-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, B1JV+Ki1eUSvHj1BqoRnzVvphRXgx6GnB7oyMvWfvfhzDxfXLD9jmrOt5qlMBUGd mXBtjaOpmV84RumykZAf1g== 0000927356-98-000181.txt : 19980218 0000927356-98-000181.hdr.sgml : 19980218 ACCESSION NUMBER: 0000927356-98-000181 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980217 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMMNET CELLULAR INC CENTRAL INDEX KEY: 0000787912 STANDARD INDUSTRIAL CLASSIFICATION: RADIO TELEPHONE COMMUNICATIONS [4812] IRS NUMBER: 840924904 STATE OF INCORPORATION: CO FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-15056 FILM NUMBER: 98543073 BUSINESS ADDRESS: STREET 1: 8350 EAST CRESCENT PARKWAY SUITE 400 CITY: ENGLEWOOD STATE: CO ZIP: 80111 BUSINESS PHONE: 3036943234 MAIL ADDRESS: STREET 1: 8350 EAST CRESCENT PKWY STREET 2: STE 400 CITY: ENGLEWOOD STATE: CO ZIP: 80111 FORMER COMPANY: FORMER CONFORMED NAME: CELLULAR INC DATE OF NAME CHANGE: 19920703 10-Q 1 FORM 10-Q 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: December 31, 1997 ----------------- [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to ____________ Commission file number: 0-15056 ------- COMMNET CELLULAR INC. --------------------- (Exact name of registrant as specified in its charter) Colorado 84-0924904 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 8350 East Crescent Parkway, Suite 400 Englewood, Colorado 80111 ------------------------- (Address of principal executive offices) (Zip Code) 303/694-3234 ------------ (Registrant's telephone number, including area code) N/A --- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- The number of shares of the registrant's Common Stock outstanding as of February 10, 1998 was 4,527,778. COMMNET CELLULAR INC. FORM 10-Q - DECEMBER 31, 1997 INDEX Part I Financial Information Page - ------ --------------------- ---- Item 1 Financial Statements Consolidated Condensed Balance Sheets - December 31, 1997 and September 30, 1997 1 Consolidated Condensed Statements of Operations - Three Months Ended December 31, 1997 and December 31, 1996 3 Consolidated Condensed Statements of Cash Flows - Three Months Ended December 31, 1997 and December 31, 1996 4 Notes to Consolidated Condensed Financial Statements 6 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 20 COMMNET CELLULAR INC. CONSOLIDATED CONDENSED BALANCE SHEETS (Amounts in thousands)
December 31, September 30, Assets 1997 1997 - ------------------------------------------------------ ------------ ------------ (unaudited) Current assets: Cash and cash equivalents $ 23,682 $ 14,132 Accounts receivable, net of allowance for doubtful accounts of $1,924 and $2,122 at December 31, 1997 and September 30, 1997, respectively 27,006 25,386 Current portion of advances to affiliates 3,288 2,873 Inventory and other 5,994 4,558 -------- -------- Total current assets 59,970 46,949 Investment in and advances to affiliates 42,991 47,211 Investment in cellular system equipment 14,527 10,243 Property and equipment, at cost: Cellular system equipment 164,454 159,436 Land, buildings and improvements 32,193 31,688 Furniture and equipment 19,984 19,505 -------- -------- 216,631 210,629 Less accumulated depreciation 71,749 66,754 -------- -------- Net property and equipment 144,882 143,875 Other assets, less accumulated amortization of $37,807 and $36,883 at December 31, 1997 and September 30, 1997, respectively: FCC licenses and filing rights 97,484 98,216 Deferred loan costs and other 7,038 6,422 -------- -------- Total other assets 104,522 104,638 -------- -------- $366,892 $352,916 ======== ========
See accompanying notes. -1- COMMNET CELLULAR INC. CONSOLIDATED CONDENSED BALANCE SHEETS (CONTINUED) (Amounts in thousands, except share data)
December 31, September 30, Liabilities and Stockholders' Equity 1997 1997 - ------------------------------------------------------- ------------ ------------ (unaudited) Current liabilities: Accounts payable $ 5,250 $ 7,695 Accounts payable - property and equipment purchases 9,333 8,228 Accrued commissions 1,302 1,118 Accrued interconnect costs 2,635 1,851 Accrued operating taxes 2,974 2,809 Other accrued liabilities 5,644 5,988 Interest payable 4 2,302 Current portion of secured bank financing and other long-term debt 3,088 1,118 --------- --------- Total current liabilities 30,230 31,109 Long-term debt: Secured bank financing 17,515 8,803 Note payable and other long-term debt 2,916 2,916 11 3/4% senior subordinated discount notes 163,762 159,133 11 1/4% subordinated notes 80,000 80,000 Minority interests 9,277 9,055 Commitments Stockholders' equity: Preferred Stock, $.01 par value; 1,000,000 shares authorized; no shares issued - - Common Stock, $.001 par value; 40,000,000 shares authorized; 13,796,836 and 13,785,211 shares issued at December 31, 1997 and September 30, 1997, respectively 14 14 Capital in excess of par value 166,281 165,989 Accumulated deficit (103,103) (104,103) --------- --------- Total stockholders' equity 63,192 61,900 --------- --------- $ 366,892 $ 352,916 ========= =========
See accompanying notes. -2- COMMNET CELLULAR INC. CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS THREE MONTHS ENDED DECEMBER 31, 1997 AND 1996 (Amounts in thousands, except per share data) (unaudited)
1997 1996 ------- ------- Revenues: Cellular service $27,894 $25,331 In-roaming 10,811 8,284 Equipment sales 639 881 ------- ------- 39,344 34,496 Costs and expenses: Cellular operations: Cost of cellular service 6,277 6,752 Cost of equipment sales 3,474 2,939 General and administrative 8,772 7,464 Marketing and selling 5,924 6,439 Depreciation and amortization 5,625 4,808 Corporate: General and administrative 2,693 1,885 Depreciation and amortization 972 527 Less amounts allocated to nonconsolidated affiliates (2,394) (1,512) ------- ------- 31,343 29,302 ------- ------- Operating income 8,001 5,194 Equity in net loss of affiliates 400 (608) Minority interest in net income of consolidated affiliates (1,320) (397) Interest expense (7,325) (7,317) Interest income 1,244 1,753 ------- ------- Net income (loss) $ 1,000 $(1,375) ======= ======= Net income (loss) per common share $ 0.07 $ (0.10) ======= ======= Weighted average shares outstanding 13,792 13,774 ======= =======
See accompanying notes. -3- COMMNET CELLULAR INC. CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS THREE MONTHS ENDED DECEMBER 31, 1997 AND 1996 (Amounts in thousands) (unaudited)
1997 1996 ------- ------- Operating activities: Net income (loss) $ 1,000 $(1,375) Adjustments to reconcile net loss to net cash provided by operating activities: Minority interest 1,320 397 Depreciation 5,672 4,470 Amortization 924 865 Equity in net (income) loss of affiliates (400) 608 Interest expense on 11 3/4% senior subordinated discount notes 4,629 4,130 Accrued interest on advances to affiliates (1,030) (1,489) Change in operating assets and liabilities, net of effects from consolidating acquired interests: Accounts receivable (1,620) 1,643 Inventory and other (1,436) (584) Accounts payable and accrued liabilities (1,743) 1,915 Accrued interest (2,298) 2,134 ------- ------- Net cash provided by operating activities 5,018 12,714 Investing activities: Reductions in investments in and advances to affiliates 5,572 1,123 Additions to investment in cellular system equipment (4,284) (3,195) Additions to property and equipment (5,539) (2,696) Reduction in (additions to) other assets (807) 58 Purchase of interests in affiliates, net of cash acquired and net of assets and liabilities recorded due to consolidation - (48) ------- ------- Net cash used by investing activities (5,058) (4,758)
See accompanying notes. -4- COMMNET CELLULAR INC. CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (CONTINUED) THREE MONTHS ENDED DECEMBER 31, 1997 AND 1996 (Amounts in thousands) (unaudited)
1997 1996 ------- ------- Financing activities: Proceeds from secured bank financing $15,000 $24,000 Payments of secured bank financing (4,175) (3,903) Distributions to minority interests (1,471) (98) Capital contributions from minority interests - 2,949 Reduction of obligation under capital leases (56) (75) Issuance of Common Stock, net of offering costs 292 153 Repurchases of Common Stock - (2,932) ------- ------- Net cash provided by financing activities 9,590 20,094 ------- ------- Net increase in cash and cash equivalents 9,550 28,050 Cash and cash equivalents at beginning of period 14,132 11,492 ------- ------- Cash and cash equivalents at end of period $23,682 $39,542 ======= ======= Supplemental schedule of additional cash flow information and noncash activities: Cash paid during the three-month period for interest $ 4,994 $ 1,053 Purchase of cellular system equipment through accounts payable 9,333 5,838
See accompanying notes. -5- 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, 1995, 1996 and 1997 included in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1997. The results of operations for the three months ended December 31, 1997 are not necessarily indicative of the results for a full year. Certain amounts relating to December 31, 1996 have been reclassified to correspond to the December 31, 1997 classification. 2. Earnings per share ------------------ In 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("Statement No. 128"). Statement No. 128 replaced the previously reported primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants, and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods have been presented to conform to the Statement No. 128 requirements. 3. Stockholders' equity -------------------- Changes to Common Stock during the three months ended December 31, 1997 were as follows (amounts in thousands, except share data): Common Stock Capital in Excess ----------------------- of Shares Amount Par Value ----------------------- ----------------- Balance at September 30, 1997 13,785,211 $14 $165,989 Issuance of Common Stock: Exercise of options 11,625 - 292 ---------- --- -------- Balance at December 31, 1997 13,796,836 $14 $166,281 ========== === ======== At December 31, 1997 the Company had 1,896,275 options outstanding at a weighted average exercise price of $23.81. -6- COMMNET CELLULAR INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited) 4. Cost of equipment sales ----------------------- During 1996, the Company introduced a new customer service program whereby a handset is provided to the customer and returned to the Company at the end of the service agreement. The cost of providing the handset to the customer is included in cost of equipment sales, with no corresponding recognition of equipment revenue, as any revenue related to the program is recognized in cellular service revenue. The following table reflects activity in the three months ended December 31, 1997 giving effect to the costs associated with the program described above (amounts in thousands).
Three Months ended December 31, 1997 ------------------ Cost of equipment sales $1,212 Cost of equipment owned by the Company, but provided to subscribers to use: New subscribers 1,509 Existing subscribers 754 ------ $3,475 ======
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 December 31, 1997, the Company had a substantial net deferred tax asset that has been reserved with a valuation allowance of 100%. Therefore, no deferred tax expense was necessary. 6. Subsequent events ----------------- On February 10, 1998, AV Acquisition Corp., ("Newco"), a subsidiary of Blackstone CCI Capital Partners L.P., a Delaware limited partnership (the "Partnership") affiliated with Blackstone Management Associates II L.L.C., a Delaware limited liability company ("Blackstone"), was merged into the Company (the "Merger") pursuant to an Agreement and Plan of Merger dated May 27, 1997 (the "Merger Agreement"). At the effective time of the Merger, each share of Common Stock issued and outstanding (other than those shares described below) was converted, at the election of the holder thereof and subject to the terms of the Merger Agreement, into either (a) the right to receive $36.00 in cash or (b) the right to retain one fully paid and nonassessable share of Common Stock. The following shares of Common Stock were not subject to conversions pursuant to the Merger: shares of Common Stock held by the Partnership, and partnerships affiliated with Blackstone that acquired interests in Newco prior to the consummation of the Merger, Newco, and any wholly-owned subsidiary of the Company or any wholly-owned subsidiary of Newco; fractional shares that were converted to cash; and shares of Common Stock in respect of which dissenters' rights had been properly exercised. The election to retain Common Stock was subject to proration so that, following the Merger, 588,611 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. -7- COMMNET CELLULAR INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited) 6. Subsequent events (continued) ----------------- In addition, on February 10, 1998, the Company repurchased approximately $176,600,000 of the approximately $176,700,000 aggregate principal amount of its 11-1/4% Senior Subordinated Discount Notes and all of the $80,000,000 aggregate principal amount of its 11-3/4% 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"). -8- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General - ------- The Company generated net income during the first quarter of fiscal 1998 and the fiscal year ended September 30, 1997 and operating income during the fiscal year ended September 30, 1996 and focused on increasing penetration and subscriber usage. In addition, the Company expects that operating income before depreciation and amortization ("EBITDA"), which was positive during the first quarter of fiscal 1998 and the fiscal years ended September 30, 1997 and 1996, will continue to be positive and will increase in future fiscal years (although there can be no assurance that this will be the case). Certain financial analysts consider EBITDA a meaningful measure of an entity's ability to meet long-term financial obligations, and growth in EBITDA a meaningful barometer of future profitability, especially in a capital-intensive industry such as cellular telecommunications. However, EBITDA should not be considered in isolation to, or be construed as having greater significance than, other indicators of an entity's performance. The results discussed below may not be indicative of future results. Consolidated results of operations include the revenues and expenses of those markets in which the Company holds a greater than 50% interest. The results of operations of 46 markets, all of which were consolidated for the entire period, are included in the consolidated results for the quarters ended December 31, 1997 and 1996. Consolidated results of operations also include the operations of Cellular, Inc. Financial Corporation ("CIFC"), the Company's wholly-owned financing subsidiary, Cellular Inc. Network Corporation ("CINC"), a wholly-owned subsidiary through which the Company holds interests in certain cellular licenses, as well as CommNet Paging Inc. ("CPI"), a wholly-owned subsidiary which provides paging services. Equity in net 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. Eighteen markets were accounted for under the equity method for both quarters ended December 31, 1997 and 1996. Markets in which the Company's interest is less than 20% are accounted for under the cost method. Eighteen markets were accounted for under the cost method for both quarters ended December 31, 1997 and 1996. Interest income reflects interest income derived from the financing activities of CIFC and the Company with nonconsolidated affiliates, as well as interest income derived from cash and short-term investments of the Company and its consolidated affiliates. CIFC has entered into loan agreements with the majority of the Company's affiliates pursuant to which CIFC makes loans to such entities for the purpose of financing or refinancing the affiliates' costs of construction and operation of cellular telephone systems. Such loans are financed with funds borrowed by CIFC from CoBank, ACB, as agent for a syndicate of lenders ("CoBank") and from the Company. At December 31, 1997, loans generally bore interest at a margin over LIBOR based upon the borrower'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. There exists a seasonality in both service revenues, which tend to increase more rapidly in the third and fourth quarters, and operating expenses, which tend to be highest in the first quarter due to increased marketing activities and customer growth, which may cause operating income to vary from quarter to quarter. 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 -9- are not renewed; increased cellular fraud; the impact of new business opportunities requiring significant initial investments; and the impact of deployment of new technologies on capital spending. Results of Operations - --------------------- Three Months Ended December 31, 1997 and 1996. Cellular service revenues, --------------------------------------------- including in-roaming revenues, increased 15% from $33,615,000 for the quarter ended December 31, 1996 to $38,705,000 for the quarter ended December 31, 1997. The growth was due to the increase in the number of subscribers in consolidated markets. In-roaming revenues increased by 31%, or $2,527,000, from $8,284,000 for the quarter ended December 31, 1996 to $10,811,000 for the quarter ended December 31, 1997, due to increased coverage in cellular markets and to industry-wide subscriber increases. In-roaming revenues are expected to increase in the future as a result of further industry-wide growth in subscribers and expansion of the Company's coverage, particularly along highway corridors; however, roaming rates may decline, consistent with industry trends. Average monthly revenue per subscriber, including in-roaming, decreased from $60 for the quarter ended December 31, 1996 to $54 for the quarter ended December 31, 1997, reflecting the benefit of declining prices to the consumer which is consistent with an overall industry trend. However, in-roaming revenues per subscriber per month was unchanged at $15, reflecting the larger scale benefit of the Company's cell site expansion program. Cost of cellular service decreased as a percentage of service revenues from 20% for the quarter ended December 31, 1996 to 16% for the quarter ended December 31, 1997, as revenues derived from the growing subscriber base outpaced the fixed components of cost of service. The Company has renegotiated the majority of its interconnect agreements for lower prices and is in the process of renegotiating others. The Company expects cost of cellular service to continue to decline as a percentage of service revenues as revenues continue to outpace the fixed components of cost of service and as a result of negotiations completed during fiscal 1997 that reduced interconnection rates. Equipment sales decreased 28% from $881,000 for the quarter ended December 31, 1996 to $639,000 for the quarter ended December 31, 1997, due to decreases in the sale of accessories. Cost of equipment sales increased 18% from $2,939,000 for the quarter ended December 31, 1996 to $3,474,000 for the quarter ended December 31, 1997. Approximately $1,509,000 and $754,000 of the quarter ended December 31, 1997 cost of equipment sales relates to equipment provided to new and existing customers, respectively, which the customers are required to return to the Company if service is terminated. Although the Company retains ownership of the equipment, it carries such equipment at no value on its balance sheet. The Company expects negative equipment margins in the future as the Company subsidizes use of handsets to shift consumer focus to the value of cellular service. General and administrative costs of cellular operations increased 18% from $7,464,000 during the quarter ended December 31, 1996 to $8,722,000 during the quarter ended December 31, 1997, due to the growth in the customer base. The majority of these costs were incremental customer billing services and consulting expenses, offset by a reduction of bad debt expense. General and administrative costs as a percentage of service revenues decreased from 25% for the quarter ended December 31, 1996 to 22% for the quarter ended December 31, 1997. The decrease was primarily due to revenues increasing at a faster rate than incremental general and administrative costs. Marketing and selling costs decreased 7% from $6,439,000 for the quarter ended December 31, 1996 to $5,924,000 for the quarter ended December 31, 1997, primarily as a result of decreases in advertising costs offset by increased commission costs as a result of higher subscriber activations. Marketing costs per gross new subscriber decreased 22% from $239 for the quarter ended December 31, 1996 to $187 for the quarter ended December 31, 1997, as a result of increased gross subscriber additions, as well as decreased advertising costs. Depreciation and amortization relating to cellular operations increased 17% from $4,808,000 for the quarter ended December 31, 1996 to $5,626,000 for the quarter ended December 31, 1997, primarily related to increased property and equipment balances. -10- Corporate costs and expenses for the quarter ended December 31, 1996 were $900,000, which represented gross expenses of $2,412,000 less amounts allocated to nonconsolidated affiliates of $1,512,000. Corporate costs and expenses for the quarter ended December 31, 1997 were $1,271,000, which represented gross expenses of $3,665,000 less amounts allocated to nonconsolidated affiliates of $2,394,000. Expenses to develop operations of CPI were not allocated to affiliates. Corporate costs and expenses are expected to decrease slightly in future periods because CPI operations are expected to expand resulting in separate line item business reporting of CPI revenues and cost and expenses. Equity in net income of affiliates for the quarter ended December 31, 1997 was $400,000 compared to a net loss of $608,000 for the quarter ending December 31, 1996. The improvement was primarily due to increased profitability of those markets accounted for under the equity method. Interest expense increased $8,000 from $7,317,000 for the quarter ended December 31, 1996 to $7,325,000 for the quarter ended December 31, 1997. Cash paid for interest increased from $1,053,000 during the quarter ended December 31, 1996 to $4,994,000 during the quarter ended December 31, 1997 due to the semi-annual payment of the Company's 11-1/4% Subordinated Notes which occurred during the quarter ended December 31, 1997. The fiscal 1997 semi-annual payment was made during the second fiscal quarter of 1997. Interest income decreased 29% from $1,753,000 for the quarter ended December 31, 1996 to $1,244,000 for the quarter ended December 31, 1997. The decrease was due to lower notes receivable as a result of repayment of outstanding debt from nonconsolidated affiliates, and lower cash advances. Acquisitions and Sales - ---------------------- On February 10, 1998, AV Acquisition Corp., ("Newco"), a subsidiary of Blackstone CCI Capital Partners L.P., a Delaware limited partnership (the "Partnership") affiliated with Blackstone Management Associates II L.L.C., a Delaware limited liability company ("Blackstone"), was merged into the Company (the "Merger") pursuant to an Agreement and Plan of Merger dated May 27, 1997 (the "Merger Agreement"). At the effective time of the Merger, each share of Common Stock issued and outstanding (other than those shares described below) was converted, at the election of the holder thereof and subject to the terms of the Merger Agreement, into either (a) the right to receive $36.00 in cash or (b) the right to retain one fully paid and nonassessable share of Common Stock. The following shares of Common Stock were not subject to conversions pursuant to the Merger: shares of Common Stock held by the Partnership, and partnerships affiliated with Blackstone that acquired interests in Newco prior to the consummation of the Merger, Newco, and any wholly-owned subsidiary of the Company or any wholly-owned subsidiary of Newco; fractional shares that were converted to cash; and shares of Common Stock in respect of which dissenters' rights had been properly exercised. The election to retain Common Stock was subject to proration so that, following the Merger, 588,611 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"). -11- Changes in Financial Condition - ------------------------------ Net cash provided by operating activities was $5,018,000 during the three months ended December 31, 1997. This was due to net income after adjustments to reconcile net cash provided by operating activities of $12,115,000 offset by cash used to fund changes in working capital of $7,097,000. Net cash used by investing activities was $5,058,000 for the three months ended December 31, 1997. This was due primarily to $9,823,000 required to fund the purchase of property and equipment and investment in cellular system equipment, offset by a decrease of $5,572,000 to investments in and advances to affiliates. Net cash provided by financing activities was $9,590,000 for the three months ended December 31, 1997. This was primarily due to net increases in secured bank financing of $10,825,000, offset by distributions to minority interests of $1,471,000. 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 at December 31, 1997 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. At December 31, 1997, the outstanding balance under the CoBank Credit Agreement was approximately $20,586,000, all of which was fixed at an interest rate of 7.69%. As of December 31, 1997, the Company had unused commitments under the CoBank Credit Agreement of $144,414,000. In addition to the liquidity provided by the CoBank Credit Agreement, at December 31, 1997, the Company, on a consolidated basis, had available $23,682,000 of cash and cash equivalents. On February 10, 1998, in connection with the closing of the Merger of AV Acquisition Corp. (see "Acquisitions and Sales"), CIFC and the Company drew down $680,000,000 under the Chase Credit Agreement which was used, in part, to pay off outstanding amounts under the CoBank Credit Agreement, to repurchase the Company's 11-3/4% Senior Subordinated Notes and 11-1/4% Subordinated Notes, to pay the cash portion of the Merger consideration to holders of the Company's Common Stock, and to fund costs associated with the Merger. Advances made under to Chase Credit Agreement will be used, when necessary, to fund 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 for the first six months from 1.25% to 2.50% over prime for variable rate loans or 2.25% to 3.50% over LIBOR for fixed rate loans. All obligations of CIFC are guaranteed by the Company and its wholly-owned subsidiaries under the Chase Credit Agreement and the guarantees will be secured by first priority security interest in substantially all tangible and intangible asses, trademarks, tradenames and equipment of CIFC and the guarantors. In addition, the Chase Credit Agreement will be 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 imitations 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. The Company's budgeted capital requirements consist primarily of (I) parent company capital expenditures, working capital and debt service and (ii) the capital expenditures, working capital, other operating and debt service requirements of the affiliates. Capital expenditures in managed markets, reflected as additions to investments in and advances to affiliates, and additions to property and equipment and investment in cellular system equipment, for the three -12- months ended December 31, 1997 was $8,834,000. These expenditures were primarily for 11 new cell sites, switch upgrades, increased channel capacity, paging infrastructure and corporate assets. The Company expects capital expenditures for the remainder of fiscal year 1998 to be $25,431,000 to optimize coverage, upgrade switching capacity, increased channel capacity and for paging infrastructure. At December 31, 1997, the Company's near-term debt service requirements consisted primarily of principal and interest payments on the indebtedness incurred under the CoBank Credit Agreement and interest payments on the 11-1/4% Subordinated Notes due 2005. The Company anticipates its cash interest expense for the remainder of fiscal year 1998 primarily under the Chase Credit Agreement will be $55,878,000. As of February 10, 1998 the Company's near-term debt service requirements consist primarily of interest payments on the indebtedness incurred under the Chase Credit Agreement. Additional borrowings under the Chase Credit Agreement may be required if cash from operating activities is not sufficient to fund cash interest expense. The Company believes operating cash flow, existing cash balances and borrowing availability under the Chase Credit Agreement will be sufficient to meet all future anticipated capital requirements of the parent company and its affiliates and debt service requirements of the Company at both the parent company level and on a consolidated basis. Although the Company believes that the foregoing sources of liquidity will be sufficient to meet budgeted capital expenditures and debt service requirements of the parent company and the affiliates, there can be no assurance that this will be the case. 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 are likely to require capital in addition to the budgeted capital requirements described above, and such requirements may in turn require the issuance of additional debt or equity securities. The Company's ability to finance the acquisition of additional cellular properties with debt financing may be constrained by certain restrictions contained in the Chase Credit Agreement. -13- 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 3,570,000 net Company pops in 82 markets located in 14 states. These markets consist of 72 RSA markets having a total of 5,246,000 pops and 10 MSA markets having a total of 1,315,000 pops, of which the Company's interests represent 2,885,000 net Company pops and 685,000 net Company pops, respectively. The Company currently manages 56 of the 82 markets in which it holds an interest and owns a greater than 50% interest in 45 of its 56 managed markets. As of December 31, 1997, the Company had net advances of $238,676,000 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 $199,485,000. In addition, the Company had proportionate obligations of additional debt of its affiliates from other financing sources of $6,783,000. The assets of the affiliates in which the Company has investments or advances represent 4,277,000 pops, which include 3,570,000 net Company pops and 707,000 pops attributable to parties other than the Company. Advances related to pops attributable to parties other than the Company total $39,191,000. Pops refers to the estimated population of a market as initially licensed by the Federal Communications Commission ("FCC"). Systems in which the Company holds an interest constitute one of the largest geographic collections of contiguous cellular markets in the United States. The Company has concentrated on creating an integrated network of contiguous cellular systems comprised of markets which are managed by the Company. The network currently consists of 56 markets (49 RSA and 7 MSA markets) spanning nine states and represents approximately 4,161,000 total pops and 3,212,000 net Company pops. As of December 31, 1997, the RSA and MSA managed markets had 218,548 and 71,293 subscribers, respectively. Information regarding the Company's net interest in each cellular licensee and the market subject to such license, as of February 10, 1998, is summarized in the following table.
Net Company MSA or Interest in 1996 Net Company Pops RSA Code (1)(7) State Licensee (2) Population (3)(6) (4) - ---------------- ------------ ------------ ----------------- ---------------- MSAs: 141 Minnesota 16.34% 240,234 39,254 185 Indiana 16.67% 170,755 28,465 241*(5) Colorado 73.99% 130,921 96,868 253*(5) Iowa 74.50% 120,902 90,072 267*(5) South Dakota 51.00% 137,742 70,248 268*(5) Montana 91.63% 126,711 116,105 279 Maine 11.11% 103,721 11,522 289*(5) South Dakota 100.00% 111,904 111,904 297*(5) Montana 91.63% 81,568 74,741 298*(5) North Dakota 51.00% 90,439 46,124 --------- ------- Total MSA 1,314,897 685,303 RSAs: 348* Colorado 10.00% 47,002 4,700 349*(5) Colorado 61.75% 62,939 38,865 351*(5) Colorado 61.75% 74,044 45,722 352*(5) Colorado 66.00% 30,019 19,813 353*(5) Colorado 100.00% 72,920 72,920 354*(5) Colorado (B1) 69.40% 47,604 33,037 355* Colorado 49.00% 45,762 22,423 356* Colorado (B1) 49.00% 25,426 12,459
-14-
Net Company MSA or Interest in 1996 Net Company RSA Code (1) State Licensee (2) Population (3)(6) Pops (4) - ------------ ---------------- ------------ ----------------- ----------- 389 Idaho 50.00% 71,284 35,642 390 Idaho 33.33% 17,602 5,867 392*(5) Idaho (B1) 100.00% 141,031 141,031 393*(5) Idaho 91.64% 293,120 268,615 415 Iowa 10.11% 155,178 15,694 416 (5) Iowa 78.57% 109,023 85,659 417*(5) Iowa 100.00% 155,268 155,268 419* Iowa 44.92% 54,745 24,591 420*(5) Iowa 100.00% 63,302 63,302 424* Iowa 50.00% 66,929 33,465 425* Iowa 13.28% 107,809 14,321 426* Iowa 49.14% 83,580 41,070 427* Iowa 49.17% 103,912 51,090 428 Kansas 3.07% 27,741 852 429 Kansas 3.07% 30,523 937 430 Kansas 3.07% 53,026 1,628 431 Kansas 3.07% 137,928 4,234 432 Kansas 3.07% 31,040 953 433 Kansas 3.07% 20,123 618 434 Kansas 3.07% 80,524 2,472 435 Kansas 3.07% 131,254 4,029 436 Kansas 3.07% 58,858 1,807 437 Kansas 3.07% 109,008 3,347 438 Kansas 3.07% 84,143 2,583 439 Kansas 3.07% 43,831 1,346 440 Kansas 3.07% 29,677 911 441 Kansas 3.07% 175,260 5,380 442 Kansas 3.07% 155,007 4,759 512 Missouri (B1) 14.70% 56,464 8,300 523*(5) Montana (B1) 91.63% 72,719 66,632 523*(5) Montana (B2) 91.63% 78,894 72,291 524*(5) Montana (B1) 91.63% 34,780 31,869 526*(5) Montana (B1) 91.63% 21,753 19,932 527*(5) Montana 91.63% 189,151 173,319 528*(5) Montana 91.63% 65,206 59,748 529*(5) Montana 91.63% 30,030 27,516 530*(5) Montana 91.63% 92,780 85,014 531*(5) Montana 91.63% 33,426 30,628 532*(5) Montana 91.63% 20,078 18,397 553*(5) New Mexico (B2) 58.36% 113,473 66,223 555 New Mexico 12.25% 89,939 11,018 557 New Mexico 16.33% 59,835 9,772 580*(5) North Dakota 53.36% 103,812 55,393 581* North Dakota 49.00% 60,895 29,839 582 North Dakota 41.45% 90,709 37,598 583* North Dakota 49.00% 63,305 31,019 584*(5) North Dakota 61.75% 48,606 30,014 634*(5) South Dakota 100.00% 37,096 37,096 635*(5) South Dakota 100.00% 23,000 23,000 636*(5) South Dakota 100.00% 53,557 53,557
-15-
Net Company MSA or Interest in 1996 Net Company RSA Code (1) State Licensee (2) Population (3)(6) Pops (4) - ------------ ----------------- ------------ ------------------- ----------- 638*(5) South Dakota (B1) 100.00% 17,069 17,069 638*(5) South Dakota (B2) 100.00% 9,102 9,102 639*(5) South Dakota (B1) 100.00% 36,886 36,886 639*(5) South Dakota (B2) 100.00% 3,233 3,233 640*(5) South Dakota 64.49% 67,096 43,270 641*(5) South Dakota 61.13% 73,887 45,167 642* South Dakota 49.00% 96,725 47,395 675*(5) Utah 100.00% 56,209 56,209 676*(5) Utah 100.00% 107,882 107,882 677*(5) Utah (B3) 100.00% 39,506 39,506 678*(5) Utah 80.00% 28,326 22,661 718*(5) Wyoming 66.00% 50,273 33,180 719*(5) Wyoming 100.00% 76,440 76,440 720*(5) Wyoming 100.00% 147,595 147,595 --------- --------- Total RSA 5,246,179 2,885,188 --------- --------- Total MSA and RSA 6,561,076 3,570,483 ========= =========
__________ (1) MSA ranking is based on population as established by the FCC. RSAs have been numbered by the FCC alphabetically by state. (2) Represents the net ownership interest of the Company in the licensee for a cellular telephone system in the respective market. Net ownership of greater than 50% does not necessarily represent a controlling interest in such licensee. (3) Derived from the Demographics On-Call 1996 population estimates. (4) Net Company Pops represents Net Company Interest in Licensee multiplied by 1996 population. (5) The operations of these markets are currently reflected on a consolidated basis in the Company's consolidated financial statements. The operations of the other markets in which the Company holds an interest are reflected in such financial statements on either an equity or a cost basis. (6) Represents population within the market area initially licensed by the FCC. The number of pops which are covered by radio signal in a market is expected to be marginally lower than the market's total pops on a going- forward basis. Markets managed by the Company are denoted by an asterisk (*). -16- Subscriber Growth Table - ----------------------- Information regarding subscribers to the MSA and RSA cellular systems managed by the Company is summarized by the following table:
Number of Estimated Population Number of Operating Systems of Operating Systems Subscribers -------------------- -------------------------------------- -------------------------------- Subscriber Total MSA RSA Total MSA RSA Total MSA RSA Growth ----- --- --- --------- ------------ ------------ ------- ------ ------- ---------- 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 4,329,904 798,807 (8) 3,537,369 (8) 274,745 68,579 206,166 30.04% Dec. 31, 1997 56 7 49 4,329,904 798,807 (8) 3,537,369 (8) 289,841 71,293 218,548 5.49%
_______________ (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. -17- 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.
Three Months ended December 31, --------------------------------------------------------------------------------------------- 1997 1996 1997 1996 1997 1996 ----------------------------- ------------------------------- --------------------------- Combined (1) Financed Proportionate(2) Company Proportionate(3) ----------------------------- ------------------------------- --------------------------- MANAGED MARKETS Revenues: Cellular service $ 33,360 $ 29,775 $ 30,023 $ 27,985 $ 25,089 $ 22,513 In-roaming 12,770 9,550 11,467 9,054 9,771 7,363 Equipment sales 716 929 640 883 569 740 -------- -------- -------- -------- -------- -------- Total revenues 46,846 40,254 42,130 37,922 35,429 30,616 Costs and expenses involving cash: Cost of sales: Cellular service (including in-roaming) 6,949 7,259 6,452 6,989 5,467 5,722 Equipment sales 4,178 3,204 3,759 2,993 3,188 2,517 General and administrative 10,440 8,694 9,445 8,193 7,918 6,566 Marketing and selling 7,442 7,826 6,772 7,339 5,569 5,826 Total cash costs and -------- -------- -------- -------- -------- -------- expenses 29,009 26,983 26,428 25,514 22,142 20,631 -------- -------- -------- -------- -------- -------- EBITDA $ 17,837 $ 13,271 $ 15,702 $ 12,408 $ 13,287 $ 9,985 ======== ======== ======== ======== ======== ======== Capital expenditures $ 8,834 $ 10,166 $ 8,215 $ 9,840 $ 7,049 $ 8,664 Subscriber count 289,841 229,879 259,199 214,049 214,550 171,439 Total markets 56 55 56 55 56 55 NONMANAGED MARKETS Revenues: Cellular service (including in-roaming) $ 32,438 $ 29,192 $ 5,255 $ 4,504 $ 3,760 $ 3,246 Equipment sales 2,219 1,747 184 168 152 137 -------- -------- -------- -------- -------- -------- Total revenues 34,657 30,939 5,439 4,672 3,912 3,383 Costs and expenses involving cash: Cost of sales: Cellular service 6,481 6,367 926 1,040 673 756 Equipment sales 3,309 2,156 281 231 229 180 General and administrative 7,572 4,490 1,199 966 842 643 Marketing and selling 5,070 5,167 961 742 769 581 -------- -------- ------- ------- ------- ------- Total cash costs and expenses 22,432 18,180 3,367 2,979 2,513 2,160 -------- -------- ------- ------- ------- ------- EBITDA $ 12,225 $ 12,759 $ 2,072 $ 1,693 $ 1,399 $ 1,223 ======== ======== ======= ======= ======= ======= Capital expenditures $ 4,029 $ 4,808 $ 552 $ 689 $ 475 $ 476 Subscriber count 199,023 163,332 33,615 25,061 24,697 18,492 Total markets 26 27 26 27 26 27
-18-
Three Months ended December 31, ------------------------------- 1997 1996 ---- ---- Reconciliation From Company Proportionate EBITDA to Consolidated Reporting Total proportionate EBITDA (managed and nonmanaged markets) $14,686 $11,208 Depreciation and amortization (5,211) (4,186) Interest expense (3,370) (2,043) Equity in nonlicensee affiliates (175) (1,666) Minority interests 226 796 Intercompany interest 3,183 1,706 Amortization of license costs not owned by affiliates (349) (596) Unallocated corporate expenses (1,269) (900) Interest expense (net) and other (6,721) (5,694) ------- ------- Consolidated net loss $ 1,000 $(1,375) ======= =======
_______________ (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. -19- 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 December 31, 1997: Date of Report Item Reported Financial Statements Filed -------------- ------------- -------------------------- November 24, 1997 Item 5 None -20- 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: February 17, 1998 By: /s/Daniel P. Dwyer ------------------ Daniel P. Dwyer Executive Vice President, Treasurer & Chief Financial Officer Date: February 17, 1998 By: /s/Andrew J. Gardner -------------------- Andrew J. Gardner Senior Vice President and Controller (Principal Accounting Officer) -21- EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS SEP-30-1998 OCT-01-1997 DEC-31-1997 23,682 0 28,930 1,924 3,288 59,970 216,631 71,749 366,892 30,230 264,193 0 0 166,295 (103,103) 366,892 39,344 39,344 9,751 31,343 (324) 872 7,325 1,000 0 1,000 0 0 0 1,000 0.07 0 Includes cellular, paging and equipment revenues. Not reported as the Company has no potentially dilutive securities.
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