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Previous: GLOBAL WATER TECHNOLOGIES INC, 10QSB, 1999-11-15 |
Next: RURAL CELLULAR CORP, 10-Q, 1999-11-15 |
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, 1999. | |
| / / |
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
[LOGO]
Rural Cellular Corporation
(Exact name of registrant as specified in its charter)
| Minnesota (State or other jurisdiction of incorporation or organization) |
41-1693295 (I.R.S. Employer 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 November 1, 1999:
Class A 8,004,711
Class B 1,076,473
TABLE OF CONTENTS
| |
Page Number |
|
|---|---|---|
| Part I.—Financial Information | ||
| Item 1. Financial Statements |
|
|
| Condensed Consolidated Balance Sheets— As of September 30, 1999 and December 31, 1998 |
|
3 |
| Condensed Consolidated Statements of Operations— Three and Nine months ended September 30, 1999 and 1998 |
|
5 |
| Condensed Consolidated Statements of Cash Flows— Nine months ended September 30, 1999 and 1998 |
|
6 |
| Notes to Condensed Consolidated Financial Statements |
|
7 |
| Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations |
|
14 |
| Item 3. Quantitative and Qualitative Disclosures about Market Risk |
|
22 |
| Part II.—Other Information |
|
|
| Item 5. Other Information |
|
24 |
| Item 6. Exhibits and Reports on Form 8-K |
|
24 |
| Signature page |
|
25 |
RURAL CELLULAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
(Unaudited)
ASSETS
| |
Sept. 30, 1999 |
Dec. 31, 1998 |
||||
|---|---|---|---|---|---|---|
| CURRENT ASSETS: | ||||||
| Cash | $ | 1,073 | $ | 2,062 | ||
| Accounts receivable, less allowance of $985 and $1,555 | 22,944 | 13,796 | ||||
| Inventories | 3,068 | 2,321 | ||||
| Other current assets | 631 | 813 | ||||
| Total current assets | 27,716 | 18,992 | ||||
| PROPERTY AND EQUIPMENT, less accumulated depreciation of $60,903 and $42,538 |
|
|
128,764 |
|
|
131,714 |
| LICENSES AND OTHER ASSETS: |
|
|
|
|
|
|
| Licenses and other intangible assets, less accumulated amortization of $16,812 and $8,108 | 321,135 | 309,672 | ||||
| Deferred debt ssuance costs, less accumulated amortization of $1,429 and $509 | 10,949 | 11,761 | ||||
| Other assets | 6,770 | 8,385 | ||||
| Total licenses and other assets | 338,854 | 329,818 | ||||
| $ | 495,334 | $ | 480,524 | |||
The accompanying notes are an integral part of these condensed consolidated balance sheets.
RURAL CELLULAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
(In Thousands)
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
| |
Sept. 30, 1999 |
Dec. 31, 1998 |
|||||
|---|---|---|---|---|---|---|---|
| CURRENT LIABILITIES: | |||||||
| Accounts payable | $ | 11,906 | $ | 16,524 | |||
| Advance billings and customer deposits | 3,795 | 3,229 | |||||
| Accrued interest | 6,305 | 3,508 | |||||
| Dividends payable | 2,044 | 1,880 | |||||
| Other accrued expenses | 4,802 | 3,389 | |||||
| Total current liabilities | 28,852 | 28,530 | |||||
| LONG-TERM DEBT |
|
|
307,143 |
|
|
298,851 |
|
| Total liabilities |
|
|
335,995 |
|
|
327,381 |
|
| MINORITY INTEREST |
|
|
— |
|
|
1,663 |
|
| EXCHANGEABLE PREFERRED STOCK |
|
|
143,767 |
|
|
132,201 |
|
| SHAREHOLDERS' EQUITY: |
|
|
|
|
|
|
|
| Class A common stock; $.01 par value; 15,000 shares authorized; 7,935 and 7,780 shares issued and outstanding | 79 | 78 | |||||
| Class B common stock; $.01 par value; 5,000 shares authorized; 1,144 and 1,203 shares issued and outstanding | 11 | 12 | |||||
| Additional paid-in capital | 36,476 | 35,707 | |||||
| Accumulated deficit | (20,994 | ) | (16,518 | ) | |||
| Total shareholders' equity | 15,572 | 19,279 | |||||
| $ | 495,334 | $ | 480,524 | ||||
The accompanying notes are an integral part of these condensed consolidated balance sheets.
RURAL CELLULAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousand Except Per Share Data)
(Unaudited)
| |
Three months ended Sept. 30, |
Nine months ended Sept. 30, |
|||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
1999 |
1998 |
1999 |
1998 |
|||||||||
| REVENUES: | |||||||||||||
| Service | $ | 28,162 | $ | 24,295 | $ | 78,263 | $ | 51,178 | |||||
| Roamer | 15,971 | 8,699 | 33,310 | 13,577 | |||||||||
| Equipment | 2,809 | 961 | 5,704 | 1,669 | |||||||||
| Total revenues | 46,942 | 33,955 | 117,277 | 66,424 | |||||||||
| OPERATING EXPENSES: | |||||||||||||
| Network costs | 5,119 | 5,886 | 14,352 | 13,335 | |||||||||
| Cost of equipment sales | 3,501 | 2,042 | 8,145 | 4,012 | |||||||||
| Selling, general and administrative | 14,331 | 11,666 | 39,318 | 25,811 | |||||||||
| Depreciation and amortization | 9,896 | 8,458 | 29,549 | 17,523 | |||||||||
| Total operating expenses | 32,847 | 28,052 | 91,364 | 60,681 | |||||||||
| OPERATING INCOME | 14,095 | 5,903 | 25,913 | 5,743 | |||||||||
| OTHER INCOME (EXPENSE): | |||||||||||||
| Interest expense | (6,692 | ) | (6,725 | ) | (20,207 | ) | (12,340 | ) | |||||
| Interest and dividend income | 59 | 87 | 289 | 1,318 | |||||||||
| Other income (expense) | 92 | (347 | ) | (210 | ) | 645 | |||||||
| Minority interest | — | 1,183 | 1,538 | 3,126 | |||||||||
| Other expense, net | (6,541 | ) | (5,802 | ) | (18,590 | ) | (8,541 | ) | |||||
| INCOME (LOSS) BEFORE INCOME TAX AND EXTRAORDINARY ITEM | 7,554 | 101 | 7,323 | (2,798 | ) | ||||||||
| INCOME TAX PROVISION | — | — | 34 | — | |||||||||
| INCOME (LOSS) BEFORE EXTRAORDINARY ITEM | 7,554 | 101 | 7,289 | (2,798 | ) | ||||||||
| Extraordinary item—early retirement of debt | — | (1,042 | ) | — | (1,042 | ) | |||||||
| NET INCOME (LOSS) | 7,554 | (941 | ) | 7,289 | (3,840 | ) | |||||||
| PREFERRED STOCK DIVIDEND | (4,032 | ) | (3,528 | ) | (11,765 | ) | (5,398 | ) | |||||
| NET INCOME (LOSS) APPLICABLE TO COMMON SHARE | $ | 3,522 | $ | (4,469 | ) | $ | (4,476 | ) | $ | (9,238 | ) | ||
| NET INCOME (LOSS) PER BASIC COMMON SHARE | $ | 0.39 | $ | (0.50 | ) | $ | (0.50 | ) | $ | (1.04 | ) | ||
| NET INCOME (LOSS) PER DILUTED COMMON SHARE | $ | 0.36 | $ | (0.50 | ) | $ | (0.50 | ) | $ | (1.04 | ) | ||
| BASIC WEIGHTED AVERAGE COMMON SHARE OUTSTANDING | 9,055 | 8,931 | 9,029 | 8,893 | |||||||||
| DILUTED WEIGHTED AVERAGE COMMON SHARE OUTSTANDING | 9,725 | 8,931 | 9,029 | 8,893 | |||||||||
The accompanying notes are an integral part of these condensed consolidated balance sheets.
RURAL CELLULAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
| |
Nine Months Ended Sept. 30, |
||||||
|---|---|---|---|---|---|---|---|
| |
1999 |
1998 |
|||||
| OPERATING ACTIVITIES: | |||||||
| Net income (loss) | $ | 7,289 | $ | (3,840 | ) | ||
| Adjustments to reconcile to net cash provided by operating activities | |||||||
| Depreciation and amortization | 29,549 | 17,523 | |||||
| Extraordinary item—early extinguishment of debt | — | 1,042 | |||||
| Equity in losses of unconsolidated affiliates | 2 | 654 | |||||
| Change in minority interest | (1,663 | ) | (3,125 | ) | |||
| Other | 769 | (60 | ) | ||||
| Change in other operating elements: | |||||||
| Accounts receivable | (9,273 | ) | (1,512 | ) | |||
| Inventories | (748 | ) | 249 | ||||
| Other current assets | 189 | (308 | ) | ||||
| Accounts payable | (4,494 | ) | 1,220 | ||||
| Advance billings and customer deposits | 557 | 6,230 | |||||
| Other accrued expenses | 3,917 | (83 | ) | ||||
| Net cash provided by operating activities | 26,094 | 17,990 | |||||
| INVESTING ACTIVITIES: | |||||||
| Purchase of property and equipment, net | (15,694 | ) | (23,956 | ) | |||
| Purchase of Glacial Lakes Cellular | (11,156 | ) | — | ||||
| Purchase of Atlantic and Western Maine Cellular | — | (269,984 | ) | ||||
| Acquisition of FCC licenses | (8,655 | ) | — | ||||
| Other | (550 | ) | (1,621 | ) | |||
| Net cash used in investing activities | (36,055 | ) | (295,561 | ) | |||
| FINANCING ACTIVITIES: | |||||||
| Proceeds from exercise of stock options | 770 | 1,227 | |||||
| Proceeds from issuance of senior subordinated notes | — | 125,000 | |||||
| Proceeds from issuance of preferred stock | — | 125,000 | |||||
| Proceeds from issuance of long-term debt | 24,000 | 188,625 | |||||
| Proceeds from termination of interest rate swap | 360 | 1,003 | |||||
| Repayments of long-term debt | (16,000 | ) | (143,625 | ) | |||
| Payment of debt issuance costs | (158 | ) | (12,505 | ) | |||
| Net cash provided by financing activities | 8,972 | 284,725 | |||||
| NET INCREASE (DECREASE) IN CASH | (989 | ) | 7,154 | ||||
| CASH, at beginning of period | 2,062 | 1,995 | |||||
| CASH, at end of period | $ | 1,073 | $ | 9,149 | |||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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 September 30, 1999 and 1998 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, 1998. The results of operations for the three and nine months ended September 30, 1999 are not necessarily indicative of the operating results for the full fiscal year or for any other interim periods.
2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Income (loss) Per Common Share:
Income (loss) per common share is calculated using the weighted average number of shares of outstanding common stock during the period. The number of shares outstanding has been calculated based on the requirements of Statement of Financial Accounting Standards No. 128, "Earnings Per Share." During periods where a net loss is recorded all options outstanding are anti-dilutive; thus basic and diluted loss per share are equal. In periods where net income is recorded, certain options are dilutive and are included in the basis to calculate the diluted income per share.
Recently Issued Accounting Standards:
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." It requires the recognition of all derivatives as either assets or liabilities and the measurement of those instruments at fair value. SFAS No. 133 is effective for fiscal years beginning after June 15, 2000. The implementation of SFAS No. 133 is not expected to have a material impact on the Company's financial position or results of operations.
3) ACQUISITIONS:
Atlantic Cellular Company, L.P.
Effective July 1, 1998, the Company completed the acquisition of the 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, for approximately $262.5 million. 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. The cellular properties acquired from Atlantic include: (i) northwestern Massachusetts (RSA 1); (ii) western New Hampshire (RSA 1); (iii) the northeastern corner of New York (RSA 2); and (iv) the entire state of Vermont (RSA 1, RSA 2, and the Burlington MSA). In addition, the Company acquired Atlantic's long distance business. The Company operates its Atlantic operations through its wholly-owned subsidiary, RCC Atlantic, Inc. ("RCC Atlantic").
Western Maine Cellular, Inc.
Effective July 31, 1998, the Company completed the acquisition of the outstanding stock of Western Maine Cellular, Inc. ("WMC"), a wholly-owned subsidiary of Utilities, Inc., for approximately $7.5 million. WMC provides cellular service to western Maine RSA 1, which incorporates a 3,700 square-mile service area of western Maine and encompasses 83,000 POPs. The Company operates WMC through its wholly-owned subsidiary, MRCC, Inc.
Glacial Lakes Cellular 2000
Effective February 1, 1999, the Company acquired RGI, Inc. d/b/a Glacial Lakes Cellular 2000 ("Glacial") for approximately $11.2 million. Operating under the name Cellular 2000®, Glacial provides cellular service to northeastern South Dakota (RSA 4), which includes eight counties and is adjacent to RCC's existing cellular operation in northern and central Minnesota. Glacial's service area encompasses 69,000 POPs.
Accounting Treatment
The purchase prices for Atlantic, WMC and Glacial were allocated to the net assets based on their estimated fair values and the excess was recorded as goodwill and is being amortized over 39 years. All of the above acquisitions have been accounted for under the purchase method of accounting; accordingly, operating results have been included from the date of acquisition.
The following unaudited pro forma information presents the consolidated results of operations as if the acquisitions of Atlantic, WMC and Glacial had occurred as of January 1, 1998. 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 Ended September 30, |
Nine Months Ended September 30, |
|||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
1999 |
1998 |
1999 |
1998 |
|||||||||
| |
(In thousands, except for per share data) |
(In thousands, except for per share data) |
|||||||||||
| Total revenues | $ | 46,942 | $ | 35,058 | $ | 117,630 | $ | 93,260 | |||||
| Operating income | 14,095 | 6,075 | 25,943 | 11,026 | |||||||||
| Net income (loss) | $ | 3,522 | $ | (4,494 | ) | $ | (4,548 | ) | $ | (19,972 | ) | ||
| Basic weighted average common shares outstanding | 9,055 | 8,931 | 9,029 | 8,893 | |||||||||
| Diluted weighted average common shares outstanding | 9,725 | 8,931 | 9,029 | 8,893 | |||||||||
| Basic net earnings (loss) per share | $ | 0.39 | $ | (0.50 | ) | $ | (0.50 | ) | $ | (2.25 | ) | ||
| Diluted net earnings (loss) per share | $ | 0.36 | $ | (0.50 | ) | $ | (0.50 | ) | $ | (2.25 | ) | ||
4) LONG TERM DEBT:
The Company had the following long-term debt outstanding at:
| |
September 30, 1999 |
December 31, 1998 |
||||
|---|---|---|---|---|---|---|
| |
(In thousands) |
|||||
| $300 million credit facility | $ | 181,000 | $ | 173,000 | ||
| Deferred gain on hedge agreements | 1,143 | 851 | ||||
| 95/8% Senior Subordinated Notes | 125,000 | 125,000 | ||||
| Long-term debt | $ | 307,143 | $ | 298,851 | ||
95/8% Senior Subordinated Notes—On May 14, 1998, the Company issued $125 million principal amount of 95/8% Senior Subordinated Notes due 2008 (the"Senior Subordinated Notes"). Interest on the Senior Subordinated Notes began to accrue on May 14, 1998, and is payable semi-annually on May 15 and November 15 of each year, commencing on November 15, 1998. The Senior Subordinated Notes will mature on May 15, 2008, and are redeemable, in whole or in part, at the option of the Company, at any time on or after May 15, 2003 at 104.813% of the principal amount declining annually to 100% of the principal amount on and after May 15, 2006. In addition, at any time prior to May 15, 2001, the Company may redeem up to 25% of the aggregate principal amount of Senior Subordinated Notes with the net cash proceeds of a "qualifying event" at a price equal to 109.625% of the aggregate principal amount thereof, plus accrued and unpaid interest, if any, to the date of redemption; provided that at least $90 million in aggregate principal amount of Senior Subordinated Notes remains outstanding immediately after such redemption. A "qualifying event" is a public equity offering or one or more strategic equity investments which in either case results in aggregate net proceeds to the Company of not less than $50 million. Within 30 days after the occurrence of a change of control, the Company will be required to make an offer to purchase all outstanding Senior Subordinated Notes at a price equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid interest, if any, to the date of purchase. The Senior Subordinated Notes are unsecured senior subordinated obligations of the Company and will be subordinated in right of payment to future senior indebtedness (as defined in the Indenture related to the Senior Subordinated Notes) of the Company and effectively subordinated to all obligations of the Company's subsidiaries (including the guarantees by such subsidiaries of the Credit Facility described below).
Credit Facility—On July 1, 1998, the Company entered into a revolving Credit Facility for $300 million with a syndicate of banks (the "Credit Facility"). At the Company's discretion, advances under the Credit Facility bear interest at the London Interbank Offering Rate ("LIBOR") plus an applicable margin (1.25% as of September 30, 1999) 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. As of September 30, 1999, the effective rate of interest on the Credit Facility, excluding the impact of the hedge agreements, was 7.04%. A commitment fee of 0.375% on the unused portion of the Credit Facility is payable quarterly. Borrowings under the Credit Facility are secured by a pledge of all the assets of the Company excluding its ownership in the stock of Cellular 2000, Inc. Mandatory commitment reductions will be required upon any material sale of assets. The Credit 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, 1999, the Company was in compliance with all covenants under the Credit Facility.
Beginning in 2001, the Credit Facility is to be reduced in equal quarterly amounts increasing annually as follows (in thousands):
| Year |
Amount |
||
|---|---|---|---|
| 1999 | $ | — | |
| 2000 | — | ||
| 2001 | 13,575 | ||
| 2002 | 18,100 | ||
| 2003 | 27,150 | ||
| 2004 | 36,200 | ||
| Thereafter | 85,975 | ||
| Total | $ | 181,000 | |
5) FINANCIAL INSTRUMENTS:
As required by the Credit Facility, the Company maintains interest rate swaps on at least 50% of the principal amount of the loans outstanding such that the weighted average term of all interest rate protection is not less than three years at all dates of determination and as otherwise provided in the Credit Facility. Under the interest rate swap agreements, the Company will pay the difference between LIBOR and the fixed swap rate if the LIBOR exceeds the swap rate. As of September 30, 1999, the Company is party to three interest rate swaps expiring August 6, 2003, with a total outstanding notional amount of $165 million and a negative fair market value of $491,000. Income and expense associated with swap transactions are accrued over the periods prescribed by the contracts.
On February 2, 1999, the Company also entered into two swap transactions with TD Bank Financial Group, which, together, effectively lower the interest rate on the Senior Subordinated Notes from 9.625% to 8.535% through May 2003. During the period of June 2003 through May 2008, the Company will pay the difference between LIBOR and the fixed swap rate if the swap rate exceeds LIBOR, and the Company will receive the difference between LIBOR and the fixed swap rate if LIBOR exceeds the swap rate. Settlement occurs on the semiannual reset dates specified by the terms of the contracts. The notional principal amount of the interest rates swaps outstanding was $125 million at February 2, 1999. As of September 30, 1999, the positive fair market value of the swap transactions was $3.3 million.
In 1998 in anticipation of the offering of the Senior Subordinated Notes and Exchangeable Preferred Stock, the Company entered into a $150 million hedge agreement. On May 12, 1998, the Company settled the hedge agreement, resulting in a gain of approximately $1.0 million. This gain is being accreted as a reduction of interest expense over the lives of the underlying debt instruments.
6) SUPPLEMENTAL DISCLOSURE OF CONDENSED CONSOLIDATED CASH FLOW INFORMATION:
| |
Nine months ended September 30, |
|||||
|---|---|---|---|---|---|---|
| |
1999 |
1998 |
||||
| |
(In thousands) |
|||||
| Cash paid for: | ||||||
| Income taxes | $ | 34 | $ | — | ||
| Interest | 16,302 | 6,888 | ||||
| Non-cash investing and financing activity: |
|
|
|
|
|
|
| Preferred stock dividends paid in kind | $ | 11,566 | $ | 3,554 | ||
7) SEGMENT INFORMATION:
The Company's consolidated financial statements consist of the business units RCC Cellular and Wireless Alliance. RCC Cellular includes cellular operations in Minnesota, South Dakota, Maine, Massachusetts, New Hampshire, New York and Vermont. 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 70%-owned by the Company and 30%-owned by APT Inc., an affiliate of Aerial Communications, Inc. Information about the Company's operations in its business units for the three and nine months ended September 30, 1999 and 1998 is as follows:
| |
Three months ended September 30, |
Nine months Ended September 30, |
|||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
1999 |
1998 |
1999 |
1998 |
|||||||||
| |
(In thousands) |
(In thousands) |
|||||||||||
| Statement of Operations: | |||||||||||||
| Revenues | |||||||||||||
| RCC Cellular | $ | 44,661 | $ | 31,069 | $ | 110,581 | $ | 58,391 | |||||
| Wireless Alliance LLC | 2,355 | 3,339 | 7,008 | 9,273 | |||||||||
| Eliminating | (74 | ) | (453 | ) | (312 | ) | (1,240 | ) | |||||
| Total revenue | 46,942 | 33,955 | 117,277 | 66,424 | |||||||||
| Operating expenses | |||||||||||||
| RCC Cellular | 28,638 | 23,217 | 78,921 | 47,133 | |||||||||
| Wireless Alliance LLC | 4,283 | 5,288 | 12,755 | 14,788 | |||||||||
| Eliminating | (74 | ) | (453 | ) | (312 | ) | (1,240 | ) | |||||
| Total operating expenses | 32,847 | 28,052 | 91,364 | 60,681 | |||||||||
| Operating income (loss) | |||||||||||||
| RCC Cellular | 16,023 | 7,852 | 31,660 | 11,258 | |||||||||
| Wireless Alliance LLC | (1,928 | ) | (1,949 | ) | (5,747 | ) | (5,515 | ) | |||||
| Total operating income | 14,095 | 5,903 | 25,913 | 5,743 | |||||||||
| Depreciation and amortization | |||||||||||||
| RCC Cellular | 8,727 | 7,582 | 25,883 | 15,520 | |||||||||
| Wireless Alliance LLC | 1,169 | 876 | 3,666 | 2,003 | |||||||||
| Total depreciation and amortization | 9,896 | 8,458 | 29,549 | 17,523 | |||||||||
| Interest expense | |||||||||||||
| RCC Cellular | 6,692 | 6,725 | 20,207 | 12,487 | |||||||||
| Wireless Alliance LLC | 545 | 470 | 1,901 | 871 | |||||||||
| Eliminating | (545 | ) | (470 | ) | (1,901 | ) | (1,018 | ) | |||||
| Total interest expense | 6,692 | 6,725 | 20,207 | 12,340 | |||||||||
| Other Operating Data: | |||||||||||||
| EBITDA(*) | |||||||||||||
| RCC Cellular | 24,750 | 15,434 | 57,543 | 26,778 | |||||||||
| Wireless Alliance LLC | (759 | ) | (1,073 | ) | (2,081 | ) | (3,512 | ) | |||||
| Total EBITDA | 23,991 | 14,361 | 55,462 | 23,266 | |||||||||
| Capital expenditures | |||||||||||||
| RCC Cellular | 4,893 | 4,932 | 12,584 | 15,726 | |||||||||
| Wireless Alliance LLC | 675 | 2,368 | 3,110 | 8,230 | |||||||||
| Total capital expenditures | $ | 5,568 | $ | 7,300 | $ | 15,694 | $ | 23,956 | |||||
| |
Sept. 30, 1999 |
Dec. 31, 1998 |
|||||
|---|---|---|---|---|---|---|---|
| Balance Sheet Data: | |||||||
| Property and equipment | |||||||
| RCC Cellular | $ | 165,815 | $ | 151,227 | |||
| Wireless Alliance LLC | 23,851 | 23,025 | |||||
| Total property and equipment | 189,666 | 174,252 | |||||
| Total assets | |||||||
| RCC Cellular | 504,422 | 476,251 | |||||
| Wireless Alliance LLC | 33,995 | 34,870 | |||||
| Eliminating | (43,083 | ) | (30,597 | ) | |||
| Total assets | $ | 495,334 | $ | 480,524 | |||
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Over the past three years, acquisitions of additional cellular operations, development of the PCS markets through Wireless Alliance, and the issuance of subordinated notes and preferred stock have affected the Company's financial performance and, accordingly, the year-to-year comparability of such performance. Further, the Company's past performance, especially the changes from year to year, should not be considered predictive of the Company's 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 operating data for the periods indicated.
| |
Three months ended Sept. 30, |
Nine months ended Sept. 30, |
|||||||
|---|---|---|---|---|---|---|---|---|---|
| |
1999 |
1998 |
1999 |
1998 |
|||||
| REVENUES: | |||||||||
| Service | 60.0 | % | 71.6 | % | 66.7 | % | 77.0 | % | |
| Roamer | 34.0 | 25.6 | 28.4 | 20.5 | |||||
| Equipment | 6.0 | 2.8 | 4.9 | 2.5 | |||||
| Total revenues | 100.0 | 100.0 | 100.0 | 100.0 | |||||
| OPERATING EXPENSES: | |||||||||
| Network costs | 10.9 | 17.3 | 12.2 | 20.1 | |||||
| Cost of equipment sales | 7.5 | 6.0 | 7.0 | 6.0 | |||||
| Selling, general and administrative | 30.5 | 34.4 | 33.5 | 38.9 | |||||
| Depreciation and amortization | 21.1 | 24.9 | 25.2 | 26.4 | |||||
| Total operating expenses | 70.0 | 82.6 | 77.9 | 91.4 | |||||
| OPERATING INCOME | 30.0 | 17.4 | 22.1 | 8.6 | |||||
| OTHER INCOME (EXPENSE): | |||||||||
| Interest expense | (14.2 | ) | (19.8 | ) | (17.2 | ) | (18.6 | ) | |
| Interest and dividend income | 0.1 | 0.3 | 0.2 | 2.0 | |||||
| Other expense | 0.2 | (1.0 | ) | (0.2 | ) | (1.0 | ) | ||
| Minority interest | — | 3.5 | 1.3 | 4.7 | |||||
| Other expense, net | (13.9 | ) | (17.0 | ) | (15.9 | ) | (12.9 | ) | |
| INCOME (LOSS) BEFORE INCOME TAX | 16.1 | 0.4 | 6.2 | (4.3 | ) | ||||
| INCOME TAX PROVISION | — | — | 0.0 | — | |||||
| INCOME (LOSS) BEFORE EXTRAORDINARY ITEM | 16.1 | 0.4 | 6.2 | (4.3 | ) | ||||
| Extraordinary item—early retirement of debt | — | (3.1 | ) | — | (1.6 | ) | |||
| NET INCOME (LOSS) | 16.1 | (2.7 | ) | 6.2 | (5.9 | ) | |||
| PREFERRED STOCK DIVIDEND | (8.6 | ) | (10.4 | ) | (10.0 | ) | (8.1 | ) | |
| NET INCOME (LOSS) APPLICABLE TO COMMON SHARES | 7.5 | % | (13.1 | )% | (3.8 | )% | (14.0 | )% | |
| EBITDA(5) | 51.1 | % | 42.3 | % | 47.3 | % | 35.0 | % | |
| |
Three months ended Sept. 30, |
Nine months ended Sept. 30, |
|||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
1999 |
1998 |
1999 |
1998 |
|||||||||
| Other Operating Data: | |||||||||||||
| Customers at period end: | |||||||||||||
| RCC Cellular | 217,689 | 175,847 | 217,689 | 175,847 | |||||||||
| Wireless Alliance—Cellular | 1,840 | 15,481 | 1,840 | 15,481 | |||||||||
| Wireless Alliance—PCS | 11,110 | 2,264 | 11,110 | 2,264 | |||||||||
| Other | 13,790 | 11,469 | 13,790 | 11,469 | |||||||||
| Total customers | 244,429 | 205,061 | 244,429 | 205,061 | |||||||||
| Penetration:(1) | |||||||||||||
| RCC Cellular | 9.0 | % | 7.5 | % | 9.0 | % | 7.5 | % | |||||
| Wireless Alliance—PCS | 1.6 | % | 0.3 | % | 1.6 | % | 0.3 | % | |||||
| Retention:(2) | |||||||||||||
| RCC Cellular | 98.3 | % | 98.5 | % | 98.4 | % | 98.6 | % | |||||
| Wireless Alliance—PCS | 97.5 | % | 98.0 | % | 98.1 | % | 98.8 | % | |||||
| Average monthly revenue per customer:(3) | |||||||||||||
| RCC Cellular | $ | 63 | $ | 57 | $ | 55 | $ | 52 | |||||
| Wireless Alliance—PCS | $ | 51 | $ | 68 | $ | 52 | $ | 65 | |||||
| Acquisition cost per customer:(4) | |||||||||||||
| RCC Cellular | $ | 364 | $ | 369 | $ | 367 | $ | 393 | |||||
| Wireless Alliance—PCS | $ | 526 | $ | 722 | $ | 518 | $ | 525 | |||||
| Cell sites / Base stations: | |||||||||||||
| RCC Cellular | 257 | 204 | 257 | 204 | |||||||||
| Wireless Alliance—PCS | 57 | 40 | 57 | 40 | |||||||||
The following chart summarizes the Company's existing wireless systems:
| |
Percentage Ownership |
Total POPs |
Net POPs |
Date of Acquisition |
||||
|---|---|---|---|---|---|---|---|---|
| RCC Cellular | ||||||||
| Midwest Cluster | ||||||||
| Minnesota RSA 1 | 100 | % | 50,000 | 50,000 | 4/01/91 | |||
| Minnesota RSA 2 | 100 | % | 64,000 | 64,000 | 4/01/91 | |||
| Minnesota RSA 3 | 100 | % | 59,000 | 59,000 | 4/01/91 | |||
| South Dakota RSA 4 | 100 | % | 69,000 | 69,000 | 2/01/99 | |||
| Minnesota RSA 5 | 100 | % | 206,000 | 206,000 | 4/01/91 | |||
| Minnesota RSA 6 | 100 | % | 257,000 | 257,000 | 4/01/91 | |||
| Total Midwest POPs | 705,000 | 705,000 | ||||||
| New England Cluster | ||||||||
| MRCC | ||||||||
| Maine, Bangor MSA | 100 | % | 143,000 | 143,000 | 5/01/97 | |||
| Maine RSA 1 | 100 | % | 83,000 | 83,000 | 7/31/98 | |||
| Maine RSA 2 | 100 | % | 148,000 | 148,000 | 5/01/97 | |||
| Maine RSA 3 | 100 | % | 221,000 | 221,000 | 5/01/97 | |||
| Total MRCC POPs | 595,000 | 595,000 | ||||||
| Atlantic | ||||||||
| Massachusetts RSA 1 | 100 | % | 71,000 | 71,000 | 7/01/98 | |||
| New Hampshire RSA 1 | 100 | % | 223,000 | 223,000 | 7/01/98 | |||
| New York RSA 2 | 100 | % | 226,000 | 226,000 | 7/01/98 | |||
| Vermont, Burlington MSA | 100 | % | 148,000 | 148,000 | 7/01/98 | |||
| Vermont RSA 1 | 100 | % | 210,000 | 210,000 | 7/01/98 | |||
| Vermont RSA 2 | 100 | % | 232,000 | 232,000 | 7/01/98 | |||
| Total Atlantic POPs | 1,110,000 | 1,110,000 | ||||||
| Total New England POPs | 1,705,000 | 1,705,000 | ||||||
| Total RCC Cellular POPs | 2,410,000 | 2,410,000 | ||||||
| Wireless Alliance (PCS) | ||||||||
| Duluth, Minnesota/Superior, Wisconsin: | ||||||||
| Cook, Lake, St. Louis and Carlton (portion) Counties in Minnesota and Douglas County in Wisconsin | 70 | % | 270,000 | 189,000 | 4/10/97 | |||
| Fargo, North Dakota/Moorhead, Minnesota: | ||||||||
| Cass and Trail Counties in North Dakota and Clay County in Minnesota | 70 | % | 175,000 | 123,000 | 4/10/97 | |||
| Grand Forks, North Dakota: | ||||||||
| Grand Forks County in North Dakota and Polk County in Minnesota | 70 | % | 102,000 | 71,000 | 4/10/97 | |||
| Sioux Falls, South Dakota: | ||||||||
| Minnehaha and Lincoln Counties in South Dakota | 70 | % | 161,000 | 113,000 | 11/06/97 | |||
| Total PCS POPs | 708,000 | 496,000 | ||||||
| Total POPs | 3,118,000 | 2,906,000 | ||||||
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998
Revenues
Service revenues for the three months ended September 30, 1999 increased 15.9% to $28.2 million from $24.3 million in 1998. Service revenues for the nine months ended September 30, 1999 increased 52.9% to $78.3 million from $51.2 million in 1998. The revenue growth for the three months ended September 30, 1999 reflects 11,000 additional customers added through increased penetration in existing markets. The revenue growth for the nine months ended September 30, 1999 reflects the effect of 23,000 additional customers added through increased penetration in existing markets and the acquisitions of Atlantic, WMC and Glacial. Local service revenue per customer for the three months ended September 30, 1999 declined slightly when compared to the third quarter of 1998. RCC Cellular penetration increased to 9.0% at September 30, 1999 as compared to 7.5% at September 30, 1998. Wireless Alliance PCS penetration increased to 1.6% at September 30, 1999 as compared to 0.3% at September 30, 1998. Service revenues are expected to increase in the future primarily as a result of future acquisitions, further anticipated industry-wide growth in subscribers and expansion of the Company's coverage.
Roamer revenues for the three months ended September 30, 1999 increased 83.6% to $16.0 million from $8.7 million in 1998. Roamer revenues for the nine months ended September 30, 1999 increased 145.4% to $33.3 million from $13.6 million in 1998. Roamer revenues have increased due to the activation of additional cell sites, acquisitions of new service areas and increased industry-wide wireless usage resulting from the now popular one-rate plans. Partially offsetting increases in wireless usage as it relates to roaming during the quarter was the impact from the negotiation of roaming agreements with two major roaming partners. Accordingly, roamer revenues have increased as a percentage of cellular revenues (excluding the impact of Wireless Alliance) to 35.7% for the three months ended September 30, 1999 from 29.4% in the comparable period of the prior year. During the nine months ended September 30, 1999, roamer revenues as a percentage of revenues (excluding the impact of Wireless Alliance) increased to 30.1% as compared to 24.7% during the comparable period of the prior year. Wireless Alliance generated $122,000 and $334,000 in PCS roaming revenue, respectively, during the three and nine months ended September 30, 1999.
Equipment revenues for the three and nine months ended September 30, 1999 increased 192.2% and 241.8%, respectively, over the comparable periods of the prior year. This growth reflects network equipment reselling and increases in direct phone sales programs.
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 September 30, 1999, decreased 13.0% over the comparable period of the prior year. This decrease primarily reflects costs not incurred by the Company resulting from its scale back of its cellular reselling program. Network cost for the nine months ended September 30, 1999, increased 7.6%. The increase in network costs resulted primarily from expenses incurred by RCC Atlantic, which more than offset Wireless Alliance network cost reductions. As a percentage of total revenues, network costs for the three and nine months ended September 30, 1999 decreased to 10.9% and 12.2%, respectively, from 17.3% and 20.1% in the comparable periods of the prior year. Wireless Alliance network costs for the three and nine months ended September 30, 1999 decreased to $1.1 million and $3.5 million, respectively, from $2.5 million and $7.1 million in the comparable periods of the prior year. The Company expects consolidated network costs to continue to decline as a percentage of revenues as revenues continue to outpace the fixed components of network costs.
Cost of equipment sales for the three and nine months ended September 30, 1999 increased 71.4% and 103.0%, respectively, over the comparable periods of the prior year to $3.5 million and $8.2 million, respectively, from $2.0 million and $4.0 million. As a percentage of revenue, cost of equipment for each of the three and nine months ended September 30, 1999 increased to 7.5% and 7.0% respectively, as compared to 6.0% in comparable periods of the prior year. This growth was primarily due to the cost of resold network equipment combined with an increase in the number of phones sold to direct resale 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 for the three and nine months ended September 30, 1999 increased 22.8% and 52.3%, respectively, over the comparable periods of the prior year to $14.3 million and $39.3 million, respectively, from $11.7 million and $25.8 million. The increase in SG&A resulted primarily from additional costs related to the operation of RCC Atlantic. Reflecting certain economies achieved through the Atlantic acquisition and the relatively fixed nature of SG&A, SG&A decreased as a percentage of revenue for the three and nine months ended September 30, 1999 to 30.5% and 33.5%, respectively, as compared to 34.4% and 38.9%, respectively, in the comparable periods of the prior year. Due to the seasonality of the Company's revenue stream, the Company expects SG&A as a percentage of total revenues to be higher in the upcoming fourth quarter as compared to the second and third quarters of its fiscal year.
Depreciation and amortization expense for the three and nine months ended September 30, 1999 increased 17.0% and 68.6%, respectively, over the comparable periods of the prior year to $9.9 million and $29.6 million, respectively, from $8.5 million and $17.5 million. The increase reflects the depreciable assets acquired as part of the Atlantic acquisition, 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, and rental equipment.
Other Income (Expense)
Interest expense for the three months ended September 30, 1999 and 1998 was $6.7 million. Interest expense for the nine months ended September 30, 1999 increased 63.8% to $20.2 million as compared to $12.3 million in the comparable period of the prior year. The increase in interest expense for the nine month period ended September 30, 1999 resulted from higher average borrowings under the Credit Facility and interest related to the 95/8% Senior Subordinated Notes ("Senior Subordinated Notes"). Borrowing under the Credit Facility and Senior Subordinated Notes were used to finance the acquisitions of Atlantic and WMC, the continued build-out of additional cell sites, and other growth initiatives. Other income for the nine months ended September 30, 1999 also includes a decrease of 50.8% in the minority partner's absorption of Wireless Alliance losses to $1.5 million from $3.1 million in the comparable period of the prior year. Reflecting the minority partner's maximum accumulated contribution towards Wireless Alliance losses posted at June 30, 1999, the Company did not post an additional offset to Wireless Alliance losses during the three months ended September 30, 1999.
Seasonality
Somewhat offset by the RCC Atlantic business unit more year around roaming revenues, the Company experiences seasonal fluctuations in revenues and operating income (loss). The Company's average monthly roamer revenue per cellular customer increases during the second and third calendar quarters. This increase reflects greater usage by the Company's roamer customers who travel in the Company's cellular service area for weekend and vacation recreation or work in seasonal industries. Because the Company's cellular service area includes many seasonal recreational areas, the Company expects that roamer revenues will continue to fluctuate seasonally more than service revenues. The Company expects its operations in the fourth quarter of 1999 to be affected by the traditional seasonal slowing in wireless usage in its service areas resulting in decreased revenue and EBITDA as compared to the third quarter of 1999.
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 Company's Credit Facility. As of September 30, 1999, the Company had $181 million outstanding under its $300 million Credit Facility. Under the 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 Credit Facility.
Net cash provided by operating activities was $26.1million for the nine months ended September 30, 1999. Adjustments to the $7.3 net income to reconcile to net cash used in operating activities included $30.0 million in depreciation and amortization and a $9.3 million increase in accounts receivable.
Net cash used in investing activities for the nine months ended September 30, 1999 was $36.1 million. The principal uses of cash included the Company's $11.2 million acquisition of Glacial, $15.7 million in purchases of property and equipment, of which $3.1 million was attributable to Wireless Alliance capital expenditures. These purchases reflect the continued expansion of existing coverage in RCC Cellular and the continued upgrading of existing cell sites and switching equipment. Capital expenditures (including $1.3 million for Wireless Alliance) are expected to be approximately $5.3 million in the fourth quarter of 1999. Capital expenditures and debt service are expected to be funded through internally generated cash flow and, if necessary, borrowings under the Credit Facility. In addition, an affiliate of the Company was a successful bidder in the FCC Local Multi-Point Distribution System ("LMDS") auction at a cost of $7.0 million and was a successful bidder in the FCC C Block license auction acquiring the St. Cloud, MN BTA for $1.6 million.
Net cash provided by financing activities was $9.0 million for the nine months ended September 30,1999. Financing activities for such period primarily consisted of $8 million in additional borrowing under the Credit Facility, net of a partial repayment of $16 million.
The Company believes that cash flow from operations and the funds available under the credit facility will be sufficient to sustain current operations. Effective November 8, 1999, the Company's wholly owned subsidiary, RCC Holdings, Inc., entered into an agreement to acquire the cellular telephone licenses, operations, and related assets of Triton Cellular Partners, L. P. at a cost of $1.24 billion. For further information regarding the proposed acquisition, see Part II, Item 5 and Exhibits 2 and 99 to this Report. The Company believes that the financing arranged for the acquisition will be sufficient both to complete the acquisition and for the Company's normal operations following the acquisition.
Year 2000 Readiness
General
Issues regarding Year 2000 readiness exist because many computer systems and applications currently in use employ two-digit fields to designate a year. As a result, 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 result in system failures or miscalculations causing disruptions of operations, including, among other things, an inability to process transactions, send invoices, or engage in normal business activities. Hence, the computerized systems used by the Company have been reviewed, evaluated and if and where necessary, modified or replaced to ensure that all business and operational systems are Year 2000 ("Y2K") ready.
State of Readiness
The Company has formed a Y2K Project Team, representing all business units, and staffed with subject matter experts to address Y2K readiness matters. The Y2K Project Team's plan is made up of five phases: identification, assessment, remediation, test and acceptance, and contingency planning.
Major areas being addressed by the Y2K project team include:
The project team has completed the identification and assessment phase of its Y2K readiness task accounting for almost all external and internal computer hardware, software, and computer based items. The results of the assessment have determined that much of the internal systems are Y2K ready.
Remediation efforts towards upgrading, replacing or discontinuing mission critical non-compliant systems, including billing and switching systems, were completed during the third quarter of 1999. Mission critical systems are those whose failure poses a risk of disruption to the Company's ability to provide wireless services, to collect revenues, to meet safety standards, or to comply with legal requirements.
Risks relating to Y2K Readiness Matters
The failure of the Company to upgrade its billing systems to be Y2K ready may result in the Company being unable to continue operations. Accordingly, the Company has identified the issues regarding Y2K readiness in its billing systems and now believes it has all mission critical software and hardware remedied and Y2K ready. When possible, the Company continues to test some of its Y2K related system upgrades. The Company has also participated in the wireless industry's successful Y2K readiness testing of GTE's roaming clearing-house. Although the Company believes that these efforts should result in a cellular network that will continue to function without material service affecting outages due to Y2K problems, some network equipment suppliers have been unwilling or unable to give unqualified warranties that network equipment is Y2K compliant. Service affecting outages, if prolonged and widespread, will materially affect the Company's revenues.
The terms and conditions under which the Company provides cellular and paging services to its customers contain provisions that limit the Company's liability in the event that there is a service failure. The terms and conditions provide that the Company is not liable for any consequential or incidental damages to its customers. They further provide that no credit will be given for service outages of less than 24 hours in duration. In addition, they limit damages for failure to provide service to a credit for the pro rated number of days that service was unavailable. Service affecting outages have occurred in limited geographic areas in the past and the Company has not been found liable to any person for damages in excess of the limitations imposed by the terms and conditions of service. The Company believes it is unlikely that an outage related to Y2K readiness would lead to a different result. The Company has adopted a policy of not giving any warranties to customers regarding Y2K readiness. The Company, at this time, does not anticipate that any litigation involving the Company would arise as a result of Y2K readiness issues.
Estimated Y2K Readiness Costs
During 1998, the Company did not incur material costs related to bringing systems into Y2K readiness. For 1999, the Company has budgeted $2.0 million to cover costs associated with Y2K assessments, modifications, and associated upgrades of which approximately $1.3 million has been spent towards upgrades and replacements to non-Y2K compliant systems. The Company did not incur any material Y2K related costs during the third quarter of 1999.
Third Party Providers
The potential impact of the Y2K problem will also depend on the way in which the Y2K issue is addressed by customers, vendors, service providers, utilities, governmental agencies and other entities with which the Company does business. The Company is communicating with these parties to learn how they are addressing the Y2K issue and to evaluate any likely impact on the Company. The Company has requested commitment dates from the various parties as to their Y2K readiness and delivery of compliant software and other products. The Y2K efforts of third parties are not within the Company's control; however, their failure to respond to Y2K issues successfully could result in business disruption and increased operating costs for the Company. At the present time, it is not possible to determine whether any such events are likely to occur or to quantify any potential negative impact they may have on the Company's future results of operations and financial condition.
Contingency Planning
The Company's Y2K most likely worst case scenario may involve interruption of telecommunications services and data processing services and/or interruption of customer billing, operating and other information systems. The Company has developed contingency plans that might be available in the event of either internal or external Y2K readiness problems. There are however, some mission critical systems, including the billing system, where viable contingency plans cannot be developed.
Y2K Forward-looking Information
The foregoing discussion regarding the Y2K project's timing, effectiveness, implementation, and cost, contains forward-looking statements, which are based on management's best estimates derived using assumptions. These forward-looking statements involve inherent risks and uncertainties, and actual results could differ materially from those contemplated by such statements. Factors that might cause material differences include, but are not limited to, the availability of key Y2K personnel, the Company's ability to locate and correct all relevant computer codes, the readiness of third parties, and the Company's ability to respond to unforeseen Y2K complications. Such material differences could result in, among other things, business disruption, operational problems, financial loss, legal liability and similar risks.
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.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
To finance the Company's operations and acquisition activity, the Company has issued Exchangeable Preferred Stock and Senior Subordinated Notes and has entered into a bank credit facility. These on-balance sheet financial instruments, to the extent they provide for variable rates of interest, expose the Company to interest rate risk, with the primary interest rate risk exposure resulting from changes in LIBOR or the prime rate, which are used to determine the interest rates that are applicable to borrowings under the Company's bank credit facilities. The Company uses off-balance sheet derivative financial instruments, including interest rate swap and interest rate protection agreements, to partially hedge interest transactions. All of the Company's derivative financial instrument transactions are entered into for non-trading purposes. The terms and characteristics of the derivative financial instruments are matched with the underlying on-balance sheet instrument or anticipated transactions and do not constitute speculative or leveraged positions independent of these exposures.
The information below summarizes the Company's sensitivity to market risk associated with fluctuations in interest rates as of September 30, 1999. To the extent that the Company's financial instruments expose the Company to interest rate risk, they are presented within each market risk category in the table below. The table presents principal cash flows and related interest rates by year of maturity for the Company's Senior Subordinated Notes and bank credit facilities in effect at September 30, 1999. The table also presents payments in kind, interest and related interest rates by year of maturity for the Company's Exchangeable Preferred Stock in effect at September 30, 1999. The cash flows related to the variable portion of interest rate swaps are determined by dealers using valuation models that estimate the future level of interest rates, with consideration of the applicable yield curve as of September 30, 1999. For interest rate swaps and interest rate protection agreements, the table presents notional amounts and the related reference interest rates by year of maturity. Fair values included herein have been determined based on (i) quoted market prices for Exchangeable Preferred Stock and Senior Subordinated Notes; (ii) the carrying value for the bank credit facility at September 30, 1999 as interest rates are reset periodically; and (iii) estimates obtained from dealers to settle interest rate swaps and interest rate protection agreements. Notes 4 and 5 to the Consolidated Financial Statements contain descriptions of the Senior Subordinated Notes and the Credit Facility and interest rate risk management agreements and should be read in conjunction with the table below.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
| |
1999 |
2000 |
2001 |
2002 |
2003 |
There- After |
Total Paid |
Market Value |
|||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
(Dollars in thousands) |
||||||||||||||||||||||||
| Interest Rate Sensitivity: | |||||||||||||||||||||||||
| Senior Subordinated Notes: | $ | 130,000 | |||||||||||||||||||||||
| Interest Amount | $ | 12,031 | $ | 12,031 | $ | 12,031 | $ | 12,031 | $ | 12,031 | $ | 52,771 | $ | 112,926 | |||||||||||
| Average Interest Rate | 9.63 | % | 9.63 | % | 9.63 | % | 9.63 | % | 9.63 | % | 9.63 | % | 9.63 | % | |||||||||||
| Exchangeable Preferred Stock: | $ | 123,750 | |||||||||||||||||||||||
| Dividend Amount | $ | 15,711 | $ | 17,553 | $ | 19,637 | $ | 22,133 | $ | 24,640 | $ | 119,495 | $ | 219,169 | |||||||||||
| Average Dividend Rate | 11.38 | % | 11.38 | % | 11.38 | % | 11.38 | % | 11.38 | % | 11.38 | % | 11.38 | % | |||||||||||
| Credit Facility: | $ | 181,000 | |||||||||||||||||||||||
| Interest Amount | $ | 12,358 | $ | 13,177 | $ | 13,140 | $ | 12,241 | $ | 10,756 | $ | 16,713 | $ | 78,385 | |||||||||||
| Average Interest Rate | 6.83 | % | 7.28 | % | 7.47 | % | 7.62 | % | 7.73 | % | 7.90 | % | 7.58 | % | |||||||||||
| Interest Rate Swaps: | |||||||||||||||||||||||||
| Fixed to Variable Interest Rate Swap Transactions—Senior Subordinated Notes | $ | 3,308 | |||||||||||||||||||||||
| Interest Received | $ | (1,249 | ) | $ | (1,363 | ) | $ | (1,363 | ) | $ | (1,363 | ) | $ | (568 | ) | — | $ | (5,906 | ) | ||||||
| Interest Paid | — | — | — | — | $ | 587 | $ | 3,132 | $ | 3,719 | |||||||||||||||
| Average Receive Rate | 1.09 | % | 1.09 | % | 1.09 | % | 1.09 | % | 1.09 | % | — | 1.09 | % | ||||||||||||
| Average Pay Rate | — | — | — | — | 0.81 | % | 0.59 | % | 0.62 | % | |||||||||||||||
| Variable to Fixed Interest Rate Swap Transactions—Credit Facility: | $ | (491 | ) | ||||||||||||||||||||||
| Interest Received | — | $ | (388 | ) | $ | (817 | ) | $ | (1,064 | ) | $ | (519 | ) | — | $ | (2,788 | ) | ||||||||
| Interest Paid | $ | 744 | — | — | — | — | — | $ | 744 | ||||||||||||||||
| Average Receive Rate | — | 0.24 | % | 0.50 | % | 0.65 | % | 0.76 | % | — | 0.56 | % | |||||||||||||
| Average Pay Rate | 0.45 | % | — | — | — | — | — | 0.451 | % | ||||||||||||||||
On November 8, 1999, the Company announced that its subsidiary, RCC Holdings, Inc., entered into a definitive agreement to acquire the cellular telephone licenses, operations and related assets of Triton Cellular Partners, L.P. ("Triton Cellular"). The transaction is valued at approximately $1.24 billion. In conjunction with the acquisition, RCC has arranged for a private investment of up to $200 million of redeemable convertible preferred stock, bearing a dividend rate of 8% and convertible into common stock at $53 per share. The redeemable convertible preferred stock conversion price was calculated on October 15, 1999 utilizing an 18.3% premium to the 15-day average trailing stock price of $44.81 per share. In addition, the Company has arranged for bridge financing of up to $135 million and will enter into a new $1.2 billion credit facility. The transaction is subject to regulatory approval and is expected to be completed in the spring of 2000. For more information regarding this matter, see the Company's press release filed as exhibit 99 and the Asset Purchase Agreement among Triton Cellular Partners, L.P. and Rural Cellular Corporation filed as exhibit 2 to this report.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
None
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| RURAL CELLULAR CORPORATION (Registrant) |
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| Dated: November 15, 1999 |
/s/ RICHARD P. EKSTRAND Richard P. Ekstrand President and Chief Executive Officer |
| Dated: November 15, 1999 |
/s/ WESLEY E. SCHULTZ Wesley E. Schultz Senior Vice President and Chief Financial Officer (Principal Financial Officer) |
Part I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
PART II. OTHER INFORMATION
Item 5. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
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