduction of bad debt expense. General and
administrative costs as a percentage of service revenues increased from 21% for
the nine months ended June 30, 1997 to 22% for the nine months ended June 30,
1998.
Marketing and selling costs of cellular operations increased 16% from
$17,263,000 for the nine months ended June 30, 1997 to $20,026,000 for the nine
months ended June 30, 1998, primarily as a result of increases in advertising
costs and increased commission costs as a result of higher subscriber
activations. Marketing costs per gross new subscriber decreased 3% from $231
for the nine months ended June 30, 1997 to $224 for the nine months ended June
30, 1998.
-13-
<PAGE>
Depreciation and amortization relating to cellular operations increased 19%
from $15,008,000 for the nine months ended June 30, 1997 to $17,821,000 for the
nine months ended June 30, 1998, primarily related to increased property and
equipment in service.
Paging Operations
-----------------
Paging service revenues were $311,000 for the nine months ended June 30,
1998. Revenue producing activities commenced during fiscal 1998. Revenues are
expected to increase in the future as paging subscribers increase.
Paging costs and expenses increased 110% from $1,421,000 for the nine
months ended June 30, 1997 to $2,987,000 for the nine months ended June 30,
1998. This increase is due to the introduction of commercial paging operations
during fiscal 1998. Costs and expenses are expected to increase in the future
as paging operations expand, but at a slower rate than revenue increases.
Other Costs and Expenses
------------------------
Corporate costs and expenses for the nine months ended June 30, 1997 were
$1,628,000, which represented gross expenses of $6,279,000 less amounts
allocated to nonconsolidated affiliates of $4,651,000. Corporate costs and
expenses for the nine months ended June 30, 1998 were $24,476,000, which
represented gross expenses of $31,286,000 less amounts allocated to
nonconsolidated affiliates of $6,810,000. Excluding nonrecurring transaction
costs related to the cash settlement of stock options associated with the Merger
of $13,400,000 and the establishment of a new measurement date for remaining
options requiring recognition of an additional $10,338,000 of compensation
expense, corporate costs and expenses were $738,000. The decrease is due
primarily to certain corporate costs which were incurred in the third fiscal
quarter of 1997 which did not recur in 1998. These costs were not allocated to
affiliates.
During the third fiscal quarter of 1998, the Company and certain option
holders negotiated certain changes to the terms of option agreements affecting
most, but not all of the outstanding options. The expiration date of options
was extended from ten years after date of grant to February 5, 2008. However,
any appreciation in the value of an option due to increases in the value of
Common Stock over $36 per share (the value of a share of Common Stock on
February 10, 1998, the date of the Merger) became subjected to vesting over six
years, with a limit on vesting of 75% of such appreciation until a liquidation
event as defined in the replacement stock option agreements. In addition, the
number of options and exercise prices were reduced such that the value of
unexercised options on February 10, 1998 remained constant and the number of
shares subject to all options held by participants bore the same relationship to
the total number of shares of common stock outstanding on a fully-diluted basis
after the Merger. These changes created a new measurement date for options in a
transaction not involving cash, resulting in recognition of $12,652,000 of
compensation recorded as capital in excess of par value and $10,338,000 recorded
in the current fiscal quarter as compensation expense. The excess $2,314,000 of
compensation contributed has been recorded as a deferred charge and will be
recognized as compensation expense ratably over the vesting period.
Equity in net income of affiliates for the nine months ended June 30, 1998
was $2,700,000 compared to equity in net loss of $4,584,000 for the nine months
ending June 30, 1997. The improvement was primarily due to increased
profitability of those markets accounted for under the equity method and the
absence of TVX, Inc. losses in the current period. TVX, Inc. operations ceased
in the third fiscal quarter of 1997.
Amortization of deferred costs increased 157% from $796,000 for the quarter
ended June 30, 1997 to $2,043,000 for the quarter ended June 30, 1998, as a
result of increased deferred costs associated with the Merger.
Interest expense increased 53% from $22,064,000 for the nine months ended
June 30, 1997 to $33,858,000 for the nine months ended June 30, 1998 due to
higher secured bank financing under the Chase Credit Agreement, offset by lower
interest rates. Cash paid for interest increased from $12,013,000 during the
nine months ended June 30, 1997 to $26,920,000 during the nine months ended June
30, 1998.
-14-
<PAGE>
Interest income decreased 24% from $5,121,000 for the nine months ended
June 30, 1997 to $3,888,000 for the nine months ended June 30, 1998. The
decrease was due to lower notes receivable as a result of repayment of
outstanding debt from nonconsolidated affiliates, and lower cash advances.
The Merger
- ----------
On February 10, 1998, the Company consummated a recapitalization whereby AV
Acquisition Corp., ("Newco"), a subsidiary of Blackstone CCI Capital Partners
L.P., a Delaware limited partnership (the "Partnership") affiliated with
Blackstone Management Associates II L.L.C., a Delaware limited liability company
("Blackstone"), was merged into the Company (the "Merger") pursuant to an
Agreement and Plan of Merger dated May 27, 1997 (the "Merger Agreement"). At
the effective time of the Merger, each share of Common Stock issued and
outstanding (other than those shares described below) was converted, at the
election of the holder thereof and subject to the terms of the Merger Agreement,
into either (a) the right to receive $36.00 in cash or (b) the right to retain
one fully paid and nonassessable share of Common Stock. The following shares of
Common Stock were not subject to conversions pursuant to the Merger: shares of
Common Stock held by the Partnership, and partnerships affiliated with
Blackstone that acquired interests in Newco prior to the consummation of the
Merger, Newco, and any wholly-owned subsidiary of the Company or any wholly-
owned subsidiary of Newco; fractional shares that were converted to cash; and
shares of Common Stock in respect of which dissenters' rights had been properly
exercised. The election to retain Common Stock was subject to proration so
that, following the Merger, 2,943,055 shares (representing approximately 4% of
the issued and outstanding Common Stock) were retained by existing shareholders
of the Company, representing approximately 13% of the shares of the Company
issued and outstanding immediately after the Merger. The shares of Common Stock
owned by the shareholders of Newco represent approximately 87% of the shares of
the company issued and outstanding after the Merger, resulting in such
shareholders of Newco becoming the controlling shareholders of the Company.
In addition, on February 10, 1998, the Company repurchased approximately
$176,600,000 of the approximately $176,700,000 aggregate principal amount of its
11 3/4% Senior Subordinated Discount Notes and all of the $80,000,000 aggregate
principal amount of its 11 1/4% Subordinated Notes, and repaid the entire
amount of indebtedness under the CoBank Credit Agreement. The Merger, debt
repayment, and payment of certain costs and expenses of the Merger were funded
through borrowings under a $760,000,000 new senior bank credit facility with the
Chase Manhattan Bank as administrative agent and collateral agent, Chase
Manhattan Bank Delaware as fronting bank, and a consortium of lenders (the
"Chase Credit Agreement").
Changes in Financial Condition
- ------------------------------
Net cash used by operating activities was $4,081,000 during the nine months
ended June 30, 1998. This was due to cash provided in generating the net loss
after adjustments to reconcile net cash provided by operating activities of
$3,391,000 and by cash used to fund changes in working capital of $7,472,000.
Net cash used by investing activities was $11,147,000 for the nine months
ended June 30, 1998. This was due primarily to $21,590,000 required to fund the
purchase of property and equipment and investment in cellular system equipment,
offset by a decrease of $10,128,000 to investments in and advances to
affiliates.
Net cash provided by financing activities was $18,324,000 for the nine
months ended June 30, 1998. This was primarily due to net increases as a result
of the merger of $21,506,000, offset by distributions to minority interests of
$3,043,000.
Liquidity and Capital Resources
- -------------------------------
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 through February 10, 1998 was a loan facility with
-15-
<PAGE>
CoBank (the "CoBank Credit Agreement"), pursuant to which CoBank had agreed to
lend up to $165,000,000 to CIFC.
On February 10, 1998, in connection with the closing of the Merger (see
"Acquisitions and Sales"), CIFC and the Company drew down $680,000,000 under the
Chase Credit Agreement which was used, in part, to pay off outstanding amounts
under the CoBank Credit Agreement, to repurchase the majority of the Company's
11 3/4% Senior Subordinated Notes and all of the Company's 11 1/4%
Subordinated Notes, to pay the cash portion of the Merger consideration to
holders of the Company's Common Stock, and to fund costs associated with the
Merger. Advances made under to Chase Credit Agreement will be used, when
necessary, to fund capital and operating requirements of the Company and to fund
loans made by CIFC to the affiliates. The Chase Credit Agreement provides for
aggregate credit commitments of up to $760,000,000 at interest rates that vary
from 1.25% to 2.50% over prime for variable rate loans or 2.25% to 3.50% over
LIBOR for fixed rate loans to August 1998. Additionally, in accordance with the
terms of the Chase Credit Agreement, CIFC has entered into various interest rate
protection agreements to reduce the risk of interest rate fluctuations.
All obligations of CIFC are guaranteed by the Company and its wholly-owned
subsidiaries under the Chase Credit Agreement and the guarantees will be secured
by a first priority security interest in substantially all tangible and
intangible assets, trademarks, tradenames and equipment of CIFC and the
guarantors. In addition, the Chase Credit Agreement is secured by a first
priority security interest in substantially all of the assets held by the
Company and certain of its wholly-owned subsidiaries, to the extent the Company
and such subsidiaries have the legal ability to pledge such assets. The Chase
Credit Agreement includes limitations on dividends and distributions on capital
stock and other significant operating and financial restrictions and covenants,
including limits on the ability of the Company and its subsidiaries to incur or
prepay indebtedness, create liens, enter into leases or transactions with
affiliates, sell assets, engage in mergers or acquisitions, make investments,
and redeem or repurchase capital stock or debt.
In addition to the liquidity provided by the Chase Credit Agreement, at
June 30, 1998, the Company, on a consolidated basis, had available $17,228,000
of cash and cash equivalents. 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.
Capital expenditures in managed markets, 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, 1998 was $18,891,000. These expenditures were primarily for 16 new
cell sites, switch upgrades, increased channel capacity, paging infrastructure
and corporate assets. The Company expects capital expenditures for the
remainder of fiscal year 1998 to be $11,300,000 to optimize coverage, upgrade
switching capacity, increased channel capacity and for paging infrastructure.
At June 30, 1998, the Company's near-term debt service requirements
consisted primarily of interest payments on the indebtedness incurred under the
Chase Credit Agreement. The Company anticipates its cash interest expense for
the remainder of fiscal year 1998 under the Chase Credit Agreement will be
$15,844,000. Additional borrowings under the Chase Credit Agreement may be
required if existing cash balances and cash from operating activities is not
sufficient to fund cash interest expense or capital requirements.
The Company believes operating cash flow, existing cash balances and
borrowing availability under the Chase Credit Agreement will be sufficient to
meet future anticipated capital requirements of the parent company and its
affiliates and debt service requirements of the Company at both the parent
company level and on a consolidated basis.
Although the Company believes that the foregoing sources of liquidity will
be sufficient to meet budgeted capital expenditures and debt service
requirements of the parent company and the affiliates, there can be no assurance
that this will be the case. In such event, the Company believes it will be able
to satisfy its capital expenditure and debt service requirements with
unrestricted operating cash flow; however, the Company may be required to reduce
discretionary capital spending. To the extent the Company's cash flow is not
sufficient to satisfy
-16-
<PAGE>
such requirements, the Company will be required to raise funds through
additional financings or asset sales subject to the terms of the Chase Credit
Agreement.
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 the Chase Credit
Agreement.
-17-
<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 3,634,000 net Company pops in 82 markets located in 14 states.
These markets consist of 72 RSA markets having a total of 5,308,000 pops and 10
MSA markets having a total of 1,323,000 pops, of which the Company's interests
represent 2,941,000 net Company pops and 693,000 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 46 of its 56 managed markets. As of
June 30, 1998, the Company and CIFC had net advances of $228,364,000 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
$191,663,000. In addition, the Company had proportionate obligations of
additional debt of its affiliates from other financing sources of $6,510,000.
The assets of the affiliates in which the Company has investments or advances
represent 4,351,000 pops, which include 3,634,000 net Company pops and 707,000
pops attributable to parties other than the Company. Advances related to pops
attributable to parties other than the Company total $36,701,000. 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 4,240,000 total pops
and 3,275,000 net Company pops. As of June 30, 1998, the RSA and MSA managed
markets had 243,562 and 76,914 subscribers, respectively.
Information regarding the Company's net interest in each cellular licensee
and the market subject to such license, as of May 8, 1998, is summarized in the
following table.
<TABLE>
<CAPTION>
Net Company
MSA or Interest in 1997 Net Company
RSA Code (1) State Licensee (2) Population (3)(6) Pops (4)
----------------------------------------------------------------------------------------------------
MSAs:
<S> <C> <C> <C> <C>
141 Minnesota 16.34% 239,000 39,053
185 Indiana 16.67% 170,432 28,411
241*(5) Colorado 73.99% 133,797 98,996
253*(5) Iowa 74.50% 122,629 91,359
267*(5) South Dakota 51.00% 142,073 72,457
268*(5) Montana 91.63% 129,371 118,543
279 Maine 11.11% 100,699 11,187
289*(5) South Dakota 100.00% 110,926 110,926
297*(5) Montana 91.63% 81,841 74,991
298*(5) North Dakota 51.00% 91,892 46,865
--------- -------
Total MSA 1,322,660 692,788
RSAs:
348* Colorado 10.00% 48,034 4,803
349*(5) Colorado 61.75% 64,939 40,100
351*(5) Colorado 61.75% 82,787 51,121
352*(5) Colorado 66.00% 34,077 22,491
353*(5) Colorado 100.00% 76,728 76,728
354*(5) Colorado (B1) 69.40% 49,933 34,654
355* Colorado 49.00% 46,379 22,726
356* Colorado (B1) 49.00% 26,314 12,894
</TABLE>
-18-
<PAGE>
<TABLE>
<CAPTION>
Net Company
MSA or Interest in 1997 Net Company
RSA Code (1) State Licensee (2) Population (3)(6) Pops (4)
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
389 Idaho 50.00% 73,842 36,921
390 Idaho 33.33% 18,125 6,041
392*(5) Idaho (B1) 100.00% 144,672 144,672
393*(5) Idaho 91.64% 297,881 272,978
415 Iowa 10.11% 154,760 15,652
416 (5) Iowa 78.57% 109,072 85,698
417*(5) Iowa 100.00% 156,442 156,442
419* Iowa 44.92% 54,811 24,620
420*(5) Iowa 100.00% 63,038 63,038
424* Iowa 50.00% 66,643 33,322
425* Iowa 13.28% 107,212 14,242
426* Iowa 49.14% 83,090 40,829
427* Iowa 49.17% 103,306 50,792
428 Kansas 3.07% 27,513 845
429 Kansas 3.07% 29,973 920
430 Kansas 3.07% 52,545 1,613
431 Kansas 3.07% 128,468 3,944
432 Kansas 3.07% 31,004 952
433 Kansas 3.07% 19,562 601
434 Kansas 3.07% 79,286 2,434
435 Kansas 3.07% 129,430 3,974
436 Kansas 3.07% 58,370 1,792
437 Kansas 3.07% 110,812 3,402
438 Kansas 3.07% 85,778 2,633
439 Kansas 3.07% 44,526 1,367
440 Kansas 3.07% 29,155 895
441 Kansas 3.07% 173,882 5,338
442 Kansas 3.07% 154,003 4,728
512 Missouri (B1) 14.70% 56,472 8,301
523*(5) Montana (B1) 91.63% 73,970 67,779
523*(5) Montana (B2) 91.63% 82,182 75,303
524*(5) Montana (B1) 91.63% 34,545 31,654
526*(5) Montana (B1) 91.63% 21,515 19,714
527*(5) Montana 91.63% 196,077 179,665
528*(5) Montana 91.63% 65,707 60,207
529*(5) Montana 91.63% 30,778 28,202
530*(5) Montana 91.63% 96,342 88,278
531*(5) Montana 91.63% 33,489 30,686
532*(5) Montana 91.63% 20,200 18,509
553*(5) New Mexico (B2) 58.36% 117,311 68,463
555 New Mexico 12.25% 95,782 11,733
557 New Mexico 16.33% 62,594 10,223
580*(5) North Dakota 53.36% 105,094 56,077
581* North Dakota 49.00% 59,961 29,381
582 North Dakota 41.45% 89,668 37,167
583* North Dakota 49.00% 63,835 31,279
584*(5) North Dakota 61.75% 47,887 29,570
634*(5) South Dakota 100.00% 37,254 37,254
635*(5) South Dakota 100.00% 22,896 22,896
636*(5) South Dakota 100.00% 53,417 53,417
</TABLE>
-19-
<PAGE>
<TABLE>
<CAPTION>
Net Company
MSA or Interest in 1997 Net Company
RSA Code (1) State Licensee (2) Population (3)(6) Pops (4)
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
638*(5) South Dakota (B1) 100.00% 17,205 17,205
638*(5) South Dakota (B2) 100.00% 9,398 9,398
639*(5) South Dakota (B1) 100.00% 37,306 37,306
639*(5) South Dakota (B2) 100.00% 3,237 3,237
640*(5) South Dakota 64.49% 66,512 42,894
641*(5) South Dakota 61.13% 73,699 45,052
642* South Dakota 49.00% 99,179 48,598
675*(5) Utah 100.00% 58,396 58,396
676*(5) Utah 100.00% 116,678 116,678
677*(5) Utah (B3) 100.00% 39,326 39,326
678*(5) Utah 80.00% 27,392 21,914
718*(5) Wyoming 66.00% 50,754 33,498
719*(5) Wyoming 100.00% 78,004 78,004
720*(5) Wyoming 100.00% 147,806 147,806
--------- ---------
Total RSA 5,308,260 2,941,272
--------- ---------
Total MSA and RSA 6,630,920 3,634,060
========= =========
</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
1997 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 (*).
-20-
<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
Operating Estimated Population Number of
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%
Sept 30, 1997 56 7 49 4,161,460 800,187 (8) 3,361,273 (8) 274,745 68,579 206,166 30.04%
Dec 31, 1997 56 7 49 4,161,460 800,187 (8) 3,361,273 (8) 289,841 71,293 218,548 5.49%
Mar 31, 1998 56 7 49 4,161,460 800,187 (8) 3,361,273 (8) 307,109 74,952 232,157 5.96%
June 30, 1998 56 7 49 4,239,524 812,529 (9) 3,426,995 (9) 320,476 76,914 243,562 4.35%
</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) Derived from 1996 Demographics On-Call population estimates.
(9) Derived from 1997 Information Decision Systems population estimates.
-21-
<PAGE>
Supplemental Information:
SELECTED COMBINED AND PROPORTIONATE
OPERATING RESULTS OF CELLULAR LICENSEES
The following table presents operating data for all cellular licensees in
which the Company holds an interest. The "Combined," "Financed Proportionate"
and "Company Proportionate" operating results, which are not included in the
Company's consolidated financial statements, are provided to assist in
understanding the results of the licensees in which the Company holds an
interest. Generally accepted accounting principles ("GAAP") prescribe inclusion
of revenues and expenses for consolidated interests (generally interests of more
than 50%), but not for equity interests (generally interests of 20% to 50%) or
cost interests (generally interests of less than 20%). Equity accounting
ordinarily results in the same net income as consolidation; however, the net
operating results are reflected on one line below operating income. Operating
activity related to interests accounted for under the cost method are not
reflected at all in a GAAP operating statement.
<TABLE>
<CAPTION>
Nine Months ended June 30,
----------------------------------------------------------------------------------------
1998 1997 1998 1997 1998 1997
----------------------------------------------------------------------------------------
Combined (1) Financed Proportionate (2) Company Proportionate (3)
------------------------ -------------------------- -----------------------------
<S> <C> <C> <C> <C> <C> <C>
MANAGED MARKETS
Revenues:
Cellular service $101,469 $ 91,466 $ 91,379 $ 84,887 $ 76,156 $ 69,323
In-roaming 34,737 28,414 31,247 26,292 26,745 21,876
Equipment sales 2,450 2,803 2,221 2,615 1,911 2,273
-------- -------- -------- -------- -------- --------
Total revenues 138,656 122,683 124,847 113,794 104,812 93,472
Costs and expenses
involving cash:
Cost of sales:
Cellular service
(including in-roaming) 18,354 21,829 16,871 20,558 14,060 17,031
Equipment sales 12,661 10,515 11,438 9,726 9,692 8,323
General and administrative (4) 29,975 26,103 52,907 (5) 24,190 47,337 (5) 19,799
Marketing and selling 23,549 20,989 21,444 19,522 17,652 15,813
Total cash costs and -------- -------- -------- -------- -------- --------
expenses
84,539 79,436 102,660 73,996 88,741 60,966
-------- -------- -------- -------- -------- --------
EBITDA $ 54,117 $ 43,247 $ 22,187 $ 39,798 $ 16,071 $ 32,506
======== ======== ======== ======== ======== ========
Capital expenditures $ 18,891 $ 29,276 $ 15,972 $ 27,491 $ 13,314 $ 24,271
Subscriber count 320,476 257,273 281,603 233,333 227,482 191,499
Total markets 56 56 56 56 56 56
NONMANAGED MARKETS
Revenues:
Cellular service
(including in-roaming) $ 95,452 $ 90,875 $ 15,147 $ 13,959 $ 10,914 $ 10,338
Equipment sales 6,215 5,584 530 518 421 416
-------- -------- -------- -------- -------- --------
Total revenues 101,667 96,459 15,677 14,477 11,335 10,754
Costs and expenses
involving cash:
Cost of sales:
Cellular service 21,036 19,671 3,169 3,287 2,242 2,466
Equipment sales 9,427 7,290 793 914 604 686
General and administrative 19,593 18,950 3,502 3,259 2,412 2,299
Marketing and selling 16,233 19,614 3,046 3,058 2,368 2,397
-------- -------- -------- -------- -------- --------
Total cash costs
and expenses 66,289 65,525 10,510 10,518 7,626 7,848
-------- -------- -------- -------- -------- --------
EBITDA $ 35,378 $ 30,934 $ 5,167 $ 3,959 $ 3,709 $ 2,906
======== ======== ======== ======== ======== ========
Capital expenditures $ 11,338 $ 13,267 $ 1,420 $ 1,772 $ 1,167 $ 1,127
Subscriber count 225,024 189,208 36,429 29,465 26,683 21,801
Total markets 26 26 26 26 26 26
</TABLE>
-22-
<PAGE>
<TABLE>
<CAPTION>
Nine Months ended June 30,
--------------------------
1998 1997
------------ ------------
Reconciliation From Company Proportionate EBITDA to Consolidated Reporting
<S> <C> <C>
Total proportionate EBITDA (managed and nonmanaged markets) $ 19,780 $ 35,412
Proportionate depreciation and amortization (17,182) (13,074)
Proportionate interest expense (10,250) (7,527)
Equity in nonlicensee affiliates (1,004) (7,009)
Minority interests 879 1,781
Intercompany interest 9,685 6,710
Amortization of license costs not owned by affiliates (1,528) (2,011)
Unallocated corporate expenses (4,461) (2,424)
Gain on sales of affiliates - 349
Interest expense (net) and other (29,181) (17,123)
Merger costs (33,500) -
-------- --------
Consolidated net loss $(66,762) $ (4,916)
======== ========
</TABLE>
_______________
(1) Includes 100% of the operating activity of all licensees, regardless of the
Company's ownership interest. This is essentially equivalent to
consolidating all licensees regardless of ownership percentage.
(2) Includes that percentage of a licensee's operating results which equals the
Company's ownership interest as well as the ownership interest held by
affiliates of the Company that are financed by CIFC.
(3) Includes only that percentage of a licensee's operating results which
corresponds to the Company's ownership interest. This is essentially
equivalent to a pro rata consolidation.
(4) Includes corporate costs and expenses for Financed and Company
Proportionate.
(5) Includes $23,738,000 of transaction costs related to the Merger.
-23-
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
- ------ --------------------------------
(a) Exhibits
None.
(b) Reports on Form 8-K filed during the quarter ended June 30, 1998:
None.
-24-
<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 14, 1998 By: /s/Daniel P. Dwyer
------------------
Daniel P. Dwyer
Executive Vice
President, Treasurer &
Chief Financial Officer
Date: August 14, 1998 By: /s/Andrew J. Gardner
--------------------
Andrew J. Gardner
Senior Vice President
and Controller
(Principal Accounting Officer)
-25-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 17,228
<SECURITIES> 0
<RECEIVABLES> 28,686
<ALLOWANCES> 1,915
<INVENTORY> 5,521
<CURRENT-ASSETS> 57,265
<PP&E> 227,494
<DEPRECIATION> 82,984
<TOTAL-ASSETS> 377,274
<CURRENT-LIABILITIES> 23,750
<BONDS> 682,999
0
0
<COMMON> 306,782
<OTHER-SE> (646,348)
<TOTAL-LIABILITY-AND-EQUITY> 377,274
<SALES> 116,623<F1>
<TOTAL-REVENUES> 116,623
<CGS> 28,329
<TOTAL-COSTS> 117,423
<OTHER-EXPENSES> 1,396
<LOSS-PROVISION> 1,752
<INTEREST-EXPENSE> 33,858
<INCOME-PRETAX> (33,262)
<INCOME-TAX> 0
<INCOME-CONTINUING> (33,262)
<DISCONTINUED> 0
<EXTRAORDINARY> (33,500)
<CHANGES> 0
<NET-INCOME> (66,762)
<EPS-PRIMARY> (1.48)
<EPS-DILUTED> 0<F2>
<FN>
<F1>INCLUDES CELLULAR, PAGING, AND EQUIPMENT REVENUES.
<F2>NOT REPORTED AS COMPANY HAS NO POTENTIALLY DILUTIVE SECURITIES.
</FN>
</TABLE>
