<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, 1999
-------------
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
6, 1999 was 22,853,345.
<PAGE>
COMMNET CELLULAR INC.
Form 10-Q - June 30, 1999
INDEX
<TABLE>
<CAPTION>
Part I Financial Information Page
- ------ --------------------- ----
<S> <C> <C>
Item 1 Financial Statements
Consolidated Condensed Balance Sheets -
June 30, 1999 and September 30, 1998 1
Consolidated Condensed Statements of Operations-
Three Months Ended June 30, 1999 and
June 30, 1998 3
Consolidated Condensed Statements of Operations -
Nine Months Ended June 30, 1999 and
June 30, 1998 4
Consolidated Condensed Statements of Cash Flows -
Nine Months Ended June 30, 1999 and
June 30, 1998 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 25
</TABLE>
<PAGE>
COMMNET CELLULAR INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(Amounts in thousands)
(unaudited)
<TABLE>
<CAPTION>
June 30, September 30,
Assets 1999 1998
- --------------------------------------------------------- ------------------------ ------------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,905 $ 26,153
Accounts receivable, net of allowance for doubtful
accounts of $4,456 and $2,487 at June 30, 1999 and
September 30, 1998, respectively 31,600 28,051
Current portion of advances to affiliates 2,214 3,438
Prepaid expenses and other 2,083 1,682
Inventory 4,211 4,564
-------- --------
Total current assets
42,013 63,888
Investment in and advances to affiliates 27,080 33,637
Investment in cellular system equipment 11,212 3,816
Property and equipment, at cost:
Cellular system equipment 206,071 185,851
Land, buildings and improvements 40,312 35,280
Furniture and equipment 30,947 23,155
-------- --------
277,330 244,286
Accumulated depreciation 109,268 89,688
-------- --------
Net property and equipment 168,062 154,598
Other assets, less accumulated amortization of $42,232
and $37,295 at June 30, 1999 and September 30, 1998,
respectively:
FCC licenses and filing rights 159,252 100,380
Deferred loan costs and other 24,718 28,433
-------- --------
Total other assets 183,970 128,813
-------- --------
$432,337 $384,752
======== ========
</TABLE>
See accompanying notes.
-1-
<PAGE>
COMMNET CELLULAR INC.
CONSOLIDATED CONDENSED BALANCE SHEETS (continued)
(Amounts in thousands, except share data)
(unaudited)
<TABLE>
<CAPTION>
June 30, September 30,
Liabilities and Stockholders' Deficit 1999 1998
- --------------------------------------------------------- ------------------------- ------------------------
<S> <C> <C>
Current liabilities:
Accounts payable $ 3,660 $ 4,954
Accounts payable - property and equipment
purchases 7,841 3,675
Accrued commissions 1,741 953
Accrued interconnect costs 2,620 1,741
Accrued operating taxes 4,435 3,891
Other accrued liabilities 3,127 8,188
Interest payable 10,898 2,421
Current portion of secured bank financing and other
long-term debt 4,491 -
--------- ---------
Total current liabilities
38,813 25,823
Long-term debt:
Secured bank financing 718,025 680,000
Note payable and other long-term debt 9,511 2,916
11 3/4% senior subordinated discount notes - 83
Minority interests 7,673 11,378
Commitments
Stockholders' deficit:
Preferred Stock, $.01 par value; 1,000,000 shares
authorized; no shares issued - -
Common Stock, $.001 par value; 40,000,000 shares
authorized; 22,662,985 shares issued at June 30, 1999
and September 30, 1998 (Note 3) 5 5
Capital in excess of par value 307,271 307,271
Deferred compensation to employees (2,290) (2,661)
Accumulated deficit (646,671) (640,063)
--------- ---------
Total stockholders' deficit (341,685) (335,448)
--------- ---------
$ 432,337 $ 384,752
========= =========
</TABLE>
See accompanying notes.
-2-
<PAGE>
COMMNET CELLULAR INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
Three Months ended June 30, 1999 and 1998
(Amounts in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
1999 1998
------------------ ---------------------
<S> <C> <C>
Revenues:
Service $ 36,888 $ 30,822
In-roaming 15,994 11,040
Equipment sales 1,048 918
-------- --------
53,930 42,780
Costs and expenses:
Operations:
Cost of service 6,373 5,621
Cost of equipment sales (Note 4) 1,370 2,979
General and administrative 10,011 8,238
Marketing and selling 8,263 6,787
Depreciation and amortization 7,136 6,839
Corporate:
General and administrative 1,546 12,477
Depreciation 361 10
Less amounts allocated to nonconsolidated affiliates (1,710) (2,312)
-------- --------
33,350 40,639
-------- --------
Operating income 20,580 2,141
Equity in net income of nonconsolidated affiliates 1,443 897
Minority interest in net income of consolidated affiliates (1,632) (1,178)
Amortization of deferred costs (752) (1,019)
Interest expense (14,822) (15,121)
Interest income 628 1,322
-------- --------
Income (loss) before income taxes 5,445 (12,958)
Income tax expense 72 -
-------- --------
Net income (loss) $ 5,373 $(12,958)
======== ========
Net income (loss) per common share:
Basic $0.24 $(0.57)
======== ========
Diluted $0.22 $(0.57)
======== ========
Weighted average shares outstanding:
Basic 22,663 22,643
======== ========
Diluted 24,276 22,643
======== ========
</TABLE>
See accompanying notes.
-3-
<PAGE>
COMMNET CELLULAR INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
Nine Months ended June 30, 1999 and 1998
(Amounts in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
1999 1998
----------------- ---------------------
<S> <C> <C>
Revenues:
Service $101,383 $ 84,850
In-roaming 40,061 29,598
Equipment sales 3,491 2,175
-------- --------
144,935 116,623
Costs and expenses:
Operations:
Cost of service 19,401 17,412
Cost of equipment sales (Note 4) 8,706 10,917
General and administrative 29,624 25,448
Marketing and selling 26,241 20,460
Depreciation and amortization 19,935 18,710
Corporate:
General and administrative 8,253 29,812
Depreciation 1,411 1,474
Less amounts allocated to nonconsolidated affiliates (5,234) (6,810)
-------- --------
108,337 117,423
-------- --------
Operating income (loss) 36,598 (800)
Equity in net income of nonconsolidated affiliates 4,629 2,700
Minority interest in net income of consolidated affiliates (3,025) (3,149)
Amortization of deferred costs (2,465) (2,043)
Interest expense (43,896) (33,858)
Interest income 2,148 3,888
-------- --------
Loss before income taxes and extraordinary charge (6,011) (33,262)
Income tax expense 597 -
-------- --------
Loss before extraordinary charge (6,608) (33,262)
Extraordinary charge related to early extinguishment of long-term debt - (33,500)
-------- --------
Net loss $ (6,608) $(66,762)
======== ========
Basic and diluted loss per common share:
Loss before extraordinary charge $(0.29) $(0.74)
Extraordinary charge - (0.74)
-------- --------
Basic and diluted loss per common share $(0.29) $(1.48)
======== ========
Weighted average shares outstanding 22,663 45,041
======== ========
</TABLE>
See accompanying notes.
-4-
<PAGE>
COMMNET CELLULAR INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
Nine Months ended June 30, 1999 and 1998
(Amounts in thousands)
(unaudited)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Operating activities:
Net loss $ (6,608) $(66,762)
Adjustments to reconcile net loss to net cash provided (used) by
operating activities:
Extraordinary charge related to early extinguishment of
long-term debt - 33,500
Minority interest in net income of consolidated affiliates 3,025 3,149
Depreciation and amortization 23,811 22,227
Equity in net income of affiliates (4,629) (2,700)
Interest expense on 11 3/4% senior subordinated
discount notes 1 6,611
Stock-based compensation expense 371 10,338
Accrued interest on advances to affiliates (1,114) (2,973)
Change in operating assets and liabilities, net of effects
from consolidating acquired interests:
Accounts receivable (3,221) (1,385)
Prepaid expenses and other (401) (304)
Inventory 353 (2,307)
Accounts payable and accrued liabilities (4,450) (3,802)
Accrued interest 8,425 327
-------- --------
Net cash provided (used) by operating activities
15,563 (4,081)
Investing activities:
Reductions in investments in and advances to affiliates 16,883 10,128
Reductions in (additions to) investment in cellular system
equipment (7,396) 551
Additions to property and equipment (26,770) (21,590)
Additions to other assets (215) (236)
Purchase of interests in affiliates, net of assets and
liabilities recorded due to consolidation (59,775) -
-------- --------
Net cash used by investing activities (77,273) (11,147)
</TABLE>
See accompanying notes.
-5-
<PAGE>
COMMNET CELLULAR INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (continued)
Nine Months ended June 30, 1999 and 1998
(Amounts in thousands)
(unaudited)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Financing activities:
Proceeds from secured bank financing $64,000 $695,000
Payments of secured bank financing (23,013) (24,762)
Payment of 11 3/4% senior subordinated discount notes (83) (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 (3,442) (3,043)
Reduction of obligation under capital leases - (139)
Issuance of Common Stock, net of offering costs - 128,140
Conversion of Common Stock as a condition of merger - (475,496)
-------- ---------
Net cash provided by financing activities
37,462 18,324
-------- ---------
Net increase (decrease) in cash and cash equivalents (24,248) 3,096
Cash and cash equivalents at beginning of period 26,153 14,132
-------- ---------
Cash and cash equivalents at end of period $ 1,905 $ 17,228
======== =========
</TABLE>
<TABLE>
<CAPTION>
Supplemental schedule of additional cash flow information and
noncash activities:
<S> <C> <C>
Cash paid for interest $35,418 $26,920
Purchase of cellular system equipment through accounts payable 7,841 5,443
Write-off of offering costs included in extraordinary loss on
early extinguishment of long-term debt - 4,485
</TABLE>
See accompanying notes.
-6-
<PAGE>
<TABLE>
<S> <C>
1. Basis of presentation
---------------------
</TABLE>
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, 1996, 1997 and 1998
included in the Company's Annual Report on Form 10-K for the fiscal year ended
September 30, 1998. The results of operations for the nine months ended June
30, 1999 are not necessarily indicative of the results for a full year. Certain
amounts relating to June 30, 1998 have been reclassified to correspond to the
June 30, 1999 classification.
2. Earnings per share
------------------
The Company adopted Statement of Financial Accounting Standards No.
128, "Earnings per Share," ("SFAS No. 128") in fiscal 1998. SFAS No. 128
requires retroactive restatement of earnings per share data for all years
presented. In accordance with SFAS No. 128, the increase in weighted average
common shares, assuming dilution, is due to the application of the treasury
share method for outstanding stock options. The application of the treasury
share method resulted in an additional 1,613,430 and 1,555,869 weighted average
shares for the three and nine months ended June 30, 1999 and 1998, respectively.
However, diluted earnings per share are not presented for the nine month period
as the effect is anti-dilutive.
3. Stockholders' equity
--------------------
Changes to Common Stock during the nine months ended June 30, 1999
were as follows (amounts in thousands, except share data):
<TABLE>
<CAPTION>
Deferred
Compensation
Common Stock Capital in Related to
---------------------------------- Excess of Employee Accumulated
Shares Amount Par Value Options Deficit
---------------------------------- --------------- ---------------- ----------------------
<S> <C> <C> <C> <C> <C>
Balance at September 30, 1998 22,662,985 $5 $307,271 $(2,661) $(640,063)
Stock-based compensation - - - 371 -
Net loss - - - - (6,608)
---------- -- -------- ------- ---------
Balance at June 30, 1999 22,662,985 $5 $307,271 $(2,290) $(646,671)
========== == ======== ======= =========
</TABLE>
At June 30, 1999 the Company had 1,705,700 options outstanding at a
weighted average exercise price of $1.42.
-7-
<PAGE>
4. Cost of equipment sales
-----------------------
The Company has a customer service program whereby a handset is
provided to the customer and returned to the Company at the end of the service
agreement. Prior to the second fiscal quarter of 1999, the cost of providing
the handset to the customer was included in cost of equipment sales, with no
corresponding recognition of equipment revenue, as any revenue related to the
program was recognized in cellular service revenue. In the quarter ended March
31, 1999, the Company changed its accounting for these handsets, whereby the
cost of the handsets are included in property and equipment and depreciated over
a period of 30 months. The Company believes that this change better matches the
cost of the handset with the related revenue stream and is consistent with
predominant industry practice. The change has been accounted for as a change in
estimate. The effect of this change was a net benefit for the quarter and nine
months ended June 30, 1999 of $2,260,000 and $4,403,000, respectively, and $0.10
and $0.19 per share, respectively.
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,
1999, 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 recorded.
6. Contingencies
-------------
On October 22, 1998, 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 trial court found in favor of the
Company. Rye appealed. A joint request for stay by all parties has been filed
and granted pending the closing of the sale of Rye's interest in the Pueblo MSA
market to Cellular Inc. Network Corporation (CINC), a wholly-owned subsidiary of
the Company. Closing of the sale transaction would result in a full and
complete settlement of the lawsuit.
7. Subsequent events
-----------------
On July 18, 1999 the Company entered into an Agreement and Plan of
Merger (the "Merger Agreement") with Vodafone AirTouch PLC ("VA") and Pacific
Telecom Cellular of Colorado, Inc. ("PTC") whereby PTC would merge with and into
CommNet Cellular Inc. and the owner of each outstanding share of the Company's
common stock would receive $31.00 per share plus interest at the rate of 8% from
the date of the Merger Agreement until closing. Upon completion of the
transaction, VA will own all the outstanding shares of the Company. The merger
is subject to certain conditions, including approval from the Federal
Communications Commission. In connection with the execution and delivery of the
Merger Agreement and the transactions contemplated thereby, VA and BCP CommNet
L.P. ("BCP"), the owner of approximately 86% of the Company's common stock, have
entered into a Voting Agreement, dated as of July 18, 1999, pursuant to which
BCP has agreed to vote all the shares of the Company's common stock owned by it
in favor of the merger upon the terms and subject to the conditions set forth in
the Voting Agreement. The Merger Agreement and Voting Agreement have been filed
with the Securities and Exchange Commission, as exhibits to the Company's Form
8-K on July 21, 1999.
-8-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
- -------
The Company generated net income for the quarter ended June 30, 1999 and
operating income during the nine months ended June 30, 1999 focusing on
increasing penetration, subscriber usage and cash flow. In addition, the Company
expects that operating income before depreciation and amortization ("EBITDA"),
which was positive during the nine months ended June 30, 1999 and the fiscal
years ended September 30, 1998 and 1997, 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.
As a consequence of the Merger (see "Acquisitions"), results of operations
and financial position were impacted significantly on a one-time and recurring
basis. Under the $760,000,000 debt facility (see Liquidity and Capital
Resources), $680,000,000 was drawn to finance extinguishment of old debt, to
repurchase $475,496,000 of Common Stock and to pay transaction costs and
$42,000,000 has been drawn to purchase additional interests in certain markets
(see Acquisitions). This increase in leverage in the capital structure of the
Company caused amortization expense and interest expense to increase
significantly and this trend will continue.
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 49 markets, all of which were consolidated for the
entire period, are included in the consolidated results for the quarter ended
June 30, 1999. The results of operations of 46 markets, all of which were
consolidated for the entire period, were included in the consolidated results
for the quarter ended June 30, 1998. The increase in the number of markets
included in consolidated results was due to acquisitions consummated subsequent
to June 30, 1998. Consolidated results of operations also include the
operations of Cellular, Inc. Financial Corporation ("CIFC"), the Company's
financing subsidiary, Cellular Inc. Network Corporation ("CINC") and CommNet
Cellular License Holding LLC ("CCLHLLC"), subsidiaries through which the Company
holds interests in certain cellular licenses, as well as CommNet Paging Inc.
("CPI"), a subsidiary which provides paging services. CINC and CPI are wholly-
owned subsidiaries of CommNet Cellular Inc. CIFC is a wholly-owned subsidiary of
CINC and CCLHLLC is a wholly-owned subsidiary of CIFC.
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. For the quarter ended June 30, 1999, 17 markets were accounted for
under the equity method compared to 18 such markets for the quarter ended June
30, 1998. Markets in which the Company's interest is less than 20% are
accounted for under the cost method. Seventeen markets were accounted for under
the cost method for the quarter ended June 30, 1999 compared to 18 markets for
the quarter ended June 30, 1998.
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, 1999, loans bore interest at the
90-day LIBOR rate plus a margin determined based on the affiliate's leverage
ratio. 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.
-9-
<PAGE>
Management believes there exists a seasonality in both service revenues,
which tend to be greater in the third and fourth fiscal quarters, and operating
expenses, which tend to be highest in the first fiscal quarter due to increased
marketing activities and customer growth, which may cause operating income to
vary from quarter to quarter.
Year 2000 Compliance
- --------------------
The Company has prepared an inventory of its critical computer hardware and
software systems to determine what reasonable steps should be taken by the
Company in order to assure that these systems do not experience operating
problems as a result of these systems failure to properly recognize dates in the
year 1999 and beyond, that is, to assure that they are "Y2K compliant."
The Company has adopted a plan to become Y2K compliant which has been
approved by the Board of Directors of the Company (the "Y2K Plan"). The Company
has a standing Y2K Committee composed of senior management and professionals of
the Company that regularly meet to assess Y2K compliance issues. The Y2K Plan
requires that the Y2K Committee identify potential Y2K scenarios and the
implications of each to the operational and financial viability of the Company
and assess the level of effort, expense and impact to make the Company Y2K
compliant for each potential scenario. Members of the Y2K Committee have
published master lists of scenarios and efforts required for remediation. Major
areas being addressed by the Y2K Committee include: the cellular network;
interconnect arrangements to connect the cellular network with landline systems;
clearinghouse arrangements to allow verification and billing of roaming traffic;
the Company's wide area and local area networks; the Company's internal
communications systems; Company server hardware, software and desktop systems;
billing software, services and related elements (call detail records, rating,
posting, statement printing, processing, mailing); financial and operational
reporting systems; critical suppliers including financial institutions,
payroll/benefits processing, credit bureaus, benefit plans, building systems,
and office equipment.
Within each area of inquiry the Y2K Committee has prioritized and evaluated
each scenario and the remediation effort required to achieve Y2K compliance and
has chosen whether to either address the scenario through implementation of full
or partial remediation efforts, or not address the scenario with remediation
efforts. For those scenarios to be addressed, a remediation schedule has been
prepared showing when remediation efforts will be undertaken. As part of the
development of remediation efforts the Y2K Committee has developed testing
strategies for those remediation efforts and assumptions that must be tested and
will complete end-to-end testing before fiscal year end.
For all areas addressed by the Y2K Committee, whether addressed by
remediation efforts or not, the Y2K Committee has developed contingency plans in
the event that critical systems, services and/or equipment are not operational
on or after January 1, 2000 based upon the anticipated viability of critical
systems, services and/or equipment on or after January 1, 2000. Also, the Y2K
Committee will develop contingency plans in case some elements or assumptions
for addressing the Year 2000 problem may be false or incorrect or which prove to
need additional remediation based upon testing efforts.
As of the time of this report, the Company has reviewed all material
software license and maintenance agreements with its vendors to determine
whether these vendors have obligations to make their hardware and software Y2K
compliant and has initiated plans with such vendors to remedy any Y2K compliance
problems. Critical suppliers of the Company have been contacted to determine
whether or not they are Y2K compliant and to assess whether these suppliers'
compliance efforts to continue to meet the Company's needs.
The following identifies the current status of these efforts:
The Cellular Network. MTSO software has been upgraded to more current
versions and Y2K software "patches" have been installed in some cases. Some
testing of the system is complete. The Company believes that these efforts
should result in a cellular network that will continue to function without
material service affecting outages due to Y2K problems. Notwithstanding the
Company's efforts, network equipment suppliers have been unwilling to give
unqualified warranties that network equipment is Y2K compliant. Vendors and the
Company
-10-
<PAGE>
have committed to having resources available to expeditiously correct
Y2K problems if they arise. Service affecting outages, if prolonged and
widespread, could affect Company revenues. See "--Customer Service Terms and
Conditions" below.
Interconnect and Other Arrangements with Wireline Telephone Service
Vendors. In order to complete calls to/from wireline telephones and cellular
telephones not connected to the same MTSO, and to transmit calls from many
Company cell sites to Company MTSOs, the Company relies on wireline telephone
services from numerous vendors. U S WEST Communications, Inc. ("U S WEST") is
the largest of these vendors. Other smaller telephone companies, provide
geographically limited wireline services. The failure of any of these systems
would result in an inability of cellular customers to make or receive calls in
the geographic area affected by the failure. The Company has not received
unconditional warranties from any of these vendors that their systems are Y2K
complaint. The Company has reviewed the Y2K compliance efforts that have been
disclosed by U S WEST and other vendors and believes that efforts by these
vendors should not result in material service outages due to Y2K problems. The
Company has no alternatives to using these vendors and thus must rely on these
vendors' efforts. Service affecting outages, if prolonged and widespread, could
affect Company revenues. See "--Customer Service Terms and Conditions" below.
Company Software, Hardware, and Information Resources. The Company has
evaluated major internal computer systems for potential Y2K problems and is in
the process of implementing enhancements. Some testing has been completed on
these systems. Many of the Company's systems are interconnected with third party
systems (see below). Communication between internal and third party systems is
largely dependent on the wireline systems discussed above. The Company is
working with software and hardware vendors to correct any Y2K problems that are
detected. The Company believes that these efforts should result in internal
software, hardware and information resources that will continue to function
without material failures due to Y2K problems. Significant failures could
impair the Company's ability to provide timely financial and other internal
reporting data as result of having to rely on backup data and manual methods of
record keeping. Productivity of Company personnel could be adversely affected by
having to use alternate means of communication and alternative office systems
and equipment.
Third Party Service Providers. The Company relies on a single billing
vendor to produce bills for its customers. This billing vendor also supplies
billing and customer care software used by the Company internally. Raw billing
information is captured by Company MTSOs. The Company upgraded its billing
software during 1998. The Company uses other vendors to validate and provide for
some of its in and out roaming traffic which have completed Y2K testing and have
concluded that their systems and processes are Y2K compliant. The Company uses
third party financial institutions and employee benefit services. The Company
has contacted these third party service providers and believes that these
vendors have programs in place that should result in these vendors being able to
continue to function without material failures due to Y2K problems. However,
none of these third party vendors have given unqualified warranties to the
Company that they will be Y2K compliant. The Company could rely on internal
systems to provide monthly access billing to its customers, but has not
developed a means to bill rated minutes of use and toll to its customers. The
result of a billing vendor failure would be to delay billing of customers by the
Company with resultant delays in receiving payments from Company customers.
Failure of roamer service vendors could result in an inability for some of the
Company's customers to roam in markets that are not directly connected to the
Company's cellular network as well as an inability for customers of unconnected
systems to roam in the Company's markets. Paper-based financial institution and
employee benefit records could be used to continue these services, although at a
higher cost to the Company.
Customer Service Terms and Conditions. The terms and conditions under
which the Company provides cellular and paging services to its customers contain
provisions that limit the Company's liability in the event that there is a
service failure. The terms and conditions provide that the Company is not liable
for any consequential or incidental damages to its customers. They further
provide that no credit will be given for service outages of less than 24 hours
in duration. In addition, they limit damages for failure to provide service to a
credit for the pro rated number of days that service was unavailable. Service
affecting outages have occurred in limited geographic areas in the past and the
Company has not been found liable to any person for damages in excess of the
limitations imposed by the terms and conditions of service. The Company believes
it is unlikely that an outage occasioned by a failure attributable to a Y2K
problem would lead to a different result. Under the terms and conditions, if
the
-11-
<PAGE>
Company were unable to supply cellular service to a significant portion of
its customer base over a prolonged period of time, the Company would experience
a loss of revenues from the customers affected which could have a material
adverse affect on the Company. The Company has adopted a policy of not giving
any warranties to customers regarding Y2K compliance.
Litigation. The Company, at this time, does not anticipate any litigation
involving the Company that would arise as a result of Y2K compliance issues.
Insurance. The Company has investigated specialized Y2K insurance products
and has not, to date, found any such products that provide appropriate coverage
for the Company at acceptable premium levels.
Forward Looking Information
- ---------------------------
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; the impact of varying interest rates; and the
impact of deployment of new technologies on capital spending.
Results of Operations
- ---------------------
Three Months Ended June 30, 1999 and 1998. Operations. Service revenues,
----------------------------------------- ----------
including in-roaming revenues, increased 26% from $41,862,000 for the quarter
ended June 30, 1998 to $52,882,000 for the quarter ended June 30, 1999. The
growth was due to the increase in the number of subscribers in consolidated
markets and growth of in-roaming usage. In addition to increases in market
penetration, growth resulted from an increase in the number of markets
consolidated for the quarter from 46 for the three months ended June 30, 1998 to
49 during the three months ended June 30, 1999. Growth in subscribers offset by
lower revenues per subscriber accounted for 45% of the increase, growth of in-
roaming usage accounted for 30% of the increase, and the number of consolidated
markets accounted for 25% of the increase. In-roaming revenues increased by
45%, or $4,954,000, from $11,040,000 for the quarter ended June 30, 1998 to
$15,994,000 for the quarter ended June 30, 1999, due to increased coverage in
cellular markets, industry-wide subscriber increases and an increase in the
number of consolidated markets.
Average monthly revenue per subscriber, including in-roaming, remained at
$53 for the quarter ended June 30, 1998, reflecting increased usage offset by
declining prices to the consumer which is consistent with an overall industry
trend. However, in-roaming revenues per subscriber per month increased $2, from
$14 for the quarter ended June 30, 1998, to $16 for the quarter ended June 30,
1999. In-roaming minutes of use increased 105% from 10.8 million for the
quarter ended June 30, 1998 to 22.1 million for the quarter ended June 30, 1999.
Cost of service decreased as a percentage of service revenues, including
in-roaming revenues, from 13% for the quarter ended June 30, 1998 to 12% for the
quarter ended June 30, 1999. The Company recently renegotiated its contract to
provide long distance services for its customers at a lower cost.
Equipment sales increased 14% from $918,000 for the quarter ended June 30,
1998 to $1,048,000 for the quarter ended June 30, 1999, due to an increase in
the sales of accessories. Cost of equipment sales decreased 54% from $2,979,000
for the quarter ended June 30, 1998 to $1,370,000 for the quarter ended June 30,
1999 due to a $2,412,000 decrease from the change in method of accounting for
handsets provided to customers, offset by an increase of $803,000 related to
increased subscriber additions.
-12-
<PAGE>
General and administrative costs of operations increased 22% from
$8,238,000 during the quarter ended June 30, 1998 to $10,011,000 during the
quarter ended June 30, 1999, due to the growth in the customer base. General
and administrative costs was unchanged as a percentage of service revenues at
27% for the quarters ended June 30, 1998 and 1999.
Marketing and selling costs of operations increased 22% from $6,787,000 for
the quarter ended June 30, 1998 to $8,263,000 for the quarter ended June 30,
1999, primarily as a result of increases in salaries and commissions related to
approximately 5,000, or 16%, greater gross cellular subscriber additions, offset
by reductions in advertising. Marketing costs per gross new cellular subscriber
increased 6% from $221 for the quarter ended June 30, 1998 to $234 for the
quarter ended June 30, 1999.
Depreciation and amortization relating to operations increased 4% from
$6,839,000 for the quarter ended June 30, 1998 to $7,136,000 for the quarter
ended June 30, 1999, primarily due to a larger base of property and equipment in
service and the effect of the change of method accounting for handsets.
Other Costs and Expenses
------------------------
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. Corporate costs and
expenses for the quarter ended June 30, 1999 were $197,000, which represented
gross expenses of $1,907,000 less amounts allocated to nonconsolidated
affiliates of $1,710,000. The decrease in corporate costs is primarily due to
nonrecurring transaction costs in 1998 related to stock options.
Equity in net income of nonconsolidated affiliates for the quarter ended
June 30, 1999 was $1,443,000 compared to equity in net income of affiliates of
$897,000 for the quarter ended June 30, 1998. The improvement was primarily due
to increased profitability of those markets accounted for under the equity
method.
Amortization of deferred costs decreased 26% from $1,019,000 for the
quarter ended June 30, 1998, to $752,000 for the quarter ended June 30, 1999.
Interest expense decreased 2% from $15,121,000 for the quarter ended June
30, 1998 to $14,822,000 for the quarter ended June 30, 1999. Cash paid for
interest decreased from $15,597,000 during the quarter ended June 30, 1998 to
$14,978,000 during the quarter ended June 30, 1999. Both decreases resulted
from lower borrowing rates offset somewhat by higher debt balances.
Interest income decreased 52% from $1,322,000 for the quarter ended June
30, 1998 to $628,000 for the quarter ended June 30, 1999. 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, 1999 and 1998. Operations. Service revenues,
---------------------------------------- ----------
including in-roaming revenues, increased 24% from $114,448,000 for the nine
months ended June 30, 1998 to $141,444,000 for the nine months ended June 30,
1999. The growth was due to the increase in the number of subscribers in
consolidated markets and growth of in-roaming usage, offset by lower revenues
per subscriber. In addition to increases in market penetration, growth resulted
from an increase in the number of markets consolidated for the nine months from
46 for the nine months ended June 30, 1998 to 49 during the nine months ended
June 30, 1999. Growth in subscribers offset by lower revenues per subscriber
accounted for 47% of the increase, growth of in-roaming usage accounted for 21%
of the increase, and the number of consolidated markets accounted for 32% of the
increase. In-roaming revenues increased by 35%, or $10,463,000, from
$29,598,000 for the nine months ended June 30, 1998 to $40,061,000 for the nine
months ended June 30, 1999, due to increased coverage in cellular markets, to
industry-wide subscriber increases and an increase in the number of consolidated
markets.
Average monthly revenue per subscriber, including in-roaming, decreased
from $51 for the nine months ended June 30, 1998 to $49 for the nine months
ended June 30, 1999, reflecting the benefit of declining prices to the consumer
which is consistent with an overall industry trend. In-roaming revenues per
subscriber per month increased $1, from $13 for the nine months ended June 30,
1998 to $14 for the nine months ended June 30, 1999.
-13-
<PAGE>
However, in-roaming
minutes of use increased 71% from 30.2 million for the nine months ended June
30, 1998 to 51.6 million for the nine months ended June 30, 1999.
Cost of service decreased as a percentage of service revenues including in-
roaming, from 15% for the nine months ended June 30, 1998 to 14% for the nine
months ended June 30, 1999, as revenues derived from the growing subscriber base
outpaced the fixed components of cost of service. In addition, the Company
recently renegotiated its contract to provide long distance services at a lower
cost.
Equipment sales increased 61% from $2,175,000 for the nine months ended
June 30, 1998 to $3,491,000 for the nine months ended June 30, 1999, due to
increases in the sales of accessories and gross subscriber additions including
handset sales. Cost of equipment sales decreased 20% from $10,917,000 for the
nine months ended June 30, 1998 to $8,706,000 for the nine months ended June 30,
1999 due to a $4,621,000 decrease from the change in method of accounting,
offset by an increase of $2,410,000 related to increased subscriber additions.
General and administrative costs of operations increased 16% from
$25,448,000 during the nine months ended June 30, 1998 to $29,624,000 during the
nine months ended June 30, 1999, due to the growth in the customer base.
General and administrative costs as a percentage of service revenues decreased
from 30% for the nine months ended June 30, 1998 to 29% for the nine months
ended June 30, 1999.
Marketing and selling costs of operations increased 28% from $20,460,000
for the nine months ended June 30, 1998 to $26,241,000 for the nine months ended
June 30, 1999, primarily as a result of increases in salaries, commissions and
advertising related to approximately 13,000, or 14% greater gross subscriber
additions. Marketing costs per gross new cellular subscriber increased 14% from
$215 for the nine months ended June 30, 1998 to $245 for the nine months ended
June 30, 1999.
Depreciation and amortization relating to operations increased 7% from
$18,710,000 for the nine months ended June 30, 1998 to $19,935,000 for the nine
months ended June 30, 1999, primarily due to a larger base of property and
equipment in service and the effect of the change in method of accounting for
handsets.
Other Costs and Expenses
------------------------
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. Corporate costs and
expenses for the nine months ended June 30, 1999 were $4,430,000, which
represented gross expenses of $9,664,000 less amounts allocated to
nonconsolidated affiliates of $5,234,000. The decrease in corporate costs is
primarily due to the $23,600,000 in 1998 of nonrecurring transaction costs
related to stock options offset by compensation expense in connection with the
settlement of claims of former executives and legal fees related to the purchase
of additional interests in certain South Dakota markets totaling $2,710,000,
none of which were allocated to affiliates.
Equity in net income of affiliates for the nine months ended June 30, 1999
was $4,629,000 compared to equity in net income of affiliates of $2,700,000 for
the nine months ended June 30, 1998. The improvement was primarily due to
increased profitability of those markets accounted for under the equity method.
Amortization of deferred costs increased 21% from $2,043,000 for the nine
months ended June 30, 1998, to $2,465,000 for the nine months ended June 30,
1999, as a result of increased deferred costs associated with the Chase credit
facility.
Interest expense increased 30% from $33,858,000 for the nine months ended
June 30, 1998 to $43,896,000 for the nine months ended June 30, 1999 due to
higher secured bank financing under the Chase Credit Agreement. Cash paid for
interest increased from $26,920,000 during the nine months ended June 30, 1998
to $35,418,000 during the nine months ended June 30, 1999.
-14-
<PAGE>
Interest income decreased 45% from $3,888,000 for the nine months ended
June 30, 1998 to $2,148,000 for the nine months ended June 30, 1999. The
decrease was due to lower notes receivable as a result of repayment of
outstanding debt from nonconsolidated affiliates, and lower average cash
balances.
Acquisitions
- ------------
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 $7.20 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").
In April 1998, the Company purchased an additional 90% interest in one
managed RSA market for $9,000,000 in cash.
In May 1998, the Company purchased an additional 16% interest in one
managed RSA market for $300,000 in cash.
In December 1998, the Company purchased substantially all of the
independent telco interests in three managed RSA markets and one managed MSA
market in South Dakota for approximately $57,713,000. In April 1999, the
Company purchased the remaining independent telco interests for approximately $2
million in cash.
In June 1999, fifteen nonmanaged RSAs in Kansas in which the Company holds
a 3.07% interest entered into a merger agreement with Alltel Corporation. If
consummated, the Company will receive 213,607 shares of Alltel Corporation
common stock. Also in June 1999, the Company entered into a definitive
agreement to sell its interests in four managed RSA markets and a portion of its
interest in a fifth managed RSA market in Iowa for approximately $83.3 million
in cash and repayment of debt totaling approximately $3.4 million. In addition,
in July 1999, the Company entered into a definitive agreement to purchase all of
the independent telco interests in one managed MSA market and three managed RSA
markets for approximately $17.5 million in cash and assumption and forgiveness
of $5.3 million of debt. Closing of these transactions is subject to regulatory
and other approvals.
In July 1999, the Company purchased an additional 51% interest in one
managed RSA market for 190,360 shares of the Company's stock valued at
approximately $5,271,000.
-15-
<PAGE>
On July 18, 1999 the Company entered into an Agreement and Plan of Merger
(the "Merger Agreement") with Vodafone AirTouch PLC ("VA") and Pacific Telecom
Cellular of Colorado, Inc. ("PTC") whereby PTC would merge with and into CommNet
Cellular Inc. and the owner of each outstanding share of the Company's common
stock would receive $31.00 per share plus interest at the rate of 8% from the
date of the Merger Agreement until closing. Upon completion of the transaction,
VA will own all the outstanding shares of the Company. The merger is subject to
certain conditions, including approval from the Federal Communications
Commission. In connection with the execution and delivery of the Merger
Agreement and the transactions contemplated thereby, VA and BCP CommNet L.P.
("BCP"), the owner of approximately 86% of the Company's common stock, have
entered into a Voting Agreement, dated as of July 18, 1999, pursuant to which
BCP has agreed to vote all the shares of the Company's common stock owned by it
in favor of the merger upon the terms and subject to the conditions set forth in
the Voting Agreement. The Merger Agreement and Voting Agreement have been filed
with the Securities and Exchange Commission, as exhibits to the Company's Form
8-K on July 21, 1999.
The Company continues to pursue opportunities to the extent they enhance or
extend its network or increase shareholder value, although there can be no
assurance any such acquisitions will be consummated.
Changes in Financial Condition
- ------------------------------
Net cash provided by operating activities was $15,563,000 during the nine
months ended June 30, 1999. This was due to cash provided in generating the net
loss after adjustments to reconcile net cash provided by operating activities of
$14,857,000 and from changes in working capital of $706,000.
Net cash used by investing activities was $77,273,000 for the nine months
ended June 30, 1999. This was due primarily to $59,775,000 required to purchase
additional interests in affiliates and $34,166,000 required to fund property and
equipment additions offset by a $16,883,000 reduction in investments and
advances to affiliates.
Net cash provided by financing activities was $37,462,000 for the nine
months ended June 30, 1999. This was due to net increases in secured bank
financing of $40,904,000 offset by distributions to minority interests of
$3,442,000.
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 prior to February 10, 1998 was a loan facility with CoBank (the
"CoBank Credit Agreement"), pursuant to which CoBank had agreed to lend up to
$165,000,000 to CIFC.
On September 18, 1997, CIFC and the Company entered into a senior bank
credit facility with The Chase Manhattan Bank as administrative agent and
collateral agent, Chase Manhattan Bank Delaware, as fronting bank, and the other
lenders named therein (the "Chase Credit Agreement"). The Chase Credit
Agreement provides for aggregate credit commitments of up to $760,000,000
comprised of term loans of $680,000,000 and a revolving credit facility of
$80,000,000. All obligations of CIFC and the guarantors under the Chase Credit
Agreement and the guarantees are secured by first priority security interests 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
-16-
<PAGE>
leases or transactions with affiliates, sell assets, engage in mergers or
acquisitions, make investments, and redeem or repurchase capital stock or debt.
On February 10, 1998, in connection with the closing of the Merger (see
"Acquisitions and Sales"), CIFC and the Company drew down the $680,000,000 term
loans 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. On December 2, 1998, CIFC and the Company borrowed
$42,000,000 under the revolving credit facility of the Chase Credit Agreement to
use, with existing cash, to purchase affiliate interests in South Dakota (see
"Acquisitions"). As a result of the consolidation of these South Dakota
entities, other long-term debt increased $8,123,000 ($7,111,000 at June 30,
1999). Advances made under the Chase Credit Agreement will be used, when
necessary, to fund capital and operating requirements of the Company, to fund
loans made by CIFC to the affiliates and to finance any future acquisitions to
the extent permissible. The Chase Credit Agreement provides for aggregate
credit commitments of up to $760,000,000 at interest rates that vary from .875%
to 2.50% over prime (7.75% at June 30, 1999) for variable rate loans or 1.875%
to 3.50% over LIBOR (5.3675% at June 30, 1999) for fixed rate loans.
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.
In addition to the liquidity provided by the Chase Credit Agreement and
other long-term debt agreements at June 30, 1999, the Company, on a consolidated
basis, had available $1,905,000 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, including corporate capital
projects, for the nine months ended June 30, 1999 was $38,935,000. These
expenditures were primarily for new cell site construction, switch upgrades,
increased channel capacity, paging infrastructure and corporate assets. The
Company expects capital expenditures in managed markets for the remainder of
fiscal year 1999 to be approximately $12,000,000 to optimize coverage, upgrade
switching capacity, increase channel capacity and upgrade the paging
infrastructure.
At June 30, 1999, 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 consolidated cash interest
expense for the remainder of fiscal year 1999 under the Chase Credit Agreement
will be $15,000,000. The first principal payment under the Chase term loans is
due December 31, 1999. 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 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 would 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
-17-
<PAGE>
additional cellular properties with debt financing
may be constrained by certain restrictions contained in its existing debt
instruments.
CIFC and the Company are currently in compliance with all covenants and
anticipate they will continue to meet the requirements of the Chase Credit
Agreement. Approval may be required from the participants in the Chase Credit
Agreement for waivers or other amendments to the Chase Credit Agreement
requested by CIFC or the Company.
Recently Issued Accounting Standards
- ------------------------------------
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting Comprehensive
Income." SFAS 130 requires companies to disclose comprehensive income and its
components. In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting
for Derivative Instruments and Hedging Activities." SFAS 133 requires
derivatives to be carried at fair value. Management does not expect SFAS 133 to
have a significant impact on the Company's financial statements.
-18-
<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 3,891,000 net Company pops in 83 markets located in 14 states.
Pops refers to the estimated population of a market as initially licensed by the
FCC. As used herein "RSA" means the Cellular Geographic Service Area ("CGSA")
within a Rural Service Area and "MSA" means the CGSA within a Metropolitan
Statistical Area, as defined by the Federal Communications Commission ("FCC").
Company markets consist of 72 RSA markets having a total of 5,271,000 pops and
11 MSA markets having a total of 1,621,000 pops, of which the Company's
interests represent 3,089,000 net Company pops and 801,000 net Company pops,
respectively. The Company currently manages 56 of the 83 markets in which it
holds an interest and owns a greater than 50% interest in 49 of its 56 managed
markets. As of June 30, 1999, the Company and CIFC had net advances of
$217,800,000 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 $191,116,000. In addition, the Company had proportionate
obligations of additional debt of its affiliates from other financing sources of
$16,731,000. The assets of the affiliates in which the Company has investments
or advances represent 4,591,000 pops, which include 3,891,000 net Company pops
and 700,000 pops attributable to parties other than the Company. Advances
related to pops attributable to parties other than the Company total
$26,684,000. 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 4,281,000 total pops
and 3,534,000 net Company pops. As of June 30, 1999, the RSA and MSA managed
markets had 293,372 and 94,496 subscribers, respectively.
Information regarding the Company's net ownership interests in each
cellular licensee and the market subject to such license as of August 6, 1999 is
summarized in the following table.
<TABLE>
<CAPTION>
Net Company
MSA or Interest in 1999 Net Company
RSA Code (1) State Licensee (2) Population (3)(6) Pops (4)
- ------------------ -------------------------- -------------------- ------------------------ -------------------
MSAs:
<S> <C> <C> <C> <C>
152 ME Portland, ME 11.11% 292,709 32,520
141 MN Duluth, MN-WI 16.34% 236,055 38,571
185 IN Terra Haute, IN 16.67% 167,350 27,897
241 CO*(7)(8) Pueblo, CO 73.99% 136,877 101,275
253 IA*(7)(8) Sioux City, IA 74.50% 134,395 100,124
267 SD*(7)(8) Sioux Falls, SD 100.00% 144,557 144,557
268 MT* Billings, MT 91.63% 126,655 116,054
279 ME Lewiston-Auburn, ME 11.11% 101,304 11,255
289 SD* Rapid City, SD 100.00% 109,652 109,652
297 MT*(7)(8) Great Falls, MT 91.63% 79,065 72,447
298 ND*(7)(8) Bismarck, ND 51.00% 92,216 47,030
--------- -------
Total MSA 1,620,835 801,382
RSAs:
348 CO*(8) Colorado 100.00% 48,613 48,613
349 CO*(8) Colorado 61.75% 65,978 40,741
351 CO*(7)(8) Colorado 61.75% 79,864 49,316
352 CO*(8) Colorado 66.00% 37,494 24,746
353 CO* Colorado 100.00% 75,340 75,340
-19-
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Net Company
MSA or Interest in 1999 Net Company Pops
RSA Code (1) State Licensee (2) Population (3)(6) (4)
- ------------------ -------------------------- -------------------- ------------------------ -------------------
<S> <C> <C> <C> <C>
354 CO*(8) Colorado (B1) 69.40% 50,774 35,237
355 CO*(8) Colorado 100.00% 45,900 45,900
356 CO*(8) Colorado 49.00% 25,698 12,592
389 ID Idaho 50.00% 73,439 36,720
390 ID Idaho 33.33% 17,307 5,768
392 ID*(7)(8) Idaho (B1) 100.00% 143,655 143,655
393 ID*(7)(8) Idaho 91.64% 300,518 275,395
415 IA Iowa 10.11% 153,272 15,496
416 IA Iowa 78.57% 108,135 84,962
417 IA*(7)(8) Iowa 100.00% 156,732 156,732
419 IA* Iowa 44.92% 54,942 24,680
420 IA*(7)(8) Iowa 100.00% 62,862 62,862
424 IA* Iowa 50.00% 66,021 33,011
425 IA* Iowa 13.28% 109,755 14,575
426 IA*(8) Iowa 49.14% 82,673 40,626
427 IA*(8) Iowa 49.17% 101,532 49,923
428 Kansas 3.07% 26,766 822
429 Kansas 3.07% 29,758 914
430 Kansas 3.07% 51,524 1,582
431 Kansas 3.07% 127,600 3,917
432 Kansas 3.07% 31,613 971
433 Kansas 3.07% 19,356 594
434 Kansas 3.07% 78,820 2,420
435 Kansas 3.07% 130,188 3,997
436 Kansas 3.07% 57,737 1,773
437 Kansas 3.07% 111,966 3,437
438 Kansas 3.07% 86,881 2,667
439 Kansas 3.07% 44,202 1,357
440 Kansas 3.07% 28,601 878
441 Kansas 3.07% 176,277 5,412
442 Kansas 3.07% 153,262 4,705
512 MO Missouri (B1) 14.70% 56,731 8,339
523 MT*(7)(8) Montana (B1) 91.63% 65,402 59,928
523 MT*(8) Montana (B2) 91.63% 80,232 73,517
524 MT*(7)(8) Montana (B1) 91.63% 31,365 28,740
526 MT*(7)(8) Montana (B1) 91.63% 9,665 8,856
527 MT*(7)(8) Montana 91.63% 193,416 177,227
528 MT*(7)(8) Montana 91.63% 65,613 60,121
529 MT*(7)(8) Montana 91.63% 22,919 21,001
530 MT*(7)(8) Montana 91.63% 90,778 83,180
531 MT*(7)(8) Montana 91.63% 35,232 32,283
532 MT*(7)(8) Montana 91.63% 13,113 12,015
553 NM* (north) New Mexico (B2) 58.36% 119,567 69,779
555 NM New Mexico 12.25% 97,433 11,936
557 NM New Mexico 16.33% 62,868 10,266
580 ND*(7)(8) North Dakota 53.36% 102,916 54,916
</TABLE>
-20-
<PAGE>
<TABLE>
<CAPTION>
Net Company
MSA or Interest in 1999 Net Company Pops
RSA Code (1) State Licensee (2) Population (3)(6) (4)
- ------------------ -------------------------- -------------------- ------------------------ -------------------
<S> <C> <C> <C> <C>
581 ND*(8) North Dakota 65.06% 58,793 38,251
582 ND North Dakota 41.45% 89,604 37,141
583 ND* North Dakota 49.00% 58,229 28,532
584 ND*(7)(8) North Dakota 61.75% 45,427 28,051
634 SD*(7)(8) South Dakota 100.00% 32,684 32,684
635 SD*(7)(8) South Dakota 100.00% 18,422 18,422
636 SD*(7)(8) South Dakota 100.00% 52,164 52,164
638 SD*(8) South Dakota (B1) 100.00% 17,088 17,088
638 SD*(8) South Dakota (B2) 100.00% 15,817 15,817
639 SD* South Dakota (B1) 100.00% 45,148 45,148
639 SD* South Dakota (B2) 100.00% 1,499 1,499
640 SD*(7)(8) South Dakota 100.00% 59,848 59,848
641 SD*(7)(8) South Dakota 100.00% 77,441 77,441
642 SD* South Dakota 100.00% 108,796 108,796
675 UT*(7)(8) Utah 100.00% 62,660 62,660
676 UT*(7)(8) Utah 100.00% 121,103 121,103
677 UT*(7)(8) Utah (B3) 100.00% 42,303 42,303
678 UT*(7)(8) Utah 80.00% 28,343 22,674
718 WY*(7)(8) Wyoming 66.00% 53,058 35,018
719 WY*(7)(8) Wyoming 100.00% 75,819 75,819
720 WY*(7)(8) Wyoming 100.00% 144,455 144,455
--------- ---------
Total RSA 5,271,006 3,089,354
--------- ---------
Total MSA and RSA 6,891,841 3,890,736
========= =========
</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 1999 CACI Marketing Systems population estimates.
(4) Net Company Pops represents Net Company Interest in Licensee multiplied by
1999 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 CGSA.
Markets managed by the Company are denoted by an asterisk (*).
-21-
<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><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%
Sept 30, 1998 56 7 49 4,296,165 827,114 (10) 3,469,051 (10) 335,881 79,532 256,349 22.25%
Dec 31, 1998 56 7 49 4,296,165 827,114 (10) 3,469,051 (10) 358,665 85,029 273,636 6.59%
Mar 31, 1999 56 7 49 4,296,165 827,114 (10) 3,469,051 (10) 372,544 89,135 283,409 3.87%
June 30, 1999 56 7 49 4,281,083 823,417 (11) 3,457,666 (11) 387,868 94,496 293,372 4.11%
</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.
(10) Derived from 1998 Information Decision Systems population estimates.
(11) Derived from 1999 CACI Marketing Systems population estimates.
-22-
<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,
-----------------------------------------------------------------------------------------
1999 1998 1999 1998 1999 1998
-------------------------- ----------------------------- ----------------------------
Combined (1) Financed Proportionate (2) Company Proportionate (3)
-------------------------- ----------------------------- ----------------------------
<S> <C> <C> <C> <C> <C> <C>
Managed Markets
Revenues:
Cellular service $113,757 $101,469 $107,959 $ 91,379 $ 93,380 $ 76,156
In-roaming 44,092 34,737 41,177 31,247 36,822 26,745
Equipment sales 3,700 2,450 3,519 2,221 3,081 1,911
-------- -------- -------- -------- -------- --------
Total revenues 161,549 138,656 152,655 124,847 133,283 104,812
Costs and expenses
involving cash:
Cost of sales:
Cellular service
(including in-roaming) 18,706 18,354 17,765 16,871 15,375 14,060
Equipment sales 9,223 12,661 8,773 11,438 7,664 9,692
General and administrative (4) 33,398 29,975 36,691 29,169 31,663 23,599
Marketing and selling 28,896 23,549 27,223 21,444 23,602 17,652
Total cash costs and -------- -------- -------- -------- -------- --------
expenses
90,223 84,539 90,452 78,922 78,304 65,003
-------- -------- -------- -------- -------- --------
EBITDA $ 71,326 $ 54,117 $ 62,203 $ 45,925 $ 54,979 $ 39,809
======== ======== ======== ======== ======== ========
Capital expenditures $ 38,935 $ 18,891 $ 37,790 $ 15,972 $ 35,110 $ 13,314
Subscriber count 387,868 320,476 365,309 287,417 313,931 237,429
Total markets 56 56 56 56 56 56
Nonmanaged Markets
Revenues:
Cellular service $ 84,166 $ 76,018 $ 11,659 $ 10,064 $ 8,548 $ 7,397
In-roaming 27,741 19,434 7,170 5,083 4,834 3,517
Equipment sales 6,518 6,215 527 530 441 421
-------- -------- -------- -------- -------- --------
Total revenues 118,425 101,667 19,356 15,677 13,823 11,335
Costs and expenses
involving cash:
Cost of sales:
Cellular service 22,535 21,036 3,828 3,169 2,655 2,242
Equipment sales 7,684 9,427 795 793 582 604
General and administrative 31,680 19,593 4,534 3,502 3,229 2,412
Marketing and selling 15,015 16,233 2,986 3,046 2,210 2,368
-------- -------- -------- -------- -------- --------
Total cash costs
-------- -------- -------- -------- -------- --------
and expenses 76,914 66,289 12,143 10,510 8,676 7,626
-------- -------- -------- -------- -------- --------
EBITDA $ 41,511 $ 35,378 $ 7,213 $ 5,167 $ 5,147 $ 3,709
======== ======== ======== ======== ======== ========
Capital expenditures $ 19,247 $ 11,338 $ 2,345 $ 1,420 $ 1,527 $ 1,167
Subscriber count 247,850 225,024 39,069 36,429 30,330 26,683
Total markets 27 27 27 27 27 27
</TABLE>
-23-
<PAGE>
<TABLE>
<CAPTION>
Nine Months ended June 30,
---------------------------
1999 1998
---- ----
Reconciliation From Company Proportionate EBITDA to Consolidated Reporting
<S> <C> <C> <C>
Total proportionate EBITDA (managed and nonmanaged markets) $60,126 $43,518
Proportionate depreciation and amortization (17,668) (17,182)
Proportionate interest expense (8,631) (10,250)
Equity in nonlicensee affiliates (961) (1,004)
Minority interests 678 879
Intercompany interest 8,318 9,685
Amortization of license costs not owned by affiliates (1,542) (1,528)
Unallocated corporate expenses (4,460) (4,461)
Gain on sales of affiliates - -
Interest expense (net) and other (42,468) (29,181)
Merger costs - (57,238)
-------- -------
Consolidated net loss $(6,608) $(66,762)
======== ========
</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.
-24-
<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, 1999:
None.
-25-
<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 13, 1999 By: /s/Andrew J. Gardner
----------------------------------------------
Andrew J. Gardner
Executive Vice President, Treasurer &
Chief Financial Officer
Date: August 13, 1999 By: /s/Randy L. Lazzell
----------------------------------------------
Randy L. Lazzell
Vice President and Controller
(Principal Accounting Officer)
-26-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> JUN-01-1999
<CASH> 1,905
<SECURITIES> 0
<RECEIVABLES> 36,056
<ALLOWANCES> 4,456
<INVENTORY> 4,211
<CURRENT-ASSETS> 42,013
<PP&E> 277,330
<DEPRECIATION> 109,268
<TOTAL-ASSETS> 432,227
<CURRENT-LIABILITIES> 38,813
<BONDS> 727,536
0
0
<COMMON> 307,276
<OTHER-SE> (648,961)
<TOTAL-LIABILITY-AND-EQUITY> 432,337
<SALES> 144,935<F1>
<TOTAL-REVENUES> 144,935
<CGS> 28,107
<TOTAL-COSTS> 108,337
<OTHER-EXPENSES> (1,287)
<LOSS-PROVISION> 3,431
<INTEREST-EXPENSE> 43,896
<INCOME-PRETAX> (6,011)
<INCOME-TAX> 597
<INCOME-CONTINUING> (6,608)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,608)
<EPS-BASIC> (0.29)
<EPS-DILUTED> (0.29)
<FN>
<F1>INCLUDES CELLULAR, PAGING AND EQUIPMENT REVENUE
</FN>
</TABLE>
