-----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, V+eec9EUTmBMTjssHpIagPsHAz6RobbfO05E+AeKN9wFOnxnZIsOcoQjSIuwNeJh Opy15b4g2Mi0LSDCIabgJg== 0001047469-97-004078.txt : 19971114 0001047469-97-004078.hdr.sgml : 19971114 ACCESSION NUMBER: 0001047469-97-004078 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971112 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: 97714819 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 10-Q 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 September 30, 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 0-27416 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 October 31, 1997: CLASS A 7,580,838 CLASS B 1,272,458 TABLE OF CONTENTS PAGE NUMBER ----------- PART I.-FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS- AS OF SEPTEMBER 30, 1997 AND DECEMBER 31, 1996 . . . . . . . . . 3 CONSOLIDATED STATEMENTS OF OPERATIONS- THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 . 5 CONSOLIDATED STATEMENTS OF CASH FLOWS- NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996. . . . . . . . . . 6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS . . . . . . . . . . . 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . 9 PART II. - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. . . . . . . . . . . . . . . . . 14 SIGNATURE PAGE . . . . . . . . . . . . . . . . . . . . . . . . .15 2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS RURAL CELLULAR CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS SEPTEMBER 30, DECEMBER 31, 1997 1996 --------------- --------------- (UNAUDITED) CURRENT ASSETS: Cash $ 1,886,863 $ 237,499 Accounts receivable, net 11,148,212 6,323,637 Inventories 1,442,994 1,309,862 Prepaid income taxes 502,627 642,133 Other current assets 406,955 341,964 --------------- --------------- Total current assets 15,387,651 8,855,095 --------------- --------------- PROPERTY AND EQUIPMENT: Land 1,836,780 1,233,007 Buildings and towers 16,771,392 13,680,928 Equipment 64,581,946 35,650,325 Furniture and fixtures 5,356,131 3,626,247 Assets under construction 3,270,001 1,241,124 Less - accumulated depreciation (21,146,137) (13,496,134) --------------- --------------- Net property and equipment 70,670,113 41,935,497 --------------- --------------- INVESTMENTS AND OTHER ASSETS: Goodwill and other intangible assets, net 72,046,072 - Licenses, net 10,002,444 6,710,419 Investments in unconsolidated affiliates 1,479,121 1,442,569 Restricted investments 913,709 884,844 Other assets, net 1,712,833 761,935 --------------- --------------- Total investments and other assets 86,154,179 9,799,767 --------------- --------------- $ 172,211,943 $ 60,590,359 --------------- --------------- --------------- --------------- The accompanying notes are an integral part of these financial statements. 3 RURAL CELLULAR CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS LIABILITIES AND SHAREHOLDERS' EQUITY SEPTEMBER 30, DECEMBER 31, 1997 1996 --------------- --------------- (UNAUDITED) CURRENT LIABILITIES: Current maturities of long-term debt $ 43,517 $ 8,447,920 Accounts payable 8,616,106 8,913,734 Advanced billings and customer deposits 2,321,827 1,399,965 Accrued interest 1,806,414 88,892 Other accrued expenses 1,847,055 577,027 --------------- --------------- Total current liabilities 14,634,919 19,427,538 LONG-TERM DEBT 115,005,222 43,886 --------------- --------------- Total liabilities 129,640,141 19,471,424 --------------- --------------- MINORITY INTEREST 7,192,669 6,122,583 --------------- --------------- SHAREHOLDERS' EQUITY: Class A common stock, $.01 par value; 15,000,000 shares authorized; 7,580,838 and 7,502,552 shares issued and outstanding 75,808 75,025 Class B common stock, $.01 par value; 5,000,000 shares authorized; 1,272,458 and 1,350,744 shares issued and outstanding 12,725 13,508 Additional paid-in capital 34,445,849 34,445,849 Retained earnings 844,751 461,970 --------------- --------------- Total shareholders' equity 35,379,133 34,996,352 --------------- --------------- $ 172,211,943 $ 60,590,359 --------------- --------------- --------------- --------------- The accompanying notes are an integral part of these financial statements. 4 RURAL CELLULAR CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) -------------------------- ------------------------ THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, -------------------------- ------------------------ 1997 1996 1997 1996 ----------- ----------- ----------- ---------- REVENUES: Service $ 12,845,494 $ 6,343,656 $ 30,437,969 $ 16,305,487 Roamer 3,686,844 2,497,077 7,451,392 4,912,174 Equipment 215,029 204,926 506,926 955,670 ----------- ----------- ----------- ---------- Total revenues 16,747,367 9,045,659 38,396,287 22,173,331 ----------- ----------- ----------- ---------- OPERATING EXPENSES: Network costs 3,508,586 1,800,439 8,507,126 4,908,498 Cost of equipment sales 845,994 278,255 1,762,803 1,258,346 Selling, general and administrative 6,963,653 3,112,664 17,651,225 9,228,251 Depreciation and amortization 3,647,713 1,500,357 8,537,223 3,780,188 ----------- ----------- ----------- ---------- Total operating expenses 14,965,946 6,691,715 36,458,377 19,175,283 ----------- ----------- ----------- ---------- OPERATING INCOME 1,781,421 2,353,944 1,937,910 2,998,048 ----------- ----------- ----------- ---------- OTHER INCOME (EXPENSE): Interest expense (2,194,453) (45,171) (3,841,368) (250,717) Interest and dividend income 44,401 6,324 144,436 330,563 Equity in earnings of unconsolidated affiliates 9,428 14,830 36,552 42,564 Minority interest 979,839 - 2,105,251 - ----------- ----------- ----------- ---------- Other income (expense), net (1,160,785) (24,017) (1,555,129) 122,410 ----------- ----------- ----------- ---------- INCOME BEFORE TAXES 620,636 2,329,927 382,781 3,120,458 INCOME TAX PROVISION - 150,000 - 176,250 ----------- ----------- ----------- ---------- NET INCOME $ 620,636 $ 2,179,927 $ 382,781 $ 2,944,208 ----------- ----------- ----------- ---------- ----------- ----------- ----------- ---------- NET INCOME PER COMMON SHARE $ .07 $ .25 $ .04 $ .35 ----------- ----------- ----------- ---------- ----------- ----------- ----------- ---------- WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 8,952,834 8,861,821 8,903,932 8,393,838 The accompanying notes are an integral part of these consolidated financial statements. 5 RURAL CELLULAR CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) NINE MONTHS ENDED SEPTEMBER 30, 1997 1996 --------------- --------------- OPERATING ACTIVITIES: Net income $ 382,781 $ 2,944,208 Adjustments to reconcile to net cash provided by operating activities- Depreciation and amortization 8,537,223 3,780,188 Gain on restricted investments (32,373) (184,036) Equity in earnings of unconsolidated affiliates (36,552) (42,564) Minority interest (2,105,251) - Change in other operating elements excluding effects of acquisitions: Accounts receivable (2,549,800) (2,090,198) Inventories 303,780 (182,947) Other current assets 236,297 (17,103) Accounts payable (1,842,598) 2,722,210 Advance billings and customer deposits 577,603 353,853 Other accrued expenses 2,189,367 65,370 --------------- --------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 5,660,477 7,348,981 --------------- --------------- INVESTING ACTIVITIES: Purchase of property and equipment, net (23,518,951) (16,933,150) Contributions to unconsolidated affiliates - (222,656) Purchase of Unicel and Northern Maine (86,001,734) - Other, net 152,122 (54,940) --------------- --------------- NET CASH USED IN INVESTING ACTIVITIES (109,368,563) (17,210,746) --------------- --------------- FINANCING ACTIVITIES: Proceeds from issuance of common stock, net of offering expense - 26,540,088 Proceeds from issuance of long-term debt 124,695,000 8,790,927 Payment of debt issuance costs (1,199,483) - Repayment of long-term debt (18,138,067) (25,365,079) --------------- --------------- NET CASH PROVIDED BY FINANCING ACTIVITIES 105,357,450 9,965,936 --------------- --------------- NET INCREASE IN CASH 1,649,364 104,171 --------------- --------------- CASH, AT BEGINNING OF PERIOD 237,499 125,137 --------------- --------------- CASH, AT END OF PERIOD $ 1,886,863 $ 229,308 --------------- --------------- --------------- --------------- The accompanying notes are an integral part of these consolidated financial statements. 6 RURAL CELLULAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION: The accompanying consolidated financial statements for the periods ended September 30, 1997 and 1996 have been prepared by 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 consolidated financial statements be read in conjunction with the consolidated financial statements and notes thereto included in the Company's December 31, 1996 Report on Form 10-K. The results of operations for the periods ended September 30, 1997 are not necessarily indicative of the operating results for the full fiscal year or for any other interim periods. 2. ACQUISITIONS: Effective May 1, 1997, the Company completed the acquisition of the Maine wireless telephone operations and related assets of Unity Cellular System, Inc. (Unicel) and related cellular and microwave licenses from InterCel Licenses, Inc., both wholly owned subsidiaries of InterCel, Inc. In addition, the Company acquired Unicel's 51% interest in Northern Maine Cellular Partnership (Northern Maine). Total consideration paid for all net assets acquired was approximately $79 million in cash. The Company also acquired the remaining 49% interest in Northern Maine from an unrelated third party for approximately $7 million. The Company incorporated into its financial statements a preliminary assessment of Northern Maine and Unicel's fair value of working capital and assets. This resulted in $72.0 million disclosed as "goodwill and other intangible assets, net." As provided under generally accepted accounting principles, the Company is allowed up to one year to complete final purchase allocations and adjustments. The Company has been performing an ongoing review and expects completing final allocations by December 31, 1997. The Company operates the Maine operations through a wholly owned subsidiary called MRCC, Inc. The acquisitions were funded with the proceeds of borrowings under a revolving credit facility with a group of banks headed by T.D. Securities (USA), Inc., formerly known as The Toronto-Dominion Bank (See Note 3). The acquisitions have been accounted for under the purchase method of accounting. The following unaudited pro forma summary presents the consolidated results of operations as if the acquisitions had occurred at the beginning of the periods shown after taking into account the effect of certain adjustments and eliminations as discussed in the Company's Report on Form 8-K/A filed July 15, 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 periods, nor does it purport to represent results of operations for any future periods. 7 RURAL CELLULAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) UNAUDITED PRO FORMA THREE MONTHS ENDED NINE MONTHS ENDED SUMMARY: SEPTEMBER 30, SEPTEMBER 30, - -------------------- ------------------------ ------------------------ 1997 1996 1997 1996 ------------ ----------- ------------ ------------ Total revenues $ 16,747,367 $ 13,403,201 $ 43,214,222 $ 33,838,508 Operating income 1,781,421 2,891,087 1,870,524 3,817,654 Income (loss) before cumulative effect of accounting change, net of tax 620,636 567,792 (2,212,048) (3,340,021) Net income (loss) 620,636 567,792 (2,212,048) (4,593,202) Net income (loss) per common share $ .07 $ .06 $ (.25) $ (.52) 3. LONG TERM DEBT: On May 1, 1997, the Company entered into an agreement with the T. D. Securities (USA), Inc. for a $140 million Senior Secured Reducing Revolving Credit Facility (the Facility). Under the Facility, funds may be borrowed or repaid at any time through maturity provided that at no time the aggregate outstanding borrowings exceed the total of the Facility. During the second quarter of 1997, proceeds from the Facility were used to acquire assets of Unicel and Northern Maine and to refinance all outstanding amounts under the Company's previous loan facility with the St. Paul Bank for Cooperatives. At the Company's discretion, advances under the Facility bear interest at LIBOR (London Interbank Offering Rate) or Base Rate plus an applicable margin and will be based on the Company's ratio of indebtedness to annualized operating cash flow as of the end of the most recently completed fiscal quarter. A commitment fee on the unused portion of the Facility is payable quarterly. Facility security has been provided by a pledge of all the assets of the Company including stock of all operating subsidiaries of the Company and Wireless Alliance, LLC. Mandatory commitment reductions will be required upon any material sale of assets. The Facility is subject to various covenants including the ratio of indebtedness to annualized operating cash flow and the ratio of annualized operating cash flow to interest expense. As of September 30, 1997, the Company was in compliance with all covenants under the Facility. 4. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT: In March 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS 128), which changes the way companies calculate their earnings per share (EPS). The Company is required to adopt SFAS 128 in its December 31, 1997, financial statements, at which time prior year EPS data is to be restated in accordance with SFAS 128. If the Company had adopted SFAS 128, the effect on net income per common share for all periods presented would have been substantially unchanged. 5. SUPPLEMENTAL DISCLOSURE OF CONSOLIDATED CASH FLOW INFORMATION: NINE MONTHS ENDED SEPTEMBER 30, ------------------- 1997 1996 ------------ ------------ Cash paid during the period for interest $ 2,072,081 $ 518,946 Cash paid during the period for income taxes 64,032 - 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following Management's Discussion and Analysis of Financial Condition and Results of Operations refers to consolidated results including May through September, 1997 results of the Unicel acquisition and January through September, 1997 results of Wireless Alliance, LLC. Neither subsidiary was included in the Company's financial statements during the comparable time periods of 1996. RESULTS OF OPERATIONS The following table presents certain consolidated statements of operations data as a percentage of total revenues as well as other cellular performance indicators for the periods indicated. THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------ ------------------ 1997 1996 1997 1996 --------- --------- --------- --------- REVENUES: Service 76.7% 70.1% 79.3% 73.5% Roamer 22.0 27.6 19.4 22.2 Equipment 1.3 2.3 1.3 4.3 --------- --------- --------- --------- Total revenues 100.0 100.0 100.0 100.0 --------- --------- --------- --------- OPERATING EXPENSES: Network costs 21.0 19.9 22.2 22.1 Cost of equipment sales 5.1 3.1 4.6 5.7 Selling, general and administrative 41.5 34.4 46.0 41.7 Depreciation and amortization 21.8 16.6 22.2 17.0 --------- --------- --------- --------- Total operating expenses 89.4 74.0 95.0 86.5 --------- --------- --------- --------- OPERATING INCOME 10.6 26.0 5.0 13.5 --------- --------- --------- --------- OTHER INCOME (EXPENSE): Interest expense (13.2) (0.5) (10.0) (1.1) Interest and dividend income 0.3 0.1 0.4 1.5 Equity in earnings of unconsolidated affiliates 0.1 0.2 0.1 0.2 Minority interest 5.9 0.0 5.5 0.0 --------- --------- --------- --------- Other income (expense), net (6.9) (0.2) (4.0) 0.6 --------- --------- --------- --------- INCOME BEFORE TAXES 3.7 25.8 1.0 14.1 INCOME TAX PROVISION 0.0 1.7 0.0 0.8 --------- --------- --------- --------- NET INCOME 3.7% 24.1% 1.0% 13.3% --------- --------- --------- --------- --------- --------- --------- --------- EBITDA (1) 32.4% 42.6% 27.3% 30.6% OTHER CELLULAR PERFORMANCE INDICATORS: (2) End period penetration 7.1% 6.6% 7.1% 6.6% Average monthly retention (3) 98.2% 98.9% 98.4% 98.9% Average monthly revenue per customer $ 61 $ 77 $ 58 $ 69 Average acquisition cost per customer (4) $ 436 $ 362 $ 427 $ 334 9 FOOTNOTES TO ITEM 2, RESULTS OF OPERATIONS _____________________________ 1) EBITDA, the sum of operating income, depreciation and amortization, is utilized as a measurement of performance within the cellular industry. It should not however, be used as an alternative to using operating income or net income as an indicator of operating performance or cash flows as a measure of liquidity. Further, EBITDA is not a GAAP-based financial measure and should not be considered as an alternative to GAAP-based measures of financial performance. (2) Other Cellular Performance Indicators exclude Wireless Alliance, LLC. and include 5 months (May through September 1997) of MRCC, Inc. (3) Determined by dividing total customers discontinuing service during the period by the average customers for the period. Customers that have migrated to Wireless Alliance, LLC from RCC Minnesota, are not counted as customers that have discontinued service. (4) Based on the total of sales and marketing costs, agent commissions, and gains or losses on cellular telephone sales and leases divided by the number of gross subscribers added each period. 10 THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1996 REVENUES Service revenue for the quarter ended September 30, 1997, increased 103% to $12.8 million as compared to $6.3 million for the comparable period of the prior year. This increase in revenue is due primarily to a 29% gain in cellular customers within the Company's original service area and an additional 28,000 customers resulting from the Unicel acquisition. This increase was also partially offset by a decrease of 21% in the corresponding average revenue per customer. Service revenues for the nine months ended September 30, 1997, increased 87% to $30.4 million from $16.3 million for the comparable period of the prior year. This results from an increase in the number of cellular customers, partially offset by a decrease in the corresponding average revenue per customer as noted above. The Company has achieved this growth through focused customer sales and service strategies and by adherence to network service quality controls. This growth resulted in a market penetration rate of 7.1% at September 30, 1997, as compared to 6.6% at September 30, 1996. In addition, paging revenue, a component of service revenue, increased 37% to $810,000 for the nine month period ended September 30, 1997 as compared to $591,000 for the same period of the prior year. Roamer revenues for the quarter ended September 30, 1997, increased 48% to $3.7 million from $2.5 million for the comparable prior period. Roamer revenues for the nine months ended September 30, 1997, increased 52% to $7.4 million from $4.9 million for the comparable prior period. These increases were primarily due to an increase in the number of roamer minutes for the quarter and nine months ended September 30, 1997 over the year earlier periods. Roamer revenue increases are primarily a result of expanded coverage provided by additional cell sites, increases in nationwide penetration rates and overall increased usage of the Company's cellular service by a greater number of other carriers' customers. While total roamer revenues increased, the average revenue per roamer declined for the quarter and nine months ended September 30, 1997 due in part to reductions in intercarrier exchange rates under reciprocal agreements with certain surrounding carriers. Equipment revenues for the quarter ended September 30, 1997, increased 5% to $215,000 from $205,000 for the comparable prior period. Equipment revenues for the nine months ended September 30, 1997, decreased 47% to $507,000 from $956,000 for the comparable prior period due to the continuing popularity of the Company's phone equipment rental program. The Company expects that phone equipment sales revenue will become a less significant portion of total revenues as phone rental revenues, which are included in service revenues, continue to increase. OPERATING EXPENSES Network costs for the quarter ended September 30, 1997, increased 95% to $3.5 million from $1.8 million for the comparable prior period. Network costs for the nine months ended September 30, 1997, increased 73% to $8.5 million from $4.9 million for the comparable prior period. Network costs, as a percentage of revenues, remained relatively constant over both periods. The network cost increases are partly a result of additional fixed operating expenses for new cell sites that were added during 1997 and late 1996. In addition, the wholesale cost per minute increased during 1997. Combined with the impact of increased network usage associated with customer growth, the extended impact of the increase in wholesale cost per minute significantly contributed to the total increase within network costs. Network costs include switching and transport expenses, and other costs associated with the maintenance and operation of the Company's cellular, paging and microwave network facilities. Selling, general, and administrative ("SG&A") costs were $7.0 million for the quarter ended September 30, 1997 and $3.1 million for the comparable period in 1996, an increase of $3.9 million or 124%. As a percentage of total revenue, SG&A cost increased to 42% from 34% for the comparable prior period. For the nine months period ended September 30, 1997, SG&A cost was $17.7 million as compared to $9.2 million for same period in 1996, an increase of $8.4 million or 91%. As a percentage of total revenue, SG&A increased to 46% from 42% for the comparable nine months period. These expenses include salaries, benefits, and operating expenses such as marketing, bad debt, customer support, accounting and 11 finance, administration, commissions and billing. The increases were due primarily to an increase in the number and amount of commissions paid as a result of the Company's marketing and promotional strategies, additional employees and incremental wage and benefit increases. Depreciation and amortization expenses for the quarter ended September 30, 1997, increased 143% to $3.6 million from $1.5 million for the comparable prior period. Depreciation and amortization expenses for the nine months ended September 30, 1997, increased 126% to $8.5 million from $3.8 million for the comparable prior period. These increases were primarily a result of depreciation of network and rental phone equipment placed into service during 1996 and 1997 combined with the additional intangible asset amortization resulting from the acquisitions of Unicel and Northern Maine. Also, the Company changed the depreciable life from three years to two years for phone rental equipment placed in service during 1997. OPERATING INCOME Operating income for the quarter ended September 30, 1997 was $1.8 million with an operating margin of 11% compared to operating income of $2.4 million with an operating margin of 26% in the comparable prior period. Operating income for the nine months ended September 30, 1997 was $1.9 million with an operating margin of 5% compared to operating income of $3.0 million with an operating margin of 14% in the comparable prior period. The decreases in operating income were due primarily to network and marketing expenses associated with the initial start-up of Wireless Alliance, LLC. OTHER INCOME (EXPENSE) Other expense for the quarter ended September 30, 1997, was $1.2 million compared to $24,000 in the comparable prior period. Other expense for the nine months ended September 30, 1997 was $1.6 million compared to other income of $122,000 in the same period of the prior year. Interest expense for the quarter ended September 30, 1997, increased by $2.1 million to $2.2 million over the comparable period of the prior year. Interest expense for the nine months ended September 30, 1997, increased $3.6 million to $3.8 million over the comparable prior period. The increases in interest expense for both periods are a result of higher average borrowings associated with the Company's recent acquisitions and growth initiatives. Partially offsetting the impact of increased interest expense was the minority interest in losses of Wireless Alliance, LLC. NET INCOME Net income for the quarter ended September 30, 1997, was $621,000 as compared to net income of $2.2 million in the comparable prior period. Net income for the nine months ended September 30, 1997, decreased to $383,000 as compared to net income of $2.9 million in the comparable prior period. The Company expects to report a loss in this year's fourth quarter. SEASONALITY The Company experiences seasonal fluctuations in revenues and operating income. The Company's average monthly revenue per cellular customer has historically increased during the second and third quarters. These increases reflect greater demand in the Company's cellular service area by weekend and recreational customers and use in seasonal industries, such as agriculture and construction. Because the Company's cellular service area includes many seasonal recreational areas, the Company expects that roaming revenues will continue to be more seasonally volatile than local service revenues. LIQUIDITY AND CAPITAL RESOURCES The Company's primary liquidity requirements are for operating expenses, acquisitions, and expansion of network services and facilities to support customer growth. As of September 30, 1997, the Company had 117 cell sites and 51 paging transmitters. The Company will continue to construct additional cell sites and purchase cellular equipment in order to increase capacity as customer and usage volumes increase. Specific capital requirements of the Company are based on the property, equipment, and network facilities requirements associated with the Company's acquisition and expansion strategy and rate of customer 12 growth. The Company currently estimates that it will spend approximately $16 million for network expansion during the fourth quarter of 1997. On May 1, 1997, the Company entered into an agreement with the T. D. Securities (USA), Inc. for a $140 million Senior Secured Reducing Revolving Credit Facility (the Facility). Under the Facility, funds may be borrowed or repaid at any time through maturity provided that at no time the aggregate outstanding borrowings exceed the total of the Facility. During the second quarter, the Facility was used to acquire assets of Unicel and Northern Maine and to refinance all outstanding amounts under the Company's previous loan facility with the St. Paul Bank for Cooperatives. Future uses for funds available under the Facility will be to fund Wireless Alliance, LLC, network expansion, and for other general corporate purposes. At the Company's discretion, advances under the Facility bear interest at LIBOR (London Interbank Offering Rate) or Base Rate plus an applicable margin and will be based on the Company's ratio of indebtedness to annualized operating cash flow as of the end of the most recently completed fiscal quarter. A commitment fee on the unused portion of the Facility is payable quarterly. Facility security has been provided by a pledge of all the assets of the Company including stock of all operating subsidiaries of the Company and Wireless Alliance, LLC. Mandatory commitment reductions will be required upon any material sale of assets. The Facility is subject to various covenants including the ratio of indebtedness to annualized operating cash flow and the ratio of annualized operating cash flow to interest expense. During the third quarter of 1997, the Company entered into an interest hedge agreement for $80 million of the Facility that limits interest rates to no more than 7.85% for a minimum of 3 years. Net cash provided by operating activities during the nine months ended September 30, 1997 and 1996 were $5.7 million and $7.3 million, respectively, with the primary source being an increase in depreciation and amortization. Net cash used in investing activities during the nine months ended September 30, 1997 and 1996 was $109.3 million and $17.2 million, respectively. The principal uses of cash included the Company's acquisition of assets from Unicel and Northern Maine, property and equipment purchased for the network and switch, construction costs related to the digital microwave network, and equipment purchased for the phone rental program. Net cash provided by financing activities during the nine months ended September 30, 1997 and 1996 was $105.4 million and $10.0 million, respectively. As noted above, during the second quarter the Company entered into a revolving credit agreement and repaid all long-term debt outstanding under the Company's existing loan agreement with the St. Paul Bank for Cooperatives. FORWARD LOOKING STATEMENTS Forward-looking statements herein are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. There are certain important factors that could cause results to differ materially from those anticipated by some of the statements made herein. Investors are cautioned that all forward-looking statements involve risks and uncertainties. Such factors include but are not limited to: economic conditions, customer growth rates and the rate at which customer acquisition costs are recovered, higher than planned operating expenses and capital expenditures, competition from other cellular operators and the financial uncertainties associated with managing the Company's market expansion through the Wireless Alliance joint venture and the Unicel and Northern Maine acquisition. 13 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 27 Financial Data Schedule (b) Reports on Form 8-K An amendment to a Report on Form 8-K dated May 1, 1997, was filed on \ July 15, 1997, submitting the financial statements required under Item 7. 14 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: November 12, 1997 /s/ Richard P. Ekstrand ------------------------------------------ Richard P. Ekstrand President and Chief Executive Officer Dated: November 12, 1997 /s/ Wesley E. Schultz ------------------------------------------ Wesley E. Schultz Vice President and Chief Financial Officer (Principal Financial Officer) 15 EX-27 2 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FORM THE COMPANY'S FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 9-MOS DEC-31-1997 SEP-30-1997 1,886,863 0 12,363,976 (1,215,764) 1,442,994 15,387,651 91,816,250 (21,146,137) 172,211,943 14,634,919 0 0 0 88,533 35,290,600 172,211,943 506,926 38,396,287 1,762,803 10,269,929 25,186,652 1,001,796 3,841,368 382,781 0 382,781 0 0 0 382,781 0.04 0.04
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