SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the quarterly period ended June 30, 1998.
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the transition period from __________to__________.
Commission File Number 0-27416
RURAL CELLULAR CORPORATION
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1693295
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
PO Box 2000
3905 Dakota Street SW
Alexandria, Minnesota 56308
(320) 762-2000
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES(X) NO( )
Number of shares of common stock outstanding as of the close of business on July
30, 1998:
Class A 7,636,754
Class B 1,260,668
<PAGE>
TABLE OF CONTENTS
Page Number
PART I. - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets-
of June 30, 1998 and December 31, 1997..........................3
Consolidated Statements of Operations-
Three and six months ended June 30, 1998 and 1997...............5
Condensed Consolidated Statements of Cash Flows-
Six months ended June 30, 1998 and 1997.........................6
Notes to Condensed Consolidated Financial Statements.............7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations................ 11
PART II. - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.........................16
Item 4. Submission of Matters to a Vote of Security-Holders.............. 16
Item 6. Exhibits and Reports on Form 8-K..................................16
Signature page....................................................17
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RURAL CELLULAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
<S> <C> <C>
CURRENT ASSETS:
Cash................................................................ $ 123,898,765 $ 1,994,628
Accounts receivable, less allowance of $1,410,000 and $1,146,000 ... 10,610,581 9,621,032
Other current assets................................................ 1,713,935 2,540,161
------------ ------------
Total current assets.............................................. 136,223,281 14,155,821
------------ ------------
PROPERTY AND EQUIPMENT, less accumulated
depreciation of $31,570,000 and $23,874,000..................... 86,830,854 77,920,283
------------ ------------
LICENSES AND OTHER ASSETS:
Licenses and other intangible assets, less accumulated amortization
of $2,593,000 AND $1,490,000...................................... 80,213,559 81,348,237
Other assets, less accumulated amortization of $402,000 and $178,000 13,256,725 8,163,727
------------ ------------
Total licenses and other assets................................... 93,470,284 89,511,964
------------ ------------
$ 316,524,419 $ 181,588,068
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated balance sheets.
3
<PAGE>
RURAL CELLULAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable ........................................................... $ 6,020,387 $ 7,959,778
Advance billings and customer deposits ..................................... 1,977,010 2,541,015
Other accrued expenses ..................................................... 5,326,444 3,141,559
----------- -----------
Total current liabilities .................................................. 13,323,841 13,642,352
LONG-TERM DEBT ................................................................ 148,896,621 128,000,000
----------- -----------
Total liabilities ........................................................ 162,220,462 141,642,352
----------- -----------
MINORITY INTEREST ............................................................. 4,272,535 6,215,480
----------- -----------
EXCHANGEABLE PREFERRED STOCK .................................................. 120,670,573 --
----------- -----------
SHAREHOLDERS' EQUITY:
Class A common stock; $.01 par value; 15,000,000 shares .................... 76,341 75,926
authorized; 7,634,104 and 7,592,628 issued and outstanding
Class B common stock; $.01 par value; 5,000,000 shares ..................... 12,607 12,607
authorized; 1,260,668 shares issued and outstanding
Additional paid-in capital ................................................. 34,844,797 34,445,849
Accumulated deficit ........................................................ (5,572,896) (804,146)
----------- -----------
Total shareholders' equity ............................................... 29,360,849 33,730,236
----------- -----------
$316,524,419 $181,588,068
=========== ===========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated balance sheets.
4
<PAGE>
RURAL CELLULAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
REVENUES:
Service .......................................... $ 14,164,138 $ 10,684,233 $ 26,882,963 $ 17,592,475
Roamer ........................................... 3,119,951 2,447,067 4,877,929 3,764,548
Equipment ........................................ 388,051 195,183 708,424 291,897
---------- ---------- ---------- ----------
Total revenues ................................... 17,672,140 13,326,483 32,469,316 21,648,920
---------- ---------- ---------- ----------
OPERATING EXPENSES:
Network costs .................................... 3,821,030 2,998,325 7,448,763 4,998,540
Cost of equipment sales .......................... 1,085,487 629,433 1,969,529 916,809
Selling, general and administrative .............. 7,555,554 6,260,999 14,145,438 10,687,572
Depreciation and amortization .................... 4,846,046 2,926,729 9,065,186 4,889,510
---------- ---------- ---------- ----------
Total operating expenses ....................... 17,308,117 12,815,486 32,628,916 21,492,431
---------- ---------- ---------- ----------
OPERATING INCOME (LOSS) ............................. 364,023 510,997 (159,600) 156,489
---------- ---------- ---------- ----------
OTHER INCOME (EXPENSE):
Interest expense ............................... (3,205,217) (1,431,706) (5,615,376) (1,646,915)
Interest and dividend income ................... 952,431 37,688 1,230,969 100,035
Equity in earnings (losses) of unconsolidated
affiliates ............................... (149,374) 8,315 (297,825) 27,124
Minority interest ............................ 1,205,101 676,858 1,942,945 1,125,412
---------- ---------- ---------- ----------
Other expense, net ............................. (1,197,059) (708,845) (2,739,287) (394,344)
---------- ---------- ---------- ----------
LOSS BEFORE INCOME TAX .............................. (833,036) (197,848) (2,898,887) (237,855)
INCOME TAX PROVISION ................................ -- -- -- --
NET LOSS ............................................ (833,036) (197,848) (2,898,887) (237,855)
---------- ---------- ---------- ----------
PREFERRED STOCK DIVIDEND ............................ (1,869,863) -- (1,869,863) --
---------- ---------- ---------- ----------
NET LOSS APPLICABLE TO COMMON SHARES ................ $ (2,702,899) $ (197,848) $ (4,768,750) $ (237,855)
========== ========== ========== ==========
NET LOSS PER BASIC AND DILUTED COMMON SHARES........ $ (0.30) $ (0.02) $ (0.54) $ (0.03)
========== ========== ========== ==========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING, BASIC AND
DILUTED ........................................ 8,879,907 8,853,296 8,874,142 8,853,296
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE>
RURAL CELLULAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six months ended June 30,
1998 1997
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss ................................................. $ (4,768,750) $ (237,855)
Adjustments to reconcile to net cash provided by (used in)
operating activities:
Depreciation and amortization ....................... 9,065,186 4,889,510
Equity in (earnings) losses of unconsolidated
affiliates......................................... 306,165 (27,124)
Change in minority interest ......................... (1,942,945) (1,125,412)
Dividend requirement on preferred stock ............. 1,869,863 --
Other ............................................... (126,187) (32,373)
Change in other operating elements:
Accounts receivable ............................ (989,549) (1,891,610)
Other current assets ........................... 826,225 426,900
Accounts payable ............................... (2,030,573) 2,192,247
Other current liabilities ...................... (248,983) 1,110,109
----------- -----------
Net cash provided by operating activities ...... 1,960,452 5,304,392
----------- -----------
INVESTING ACTIVITIES:
Purchases of property and equipment, net ............ (16,656,261) (14,993,635)
Gain on hedge rate transaction ...................... 1,003,000 --
Purchases of Unicel and Northern Maine .............. -- (85,958,935)
Other ............................................... (1,004,873) 210,149
----------- -----------
Net cash used in investing activities .......... (16,658,134) (100,742,421)
----------- -----------
FINANCING ACTIVITIES:
Stock options exercised ............................. 399,363 --
Proceeds from issuance of senior subordinated notes . 125,000,000 --
Proceeds from issuance of preferred stock ........... 125,000,000 --
Proceeds from issuance of long-term debt ............ 15,625,000 117,195,000
Repayments of long-term debt ........................ (120,625,000) (18,130,902)
Payments of debt issuance costs ..................... (8,797,544) (1,137,204)
----------- -----------
Net cash provided by financing activities ...... 136,601,819 97,926,894
----------- -----------
NET INCREASE IN CASH ..................................... 121,904,137 2,488,865
CASH, at beginning of period ............................. 1,994,628 237,499
----------- -----------
CASH, at end of period ................................... $ 123,898,765 $ 2,726,364
=========== ===========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
6
<PAGE>
RURAL CELLULAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1) BASIS OF PRESENTATION:
The accompanying condensed consolidated financial statements for the periods
ended June 30,1998 and 1997 have been prepared by Rural Cellular Corporation and
subsidiaries (the "Company") without audit. In the opinion of management, normal
recurring adjustments necessary to present fairly the financial position,
results of operations, and cash flows for all periods presented have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that these condensed
consolidated financial statements be read in conjunction with the consolidated
financial statements and the notes thereto included in the Company's Report on
Form 10-K for the year ended December 31, 1997. The results of operations for
the period ended June 30, 1998 are not necessarily indicative of the operating
results for the full fiscal year or for any other interim periods.
2) ACQUISITIONS:
Unity Cellular System, Inc.
Effective May 1, 1997, the Company consummated the acquisition of the Maine
wireless telephone operations and related assets of Unity Cellular System, Inc.
and related cellular and microwave licenses from InterCel, Inc. In addition, the
Company acquired Unity's 51% interest in Northern Maine Cellular Partnership.
The Company also acquired the remaining 49% interest in Northern Maine Cellular
Partnership from an unrelated third party. The acquisitions (the "MRCC
Acquisitions") have been accounted for under the purchase method of accounting.
The Company operates its Maine operations through a wholly owned subsidiary,
MRCC, Inc.
The following unaudited pro forma information presents the consolidated results
of operations as if the acquisitions had occurred as of January 1, 1997. This
summary is not necessarily indicative of what the results of operations of the
Company and the acquired entities would have been if they had been a single
entity during such period, nor does it purport to represent results of
operations for any future periods.
THREE MONTHS SIX MONTHS
ENDED JUNE 30, 1997 ENDED JUNE 30, 1997
Total revenues $14,647,577 $26,466,855
Operating income 494,814 89,103
Net loss $ (987,933) $(2,832,684)
Basic and diluted net loss per share $ (.11) $ (.32)
7
<PAGE>
3) LONG TERM DEBT:
The Company has entered into three-year interest rate swap agreements with two
commercial banks in order to manage the relationship of its fixed rate versus
floating rate debt. Income and expense associated with swap transactions are
accrued over the periods prescribed by the contracts. These agreements, which
relate to $80 million of debt, effectively increased the Company's interest rate
on the debt by approximately .3% for the six months ended June 30, 1998. In
anticipation of the offering of the $125 million in 9 5/8% Senior Subordinated
Notes due 2008 (the "Senior Subordinated Notes") and $125 million in
exchangeable preferred stock (the "Exchangeable Preferred Stock"), the Company
also entered into a $150 million hedge agreement. On May 12, 1998, the Company
settled the hedge agreement resulting in a gain of $1.0 million. This gain is
being charged against interest expense over the lives of the underlying debt
instruments.
On May 14, 1998, the Company closed on the placement of Senior Subordinated
Notes. The Senior Subordinated Notes accrue interest at 9 5/8% from May 14,
1998. Payments of interest will be made on May 15 and November 15 of each year
commencing November 15, 1998.
On July 1, 1998, the Company replaced its $160 million existing credit facility
("Existing Credit Facility") with a $300 million credit facility (the "New
Credit Facility"). The Company had the following debt outstanding at June 30,
1998 and December 31, 1997:
LONG-TERM DEBT JUNE 30, 1998 DECEMBER 31, 1997
Deferred gain on hedge agreement $ 896,621 $ --
Existing Credit Facility 23,000,000 128,000,000
New Credit Facility -- --
9 5/8% Senior Subordinated Notes 125,000,000 --
------------ ------------
$148,896,621 $128,000,000
4) SENIOR EXCHANGEABLE PREFERRED STOCK
On May 14, 1998, the Company completed the placement of $125 million of 11 3/8%
Exchangeable Preferred Stock. The Exchangeable Preferred Stock has a liquidation
preference of $1,000 per share and is recorded at fair value on the date of
issuance less issuance costs. The Exchangeable Preferred Stock is senior to all
classes of junior preferred stock and common stock of the Company with respect
to dividend rights and rights on liquidation, winding-up and dissolution of the
Company. The Exchangeable Preferred Stock is non-voting, except as otherwise
required by law and as provided in the Certificate of Designation. Dividends on
all shares of Exchangeable Preferred Stock will be cumulative and accrue at 11
3/8% per annum from May 14, 1998 and may be paid, at the Company's option, on
any dividend payment date occurring on or before May 15, 2003, either in cash or
by the issuance of additional shares of Exchangeable Preferred Stock having an
aggregate liquidation preference equal to the amount of such dividends.
Thereafter all dividends will be payable in cash only. As of June 30, 1998, the
Company has accrued $1.9 million in preferred stock dividends which will be
distributed on August 15, 1998.
5) SUPPLEMENTAL DISCLOSURE OF CONDENSED CONSOLIDATED CASH FLOW INFORMATION:
Six Months Ended
June 30,
-----------------------
1998 1997
------------- ---------
Cash paid during the period for interest $5,496,561 $1,081,863
Cash paid (received) during the period for income taxes $ 1,250 $ (250,000)
8
<PAGE>
6) SUBSEQUENT EVENTS:
Effective July 1, 1998, the Company completed the acquisition of the Vermont,
New Hampshire, New York and Massachusetts cellular telephone licenses,
operations and related assets of Atlantic Cellular Company L.P. and one of its
subsidiaries ("Atlantic"), an independent provider of wireless communication
services in the New England region. As consideration for the acquisition of
Atlantic, the Company paid approximately $256 million in cash. Under the terms
of the agreement, the Company acquired a contiguous, multi-state service area of
21,000 square miles, encompassing approximately 1.1 million POPS ("population
served")and 74,000 customers. The cellular properties acquired from Atlantic
include: (i) the entire state of Vermont (RSA 1, RSA 2, and the Burlington MSA);
(ii) western New Hampshire (RSA 1); (iii) the northeastern corner of New York
(RSA 2); and (iv) northwestern Massachusetts (RSA 1). In addition, the Company
has acquired Atlantic's long distance business. The Company operates its
Atlantic operations as RCC Atlantic, Inc.
Effective July 31, 1998, the Company completed the acquisition of the
outstanding stock of Western Maine Cellular ("WMC"), a wholly-owned subsidiary
of Utilities, Inc., for approximately $7.5 million in cash. WMC provides
cellular service to western Maine RSA 1 which incorporates a 3,700 square-mile
service area of western Maine encompassing 83,000 POPs and serves approximately
2,500 customers.
The $263.5 million used to acquire both Atlantic and WMC was financed through
borrowings under the New Credit Facility and the proceeds from the issuance of
the Senior Subordinated debt. The acquisitions of Atlantic and WMC have been
accounted for under the purchase method of accounting.
9
<PAGE>
9. SEGMENT INFORMATION:
The Company's consolidated financial statements consist of the business units
RCC Cellular and Wireless Alliance, LLC ("Wireless Alliance"). RCC Cellular
includes cellular and paging operations in Minnesota and Maine. Wireless
Alliance, a joint venture that commenced cellular reselling operations in
November 1996 and launched its first PCS networks in the second quarter of 1998,
is 51%-owned by the Company and 49%-owned by APT Inc., an affiliate of Aerial
Communications, Inc.
Information about the Company's operations in its business units for the three
and six months ended June 30, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) Three months ended Six months ended
June 30 June 30
1998 1997 1998 1997
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
Revenues
RCC Cellular ........................... $ 14,483 $ 11,681 $ 26,535 $ 19,195
Wireless Alliance LLC .................. 3,189 1,645 5,934 2,454
------ ------ ------ ------
Total revenue ....................... 17,672 13,326 32,469 21,649
Operating expenses
RCC Cellular ........................... 12,001 9,789 23,129 16,742
Wireless Alliance LLC .................. 5,307 3,026 9,500 4,750
------ ------ ------ ------
Total operating expenses ............ 17,308 12,815 32,629 21,492
Operating income (loss)
RCC Cellular ........................... 2,482 1,892 3,406 2,453
Wireless Alliance LLC .................. (2,118) (1,381) (3,566) (2,296)
------ ------ ------ ------
Total operating income (loss) ...... 364 511 (160) 157
Depreciation and amortization
RCC Cellular ........................... 4,091 2,805 7,940 4,713
Wireless Alliance LLC .................. 756 122 1,125 176
------ ------ ------ ------
Total depreciation and amortization 4,847 2,927 9,065 4,889
OTHER OPERATING DATA:
EBITDA
RCC Cellular ........................... 6,573 4,697 11,346 7,166
Wireless Alliance LLC .................. (1,362) (1,259) (2,441) (2,120)
------ ------ ------ ------
Total EBITDA ...................... 5,211 3,438 8,905 5,046
Capital expenditures
RCC Cellular ........................... 5,638 10,507 10,744 13,600
Wireless Alliance LLC .................. 2,388 879 5,862 1,394
----- ------ ------ ------
Total capital expenditures ........ 8,026 11,386 16,606 14,994
BALANCE SHEET DATA (END OF PERIOD)
Property and equipment
RCC Cellular ........................... 103,374 81,554
Wireless Alliance LLC .................. 15,027 1,758
------- ------
Total property and equipment ...... 118,401 83,312
10
</TABLE>
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
As a result of the MRCC Acquisitions, the Company's operating results for the
first and second quarters of 1998 and 1997 may not be comparable or indicative
of future performance.
RESULTS OF OPERATIONS
The following table presents certain consolidated statement of operations data
as a percentage of total revenues as well as other financial and operating data
for the periods indicated.
<TABLE>
<CAPTION>
Three months Six months
ended June 30, June 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
REVENUES:
Service ............................................... 80.1% 80.1% 82.8% 81.3%
Roamer ................................................ 17.7 18.4 15.0 17.4
Equipment ............................................. 2.2 1.5 2.2 1.3
----- ----- ----- -----
Total revenues ........................................... 100.0 100.0 100.0 100.0
----- ----- ----- -----
OPERATING EXPENSES:
Network costs ......................................... 21.6 22.5 22.9 23.1
Cost of equipment sales ............................... 6.1 4.7 6.1 4.2
Selling, general and administrative ................... 42.8 47.0 43.6 49.4
Depreciation and amortization ......................... 27.4 22.0 27.9 22.6
----- ----- ----- -----
Total operating expenses ................................. 97.9 96.2 100.5 99.3
----- ----- ----- -----
OPERATING INCOME (LOSS)................................. 2.1 3.8 (0.5) 0.7
----- ----- ----- -----
OTHER INCOME (EXPENSE):
Interest expense ...................................... (18.1) (10.8) (17.3) (7.6)
Interest and dividend income .......................... 5.4 0.3 3.8 0.5
Equity in earnings of unconsolidated affiliates ....... (0.8) 0.1 (0.9) 0.1
Minority interest ..................................... 6.8 5.1 6.0 5.2
----- ----- ----- -----
Other expense, net ....................................... (6.7) (5.3) (8.4) (1.8)
----- ----- ----- -----
LOSS BEFORE INCOME TAX.................................... (4.6) (1.5) (8.9) (1.1)
INCOME TAX PROVISION...................................... -- -- -- --
NET LOSS.................................................. (4.6) (1.5) (8.9) (1.1)
----- ----- ----- -----
PREFERRED STOCK DIVIDEND.................................. (10.6) -- (5.8) --
------ ----- ----- -----
NET LOSS APPLICABLE TO COMMON SHARES ..................... (15.2)% (1.5)% (14.7)% (1.1)%
===== ===== ====== =====
EBITDA (1)................................................ 29.5% 25.8% 27.4% 23.3%
ADJUSTED EBITDA (1)....................................... 45.4% 40.2% 42.8% 37.3%
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
Other Operating Data Three months ended Six months ended
June 30, June 30,
1998 1997 1998 1997
POP's: (2)
<S> ...................................... <C> <C> <C> <C>
RCC Cellular ........................... 1,148,000 1,120,000 1,148,000 1,120,000
Wireless Alliance LLC .................. 708,000 516,000 708,000 516,000
--------- --------- --------- ---------
Total POP's ...................... 1,856,000 1,636,000 1,856,000 1,636,000
Customers at period end:
RCC Cellular ........................... 91,814 77,129 91,814 77,129
Wireless Alliance LLC .................. 19,373 10,424 19,373 10,424
Other .................................. 10,514 7,787 10,514 7,787
--------- --------- --------- ---------
Total customers .................. 121,701 95,340 121,701 95,340
Penetration: (3)
RCC Cellular ........................... 8.0% 6.9% 8.0% 6.9%
Wireless Alliance LLC .................. 2.7% 2.0% 2.7% 2.0%
Retention: (4)
RCC Cellular ........................... 98.8% 98.3% 98.7% 98.6%
Wireless Alliance LLC .................. 97.7% 99.1% 97.5% 99.1%
Average monthly revenue per customer (5)
RCC Cellular ........................... $53 $58 $50 $56
Wireless Alliance LLC .................. $56 $65 $54 $61
Acquisition cost per customer: (6)
RCC Cellular ........................... $395 $442 $418 $419
Wireless Alliance LLC .................. $464 $247 $461 $233
Cell sites
RCC Cellular ........................... 134 112 134 112
Wireless Alliance LLC .................. 34 0 34 0
</TABLE>
1)EBITDA is the sum of earnings before interest, taxes, depreciation and
amortization and is utilized as a performance measure within the cellular
industry. EBITDA is not intended to be a performance measure that should be
regarded as an alternative for other performance measures and should not be
considered in isolation. EBITDA is not a measurement of financial performance
under generally accepted accounting principles and does not reflect all expenses
of doing business (e.g., interest expense, depreciation). Accordingly, EBITDA
should not be considered as having greater significance than or as an
alternative to net income or operating income as an indicator of operating
performance or to cash flows as a measure of liquidity. Moreover, "EBITDA," as
used herein, may differ from "Operating Cash Flow." Adjusted EBITDA represents
EBITDA excluding Wireless Alliance's EBITDA.
2)Source 1990 census, updated for July 1, 1997 estimates, of the U.S.Census
Bureau
3)Represents the ratio of cellular customers at the end of the
period to total POPs.
4) Determined for each period by dividing total cellular customers discontinuing
service during such period by the average cellular customers for such period
(customers at the beginning of the period plus customers at the end of the
period, divided by two), dividing that result by the number of months in the
period, and subtracting such result from one.
5) Determined for each period by dividing the sum of access, airtime, roaming,
long distance, features, connections, disconnection, and other revenues for such
period by average cellular customers for such period (customers at the beginning
of the period plus customers at the end of the period, divided by two), and
dividing that result by the number of months in such period
12
<PAGE>
6)Determined for each period by dividing selling and marketing expenses, costs
of equipment sales, and depreciation of rental telephone equipment by the gross
cellular customers added during such period.
THREE AND SIX MONTHS ENDED JUNE 30, 1998 AND JUNE 30, 1997
REVENUES
Service revenues for the three months ended June 30, 1998 increased 32.6% to
$14.2 million from $10.7 million in 1997. Service revenues for the six months
ended June 30, 1998 increased 52.8% to $26.9 million from $17.6 million in the
comparable period of 1997. The growth for the three and six months ended June
30, 1998 was primarily due to the increase in the number of customers and the
MRCC Acquisitions, partially offset by a decrease of, respectively, 8.6% and
10.7% in the average revenue per RCC Cellular customer and a decrease of,
respectively, 13.8% and 11.5% in average revenue per Wireless Alliance customer.
The rate at which new customers were added to existing markets for the three and
six months ended June 30, 1998 decreased to 6.4% and 9.6% in 1998 from 11.7% and
24.8% in 1997. There were no new customers added through acquisition during the
three and six months ended June 30, 1998 as compared to 66.5% of the additional
customers being added through acquisition during the six months ended June 30,
1997.
Roamer revenues for the three months ended June 30, 1998 increased 27.5% to $3.1
million from $2.5 million in 1997. Roamer revenues for the six months ended June
30, 1998 increased 29.6% to $4.9 million from $3.8 million in the comparable
period of 1997. Roamer revenues have increased due to the activation of
additional cell sites and acquisitions of new service areas. As a percentage of
cellular revenues (excluding the impact of Wireless Alliance) roaming revenues,
for the three months ended June 30, 1998, have increased to 21.6% from 20.9% in
1997. For the six months ended June 30, 1998, roamer revenues decreased as a
percentage of cellular revenues from 19.6% in 1997 to 18.4% in 1998. Wireless
Alliance had no roamer revenues in either 1998 or 1997 because it was primarily
engaged in reselling cellular services. The Company expects Wireless Alliance to
generate roamer revenues in the third and fourth quarters of 1998.
OPERATING EXPENSES
Network costs include switching and transport expenses and the expenses
associated with the maintenance and operation of the Company's wireless network
facilities, as well as charges from other service providers for resold minutes
and services. Network cost for the three months ended June 30, 1998, increased
27.4% to $3.8 million from $3.0 million in 1997, but decreased as a percentage
of total revenues to 21.6% in 1998 from 22.5% in 1997. For the six months ended
June 30, 1998, network costs increased 49.0% to $7.5 million from $5.0 million
for the comparable period of the prior year. Network costs remained relatively
constant as a percentage of sales at 22.9% for the six months ended June 30,
1998 as compared to 23.1% in 1997. The increase in network costs resulted
primarily from expenses incurred by Wireless Alliance and MRCC, which more than
offset network cost reductions in the Company's Minnesota operations.
Contributing to the reduction of network costs in the Minnesota service area was
the completed installation of the Company's Mobile Telephone Switching Office
("MTSO") in the third quarter of 1997, thereby reducing the Company's network
costs for switching services provided by Switch 2000, Inc., an unconsolidated
affiliate. Network costs for Wireless Alliance increased to $2.5 million in the
second quarter of 1998 from $1.4 million in the comparable period of 1997. The
increase is attributed to additional network costs associated with increased
customers.
Selling, general, and administrative ("SG&A") expenses include salaries,
benefits, and operating expenses such as marketing, commissions, customer
support, accounting, administration, and billing. SG&A expenses for the three
months ended June 30, 1998 increased 20.7% to $7.6 million in 1998 from $6.3
million in 1997. For the six months ended June 30, 1998, SG&A increased 32.4% to
$14.2 million from $10.7 million in the comparable period of the prior year. The
increase in SG&A for the three months ended June 30,1998 resulted primarily from
additional costs related to MRCC and a $438,000 increase in costs of Wireless
Alliance. As a percentage of total revenues for the three and six months ended
June 30, 1998, SG&A decreased to 42.8% and 43.6%, respectively, from 47.0% and
49.4%,respectively, in 1997 reflecting economies gained through the acquisition
of MRCC and the growth of Wireless Alliance.
13
<PAGE>
Depreciation and amortization expense for the three and six months ended June
30, 1998 increased 65.6% and 85.4%, respectively, to $4.9 million and $9.1
million from $2.9 million and $4.9 million in 1997. The increase reflects the
Company's continued construction and acquisition efforts, and its investments in
network facilities, including the Company's launch of PCS services through
Wireless Alliance, a newly installed MTSO, and rental equipment.
OTHER INCOME (EXPENSE)
Interest expense for the three and six months ended June 30, 1998 increased to
$3.2 million and $5.6 million, respectively, from $1.4 million and $1.6 million
in 1997. The increase in interest expense was primarily a result of interest
incurred on the $125 million in Senior Subordinated Notes combined with
borrowings under the Existing Credit Facility. The borrowing was incurred to
finance the MRCC Acquisitions, the construction of cell sites, and other pending
acquisitions. Other income also includes the minority interest in losses of
Wireless Alliance.
SEASONALITY
The Company experiences seasonal fluctuations in revenues and operating results.
The Company, and the wireless communications industry in general, have
historically experienced significant customer growth during the fourth calendar
quarter. Accordingly, during such periods the Company experiences greater losses
on equipment sales and increases in sales and marketing expenses. In addition,
the Company's financial performance during the first calendar quarter has been
negatively affected by reduced minutes of use and roamer revenues. The Company's
average monthly revenue per cellular customer has historically increased during
the second and third calendar quarters. This increase reflects greater usage by
the Company's cellular customers and roamers who travel in the Company's
cellular service area for weekend and vacation recreation or work in seasonal
industries, such as agriculture and construction. Because the Company's cellular
service area includes many seasonal recreational areas, the Company expects that
roamer revenues will continue to fluctuate seasonally to a greater degree than
service revenues.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary liquidity requirements are for working capital, capital
expenditures, debt service, acquisitions, and customer growth. These
requirements have been met through cash flow from operations and borrowings
under the Existing Credit Facility. As of June 30, 1998, the Company had $23
million outstanding under its $160 million Existing Credit Facility. On July 1,
1998 the Company replaced its $160 million Existing Credit Facility with a $300
million New Credit Facility from an affiliate of TD Securities (USA) Inc. Under
the New Credit Facility, amounts may be borrowed or repaid at any time through
maturity provided that, at no time, the aggregate outstanding borrowings exceed
the total of the New Credit Facility. The Company believes that it will have
adequate capital resources to satisfy all its liquidity requirements for at
least the next twelve months.
Net cash provided by operating activities was $2.0 million for the six months
ended June 30, 1998. Adjustments to the $4.8 million net loss to reconcile to
net cash used in operating activities included $9.1 million in depreciation and
amortization and a $2.0 million decrease in accounts payable.
Net cash used in investing activities for the six months ended June 30, 1998 was
$16.7 million. Investing activities for such period consisted primarily of
purchases of property and equipment of $16.7 million, of which $5.9 million was
attributable to Wireless Alliance capital expenditures. These purchases reflect
the construction and launch of Wireless Alliance's PCS network, expansion of
existing coverage in RCC Cellular, and the continued upgrading of existing cell
sites and switching equipment. Capital expenditures (including $10.2 million for
Wireless Alliance) are expected to be approximately $23.1 million in remaining
quarters of 1998. Capital expenditures and debt service are expected to be
funded through internally generated cash flows and, if necessary, borrowings
under the New Credit Facility.
Net cash provided by financing activities was $137 million for the six months
ended June 30, 1998. Financing activities for such period consisted primarily of
the placement on May 14, 1998 of $125 million of 9 5/8% Senior Subordinated
Notes due May 15, 2008 and $125 million of 11 3/8% Exchangeable Preferred Stock.
The net proceeds from the sale of the Exchangeable Preferred Stock were used to
repay a portion of indebtedness under the Existing Credit Facility. On July 1,
1998, the net proceeds from the sale of the Senior Subordinated Notes together
with the New Credit Facility were used to finance the acquisition of Atlantic
and WMC.
In the ordinary course of business, the Company continues to evaluate
acquisition opportunities and other potential business transactions. Such
acquisitions, joint ventures and business transactions may be material. Such
transactions may also require the Company to seek additional sources of funding
through the issuance of additional debt and/or additional equity. There can be
no assurance that such funds will be available to the Company on acceptable or
favorable terms.
14
<PAGE>
YEAR 2000 ISSUE
The Company continues to assess the impact of the Year 2000 issue on its
reporting systems and operations. The Year 2000 issue exists because many
computer systems and applications currently use two-digit fields to designate a
year. As the century date occurs, date sensitive systems may recognize the year
2000 as 1900 or not at all. This inability to recognize or properly treat the
Year 2000 may cause systems to process critical financial and operational
information incorrectly.
During the first six months of 1998, the Company did not incur any costs to
modify existing computer systems and applications, and estimates that
approximately $600,000 will be incurred in the remaining quarters of 1998 and
1999. The Company plans to devote the necessary resources to resolve all
significant Year 2000 issues in a timely manner. If Year 2000 modifications are
not properly completed either by the Company or any company from which the
Company does business with, the Company could be adversely impacted.
FORWARD LOOKING STATEMENTS
Forward-looking statements herein are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. Although the
Company believes that the expectations reflected in such forward-looking
statements are reasonable, it can give no assurance that such expectations will
prove to be correct. A number of factors could cause actual results,
performance, achievements of the Company, or industry results to be materially
different from any future results, performance or achievements expressed or
implied by such forward-looking statements. These factors include but are not
limited to, the competitive environment in the wireless and telecommunications
industries, changes in economic conditions in general and in the Company's
business, demographic changes, changes in prevailing interest rates and the
availability of and terms of financing to fund the anticipated growth of the
Company's business, the ability to attract and retain qualified personnel, the
significant indebtedness of the Company, and changes in the Company's
acquisition and capital expenditure plans. Investors are cautioned that all
forward-looking statements involve risks and uncertainties.
In addition, such forward-looking statements are necessarily dependent upon
assumptions, estimates and data that may be incorrect or imprecise and involve
known and unknown risks, uncertainties and other factors. Accordingly, any
forward-looking statements included herein do not purport to be predictions of
future events or circumstances and may not be realized. All subsequent written
and oral forward-looking statements attributable to the Company or persons
acting on its behalf are expressly qualified in their entirety by the foregoing
cautionary statements. The Company disclaims any obligation to update any such
factors or to announce publicly the results of any revisions to any of the
forward-looking statements contained herein to reflect future events or
developments.
15
<PAGE>
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) Effective May 14, 1998, the Company sold $125 million of 11-3/8%
Exchangeable Preferred Stock to TD Securities (USA) Inc., NationsBanc
Montgomery Securities LLC, and BancBoston Securities Inc. Net proceeds to
the Company, after underwriting fees of $4.4 million, were $120.6 million.
The Company claims exemption for the sale under Section 4(2) of the
Securities Act of 1933 as a sale not involving a public offering.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
(a) The Company held its Annual Meeting of Shareholders on May 21, 1998.
(c) The following matters were considered:
1. To approve an amendment to the Company's Bylaws regarding the
number of directors; Voting on approval of the amendment was as follows:
17,695,039 shares in favor, 22,715 opposed, 35,730 abstentions, and zero
broker non-votes.
2. To elect two directors, each for a three-year term;
Name Affirmative Authority Withheld
Jeffrey S. Gilbert 17,699,299 54,185
Marvin C. Nicolai 17,698,923 54,561
There were no abstentions or broker non-votes
3. To approve an increase in the number of shares authorized to be
issued under the 1995 Stock Compensation Plan. Voting on approval of the
Plan was as follows: 16,034,239 shares in favor, 544,945 opposed, 607,855
abstentions, and 544,445 broker non-votes.
4. To ratify appointment of Arthur Andersen LLP as the Company's
independent auditors for fiscal 1998. Voting on ratification was 17,718,979
shares in favor, 2,525 opposed, 31,980 abstentions, and zero broker
non-votes
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
A report on Form 8-K dated April 27, 1998 reporting under Item 5 and filing
under Item 7, the notice of a certain proposed unregistered offering of
Senior Subordinated Notes and Exchangeable Preferred Stock pursuant to Rule
135c of the Securities Act of 1933.
16
<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 11, 1998 /s/ Richard P. Ekstrand
------------------------------------------------------
Richard P. Ekstrand
President and Chief Executive Officer
Dated: August 11, 1998 /s/ Wesley E. Schultz
------------------------------------------------------
Wesley E. Schultz
Vice President and Chief Financial Officer
(Principal Financial Officer)
17
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
This schedule contains summary financial information extracted from the
Company's financial statements for the six months ended June 30, 1998 and is
qualified in its entirety by reference to such financial statements.
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 123,898,765
<SECURITIES> 0
<RECEIVABLES> 12,020,742
<ALLOWANCES> 1,410,161
<INVENTORY> 922,801
<CURRENT-ASSETS> 791,134
<PP&E> 118,400,720
<DEPRECIATION> (31,569,866)
<TOTAL-ASSETS> 316,524,419
<CURRENT-LIABILITIES> 13,323,841
<BONDS> 0
0
120,670,573
<COMMON> 88,948
<OTHER-SE> 29,271,901
<TOTAL-LIABILITY-AND-EQUITY> 316,524,419
<SALES> 708,424
<TOTAL-REVENUES> 32,469,316
<CGS> 1,969,529
<TOTAL-COSTS> 9,418,292
<OTHER-EXPENSES> 23,210,624
<LOSS-PROVISION> 921,689
<INTEREST-EXPENSE> 5,615,376
<INCOME-PRETAX> (4,768,750)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,768,750)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,768,750)
<EPS-PRIMARY> (0.54)
<EPS-DILUTED> (0.54)
</TABLE>
