<PAGE>
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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
<PAGE>
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
<PAGE>
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
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
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.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 1,886,863
<SECURITIES> 0
<RECEIVABLES> 12,363,976
<ALLOWANCES> (1,215,764)
<INVENTORY> 1,442,994
<CURRENT-ASSETS> 15,387,651
<PP&E> 91,816,250
<DEPRECIATION> (21,146,137)
<TOTAL-ASSETS> 172,211,943
<CURRENT-LIABILITIES> 14,634,919
<BONDS> 0
0
0
<COMMON> 88,533
<OTHER-SE> 35,290,600
<TOTAL-LIABILITY-AND-EQUITY> 172,211,943
<SALES> 506,926
<TOTAL-REVENUES> 38,396,287
<CGS> 1,762,803
<TOTAL-COSTS> 10,269,929
<OTHER-EXPENSES> 25,186,652
<LOSS-PROVISION> 1,001,796
<INTEREST-EXPENSE> 3,841,368
<INCOME-PRETAX> 382,781
<INCOME-TAX> 0
<INCOME-CONTINUING> 382,781
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 382,781
<EPS-PRIMARY> 0.04
<EPS-DILUTED> 0.04
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