<PAGE>
FORM 10-Q
_______________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________
(Mark one)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended: March 31, 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 May 7,
1999 was 22,662,985.
<PAGE>
COMMNET CELLULAR INC.
Form 10-Q - March 31, 1999
INDEX
<TABLE>
<CAPTION>
Part I Financial Information Page
- ------ --------------------- ----
<C> <S> <C>
Item 1 Financial Statements
Consolidated Condensed Balance Sheets -
March 31, 1999 and September 30, 1998 1
Consolidated Condensed Statements of Operations -
Three Months Ended March 31, 1999 and
March 31, 1998 3
Consolidated Condensed Statements of Operations -
Six Months Ended March 31, 1999 and
March 31, 1998 4
Consolidated Condensed Statements of Cash Flows -
Six Months Ended March 31, 1999 and
March 31, 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 24
</TABLE>
<PAGE>
COMMNET CELLULAR INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(Amounts in thousands)
(unaudited)
<TABLE>
<CAPTION>
March 31, September 30,
Assets 1999 1998
- --------------------------------------------------------- ------------------------ ------------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 11,338 $ 26,153
Accounts receivable, net of allowance for doubtful
accounts of $3,188 and $2,487 at March 31, 1999 and
September 30, 1998, respectively 24,532 28,051
Current portion of advances to affiliates 3,817 3,438
Prepaid expenses and other 2,229 1,682
Inventory 5,075 4,564
-------- --------
Total current assets
46,991 63,888
Investment in and advances to affiliates 31,699 33,637
Investment in cellular system equipment 12,160 3,816
Property and equipment, at cost:
Cellular system equipment 193,536 185,851
Land, buildings and improvements 39,014 35,280
Furniture and equipment 29,225 23,155
-------- --------
261,775 244,286
Accumulated depreciation 103,963 89,688
-------- --------
Net property and equipment 157,812 154,598
Other assets, less accumulated amortization of $40,857
and $37,295 at March 31, 1999 and September 30, 1998,
respectively:
FCC licenses and filing rights 157,780 100,380
Deferred loan costs and other 25,354 28,433
-------- --------
Total other assets 183,134 128,813
-------- --------
$431,796 $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>
March 31, September 30,
Liabilities and Stockholders' Deficit 1999 1998
- --------------------------------------------------------- ------------------------ ------------------------
<S> <C> <C>
Current liabilities:
Accounts payable $ 13,657 $ 4,954
Accounts payable - property and equipment
purchases 4,559 3,675
Accrued commissions 1,801 953
Accrued interconnect costs 2,164 1,741
Accrued operating taxes 3,477 3,891
Other accrued liabilities 3,339 8,188
Interest payable 11,053 2,421
Current portion of secured bank financing and other
long-term debt 2,650 -
--------- ---------
Total current liabilities
42,700 25,823
Long-term debt:
Secured bank financing 719,350 680,000
Note payable and other long-term debt 10,187 2,916
11 3/4% senior subordinated discount notes - 83
Minority interests 6,740 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 March 31,
1999 and September 30, 1998 (Note 3)
Capital in excess of par value 5 5
Deferred compensation to employees 307,271 307,271
Accumulated deficit (2,413) (2,661)
(652,044) (640,063)
--------- ---------
Total stockholders' deficit (347,181) (335,448)
--------- ---------
$ 431,796 $ 384,752
========= =========
</TABLE>
See accompanying notes.
-2-
<PAGE>
COMMNET CELLULAR INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
Three Months ended March 31, 1999 and 1998
(Amounts in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
1999 1998
------------------ ---------------------
<S> <C> <C>
Revenues:
Service $ 31,739 $ 26,134
In-roaming 11,023 7,747
Equipment sales 1,009 618
-------- --------
43,771 34,499
Costs and expenses:
Operations:
Cost of service 6,704 5,150
Cost of equipment sales (Note 4) 2,383 4,413
General and administrative 9,363 8,314
Marketing and selling 8,396 7,671
Depreciation and amortization 6,626 5,988
Corporate:
General and administrative 3,333 15,258
Depreciation 903 1,019
Less amounts allocated to nonconsolidated affiliates (1,805) (2,103)
-------- --------
35,903 45,710
-------- --------
Operating income (loss) 7,868 (11,211)
Equity in net income of nonconsolidated affiliates 1,384 1,403
Minority interest in net income of consolidated affiliates (664) (651)
Amortization of deferred costs (855) (755)
Interest expense (14,568) (11,412)
Interest income 611 1,322
-------- --------
Loss before income taxes and extraordinary charge (6,224) (21,304)
Income tax expense (40) -
-------- --------
Loss before extraordinary charge (6,264) (21,304)
Extraordinary charge related to early extinguishment of long-term debt - (33,500)
-------- --------
Net loss $ (6,264) $(54,804)
======== ========
Basic and diluted income (loss) per common share:
Income (loss) before extraordinary charge $(0.28) $(0.49)
Extraordinary charge - (0.78)
-------- --------
Basic and diluted income (loss) per common share $(0.28) $(1.27)
======== ========
Weighted average shares outstanding 22,663 43,237
======== ========
</TABLE>
See accompanying notes.
-3-
<PAGE>
COMMNET CELLULAR INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
Six Months ended March 31, 1999 and 1998
(Amounts in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
1999 1998
----------------- ---------------------
<S> <C> <C>
Revenues:
Service $ 64,495 $ 54,028
In-roaming 24,067 18,558
Equipment sales 2,443 1,257
-------- --------
91,005 73,843
Costs and expenses:
Operations:
Cost of cellular service 13,028 11,791
Cost of equipment sales (Note 4) 7,336 7,938
General and administrative 19,613 17,210
Marketing and selling 17,978 13,673
Depreciation and amortization 12,799 11,871
Corporate:
General and administrative 6,707 17,335
Depreciation 1,050 1,464
Less amounts allocated to nonconsolidated affiliates (3,524) (4,498)
-------- --------
74,987 76,784
-------- --------
Operating income (loss) 16,018 (2,941)
Equity in net income of nonconsolidated affiliates 3,186 1,803
Minority interest in net income of consolidated affiliates (1,393) (1,971)
Amortization of deferred costs (1,713) (1,024)
Interest expense (29,074) (18,737)
Interest income 1,520 2,566
-------- --------
Loss before income taxes and extraordinary charge (11,456) (20,304)
Income tax expense (525) -
-------- --------
Loss before extraordinary charge (11,981) (20,304)
Extraordinary charge related to early extinguishment of long-term debt - (33,500)
-------- --------
Net loss $(11,981) $(53,804)
======== ========
Basic and diluted loss per common share:
Loss before extraordinary charge $(0.53) $(0.36)
Extraordinary charge - (0.60)
-------- --------
Basic and diluted loss per common share $(0.53) $(0.96)
======== ========
Weighted average shares outstanding 22,663 56,240
</TABLE>
See accompanying notes.
-4-
<PAGE>
COMMNET CELLULAR INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
Six Months ended March 31, 1999 and 1998
(Amounts in thousands)
(unaudited)
<TABLE>
<CAPTION>
1999 1998
--------------------- ---------------------
<S> <C> <C>
Operating activities:
Net loss $(11,981) $(20,304)
Adjustments to reconcile net loss to net cash provided (used) by
operating activities:
Minority interest in net income of consolidated affiliates 1,393 1,971
Depreciation and amortization 15,562 14,359
Equity in net income of affiliates (3,186) (1,803)
Interest expense on 11 3/4% senior subordinated
discount notes 1 6,609
Stock-based compensation expense 248 -
Accrued interest on advances to affiliates (1,224) (1,992)
Change in operating assets and liabilities, net of effects
from consolidating acquired interests:
Accounts receivable 3,847 3,214
Prepaid expenses and other (547) (205)
Inventory (511) (1,819)
Accounts payable and accrued liabilities 4,405 (6,204)
Accrued interest 8,580 804
-------- --------
Net cash provided (used) by operating activities
16,587 (5,370)
Investing activities:
Reductions in investments in and advances to affiliates 9,494 6,900
Additions to investment in cellular system equipment (8,344) (668)
Additions to property and equipment (12,965) (14,500)
Additions to other assets (66) (34)
Purchase of interests in affiliates, net of assets and
liabilities (57,713) -
recorded due to consolidation -------- --------
Net cash used by investing activities (69,594) (8,302)
</TABLE>
See accompanying notes.
-5-
<PAGE>
COMMNET CELLULAR INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (continued)
Six Months ended March 31, 1999 and 1998
(Amounts in thousands)
(unaudited)
<TABLE>
<CAPTION>
1999 1998
---------------------- ----------------------
<S> <C> <C>
Financing activities:
Proceeds from secured bank financing $ 48,000 $ 695,000
Payments of secured bank financing (6,853) (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 (2,872) (2,349)
Reduction of obligation under capital leases - (108)
Issuance of Common Stock, net of offering costs - 128,137
Conversion of Common Stock as a condition of merger - (475,496)
-------- ---------
Net cash provided by financing activities
38,192 19,046
-------- ---------
Net increase (decrease) in cash and cash equivalents (14,815) 5,374
Cash and cash equivalents at beginning of period 26,153 14,132
-------- ---------
Cash and cash equivalents at end of period $ 11,338 $ 19,506
======== =========
Supplemental schedule of additional cash flow information and
noncash activities:
Cash paid for interest $20,440 $11,323
Purchase of cellular system equipment through accounts payable 4,559 6,842
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 CONDENSED FINANCIAL STATEMENTS
(unaudited)
1. Basis of presentation
---------------------
CommNet Cellular Inc. and its majority-owned affiliates (the
"Company"), in its opinion, has included all adjustments (consisting only of
normal recurring accruals) necessary for a fair presentation of the results of
operations for the periods presented. The consolidated condensed financial
statements and notes thereto should be read in conjunction with the financial
statements and notes for the years ended September 30, 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 six months ended March
31, 1999 are not necessarily indicative of the results for a full year. Certain
amounts relating to March 31, 1998 have been reclassified to correspond to the
March 31, 1999 presentation.
2. Earnings per common 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 1,554,913 and 3,665,885 weighted average
shares for March 31, 1999 and 1998, respectively. However, diluted earnings per
share are not presented as the effect is anti-dilutive.
The Company declared a share dividend with shareholders receiving four
additional shares for each share owned as of April 20, 1998. The payment date
was May 7, 1998. Accordingly, all share and earnings per share information has
been restated to give effect to the share dividend. Prior year issued shares
are restated as if the share dividend split occurred prior to September 30,
1997.
3. Stockholders' equity
--------------------
Changes to Common Stock during the six months ended March 31, 1999
were as follows (amounts in thousands, except share data):
<TABLE>
<CAPTION>
Deferred
Compensation
Common Stock Capital in Related to
------------------------------------- Excess Employee Accumulated
Shares Amount of 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 - - - 248 -
Net loss - - - - (11,981)
---------- -- -------- ------- ---------
Balance at
=============== == ======== ======= =========
March 31, 1999 22,662,985 $5 $307,271 $(2,413) $(652,044)
========== == ======== ======= =========
</TABLE>
At March 31, 1999 the Company had 1,705,700 options outstanding at a
weighted average exercise price of $1.42.
-7-
<PAGE>
COMMNET CELLULAR INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
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 to decrease net loss for the quarter
and six months ended March 31, 1999 by $2,143,000 and to decrease net loss per
share for the same period by $0.09.
5. Income taxes
------------
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. As of March
31, 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 necessary, except for Alternative Minimum Tax associated with certain tax
preference items.
6. Compensation to terminated executives
-------------------------------------
On April 27, 1999, a binding arbitration decision compelled the
Company to pay terminated executives approximately $2,280,000, of which $865,000
had been accrued prior to the quarter ended March 31, 1999. The unaccrued
$1,415,000 was expensed in the quarter ended March 31, 1999. The terms under
which these former executives have been paid no longer exist.
7. Contingencies
-------------
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 trial court found in favor of the
Company. Rye appealed. The Company intends to defend the appeal vigorously.
-8-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
- -------
The Company generated operating income during the six months ended March
31, 1999 and focused 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 six months ended March
31, 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), $722,000,000 has been drawn to finance extinguishment of old debt,
to repurchase $475,496,000 of Common Stock, transaction costs and the purchase
of 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
March 31, 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 March 31, 1998. The increase in the number of markets
included in consolidated results was due to acquisitions consummated subsequent
to March 31, 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 loss of affiliates includes the Company's share of net loss
in the markets in which the Company's interest is 50% or less but 20% or
greater. For the quarter ended March 31, 1999, 17 markets were accounted for
under the equity method compared to 18 such markets for the quarter ended March
31, 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 March 31, 1999 compared to 18 markets for
the quarter ended March 31, 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 March 31, 1999, 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.
-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 is prioritizing and
evaluating each scenario and the remediation effort required to achieve Y2K
compliance and choosing 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
will develop testing strategies for those remediation efforts and assumptions
that must be tested.
For all areas addressed by the Y2K Committee, whether addressed by
remediation efforts or not, the Y2K Committee will develop 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.
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 have committed to having resources available to expeditiously correct
Y2K problems if they arise. Service
-10-
<PAGE>
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 efforts to provided 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 provided 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 MTSO's. 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. 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 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
-11-
<PAGE>
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.
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 March 31, 1999 and 1998. Operations. Service revenues,
------------------------------------------ ----------
including in-roaming revenues, increased 26% from $33,881,000 for the quarter
ended March 31, 1998 to $42,762,000 for the quarter ended March 31, 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 quarter from 46 for the three
months ended March 31, 1998 to 49 during the three months ended March 31, 1999.
Growth in subscribers offset by lower revenues per subscriber accounted for 46%
of the increase, growth of in-roaming usage accounted for 27% of the increase,
and the number of consolidated markets accounted for 27% of the increase. In-
roaming revenues increased by 42%, or $3,276,000, from $7,747,000 for the
quarter ended March 31, 1998 to $11,023,000 for the quarter ended March 31,
1999, due to increased coverage in cellular markets, industry-wide subscriber
increases and an increase in the number of consolidated markets. 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 $45 for the quarter ended March 31, 1998 to $44 for the quarter ended March
31, 1999, reflecting the benefit of declining prices to the consumer which is
consistent with an overall industry trend. However, in-roaming revenues per
subscriber per month increased $2, from $10 for the quarter ended March 31,
1998, to $12 for the quarter ended March 31, 1999. In-roaming minutes of use
increased 66% from 8.6 million for the quarter ended March 31, 1998 to 14.3
million for the quarter ended March 31, 1999. This increase in foreign in-
roaming minutes of use is expected to accelerate as new and existing roaming
partners use the Company's network to satisfy demand for a broad geographic
footprint.
Cost of service was unchanged as a percentage of service revenues,
including in-roaming revenues, at approximately 15% for the quarters ended March
31, 1998 and 1999. The Company recently renegotiated its contract to provide
long distance services for its customers at a lower cost.
Equipment sales increased 63% from $618,000 for the quarter ended March 31,
1998 to $1,009,000 for the quarter ended March 31, 1999, due to an increase in
the sales of accessories. Cost of equipment sales decreased 46% from $4,413,000
for the quarter ended March 31, 1998 to $2,383,000 for the quarter ended
-12-
<PAGE>
March 31, 1999. $2,209,000 of the decrease was due to the change in method of
accounting for handsets provided to customers (See Note 4), offset by an
increase of $179,000 related to increased subscriber additions.
General and administrative costs of operations increased 13% from
$8,314,000 during the quarter ended March 31, 1998 to $9,363,000 during the
quarter ended March 31, 1999, due to the growth in the customer base. The
majority of these costs were incremental customer billing services. General and
administrative costs as a percentage of service revenues decreased from 32% for
the quarter ended March 31, 1998 to 30% for the quarter ended March 31, 1999.
Marketing and selling costs of operations increased 9% from $7,671,000 for
the quarter ended March 31, 1998 to $8,396,000 for the quarter ended March 31,
1999, primarily as a result of increases in salaries and commissions due to
approximately 36,000, or 17%, greater gross cellular subscriber additions,
offset by reductions in advertising. Marketing costs per gross new cellular
subscriber decreased 5% from $244 for the quarter ended March 31, 1998 to $232
for the quarter ended March 31, 1999.
Depreciation and amortization relating to operations increased 11% from
$5,988,000 for the quarter ended March 31, 1998 to $6,626,000 for the quarter
ended March 31, 1999, primarily related to increased property and equipment in
service and the effect of the change of method accounting.
Other Costs and Expenses
------------------------
Corporate costs and expenses for the quarter ended March 31, 1998 were
$14,174,000, which represented gross expenses of $16,277,000 less amounts
allocated to nonconsolidated affiliates of $2,103,000. Corporate costs and
expenses for the quarter ended March 31, 1999 were $2,431,000, which represented
gross expenses of $4,236,000 less amounts allocated to nonconsolidated
affiliates of $1,805,000. The decrease in corporate costs is primarily due to
the $13,400,000 in 1998 of nonrecurring transaction costs related to stock
options offset by increases in compensation expense in connection with the
settlement of claims of former executives totalling $1,415,000 in 1999, none of
which were allocated to affiliates.
Equity in net income of nonconsolidated affiliates for the quarter ended
March 31, 1999 was $1,384,000 compared to equity in net income of affiliates of
$1,403,000 for the quarter ended March 31, 1998.
Amortization of deferred costs increased 13% from $755,000 for the quarter
ended March 31, 1998, to $855,000 for the quarter ended March 31, 1999, as a
result of increased deferred costs associated with the Chase credit facility.
Interest expense increased 28% from $11,412,000 for the quarter ended March
31, 1998 to $14,568,000 for the quarter ended March 31, 1999 due to higher
secured bank financing under the Chase Credit Agreement. Cash paid for interest
increased from $6,329,000 during the quarter ended March 31, 1998 to $14,886,000
during the quarter ended March 31, 1999.
Interest income decreased 54% from $1,322,000 for the quarter ended March
31, 1998 to $611,000 for the quarter ended March 31, 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.
Six Months Ended March 31, 1999 and 1998. Operations. Service revenues,
---------------------------------------- ----------
including in-roaming revenues, increased 22% from $72,586,000 for the six
months ended March 31, 1998 to $88,562,000 for the six months ended March 31,
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 six months from
46 for the six months ended March 31, 1998 to 49 during the six months ended
March 31, 1999. Growth in subscribers offset by lower revenues per subscriber
accounted for 46% of the increase, growth of in-roaming usage accounted for 21%
of the increase, and the number of consolidated markets accounted for 33% of the
increase. In-roaming revenues increased by 30%, or $5,509,000, from $18,558,000
for the six months ended March 31, 1998 to $24,067,000 for the six months ended
March 31, 1999, due to increased coverage in cellular
-13-
<PAGE>
markets, to industry-wide subscriber increases and an increase in the number of
consolidated markets. 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 $49 for the six months ended March 31, 1998 to $47 for the six months ended
March 31, 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 was unchanged at $13. However, in-roaming minutes of use
increased 43% from 20.6 million for the six months ended March 31, 1998 to 29.5
million for the six months ended March 31, 1999. This increase in foreign in-
roaming minutes of use is expected to accelerate as new and existing roaming
partners use the Company's network to satisfy demand for a broad geographic
footprint.
Cost of service decreased as a percentage of service revenues including in-
roaming, from 16% for the six months ended March 31, 1998 to 15% for the six
months ended March 31, 1999, as revenues derived from the growing subscriber
base outpaced the fixed components of cost of service. In addition, the Company
has renegotiated most of its interconnect and long distance agreements for lower
prices.
Equipment sales increased 94% from $1,257,000 for the six months ended
March 31, 1998 to $2,443,000 for the six months ended March 31, 1999, due to
increases in the sales of accessories and gross subscriber additions including
handset sales. Cost of equipment sales decreased 8% from $7,938,000 for the six
months ended March 31, 1998 to $7,336,000 for the six months ended March 31,
1999. $2,209,000 of the decrease was due to the change in method of accounting,
offset by an increase of $1,607,000 related to increased subscriber additions.
General and administrative costs of operations increased 14% from
$17,210,000 during the six months ended March 31, 1998 to $19,613,000 during the
six months ended March 31, 1999, due to the growth in the customer base. The
majority of these costs were incremental customer billing services. General and
administrative costs as a percentage of service revenues decreased from 32% for
the six months ended March 31, 1998 to 30% for the six months ended March 31,
1999.
Marketing and selling costs of operations increased 31% from $13,673,000
for the six months ended March 31, 1998 to $17,978,000 for the six months ended
March 31, 1999, primarily as a result of increases in salaries, commissions and
advertising related to a 23% greater gross subscriber additions. Marketing
costs per gross new cellular subscriber increased 12% from $224 for the six
months ended March 31, 1998 to $250 for the six months ended March 31, 1999.
Depreciation and amortization relating to operations increased 8% from
$11,871,000 for the six months ended March 31, 1998 to $12,799,000 for the six
months ended March 31, 1999, primarily related to increased property and
equipment in service and the effect of the change in method of accounting.
Other Costs and Expenses
------------------------
Corporate costs and expenses for the six months ended March 31, 1998 were
$14,301,000, which represented gross expenses of $18,799,000 less amounts
allocated to nonconsolidated affiliates of $4,498,000. Corporate costs and
expenses for the six months ended March 31, 1999 were $4,233,000, which
represented gross expenses of $7,757,000 less amounts allocated to
nonconsolidated affiliates of $3,524,000. The decrease in corporate costs is
primarily due to the $13,400,000 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 totalling $2,710,000,
none of which were allocated to affiliates.
Equity in net income of affiliates for the six months ended March 31, 1999
was $3,186,000 compared to equity in net income of affiliates of $1,803,000 for
the six months ended March 31, 1998. The improvement was primarily due to
increased profitability of those markets accounted for under the equity method.
-14-
<PAGE>
Amortization of deferred costs increased 67% from $1,024,000 for the six
months ended March 31, 1998, to $1,713,000 for the six months ended March 31,
1999, as a result of increased deferred costs associated with the Chase credit
facility.
Interest expense increased 55% from $18,737,000 for the six months ended
March 31, 1998 to $29,074,000 for the six months ended March 31, 1999 due to
higher secured bank financing under the Chase Credit Agreement. Cash paid for
interest increased from $11,323,000 during the six months ended March 31, 1998
to $20,440,000 during the six months ended March 31, 1999.
Interest income decreased 41% from $2,566,000 for the six months ended
March 31, 1998 to $1,520,000 for the six months ended March 31, 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.
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.
-15-
<PAGE>
Changes in Financial Condition
- ------------------------------
Net cash provided by operating activities was $16,587,000 during the six
months ended March 31, 1999. This was due to cash provided from changes in
working capital of $15,774,000, in addition to $813,000 provided in generating
the net loss after adjustments to reconcile net cash provided by operating
activities.
Net cash used by investing activities was $69,594,000 for the six months
ended March 31, 1999. This was due primarily to $57,713,000 required to
purchase additional interests in affiliates and $21,309,000 required to fund
property and equipment additions offset by a $9,494,000 reduction in investments
and advances to affiliates.
Net cash provided by financing activities was $38,192,000 for the six
months ended March 31, 1999. This was due to net increases in secured bank
financing of $40,981,000 offset by distributions to minority interests of
$2,872,000.
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
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. Advances made under the
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 1.00% to
2.50% over prime (7.75% at March 31, 1999) for variable rate loans or 2.00% to
3.50% over LIBOR (5.00% at March 31, 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.
-16-
<PAGE>
In addition to the liquidity provided by the Chase Credit Agreement and
other long-term debt agreements at March 31, 1999, the Company, on a
consolidated basis, had available $11,338,000 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,
reflected as additions to investments in and advances to affiliates, and
additions to property and equipment and investment in cellular system equipment,
for the six months ended March 31, 1999 was $22,364,000. 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 $20,000,000 to optimize coverage, upgrade switching
capacity, increased channel capacity and for paging infrastructure.
At March 31, 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 $30,000,000. 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 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.
-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 3,888,000 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 5,268,000 pops and
11 MSA markets having a total of 1,626,000 pops, of which the Company's
interests represent 3,082,000 net Company pops and 806,000 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 March 31, 1999, the Company and CIFC had net advances of
$220,344,000 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 $192,110,000. In addition, the Company had proportionate
obligations of additional debt of its affiliates from other financing sources of
$15,356,000. The assets of the affiliates in which the Company has investments
or advances represent 4,602,000 pops, which include 3,888,000 net Company pops
and 714,000 pops attributable to parties other than the Company. Advances
related to pops attributable to parties other than the Company total
$28,234,000. 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 4,240,000 total pops
and 3,275,000 net Company pops. As of March 31, 1999, the RSA and MSA managed
markets had 283,409 and 89,135 subscribers, respectively.
Information regarding the Company's net ownership interests in each
cellular licensee and the market subject to such license as of May 7, 1999 is
summarized in the following table.
<TABLE>
<CAPTION>
Net Company
MSA or Interest in 1998 Net Company Pops
RSA Code (1) State Licensee (2) Population (3)(6) (4)
- -----------------------------------------------------------------------------------------------------------
MSAs:
<S> <C> <C> <C> <C> <C>
152 Portland, ME 11.11% 284,147 31,569
167 Duluth, MN-WI 16.34% 240,234 39,254
206 Terra Haute, IN 16.67% 170,755 28,465
241*(5) Pueblo, CO 73.99% 133,797 98,996
253*(5) Sioux City, IA 74.50% 136,731 101,865
267*(5) Sioux Falls, SD 100.00% 142,073 142,073
268*(5) Billings, MT 91.63% 129,371 118,543
283 Lewiston-Auburn, ME 11.11% 103,721 11,523
289*(5) Rapid City, SD 100.00% 110,926 110,926
297*(5) Great Falls, MT 91.63% 82,324 75,433
298*(5) Bismarck, ND 51.00% 91,892 46,865
--------- -------
Total MSA 1,625,971 805,512
RSAs:
348* Colorado 100.00% 48,029 48,029
349*(5) Colorado 61.75% 66,939 41,335
351*(5) Colorado 61.75% 78,325 48,366
352*(5) Colorado 66.00% 36,101 23,827
353*(5) Colorado 100.00% 76,122 76,122
354*(5) Colorado (B1) 69.40% 49,823 34,577
</TABLE>
-18-
<PAGE>
<TABLE>
<CAPTION>
Net Company
MSA or Interest in 1998 Net Company Pops
RSA Code (1) State Licensee (2) Population (3)(6) (4)
- --------------- --------------- ------------------ ---------------------- --------------------------
<S> <C> <C> <C> <C>
355* Colorado 49.00% 46,379 22,726
356* Colorado (B1) 49.00% 25,782 12,633
389 Idaho 50.00% 71,284 35,642
390 Idaho 33.33% 17,602 5,867
392*(5) Idaho (B1) 100.00% 144,267 144,267
393*(5) Idaho 91.64% 300,443 275,326
415 Iowa 10.11% 155,178 15,688
416 (5) Iowa 78.57% 109,023 85,659
417*(5) Iowa 100.00% 156,442 156,442
419* Iowa 44.92% 54,811 24,621
420*(5) Iowa 100.00% 63,038 63,038
424* Iowa 50.00% 66,643 33,322
425* Iowa 13.28% 110,868 14,723
426* Iowa 49.14% 83,090 40,830
427* Iowa 49.17% 102,942 50,617
428 Kansas 4.11% 27,741 1,140
429 Kansas 4.11% 30,523 1,254
430 Kansas 4.11% 53,026 2,179
431 Kansas 4.11% 137,928 5,669
432 Kansas 4.11% 32,861 1,351
433 Kansas 4.11% 20,123 827
434 Kansas 4.11% 80,524 3,310
435 Kansas 4.11% 131,254 5,395
436 Kansas 4.11% 58,858 2,419
437 Kansas 4.11% 109,008 4,480
438 Kansas 4.11% 84,143 3,458
439 Kansas 4.11% 43,831 1,801
440 Kansas 4.11% 29,677 1,220
441 Kansas 4.11% 175,260 7,203
442 Kansas 4.11% 155,007 6,371
512 Missouri (B1) 14.70% 35,343 5,195
523*(5) Montana (B1) 91.63% 66,810 61,218
523*(5) Montana (B2) 91.63% 82,182 75,303
524*(5) Montana (B1) 91.63% 32,203 29,508
526*(5) Montana (B1) 91.63% 9,897 9,069
527*(5) Montana 91.63% 196,567 180,114
528*(5) Montana 91.63% 65,707 60,207
529*(5) Montana 91.63% 23,502 21,535
530*(5) Montana 91.63% 91,862 84,173
531*(5) Montana 91.63% 35,676 32,690
532*(5) Montana 91.63% 13,526 12,394
553*(5) New Mexico (B2) 58.36% 117,311 68,463
555 New Mexico 12.25% 89,939 11,018
557 New Mexico 16.33% 59,835 9,771
580*(5) North Dakota 53.36% 105,910 56,514
581*(5) North Dakota 65.06% 59,961 39,011
582 North Dakota 41.45% 90,709 37,599
583* North Dakota 49.00% 58,607 28,717
584*(5) North Dakota 61.75% 46,240 28,553
634*(5) South Dakota 100.00% 33,484 33,484
635*(5) South Dakota 100.00% 18,830 18,830
</TABLE>
-19-
<PAGE>
<TABLE>
<CAPTION>
Net Company
MSA or Interest in 1998 Net Company Pops
RSA Code (1) State Licensee (2) Population (3)(6) (4)
- -------------------- ------------------- ------------------- --------------------- -----------------
<S> <C> <C> <C> <C>
636*(5) South Dakota 100.00% 53,417 53,417
638*(5) South Dakota (B1) 100.00% 17,205 17,205
638*(5) South Dakota (B2) 100.00% 15,882 15,882
639*(5) South Dakota (B1) 100.00% 46,573 46,573
639*(5) South Dakota (B2) 100.00% 1,511 1,511
640*(5) South Dakota 100.00% 60,553 60,553
641*(5) South Dakota 100.00% 79,882 79,882
642*(5) South Dakota 100.00% 104,802 104,802
675*(5) Utah 100.00% 59,833 59,833
676*(5) Utah 100.00% 116,678 116,678
677*(5) Utah (B3) 100.00% 41,233 41,233
678*(5) Utah 80.00% 27,499 21,999
718*(5) Wyoming 66.00% 52,841 34,875
719*(5) Wyoming 100.00% 76,569 76,569
720*(5) Wyoming 100.00% 146,254 146,254
--------- ---------
Total RSA 5,267,728 3,082,366
--------- ---------
Total MSA and RSA 6,893,699 3,887,878
========= =========
</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 1998 Information Decision Systems database for markets
managed by the Company, and other sources for markets not managed by the
Company.
(4) Net Company Pops represents Net Company Interest in Licensee multiplied by
1998 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 (*).
-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 Estimated Population Number of
Operating Systems of Operating Systems Subscribers
------------------------- ----------------------------------------------- ----------------------------- Subscriber
Total MSA RSA Total MSA RSA Total MSA RSA Growth
--------- ----- --------- ----------- -------------- -------------------- ---------- --------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Sept 30, 1987 0 0 0 0 0 0 0 0 0
Sept 30, 1988 4 4 0 504,529 504,529 (1) 0 424 424 0
Sept 30, 1989 4 4 0 500,804 500,804 (2) 0 1,362 1,362 0 221.23%
Sept 30, 1990 18 4 14 1,687,481 500,804 (2) 1,186,677 (2) 6,444 3,513 2,931 373.13%
Sept 30, 1991 49 5 44 3,509,779 566,722 (3) 2,943,057 (3) 17,952 6,387 11,565 178.58%
Sept 30, 1992 49 5 44 3,509,779 566,722 (3) 2,943,057 (3) 35,884 11,119 24,765 99.89%
Sept 30, 1993 50 6 44 3,665,758 644,526 (4) 3,021,232 (4) 60,381 17,898 42,483 68.27%
Sept 30, 1994 55 7 48 3,906 063 771,660 (5) 3,134,403 (5) 99,002 30,711 68,291 63.96%
Sept 30, 1995 56 7 49 4,220,975 785,866 (6) 3,435,109 (6) 151,482 42,401 109,081 53.01%
Sept 30, 1996 55 7 48 4,105,119 792,913 (7) 3,312,206 (7) 211,278 55,896 155,382 39.47%
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%
- -----------------------
</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.
-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>
Six Months ended March 31,
---------------------------------------------------------------------------------------
1999 1998 1999 1998 1999 1998
-------------------------- ------------------------------- ----------------------------
Combined (1) Financed Proportionate (2) Company Proportionate (3)
-------------------------- ------------------------------- ----------------------------
<S> <C> <C> <C> <C> <C>
Managed Markets
Revenues:
Cellular service $ 72,448 $ 64,357 $ 68,894 $ 57,988 $ 59,480 $ 48,398
In-roaming 26,480 21,706 24,716 19,559 22,061 16,685
Equipment sales 2,619 1,384 2,495 1,242 2,181 1,084
-------- -------- -------- -------- -------- --------
Total revenues 101,547 87,447 96,105 78,789 83,722 66,167
Costs and expenses
involving cash:
Cost of sales:
Cellular service
(including in-roaming) 12,838 12,516 12,103 11,545 10,417 9,645
Equipment sales 7,930 9,279 7,499 8,368 6,518 7,075
General and administrative (4) 22,061 20,223 25,442 19,677 22,108 16,052
Marketing and selling 19,678 15,656 18,603 14,238 16,076 11,713
Total cash costs and -------- -------- -------- -------- -------- --------
expenses
62,507 57,674 63,647 53,828 55,119 44,485
-------- -------- -------- -------- -------- --------
EBITDA $ 39,040 $ 29,773 $ 32,458 $ 24,961 $ 28,603 $ 21,682
======== ======== ======== ======== ======== ========
Capital expenditures $ 22,364 $ 13,946 $ 21,873 $ 13,118 $ 21,090 $ 11,291
Subscriber count 372,544 307,109 350,114 275,019 300,773 227,333
Total markets 56 56 56 56 56 56
Nonmanaged Markets
Revenues:
Cellular service $ 55,642 $ 52,081 $ 7,580 $ 6,915 $ 5,749 $ 5,073
In-roaming 19,178 13,401 4,858 3,576 3,351 2,473
Equipment sales 4,467 4,525 368 427 311 336
-------- -------- -------- -------- -------- --------
Total revenues 79,287 70,007 12,806 10,918 9,411 7,882
Costs and expenses
involving cash:
Cost of sales:
Cellular service $ 16,340 13,415 2,577 2,032 1,845 1,438
Equipment sales 4,754 6,670 495 596 375 453
General and administrative 19,485 15,643 2,748 2,471 2,016 1,720
Marketing and selling 11,065 11,402 1,951 2,289 1,518 1,765
-------- -------- -------- -------- -------- --------
Total cash costs
and expenses 51,644 47,130 7,771 7,388 5,754 5,376
-------- -------- -------- -------- -------- --------
EBITDA $ 27,643 $ 22,877 $ 5,035 $ 3,530 $ 3,657 $ 2,506
======== ======== ======== ======== ======== ========
Capital expenditures $ 10,966 $ 8,633 $ 1,042 $ 1,401 $ 951 $ 1,140
Subscriber count 251,490 203,109 41,042 34,837 30,960 25,733
Total markets 27 27 27 27 27 27
</TABLE>
-22-
<PAGE>
<TABLE>
<CAPTION>
Six Months ended March 31,
----------------------------
1999 1998
------------- --------------
Reconciliation From Company Proportionate EBITDA to Consolidated Reporting
<S> <C> <C>
Total proportionate EBITDA (managed and nonmanaged markets) $ 32,260 $ $ 24,188
Depreciation and amortization (11,243) (10,452)
Interest expense (5,716) (6,829)
Equity in nonlicensee affiliates (647) (566)
Minority interests (112) 68
Intercompany interest 5,534 6,450
Amortization of license costs not owned by affiliates (1,027) (1,015)
Unallocated corporate expenses (3,186) (3,171)
Stock-based compensation expense - (13,400)
Interest expense (net) and other (27,319) (15,577)
Merger costs - (33,500)
Income tax expense (525) -
------------- --------------
Consolidated net loss $ (11,981) $ (53,804)
============= ==============
</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.
-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 March 31,
1999:
Date of Report Item Reported Financial Statements Filed
-------------- ------------- --------------------------
February 17, 1999 Item 5 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: May 14, 1999 By: /s/Andrew J. Gardner
--------------------
Andrew J. Gardner
Executive Vice President and Chief
Financial Officer
Date: May 14, 1999 By: /s/Randy L. Lazzell
-------------------
Randy L. Lazzell
Vice President and Controller
(Principal Accounting Officer)
-25-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 11,338
<SECURITIES> 0
<RECEIVABLES> 27,720
<ALLOWANCES> 3,188
<INVENTORY> 5,075
<CURRENT-ASSETS> 46,991
<PP&E> 261,775
<DEPRECIATION> 103,963
<TOTAL-ASSETS> 431,796
<CURRENT-LIABILITIES> 42,700
<BONDS> 729,537
0
0
<COMMON> 307,276
<OTHER-SE> (654,457)
<TOTAL-LIABILITY-AND-EQUITY> 431,796
<SALES> 91,005
<TOTAL-REVENUES> 91,005
<CGS> 20,364
<TOTAL-COSTS> 74,987
<OTHER-EXPENSES> (1,600)
<LOSS-PROVISION> 1,982
<INTEREST-EXPENSE> 29,074
<INCOME-PRETAX> (11,456)
<INCOME-TAX> 525
<INCOME-CONTINUING> (11,981)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,981)
<EPS-PRIMARY> (0.53)
<EPS-DILUTED> (0.53)<F1>
<FN>
<F1>(Sales) Includes cellular, paging, and equipment revenue
</FN>
</TABLE>
