<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 June 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
July 31, 1997:
CLASS A 7,554,638
CLASS B 1,298,658
<PAGE>
TABLE OF CONTENTS
PAGE NUMBER
-----------
PART I. - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS-
AS OF JUNE 30, 1997 AND DECEMBER 31, 1996. . . . . . . . . . . .3
CONSOLIDATED STATEMENTS OF OPERATIONS-
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1997 AND 1996 . . . .5
CONSOLIDATED STATEMENTS OF CASH FLOWS-
SIX MONTHS ENDED JUNE 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS. . . . . . 14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . . 14
SIGNATURE PAGE . . . . . . . . . . . . . . . . . . . . . . . . 15
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RURAL CELLULAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
JUNE 30, DECEMBER 31,
1997 1996
----------- ------------
CURRENT ASSETS: (UNAUDITED)
Cash $ 2,726,364 $ 237,499
Accounts receivable, net 10,490,022 6,323,637
Inventories 1,414,567 1,309,862
Prepaid income tax 545,992 642,133
Other current assets 505,194 341,964
----------- ------------
Total current assets 15,682,139 8,855,095
----------- ------------
PROPERTY AND EQUIPMENT:
Land 1,753,719 1,233,007
Buildings and towers 16,291,969 13,680,928
Equipment 56,492,841 35,650,325
Furniture and fixtures 4,976,093 3,626,247
Assets under construction 3,797,579 1,241,124
Less-accumulated depreciation (18,032,748) (13,496,134)
----------- ------------
Net property and equipment 65,279,453 41,935,497
----------- ------------
INVESTMENTS AND OTHER ASSETS:
Cost in excess of net assets assigned 72,453,278 --
Licenses, net 6,835,939 6,710,419
Investments in unconsolidated affiliates 1,469,693 1,442,569
Restricted investments 913,709 884,844
Other assets, net 1,646,747 761,935
----------- ------------
Total investments and other assets 83,319,366 9,799,767
----------- ------------
$164,280,958 $ 60,590,359
----------- ------------
----------- ------------
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
RURAL CELLULAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
(UNAUDITED)
CURRENT LIABILITIES:
Current maturities of long-term debt $ 42,974 $ 8,447,920
Accounts payable 12,650,952 8,913,734
Advanced billings and customer deposits 2,095,429 1,399,965
Accrued interest 652,325 88,892
Other accrued expenses 1,570,680 577,027
------------ ----------
Total current liabilities 17,012,360 19,427,538
LONG-TERM DEBT 107,512,930 43,886
------------ ----------
Total liabilities 124,525,290 19,471,424
------------ ----------
MINORITY INTEREST 4,997,171 6,122,583
------------ ----------
SHAREHOLDERS' EQUITY:
Class A common stock, $.01 par value;
15,000,000 shares authorized; 7,487,858
and 7,502,552 shares issued and
outstanding, respectively 74,879 75,025
Class B common stock, $.01 par value
5,000,000 shares authorized; 1,365,438
and 1,350,744 shares issued and
outstanding, respectively 13,654 13,508
Additional paid in capital 34,445,849 34,445,849
Retained earnings 224,115 461,970
------------ -----------
Total shareholders' equity 34,758,497 34,996,352
------------ -----------
$164,280,958 $60,590,359
------------ -----------
------------ -----------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
4
<PAGE>
RURAL CELLULAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------------- -----------------------------
1997 1996 1997 1996
REVENUES: ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C>
Service $ 10,684,233 $ 5,554,796 $ 17,592,475 $ 9,961,831
Roamer 2,447,067 1,508,452 3,764,548 2,415,097
Equipment 195,183 382,752 291,897 750,744
------------ ----------- ------------ -----------
Total revenues 13,326,483 7,446,000 21,648,920 13,127,672
------------ ----------- ------------ -----------
OPERATING EXPENSES:
Network costs 2,998,325 1,513,678 4,998,540 3,108,059
Cost of equipment sales 629,433 484,305 916,809 980,091
Selling, general and administrative 6,260,999 3,242,033 10,687,572 6,115,587
Depreciation and amortization 2,926,729 1,309,616 4,889,510 2,279,831
------------ ----------- ------------ -----------
Total operating expenses 12,815,486 6,549,632 21,492,431 12,483,568
------------ ----------- ------------ -----------
OPERATING INCOME 510,997 896,368 156,489 644,104
------------ ----------- ------------ -----------
OTHER INCOME (EXPENSE):
Interest expense (1,431,706) (14,376) (1,646,915) (205,546)
Interest and dividend income 37,688 33,482 100,035 324,239
Equity in earnings of unconsolidated affiliates 8,315 15,182 27,124 27,734
Minority interest 676,858 -- 1,125,412 --
------------ ----------- ------------ -----------
Other income (expense), net (708,845) 34,288 (394,344) 146,427
------------ ----------- ------------ -----------
(LOSS) INCOME BEFORE TAXES (197,848) 930,656 (237,855) 790,531
INCOME TAX PROVISION -- 25,000 -- 26,250
------------ ----------- ------------ -----------
NET (LOSS) INCOME $ (197,848) $ 905,656 $ (237,855) $ 764,281
------------ ----------- ------------ -----------
------------ ----------- ------------ -----------
NET (LOSS) INCOME PER COMMON
SHARES OUTSTANDING $ (0.02) $ 0.10 $ (0.03) $ 0.09
------------ ----------- ------------ -----------
------------ ----------- ------------ -----------
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 8,853,296 8,884,769 8,853,296 8,152,972
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
RURAL CELLULAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
1997 1996
----------- ----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net (loss) income $ (237,855) $ 764,281
Adjustments to reconcile to net cash provided by
operating activities-
Depreciation and amortization 4,889,510 2,279,831
Gain on restricted investments (32,373) (183,124)
Equity in losses of unconsolidated affiliates (27,124) (27,734)
Minority interest (1,125,412) --
Change in other operating elements, excluding effects of acquisitions
Accounts receivable (1,891,610) (1,613,606)
Inventories 332,207 (281,995)
Other current assets 94,693 (17,590)
Accounts payable 2,192,247 3,332,027
Advance billings and customer deposits 351,205 (164,688)
Other accrued expenses 758,904 259,339
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 5,304,392 4,346,741
----------- -----------
INVESTING ACTIVITIES:
Purchase of property and equipment, net (14,993,635) (12,962,095)
Purchase of Unicel and Northern Maine (85,958,935) (222,656)
Other, net 210,149 (30,238)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (100,742,421) (13,214,989)
----------- -----------
FINANCING ACTIVITIES:
Proceeds from issuance of common stock,
net of offering expenses -- 26,540,088
Proceeds from issuance of long-term debt 117,195,000
Payment of debt issuance costs (1,137,204) 5,178,000
Repayment of long-term debt (18,130,902) (22,670,540)
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 97,926,894 9,047,548
----------- -----------
NET INCREASE IN CASH 2,488,865 179,300
CASH, AT BEGINNING OF PERIOD 237,499 125,137
----------- -----------
CASH, AT END OF PERIOD $ 2,726,364 $ 304,437
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE>
RURAL CELLULAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
The accompanying consolidated balance sheet as of June 30, 1997, the
consolidated statements of operations for the three and six months ended June
30, 1997 and 1996, and the consolidated statements of cash flows for the six
months ended June 30, 1997 and 1996 have been prepared by the Company without
audit. In the opinion of management, all adjustments (which include only 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 Form
10-K. The results of operations for the periods ended June 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 previously announced
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 $77 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 will operate 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 information 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 had been if they were
a single entity during such periods, nor does it purport to represent results of
operations for any future periods.
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA SUMMARY: THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
1997 1996 1997 1996
----------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Total revenues. . . . . . . . . . . . . . $14,647,577 $11,293,448 $26,466,855 $20,435,307
Operating income. . . . . . . . . . . . . $ 494,814 $ 1,138,673 $ 89,103 $ 926,567
(Loss) before cumulative
effect of accounting change,
net of tax . . . . . . . . . . . . . . . $ (987,933) $ (790,559) $(2,832,684) $(3,907,813)
Net (loss). . . . . . . . . . . . . . . . $ (987,933) $ (790,559) $(2,832,684) $(5,160,994)
Net (loss) per common share . . . . . . . $ (.11) $ (.09) $ (.32) $ (.63)
</TABLE>
7
<PAGE>
3. LONG TERM DEBT:
On May 1, 1997, the Company entered into an agreement with T. D. Securities
(USA), Inc. for a $140,000,000 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, 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 June 30, 1997, the Company is in compliance with all covenants under the
Facility.
4. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT:
In March 1997, the Financial Accounting Standards Board issued the 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 all 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 (loss) per common share for all periods presented would have been
substantially unchanged.
5. SUPPLEMENTAL DISCLOSURE OF CONSOLIDATED CASH FLOW INFORMATION:
SIX MONTHS ENDED JUNE 30,
-------------------------
1997 1996
---------- ----------
Cash paid during the period for interest $ 1,081,863 $ 352,559
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Conditions
and Results of Operations refers to consolidated results including May and
June, 1997 results of the Unicel acquisition and January through June, 1997
results of Wireless Alliance, LLC. Neither subsidiary was part of the Company
during the comparative 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.
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
1997 1996 1997 1996
----------- ----------- ------------ ---------
<S> <C> <C> <C> <C>
REVENUES:
Service 80.1% 74.6% 81.3% 75.9%
Roamer 18.4 20.3 17.4 18.4
Equipment 1.5 5.1 1.3 5.7
-------- ------- -------- --------
Total revenues 100.0 100.0 100.0 100.0
-------- ------- -------- --------
OPERATING EXPENSES:
Network costs 22.5 20.3 23.1 23.7
Cost of equipment sales 4.7 6.5 4.2 7.5
Selling, general and administrative 47.0 43.6 49.4 46.6
Depreciation and amortization 22.0 17.6 22.6 17.3
-------- ------- -------- --------
Total operating expenses 96.2 88.0 99.3 95.1
-------- ------- -------- --------
OPERATING INCOME 3.8 12.0 0.7 4.9
-------- ------- -------- --------
OTHER INCOME (EXPENSE):
Interest expense (10.8) (0.2) (7.6) (1.6)
Interest and dividend income 0.3 0.5 0.5 2.5
Equity in earnings of
unconsolidated affiliates 0.1 0.2 0.1 0.2
Minority interest 5.1 -- 5.2 --
-------- ------- -------- --------
Other income (expense), net (5.3) 0.5 (1.8) 1.1
-------- ------- -------- --------
(LOSS) INCOME BEFORE INCOME TAX (1.5) 12.5 (1.1) 6.0
INCOME TAX PROVISION -- 0.3 -- 0.2
-------- ------- -------- --------
NET (LOSS) INCOME (1.5)% 12.2% (1.1)% 5.8%
-------- ------- -------- --------
-------- ------- -------- --------
EBITDA (1) 25.8% 29.6% 23.3% 22.3%
OTHER CELLULAR
PERFORMANCE INDICATORS: (2)
Ending period penetration 6.9% 6.0% 6.9% 6.0%
Average monthly retention (3) 98.3% 98.9% 98.6% 98.9%
Average monthly revenue per subscriber $ 58 $ 68 $ 56 $ 64
Average acquisition cost per subscriber (4) $442 $ 324 $ 419 $ 322
</TABLE>
9
<PAGE>
FOOTNOTES TO ITEM 2, RESULTS OF OPERATIONS
- -------------------------
(1) EBITDA is the sum of operating income and
depreciation and amortization. EBITDA is not intended to be a performance
measure that should be regarded as an alternative for other performance
indicators and should not be considered in isolation. EBITDA is provided as a
measure commonly used in the cellular industry. EBITDA is not a measure of
financial performance under generally accepted accounting principles and does
not reflect all expenses of operations. EBITDA should not be considered as an
alternative to net income (loss) as a measure of performance or to cash flows
as a measure of liquidity.
(2) Other Cellular Performance Indicators exclude Wireless Alliance, LLC and
include 2 months (May and June 1997) of Unicel.
(3) Determined by dividing total customers discontinuing service during
the period by the average customers for the period. The number of customers
used in the calculation excludes reductions caused by the migration of
customers to Wireless Alliance, LLC.
(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
<PAGE>
THREE AND SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO THREE AND SIX MONTHS ENDED
JUNE 30, 1996
REVENUES
Service revenues for the quarter ended June 30, 1997, increased 92% to
$10,684,233 from $5,554,796 for the comparable prior period, resulting
primarily from a 133% increase in the number of cellular customers, including
approximately 28,000 from the Unicel acquisition, partially offset by a
decrease of 15% in the corresponding average revenue per customer. Service
revenues for the six months June 30, 1997, increased 77% to $17,592,475 from
$9,961,831 for the comparable prior period. This results from the 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 6.9% at June 30, 1997, up significantly from
6.0% at June 30, 1996. Service revenues include paging revenues, which
increased 42% to $281,054 for the three months ended June 30, 1997 from
$198,404 for the comparable prior period.
Roamer revenues for the quarter ended June 30, 1997, increased 62% to
$2,447,067 from $1,508,452 for the comparable prior period. Roamer revenues
for the six months ended June 30, 1997, increased 56% to $3,764,548 from
$2,415,097 for the comparable prior period. These increases were primarily
due to an increase in the number of roamer minutes for the quarter and six
months ended June 30, 1997 over the year earlier periods. Roamer use
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 roamers in the
Company's cellular service area. While total roamer revenues increased, the
average revenue per roamer declined for the quarter and six months ended June
31, 1997 due in part to reductions in intercarrier exchange rates under
reciprocal agreements with certain surrounding carriers.
Equipment revenues for the quarter ended June 30, 1997, decreased 49% to
$195,183 from $382,752 for the comparable prior period. Equipment revenues for
the six months ended June 30, 1997, decreased 61% to $291,897 from $750,744 for
the comparable prior period. These decreases reflect 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 EXPENSE
Network costs for the quarter ended June 30, 1997, increased 98% to
$2,998,325 from $1,513,678 for the comparable prior period. Network costs for
the six months ended June 30, 1997, increased 61% to $4,998,540 from
$3,108,059 for the comparable prior period. Network costs as a percentage of
revenues remained relatively constant over both periods. The increased
expenses reflect additional operating expenses for new cell sites that were
added during 1997 and late 1996 and higher total variable costs resulting
from increased network usage associated with customer growth, partially
offset by economy of scale efficiencies. Network expenses include switching
and transport expenses and the expenses associated with the maintenance and
operation of the Company's cellular and paging network facilities.
Selling, general, and administrative (SG&A) for the quarter ended June 30, 1997,
increased as a percentage of total revenues to 47.0% from 43.6% for the
comparable prior period and to $6,260,999 from $3,242,033. SG&A for the six
months ended June 30, 1997, increased as a percentage of total revenues to 49.4%
from 46.6% for the comparable prior period and to $10,687,572 from $6,115,587.
These expenses include salaries, benefits, and operating expenses such as
marketing, bad debt, customer support, accounting and 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 June 30, 1997,
increased 123% to $2,926,729 from $1,309,616 for the comparable prior period.
Depreciation and amortization expenses for the six months ended June 30,
1997, increased 114% to $4,889,510 from $2,279,831 for the comparable prior
period. These increases were primarily a result of depreciation of network
and rental phone equipment placed into service during
11
<PAGE>
1996 and first quarter 1997. Also, the Company changed the depreciable life
from three years to two years for phone rental equipment issued during 1997.
OPERATING INCOME
Operating income for the quarter ended June 30, 1997 was $510,997 with an
operating margin of 3.8% compared to operating income of $896,368 with an
operating margin of 12.0% in the comparable prior period. Operating income for
the six months ended June 30, 1997 was $156,489 with an operating margin of 0.7%
compared to operating income of $644,104 with an operating margin of 4.9% 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 income (expense) for the quarter ended June 30, 1997, was an expense
of $708,845 compared to income of $34,288 in the comparable prior period.
Other income (expense) for the six months ended June 30, 1997 was an expense
of $394,344 compared to income of $146,427 in the comparable prior period.
Interest expense for the quarter ended June 30, 1997, increased $1,417,330 to
$1,431,706 over the comparable prior period. Interest expense for the six
months ended June 30, 1997, increased $1,441,369 to $1,646,915 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.
NET INCOME (LOSS)
Net loss for the quarter ended June 30, 1997, was $197,848 as compared to net
income of $905,656 in the comparable prior period. Net loss for the six
months ended June 30, 1997, was $237,855 as compared to net income of
$764,281 in the comparable prior period. Net losses for the quarter and six
months ended June 31, 1997 are primarily a result of network and marketing
expenses associated with the initial start-up of Wireless Alliance, LLC. The
Company expects to report moderate profitability in this year's third quarter
as start-up expenses for the Wireless Alliance, LLC and interest expense
associated with the Unicel acquisition are more than covered by the Company's
Minnesota operations.
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 and for
acquisitions and expansion of network services and facilities to support
customer growth. As of June 30, 1997, the Company had 76 cell sites and 50
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
growth. The Company currently estimates that it will spend approximately
$25,000,000 for capital expansion during the third and fourth quarters
of 1997.
On May 1, 1997, the Company entered into an agreement with T. D. Securities
(USA) Inc. for a $140,000,000 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 Unity Cellular System,
Inc. 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
12
<PAGE>
available under the Facility will be to fund Wireless Alliance, LLC 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.
Subsequent to June 30, 1997, the Company entered into an interest hedge
agreement for $80,000,000 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 six months ended June
30, 1997 and 1996 was $5,304,392 and $4,346,741, respectively, with the
primary source being an increase in depreciation and amortization.
Net cash used in investing activities during the six months ended June 30,
1997 and 1996 was $100,742,421 and $13,214,989, respectively. The principal
uses of cash used in investing in the six months ended June 30, 1997 were for
the asset purchase of Unity Cellular System, Inc. and Northern Maine, and
for the purchase of property and equipment for the Company's network, switch
and construction of the digital microwave network and equipment purchased for
the Company's phone rental program.
Net cash provided by financing activities during the six months ended June
30, 1997 and 1996 was $97,926,894 and $9,047,548, 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 Unity Cellular System, Inc.
acquisition.
13
<PAGE>
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
(a) The Company held its Annual Meeting of Shareholders on May 22, 1997.
(c) The following matters were considered:
1. Election of two Class III Directors, each to serve a three year
term. The vote was as follows for each of the nominees:
NAME AFFIRMATIVE AUTHORITY WITHHELD
Richard P. Ekstrand 17,586,760 91,957
---------------- ------------------
George W. Wikstrom 17,592,675 86,042
---------------- ------------------
2. An amendment to increase the number of shares in the Stock
Compensation Plan to 890,000. Voting on approval of the amendment
was as follows: 13,560,688 shares in favor, 1,763,439 opposed,
1,147,303 abstentions, and 1,207,287 broker nonvotes.
3. Adoption of an Employee Stock Purchase Plan. Voting on approval of
the Plan was as follows: 14,410,578 shares in favor, 912,489
opposed, 1,152,553 abstentions, and 1,203,097 broker nonvotes.
4. Ratification of Arthur Andersen LLP as independent auditors. Voting
on ratification was 17,584,144 shares in favor, 81,293 opposed,
13,280 abstentions, and zero broker nonvotes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
2.2 Partnership Interest Purchase Agreement dated April 28, 1997
by and between Cellco and Partnership dba Bell Atlantic NYNEX
Mobile, Inc. and MRCC, Inc. (filed as an exhibit to Report on
Form 8-K dated May 1, 1997 and incorporated herein by reference)
10 Loan Agreement dated May 1, 1997 among the Registrant and The
Toronto Dominion Bank, Bank Boston, N.A., St. Paul Bank for
Cooperatives, CoBank, Fleet National Bank, First National Bank
of Maryland, Societe Generale, New York Branch, and Merita
Bank Ltd New York Branch (the "Banks"), BankBoston, N.A. and
St. Paul Bank for Cooperatives (the "Co-Agents"), and Toronto
Dominion (Texas), Inc. (the "Administrative Agent").
(filed as an exhibit to Report on Form 8-K dated May 1, 1997
and incorporated herein by reference)
27 Financial Data Schedule
(b) Reports on Form 8-K
A Report on Form 8-K dated May 1, 1997, was filed during the
quarter ended June 30, 1997, reporting under Item 2 the purchase
of certain assets of Unity Cellular Systems, Inc. and Intercel
Licenses Inc. and the acquisition of a 49% interest in Northern Maine
Cellular Partnership and filing under Item 7 a copy of the agreement
for the purchase of the partnership interest and the loan agreement
with The Toronto Dominion Bank, et al.
An amendment to the Report on Form 8-K discussed above containing
required financial statements was filed on July 15, 1997.
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: August 13, 1997 /s/ Richard P. Ekstrand
--------------- --------------------------------------
Richard P. Ekstrand
President and Chief Executive Officer
Dated: August 13, 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 FROM THE
COMPANY'S FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 2,726,364
<SECURITIES> 0
<RECEIVABLES> 11,121,470
<ALLOWANCES> 631,448
<INVENTORY> 1,414,567
<CURRENT-ASSETS> 15,682,139
<PP&E> 83,312,201
<DEPRECIATION> 18,032,748
<TOTAL-ASSETS> 164,280,958
<CURRENT-LIABILITIES> 17,012,360
<BONDS> 0
0
0
<COMMON> 88,533
<OTHER-SE> 34,669,964
<TOTAL-LIABILITY-AND-EQUITY> 164,280,958
<SALES> 291,897
<TOTAL-REVENUES> 21,648,920
<CGS> 916,809
<TOTAL-COSTS> 5,915,349
<OTHER-EXPENSES> 14,982,827
<LOSS-PROVISION> 594,255
<INTEREST-EXPENSE> 1,646,915
<INCOME-PRETAX> (237,855)
<INCOME-TAX> 0
<INCOME-CONTINUING> (237,855)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (237,855)
<EPS-PRIMARY> (0.03)
<EPS-DILUTED> (0.03)
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