-----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, IHoiucK7rSwLtx97EJ1xmbo4TM0/GaFAmKwcZFOc1mBoLrUFRBP574HerUz+vGUE 9YLSYd9e7xAocfws8v7EAQ== 0000869561-98-000006.txt : 19980812 0000869561-98-000006.hdr.sgml : 19980812 ACCESSION NUMBER: 0000869561-98-000006 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980811 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: RURAL CELLULAR CORP CENTRAL INDEX KEY: 0000869561 STANDARD INDUSTRIAL CLASSIFICATION: RADIO TELEPHONE COMMUNICATIONS [4812] IRS NUMBER: 411693295 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-27416 FILM NUMBER: 98681947 BUSINESS ADDRESS: STREET 1: 3905 DAKOTA ST SW STREET 2: P O BOX 2000 CITY: ALEXANDRIA STATE: MN ZIP: 56308 BUSINESS PHONE: 3207622000 MAIL ADDRESS: STREET 1: P O BOX 2000 CITY: ALEXANDRIA STATE: MN ZIP: 56038 10-Q 1 QUARTERLY REPORT FOR RURAL CELLULAR CORPORATION SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the quarterly period ended June 30, 1998. ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from __________to__________. Commission File Number 0-27416 RURAL CELLULAR CORPORATION (Exact name of registrant as specified in its charter) MINNESOTA 41-1693295 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) PO Box 2000 3905 Dakota Street SW Alexandria, Minnesota 56308 (320) 762-2000 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) 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( ) Number of shares of common stock outstanding as of the close of business on July 30, 1998: Class A 7,636,754 Class B 1,260,668 TABLE OF CONTENTS Page Number PART I. - FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets- of June 30, 1998 and December 31, 1997..........................3 Consolidated Statements of Operations- Three and six months ended June 30, 1998 and 1997...............5 Condensed Consolidated Statements of Cash Flows- Six months ended June 30, 1998 and 1997.........................6 Notes to Condensed Consolidated Financial Statements.............7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................ 11 PART II. - OTHER INFORMATION Item 2. Changes in Securities and Use of Proceeds.........................16 Item 4. Submission of Matters to a Vote of Security-Holders.............. 16 Item 6. Exhibits and Reports on Form 8-K..................................16 Signature page....................................................17 2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS RURAL CELLULAR CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) ASSETS
June 30, December 31, 1998 1997 CURRENT ASSETS: Cash................................................................ $ 123,898,765 $ 1,994,628 Accounts receivable, less allowance of $1,410,000 and $1,146,000 ... 10,610,581 9,621,032 Other current assets................................................ 1,713,935 2,540,161 ------------ ------------ Total current assets.............................................. 136,223,281 14,155,821 ------------ ------------ PROPERTY AND EQUIPMENT, less accumulated depreciation of $31,570,000 and $23,874,000..................... 86,830,854 77,920,283 ------------ ------------ LICENSES AND OTHER ASSETS: Licenses and other intangible assets, less accumulated amortization of $2,593,000 AND $1,490,000...................................... 80,213,559 81,348,237 Other assets, less accumulated amortization of $402,000 and $178,000 13,256,725 8,163,727 ------------ ------------ Total licenses and other assets................................... 93,470,284 89,511,964 ------------ ------------ $ 316,524,419 $ 181,588,068 ============ ============
The accompanying notes are an integral part of these condensed consolidated balance sheets. 3 RURAL CELLULAR CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) LIABILITIES AND SHAREHOLDERS' EQUITY
June 30, December 31, 1998 1997 CURRENT LIABILITIES: Accounts payable ........................................................... $ 6,020,387 $ 7,959,778 Advance billings and customer deposits ..................................... 1,977,010 2,541,015 Other accrued expenses ..................................................... 5,326,444 3,141,559 ----------- ----------- Total current liabilities .................................................. 13,323,841 13,642,352 LONG-TERM DEBT ................................................................ 148,896,621 128,000,000 ----------- ----------- Total liabilities ........................................................ 162,220,462 141,642,352 ----------- ----------- MINORITY INTEREST ............................................................. 4,272,535 6,215,480 ----------- ----------- EXCHANGEABLE PREFERRED STOCK .................................................. 120,670,573 -- ----------- ----------- SHAREHOLDERS' EQUITY: Class A common stock; $.01 par value; 15,000,000 shares .................... 76,341 75,926 authorized; 7,634,104 and 7,592,628 issued and outstanding Class B common stock; $.01 par value; 5,000,000 shares ..................... 12,607 12,607 authorized; 1,260,668 shares issued and outstanding Additional paid-in capital ................................................. 34,844,797 34,445,849 Accumulated deficit ........................................................ (5,572,896) (804,146) ----------- ----------- Total shareholders' equity ............................................... 29,360,849 33,730,236 ----------- ----------- $316,524,419 $181,588,068 =========== ===========
The accompanying notes are an integral part of these condensed consolidated balance sheets. 4 RURAL CELLULAR CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three months ended June 30, Six months ended June 30, 1998 1997 1998 1997 REVENUES: Service .......................................... $ 14,164,138 $ 10,684,233 $ 26,882,963 $ 17,592,475 Roamer ........................................... 3,119,951 2,447,067 4,877,929 3,764,548 Equipment ........................................ 388,051 195,183 708,424 291,897 ---------- ---------- ---------- ---------- Total revenues ................................... 17,672,140 13,326,483 32,469,316 21,648,920 ---------- ---------- ---------- ---------- OPERATING EXPENSES: Network costs .................................... 3,821,030 2,998,325 7,448,763 4,998,540 Cost of equipment sales .......................... 1,085,487 629,433 1,969,529 916,809 Selling, general and administrative .............. 7,555,554 6,260,999 14,145,438 10,687,572 Depreciation and amortization .................... 4,846,046 2,926,729 9,065,186 4,889,510 ---------- ---------- ---------- ---------- Total operating expenses ....................... 17,308,117 12,815,486 32,628,916 21,492,431 ---------- ---------- ---------- ---------- OPERATING INCOME (LOSS) ............................. 364,023 510,997 (159,600) 156,489 ---------- ---------- ---------- ---------- OTHER INCOME (EXPENSE): Interest expense ............................... (3,205,217) (1,431,706) (5,615,376) (1,646,915) Interest and dividend income ................... 952,431 37,688 1,230,969 100,035 Equity in earnings (losses) of unconsolidated affiliates ............................... (149,374) 8,315 (297,825) 27,124 Minority interest ............................ 1,205,101 676,858 1,942,945 1,125,412 ---------- ---------- ---------- ---------- Other expense, net ............................. (1,197,059) (708,845) (2,739,287) (394,344) ---------- ---------- ---------- ---------- LOSS BEFORE INCOME TAX .............................. (833,036) (197,848) (2,898,887) (237,855) INCOME TAX PROVISION ................................ -- -- -- -- NET LOSS ............................................ (833,036) (197,848) (2,898,887) (237,855) ---------- ---------- ---------- ---------- PREFERRED STOCK DIVIDEND ............................ (1,869,863) -- (1,869,863) -- ---------- ---------- ---------- ---------- NET LOSS APPLICABLE TO COMMON SHARES ................ $ (2,702,899) $ (197,848) $ (4,768,750) $ (237,855) ========== ========== ========== ========== NET LOSS PER BASIC AND DILUTED COMMON SHARES........ $ (0.30) $ (0.02) $ (0.54) $ (0.03) ========== ========== ========== ========== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING, BASIC AND DILUTED ........................................ 8,879,907 8,853,296 8,874,142 8,853,296
The accompanying notes are an integral part of these condensed consolidated financial statements. 5 RURAL CELLULAR CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Six months ended June 30, 1998 1997 OPERATING ACTIVITIES: Net loss ................................................. $ (4,768,750) $ (237,855) Adjustments to reconcile to net cash provided by (used in) operating activities: Depreciation and amortization ....................... 9,065,186 4,889,510 Equity in (earnings) losses of unconsolidated affiliates......................................... 306,165 (27,124) Change in minority interest ......................... (1,942,945) (1,125,412) Dividend requirement on preferred stock ............. 1,869,863 -- Other ............................................... (126,187) (32,373) Change in other operating elements: Accounts receivable ............................ (989,549) (1,891,610) Other current assets ........................... 826,225 426,900 Accounts payable ............................... (2,030,573) 2,192,247 Other current liabilities ...................... (248,983) 1,110,109 ----------- ----------- Net cash provided by operating activities ...... 1,960,452 5,304,392 ----------- ----------- INVESTING ACTIVITIES: Purchases of property and equipment, net ............ (16,656,261) (14,993,635) Gain on hedge rate transaction ...................... 1,003,000 -- Purchases of Unicel and Northern Maine .............. -- (85,958,935) Other ............................................... (1,004,873) 210,149 ----------- ----------- Net cash used in investing activities .......... (16,658,134) (100,742,421) ----------- ----------- FINANCING ACTIVITIES: Stock options exercised ............................. 399,363 -- Proceeds from issuance of senior subordinated notes . 125,000,000 -- Proceeds from issuance of preferred stock ........... 125,000,000 -- Proceeds from issuance of long-term debt ............ 15,625,000 117,195,000 Repayments of long-term debt ........................ (120,625,000) (18,130,902) Payments of debt issuance costs ..................... (8,797,544) (1,137,204) ----------- ----------- Net cash provided by financing activities ...... 136,601,819 97,926,894 ----------- ----------- NET INCREASE IN CASH ..................................... 121,904,137 2,488,865 CASH, at beginning of period ............................. 1,994,628 237,499 ----------- ----------- CASH, at end of period ................................... $ 123,898,765 $ 2,726,364 =========== ===========
The accompanying notes are an integral part of these condensed consolidated financial statements. 6 RURAL CELLULAR CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1) BASIS OF PRESENTATION: The accompanying condensed consolidated financial statements for the periods ended June 30,1998 and 1997 have been prepared by Rural Cellular Corporation and subsidiaries (the "Company") without audit. In the opinion of management, normal recurring adjustments necessary to present fairly the financial position, results of operations, and cash flows for all periods presented have been made. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. It is suggested that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Company's Report on Form 10-K for the year ended December 31, 1997. The results of operations for the period ended June 30, 1998 are not necessarily indicative of the operating results for the full fiscal year or for any other interim periods. 2) ACQUISITIONS: Unity Cellular System, Inc. Effective May 1, 1997, the Company consummated the acquisition of the Maine wireless telephone operations and related assets of Unity Cellular System, Inc. and related cellular and microwave licenses from InterCel, Inc. In addition, the Company acquired Unity's 51% interest in Northern Maine Cellular Partnership. The Company also acquired the remaining 49% interest in Northern Maine Cellular Partnership from an unrelated third party. The acquisitions (the "MRCC Acquisitions") have been accounted for under the purchase method of accounting. The Company operates its Maine operations through a wholly owned subsidiary, MRCC, Inc. The following unaudited pro forma information presents the consolidated results of operations as if the acquisitions had occurred as of January 1, 1997. This summary is not necessarily indicative of what the results of operations of the Company and the acquired entities would have been if they had been a single entity during such period, nor does it purport to represent results of operations for any future periods. THREE MONTHS SIX MONTHS ENDED JUNE 30, 1997 ENDED JUNE 30, 1997 Total revenues $14,647,577 $26,466,855 Operating income 494,814 89,103 Net loss $ (987,933) $(2,832,684) Basic and diluted net loss per share $ (.11) $ (.32) 7 3) LONG TERM DEBT: The Company has entered into three-year interest rate swap agreements with two commercial banks in order to manage the relationship of its fixed rate versus floating rate debt. Income and expense associated with swap transactions are accrued over the periods prescribed by the contracts. These agreements, which relate to $80 million of debt, effectively increased the Company's interest rate on the debt by approximately .3% for the six months ended June 30, 1998. In anticipation of the offering of the $125 million in 9 5/8% Senior Subordinated Notes due 2008 (the "Senior Subordinated Notes") and $125 million in exchangeable preferred stock (the "Exchangeable Preferred Stock"), the Company also entered into a $150 million hedge agreement. On May 12, 1998, the Company settled the hedge agreement resulting in a gain of $1.0 million. This gain is being charged against interest expense over the lives of the underlying debt instruments. On May 14, 1998, the Company closed on the placement of Senior Subordinated Notes. The Senior Subordinated Notes accrue interest at 9 5/8% from May 14, 1998. Payments of interest will be made on May 15 and November 15 of each year commencing November 15, 1998. On July 1, 1998, the Company replaced its $160 million existing credit facility ("Existing Credit Facility") with a $300 million credit facility (the "New Credit Facility"). The Company had the following debt outstanding at June 30, 1998 and December 31, 1997: LONG-TERM DEBT JUNE 30, 1998 DECEMBER 31, 1997 Deferred gain on hedge agreement $ 896,621 $ -- Existing Credit Facility 23,000,000 128,000,000 New Credit Facility -- -- 9 5/8% Senior Subordinated Notes 125,000,000 -- ------------ ------------ $148,896,621 $128,000,000 4) SENIOR EXCHANGEABLE PREFERRED STOCK On May 14, 1998, the Company completed the placement of $125 million of 11 3/8% Exchangeable Preferred Stock. The Exchangeable Preferred Stock has a liquidation preference of $1,000 per share and is recorded at fair value on the date of issuance less issuance costs. The Exchangeable Preferred Stock is senior to all classes of junior preferred stock and common stock of the Company with respect to dividend rights and rights on liquidation, winding-up and dissolution of the Company. The Exchangeable Preferred Stock is non-voting, except as otherwise required by law and as provided in the Certificate of Designation. Dividends on all shares of Exchangeable Preferred Stock will be cumulative and accrue at 11 3/8% per annum from May 14, 1998 and may be paid, at the Company's option, on any dividend payment date occurring on or before May 15, 2003, either in cash or by the issuance of additional shares of Exchangeable Preferred Stock having an aggregate liquidation preference equal to the amount of such dividends. Thereafter all dividends will be payable in cash only. As of June 30, 1998, the Company has accrued $1.9 million in preferred stock dividends which will be distributed on August 15, 1998. 5) SUPPLEMENTAL DISCLOSURE OF CONDENSED CONSOLIDATED CASH FLOW INFORMATION: Six Months Ended June 30, ----------------------- 1998 1997 ------------- --------- Cash paid during the period for interest $5,496,561 $1,081,863 Cash paid (received) during the period for income taxes $ 1,250 $ (250,000) 8 6) SUBSEQUENT EVENTS: Effective July 1, 1998, the Company completed the acquisition of the Vermont, New Hampshire, New York and Massachusetts cellular telephone licenses, operations and related assets of Atlantic Cellular Company L.P. and one of its subsidiaries ("Atlantic"), an independent provider of wireless communication services in the New England region. As consideration for the acquisition of Atlantic, the Company paid approximately $256 million in cash. Under the terms of the agreement, the Company acquired a contiguous, multi-state service area of 21,000 square miles, encompassing approximately 1.1 million POPS ("population served")and 74,000 customers. The cellular properties acquired from Atlantic include: (i) the entire state of Vermont (RSA 1, RSA 2, and the Burlington MSA); (ii) western New Hampshire (RSA 1); (iii) the northeastern corner of New York (RSA 2); and (iv) northwestern Massachusetts (RSA 1). In addition, the Company has acquired Atlantic's long distance business. The Company operates its Atlantic operations as RCC Atlantic, Inc. Effective July 31, 1998, the Company completed the acquisition of the outstanding stock of Western Maine Cellular ("WMC"), a wholly-owned subsidiary of Utilities, Inc., for approximately $7.5 million in cash. WMC provides cellular service to western Maine RSA 1 which incorporates a 3,700 square-mile service area of western Maine encompassing 83,000 POPs and serves approximately 2,500 customers. The $263.5 million used to acquire both Atlantic and WMC was financed through borrowings under the New Credit Facility and the proceeds from the issuance of the Senior Subordinated debt. The acquisitions of Atlantic and WMC have been accounted for under the purchase method of accounting. 9 9. SEGMENT INFORMATION: The Company's consolidated financial statements consist of the business units RCC Cellular and Wireless Alliance, LLC ("Wireless Alliance"). RCC Cellular includes cellular and paging operations in Minnesota and Maine. Wireless Alliance, a joint venture that commenced cellular reselling operations in November 1996 and launched its first PCS networks in the second quarter of 1998, is 51%-owned by the Company and 49%-owned by APT Inc., an affiliate of Aerial Communications, Inc. Information about the Company's operations in its business units for the three and six months ended June 30, 1998 and 1997 is as follows:
(Dollars in thousands) Three months ended Six months ended June 30 June 30 1998 1997 1998 1997 STATEMENT OF OPERATIONS: Revenues RCC Cellular ........................... $ 14,483 $ 11,681 $ 26,535 $ 19,195 Wireless Alliance LLC .................. 3,189 1,645 5,934 2,454 ------ ------ ------ ------ Total revenue ....................... 17,672 13,326 32,469 21,649 Operating expenses RCC Cellular ........................... 12,001 9,789 23,129 16,742 Wireless Alliance LLC .................. 5,307 3,026 9,500 4,750 ------ ------ ------ ------ Total operating expenses ............ 17,308 12,815 32,629 21,492 Operating income (loss) RCC Cellular ........................... 2,482 1,892 3,406 2,453 Wireless Alliance LLC .................. (2,118) (1,381) (3,566) (2,296) ------ ------ ------ ------ Total operating income (loss) ...... 364 511 (160) 157 Depreciation and amortization RCC Cellular ........................... 4,091 2,805 7,940 4,713 Wireless Alliance LLC .................. 756 122 1,125 176 ------ ------ ------ ------ Total depreciation and amortization 4,847 2,927 9,065 4,889 OTHER OPERATING DATA: EBITDA RCC Cellular ........................... 6,573 4,697 11,346 7,166 Wireless Alliance LLC .................. (1,362) (1,259) (2,441) (2,120) ------ ------ ------ ------ Total EBITDA ...................... 5,211 3,438 8,905 5,046 Capital expenditures RCC Cellular ........................... 5,638 10,507 10,744 13,600 Wireless Alliance LLC .................. 2,388 879 5,862 1,394 ----- ------ ------ ------ Total capital expenditures ........ 8,026 11,386 16,606 14,994 BALANCE SHEET DATA (END OF PERIOD) Property and equipment RCC Cellular ........................... 103,374 81,554 Wireless Alliance LLC .................. 15,027 1,758 ------- ------ Total property and equipment ...... 118,401 83,312 10
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS As a result of the MRCC Acquisitions, the Company's operating results for the first and second quarters of 1998 and 1997 may not be comparable or indicative of future performance. RESULTS OF OPERATIONS The following table presents certain consolidated statement of operations data as a percentage of total revenues as well as other financial and operating data for the periods indicated.
Three months Six months ended June 30, June 30, 1998 1997 1998 1997 REVENUES: Service ............................................... 80.1% 80.1% 82.8% 81.3% Roamer ................................................ 17.7 18.4 15.0 17.4 Equipment ............................................. 2.2 1.5 2.2 1.3 ----- ----- ----- ----- Total revenues ........................................... 100.0 100.0 100.0 100.0 ----- ----- ----- ----- OPERATING EXPENSES: Network costs ......................................... 21.6 22.5 22.9 23.1 Cost of equipment sales ............................... 6.1 4.7 6.1 4.2 Selling, general and administrative ................... 42.8 47.0 43.6 49.4 Depreciation and amortization ......................... 27.4 22.0 27.9 22.6 ----- ----- ----- ----- Total operating expenses ................................. 97.9 96.2 100.5 99.3 ----- ----- ----- ----- OPERATING INCOME (LOSS)................................. 2.1 3.8 (0.5) 0.7 ----- ----- ----- ----- OTHER INCOME (EXPENSE): Interest expense ...................................... (18.1) (10.8) (17.3) (7.6) Interest and dividend income .......................... 5.4 0.3 3.8 0.5 Equity in earnings of unconsolidated affiliates ....... (0.8) 0.1 (0.9) 0.1 Minority interest ..................................... 6.8 5.1 6.0 5.2 ----- ----- ----- ----- Other expense, net ....................................... (6.7) (5.3) (8.4) (1.8) ----- ----- ----- ----- LOSS BEFORE INCOME TAX.................................... (4.6) (1.5) (8.9) (1.1) INCOME TAX PROVISION...................................... -- -- -- -- NET LOSS.................................................. (4.6) (1.5) (8.9) (1.1) ----- ----- ----- ----- PREFERRED STOCK DIVIDEND.................................. (10.6) -- (5.8) -- ------ ----- ----- ----- NET LOSS APPLICABLE TO COMMON SHARES ..................... (15.2)% (1.5)% (14.7)% (1.1)% ===== ===== ====== ===== EBITDA (1)................................................ 29.5% 25.8% 27.4% 23.3% ADJUSTED EBITDA (1)....................................... 45.4% 40.2% 42.8% 37.3%
11
Other Operating Data Three months ended Six months ended June 30, June 30, 1998 1997 1998 1997 POP's: (2) ...................................... RCC Cellular ........................... 1,148,000 1,120,000 1,148,000 1,120,000 Wireless Alliance LLC .................. 708,000 516,000 708,000 516,000 --------- --------- --------- --------- Total POP's ...................... 1,856,000 1,636,000 1,856,000 1,636,000 Customers at period end: RCC Cellular ........................... 91,814 77,129 91,814 77,129 Wireless Alliance LLC .................. 19,373 10,424 19,373 10,424 Other .................................. 10,514 7,787 10,514 7,787 --------- --------- --------- --------- Total customers .................. 121,701 95,340 121,701 95,340 Penetration: (3) RCC Cellular ........................... 8.0% 6.9% 8.0% 6.9% Wireless Alliance LLC .................. 2.7% 2.0% 2.7% 2.0% Retention: (4) RCC Cellular ........................... 98.8% 98.3% 98.7% 98.6% Wireless Alliance LLC .................. 97.7% 99.1% 97.5% 99.1% Average monthly revenue per customer (5) RCC Cellular ........................... $53 $58 $50 $56 Wireless Alliance LLC .................. $56 $65 $54 $61 Acquisition cost per customer: (6) RCC Cellular ........................... $395 $442 $418 $419 Wireless Alliance LLC .................. $464 $247 $461 $233 Cell sites RCC Cellular ........................... 134 112 134 112 Wireless Alliance LLC .................. 34 0 34 0
1)EBITDA is the sum of earnings before interest, taxes, depreciation and amortization and is utilized as a performance measure within the cellular industry. EBITDA is not intended to be a performance measure that should be regarded as an alternative for other performance measures and should not be considered in isolation. EBITDA is not a measurement of financial performance under generally accepted accounting principles and does not reflect all expenses of doing business (e.g., interest expense, depreciation). Accordingly, EBITDA should not be considered as having greater significance than or as an alternative to net income or operating income as an indicator of operating performance or to cash flows as a measure of liquidity. Moreover, "EBITDA," as used herein, may differ from "Operating Cash Flow." Adjusted EBITDA represents EBITDA excluding Wireless Alliance's EBITDA. 2)Source 1990 census, updated for July 1, 1997 estimates, of the U.S.Census Bureau 3)Represents the ratio of cellular customers at the end of the period to total POPs. 4) Determined for each period by dividing total cellular customers discontinuing service during such period by the average cellular customers for such period (customers at the beginning of the period plus customers at the end of the period, divided by two), dividing that result by the number of months in the period, and subtracting such result from one. 5) Determined for each period by dividing the sum of access, airtime, roaming, long distance, features, connections, disconnection, and other revenues for such period by average cellular customers for such period (customers at the beginning of the period plus customers at the end of the period, divided by two), and dividing that result by the number of months in such period 12 6)Determined for each period by dividing selling and marketing expenses, costs of equipment sales, and depreciation of rental telephone equipment by the gross cellular customers added during such period. THREE AND SIX MONTHS ENDED JUNE 30, 1998 AND JUNE 30, 1997 REVENUES Service revenues for the three months ended June 30, 1998 increased 32.6% to $14.2 million from $10.7 million in 1997. Service revenues for the six months ended June 30, 1998 increased 52.8% to $26.9 million from $17.6 million in the comparable period of 1997. The growth for the three and six months ended June 30, 1998 was primarily due to the increase in the number of customers and the MRCC Acquisitions, partially offset by a decrease of, respectively, 8.6% and 10.7% in the average revenue per RCC Cellular customer and a decrease of, respectively, 13.8% and 11.5% in average revenue per Wireless Alliance customer. The rate at which new customers were added to existing markets for the three and six months ended June 30, 1998 decreased to 6.4% and 9.6% in 1998 from 11.7% and 24.8% in 1997. There were no new customers added through acquisition during the three and six months ended June 30, 1998 as compared to 66.5% of the additional customers being added through acquisition during the six months ended June 30, 1997. Roamer revenues for the three months ended June 30, 1998 increased 27.5% to $3.1 million from $2.5 million in 1997. Roamer revenues for the six months ended June 30, 1998 increased 29.6% to $4.9 million from $3.8 million in the comparable period of 1997. Roamer revenues have increased due to the activation of additional cell sites and acquisitions of new service areas. As a percentage of cellular revenues (excluding the impact of Wireless Alliance) roaming revenues, for the three months ended June 30, 1998, have increased to 21.6% from 20.9% in 1997. For the six months ended June 30, 1998, roamer revenues decreased as a percentage of cellular revenues from 19.6% in 1997 to 18.4% in 1998. Wireless Alliance had no roamer revenues in either 1998 or 1997 because it was primarily engaged in reselling cellular services. The Company expects Wireless Alliance to generate roamer revenues in the third and fourth quarters of 1998. OPERATING EXPENSES Network costs include switching and transport expenses and the expenses associated with the maintenance and operation of the Company's wireless network facilities, as well as charges from other service providers for resold minutes and services. Network cost for the three months ended June 30, 1998, increased 27.4% to $3.8 million from $3.0 million in 1997, but decreased as a percentage of total revenues to 21.6% in 1998 from 22.5% in 1997. For the six months ended June 30, 1998, network costs increased 49.0% to $7.5 million from $5.0 million for the comparable period of the prior year. Network costs remained relatively constant as a percentage of sales at 22.9% for the six months ended June 30, 1998 as compared to 23.1% in 1997. The increase in network costs resulted primarily from expenses incurred by Wireless Alliance and MRCC, which more than offset network cost reductions in the Company's Minnesota operations. Contributing to the reduction of network costs in the Minnesota service area was the completed installation of the Company's Mobile Telephone Switching Office ("MTSO") in the third quarter of 1997, thereby reducing the Company's network costs for switching services provided by Switch 2000, Inc., an unconsolidated affiliate. Network costs for Wireless Alliance increased to $2.5 million in the second quarter of 1998 from $1.4 million in the comparable period of 1997. The increase is attributed to additional network costs associated with increased customers. Selling, general, and administrative ("SG&A") expenses include salaries, benefits, and operating expenses such as marketing, commissions, customer support, accounting, administration, and billing. SG&A expenses for the three months ended June 30, 1998 increased 20.7% to $7.6 million in 1998 from $6.3 million in 1997. For the six months ended June 30, 1998, SG&A increased 32.4% to $14.2 million from $10.7 million in the comparable period of the prior year. The increase in SG&A for the three months ended June 30,1998 resulted primarily from additional costs related to MRCC and a $438,000 increase in costs of Wireless Alliance. As a percentage of total revenues for the three and six months ended June 30, 1998, SG&A decreased to 42.8% and 43.6%, respectively, from 47.0% and 49.4%,respectively, in 1997 reflecting economies gained through the acquisition of MRCC and the growth of Wireless Alliance. 13 Depreciation and amortization expense for the three and six months ended June 30, 1998 increased 65.6% and 85.4%, respectively, to $4.9 million and $9.1 million from $2.9 million and $4.9 million in 1997. The increase reflects the Company's continued construction and acquisition efforts, and its investments in network facilities, including the Company's launch of PCS services through Wireless Alliance, a newly installed MTSO, and rental equipment. OTHER INCOME (EXPENSE) Interest expense for the three and six months ended June 30, 1998 increased to $3.2 million and $5.6 million, respectively, from $1.4 million and $1.6 million in 1997. The increase in interest expense was primarily a result of interest incurred on the $125 million in Senior Subordinated Notes combined with borrowings under the Existing Credit Facility. The borrowing was incurred to finance the MRCC Acquisitions, the construction of cell sites, and other pending acquisitions. Other income also includes the minority interest in losses of Wireless Alliance. SEASONALITY The Company experiences seasonal fluctuations in revenues and operating results. The Company, and the wireless communications industry in general, have historically experienced significant customer growth during the fourth calendar quarter. Accordingly, during such periods the Company experiences greater losses on equipment sales and increases in sales and marketing expenses. In addition, the Company's financial performance during the first calendar quarter has been negatively affected by reduced minutes of use and roamer revenues. The Company's average monthly revenue per cellular customer has historically increased during the second and third calendar quarters. This increase reflects greater usage by the Company's cellular customers and roamers who travel in the Company's cellular service area for weekend and vacation recreation or work in seasonal industries, such as agriculture and construction. Because the Company's cellular service area includes many seasonal recreational areas, the Company expects that roamer revenues will continue to fluctuate seasonally to a greater degree than service revenues. LIQUIDITY AND CAPITAL RESOURCES The Company's primary liquidity requirements are for working capital, capital expenditures, debt service, acquisitions, and customer growth. These requirements have been met through cash flow from operations and borrowings under the Existing Credit Facility. As of June 30, 1998, the Company had $23 million outstanding under its $160 million Existing Credit Facility. On July 1, 1998 the Company replaced its $160 million Existing Credit Facility with a $300 million New Credit Facility from an affiliate of TD Securities (USA) Inc. Under the New Credit Facility, amounts may be borrowed or repaid at any time through maturity provided that, at no time, the aggregate outstanding borrowings exceed the total of the New Credit Facility. The Company believes that it will have adequate capital resources to satisfy all its liquidity requirements for at least the next twelve months. Net cash provided by operating activities was $2.0 million for the six months ended June 30, 1998. Adjustments to the $4.8 million net loss to reconcile to net cash used in operating activities included $9.1 million in depreciation and amortization and a $2.0 million decrease in accounts payable. Net cash used in investing activities for the six months ended June 30, 1998 was $16.7 million. Investing activities for such period consisted primarily of purchases of property and equipment of $16.7 million, of which $5.9 million was attributable to Wireless Alliance capital expenditures. These purchases reflect the construction and launch of Wireless Alliance's PCS network, expansion of existing coverage in RCC Cellular, and the continued upgrading of existing cell sites and switching equipment. Capital expenditures (including $10.2 million for Wireless Alliance) are expected to be approximately $23.1 million in remaining quarters of 1998. Capital expenditures and debt service are expected to be funded through internally generated cash flows and, if necessary, borrowings under the New Credit Facility. Net cash provided by financing activities was $137 million for the six months ended June 30, 1998. Financing activities for such period consisted primarily of the placement on May 14, 1998 of $125 million of 9 5/8% Senior Subordinated Notes due May 15, 2008 and $125 million of 11 3/8% Exchangeable Preferred Stock. The net proceeds from the sale of the Exchangeable Preferred Stock were used to repay a portion of indebtedness under the Existing Credit Facility. On July 1, 1998, the net proceeds from the sale of the Senior Subordinated Notes together with the New Credit Facility were used to finance the acquisition of Atlantic and WMC. In the ordinary course of business, the Company continues to evaluate acquisition opportunities and other potential business transactions. Such acquisitions, joint ventures and business transactions may be material. Such transactions may also require the Company to seek additional sources of funding through the issuance of additional debt and/or additional equity. There can be no assurance that such funds will be available to the Company on acceptable or favorable terms. 14 YEAR 2000 ISSUE The Company continues to assess the impact of the Year 2000 issue on its reporting systems and operations. The Year 2000 issue exists because many computer systems and applications currently use two-digit fields to designate a year. As the century date occurs, date sensitive systems may recognize the year 2000 as 1900 or not at all. This inability to recognize or properly treat the Year 2000 may cause systems to process critical financial and operational information incorrectly. During the first six months of 1998, the Company did not incur any costs to modify existing computer systems and applications, and estimates that approximately $600,000 will be incurred in the remaining quarters of 1998 and 1999. The Company plans to devote the necessary resources to resolve all significant Year 2000 issues in a timely manner. If Year 2000 modifications are not properly completed either by the Company or any company from which the Company does business with, the Company could be adversely impacted. FORWARD LOOKING STATEMENTS Forward-looking statements herein are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to be correct. A number of factors could cause actual results, performance, achievements of the Company, or industry results to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These factors include but are not limited to, the competitive environment in the wireless and telecommunications industries, changes in economic conditions in general and in the Company's business, demographic changes, changes in prevailing interest rates and the availability of and terms of financing to fund the anticipated growth of the Company's business, the ability to attract and retain qualified personnel, the significant indebtedness of the Company, and changes in the Company's acquisition and capital expenditure plans. Investors are cautioned that all forward-looking statements involve risks and uncertainties. In addition, such forward-looking statements are necessarily dependent upon assumptions, estimates and data that may be incorrect or imprecise and involve known and unknown risks, uncertainties and other factors. Accordingly, any forward-looking statements included herein do not purport to be predictions of future events or circumstances and may not be realized. All subsequent written and oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the foregoing cautionary statements. The Company disclaims any obligation to update any such factors or to announce publicly the results of any revisions to any of the forward-looking statements contained herein to reflect future events or developments. 15 PART II. OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS (c) Effective May 14, 1998, the Company sold $125 million of 11-3/8% Exchangeable Preferred Stock to TD Securities (USA) Inc., NationsBanc Montgomery Securities LLC, and BancBoston Securities Inc. Net proceeds to the Company, after underwriting fees of $4.4 million, were $120.6 million. The Company claims exemption for the sale under Section 4(2) of the Securities Act of 1933 as a sale not involving a public offering. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS (a) The Company held its Annual Meeting of Shareholders on May 21, 1998. (c) The following matters were considered: 1. To approve an amendment to the Company's Bylaws regarding the number of directors; Voting on approval of the amendment was as follows: 17,695,039 shares in favor, 22,715 opposed, 35,730 abstentions, and zero broker non-votes. 2. To elect two directors, each for a three-year term; Name Affirmative Authority Withheld Jeffrey S. Gilbert 17,699,299 54,185 Marvin C. Nicolai 17,698,923 54,561 There were no abstentions or broker non-votes 3. To approve an increase in the number of shares authorized to be issued under the 1995 Stock Compensation Plan. Voting on approval of the Plan was as follows: 16,034,239 shares in favor, 544,945 opposed, 607,855 abstentions, and 544,445 broker non-votes. 4. To ratify appointment of Arthur Andersen LLP as the Company's independent auditors for fiscal 1998. Voting on ratification was 17,718,979 shares in favor, 2,525 opposed, 31,980 abstentions, and zero broker non-votes ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 27 Financial Data Schedule (b) Reports on Form 8-K A report on Form 8-K dated April 27, 1998 reporting under Item 5 and filing under Item 7, the notice of a certain proposed unregistered offering of Senior Subordinated Notes and Exchangeable Preferred Stock pursuant to Rule 135c of the Securities Act of 1933. 16 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this amendment to be signed on its behalf by the undersigned, thereunto duly authorized. RURAL CELLULAR CORPORATION (Registrant) Dated: August 11, 1998 /s/ Richard P. Ekstrand ------------------------------------------------------ Richard P. Ekstrand President and Chief Executive Officer Dated: August 11, 1998 /s/ Wesley E. Schultz ------------------------------------------------------ Wesley E. Schultz Vice President and Chief Financial Officer (Principal Financial Officer) 17 EX-27 2 FDS -- WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE. This schedule contains summary financial information extracted from the Company's financial statements for the six months ended June 30, 1998 and is qualified in its entirety by reference to such financial statements.
5 6-MOS DEC-31-1998 JUN-30-1998 123,898,765 0 12,020,742 1,410,161 922,801 791,134 118,400,720 (31,569,866) 316,524,419 13,323,841 0 0 120,670,573 88,948 29,271,901 316,524,419 708,424 32,469,316 1,969,529 9,418,292 23,210,624 921,689 5,615,376 (4,768,750) 0 (4,768,750) 0 0 0 (4,768,750) (0.54) (0.54)
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