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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 March 31, 2000. | |
| ( ) |
|
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 LOGO]
RURAL CELLULAR CORPORATION
(Exact name of registrant as specified in its charter)
| Minnesota | 41-1693295 | |
| (State or other jurisdiction of incorporation or organization) |
(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 April 28, 2000:
| Class A | 10,909,541 | |
| Class B | 861,562 |
TABLE OF CONTENTS
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Page Number |
|---|---|---|---|---|
| Part I. — | Financial Information | |||
| Item 1. |
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Financial Statements |
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Condensed Consolidated Balance Sheets— As of March 31, 2000 and December 31, 1999 |
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3 |
| |
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Condensed Consolidated Statements of Operations— Three months ended March 31, 2000 and 1999 |
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5 |
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Condensed Consolidated Statements of Cash Flows— Three months ended March 31, 2000 and 1999 |
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6 |
| |
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Notes to Condensed Consolidated Financial Statements |
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7 |
| Item 2. |
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Management's Discussion and Analysis of Financial Condition and Results of Operations |
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12 |
| Item 3. |
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Quantitative and Qualitative Disclosures about Market Risk |
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19 |
| Part II. — |
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Other Information |
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| Item 4. |
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Submission of Matters to a Vote of Security — Holders |
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20 |
| Item 5. |
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Other Information |
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20 |
| Item 6. |
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Exhibits and Reports on Form 8-K |
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20 |
| Signature page |
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21 |
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2
RURAL CELLULAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
(Unaudited)
ASSETS
| |
March 31, 2000 |
December 31, 1999 |
||||
|---|---|---|---|---|---|---|
| CURRENT ASSETS: | ||||||
| Cash | $ | 2,771 | $ | 1,285 | ||
| Accounts receivable, less allowance of $895 and $894 | 20,990 | 17,036 | ||||
| Inventories | 3,264 | 4,419 | ||||
| Other current assets | 1,332 | 633 | ||||
| Total current assets | 28,357 | 23,373 | ||||
| PROPERTY AND EQUIPMENT, less accumulated depreciation of $76,282 and $68,604 | 124,149 | 130,651 | ||||
| LICENSES AND OTHER ASSETS: | ||||||
| Licenses and other intangible assets, less accumulated amortization of $22,644 and $19,728 | 315,716 | 318,632 | ||||
| Deferred debt issuance costs, less accumulated amortization of $1,619 and $1,753 | 6,864 | 11,099 | ||||
| Restricted funds in escrow | 170,800 | 35,000 | ||||
| Other assets | 8,207 | 7,523 | ||||
| Total licenses and other assets | 501,587 | 372,254 | ||||
| $ | 654,093 | $ | 526,278 | |||
The accompanying notes are an integral part of these condensed consolidated balance sheets.
3
RURAL CELLULAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
(Unaudited, except par value)
LIABILITIES AND SHAREHOLDERS' EQUITY
| |
March 31, 2000 |
December 31, 1999 |
|||||
|---|---|---|---|---|---|---|---|
| CURRENT LIABILITIES: | |||||||
| Accounts payable | $ | 12,184 | $ | 16,220 | |||
| Advance billings and customer deposits | 3,522 | 3,271 | |||||
| Accrued interest | 4,763 | 3,683 | |||||
| Dividends payable | 4,661 | 2,102 | |||||
| Other accrued expenses | 3,399 | 3,984 | |||||
| Total current liabilities | 28,529 | 29,260 | |||||
| LONG-TERM DEBT |
|
|
154,719 |
|
|
339,742 |
|
| Total liabilities | 183,248 | 369,002 | |||||
| COMMITMENTS AND CONTINGENCIES | |||||||
| PREFERRED SECURITIES | 313,963 | 147,849 | |||||
| SHAREHOLDERS' EQUITY: | |||||||
| Class A common stock; $.01 par value; 200,000 shares authorized at March 31, 2000, 15,000 shares authorized at December 31, 1999, 10,843 and 8,090 shares issued and outstanding | 108 | 81 | |||||
| Class B common stock; $.01 par value; 10,000 shares authorized at March 31, 2000, 5,000 shares authorized at December 31, 1999, 926 and 1,032 shares issued and outstanding | 9 | 10 | |||||
| Additional paid-in capital | 190,365 | 36,916 | |||||
| Accumulated deficit | (33,600 | ) | (27,580 | ) | |||
| Total shareholders' equity | 156,882 | 9,427 | |||||
| $ | 654,093 | $ | 526,278 | ||||
The accompanying notes are an integral part of these condensed consolidated balance sheets.
4
RURAL CELLULAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Data)
(Unaudited)
| |
Three Months Ended March 31, |
||||||
|---|---|---|---|---|---|---|---|
| |
2000 |
1999 |
|||||
| REVENUES: | |||||||
| Service | $ | 28,204 | $ | 23,642 | |||
| Roamer | 10,705 | 7,251 | |||||
| Equipment | 2,725 | 1,272 | |||||
| Total revenues | 41,634 | 32,165 | |||||
| OPERATING EXPENSES: | |||||||
| Network costs | 4,893 | 4,844 | |||||
| Cost of equipment sales | 5,934 | 2,122 | |||||
| Selling, general and administrative | 15,286 | 11,753 | |||||
| Depreciation and amortization | 11,200 | 9,726 | |||||
| Total operating expenses | 37,313 | 28,445 | |||||
| OPERATING INCOME | 4,321 | 3,720 | |||||
| OTHER INCOME (EXPENSE): | |||||||
| Interest expense | (5,279 | ) | (6,718 | ) | |||
| Interest and dividend income | 1,847 | 146 | |||||
| Minority interest | — | 1,332 | |||||
| Other | (22 | ) | (1 | ) | |||
| Other expense, net | (3,454 | ) | (5,241 | ) | |||
| INCOME (LOSS) BEFORE INCOME TAX | 867 | (1,521 | ) | ||||
| INCOME TAX PROVISION | — | 34 | |||||
| NET INCOME (LOSS) | 867 | (1,555 | ) | ||||
| PREFERRED STOCK DIVIDEND | (6,887 | ) | (3,813 | ) | |||
| NET LOSS APPLICABLE TO COMMON SHARES | $ | (6,020 | ) | $ | (5,368 | ) | |
| NET LOSS PER BASIC AND DILUTED COMMON SHARE | $ | (0.57 | ) | $ | (0.60 | ) | |
| WEIGHTED AVERAGE COMMON SHARES OUTSTANDING, BASIC AND DILUTED | 10,643 | 9,006 | |||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
RURAL CELLULAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
| |
Three Months Ended March 31, |
||||||
|---|---|---|---|---|---|---|---|
| |
2000 |
1999 |
|||||
| OPERATING ACTIVITIES: | |||||||
| Net income (loss) | $ | 867 | $ | (1,555 | ) | ||
| Adjustments to reconcile to net cash provided by operating activities: | |||||||
| Depreciation and amortization | 11,200 | 9,726 | |||||
| Change in minority interest | — | (1,332 | ) | ||||
| Other | 125 | 212 | |||||
| Change in other operating elements: | |||||||
| Accounts receivable | (3,954 | ) | 434 | ||||
| Inventories | 1,155 | 657 | |||||
| Other current assets | (307 | ) | 2 | ||||
| Accounts payable | (3,240 | ) | (7,582 | ) | |||
| Advance billings and customer deposits | 251 | 83 | |||||
| Other accrued expenses | 544 | 3,070 | |||||
| Net cash provided by operating activities | 6,641 | 3,715 | |||||
| INVESTING ACTIVITIES: | |||||||
| Purchase of property and equipment, net | (2,520 | ) | (5,694 | ) | |||
| Pending acquisition costs | (136,239 | ) | — | ||||
| Purchases of wireless properties | — | (11,140 | ) | ||||
| Other | (683 | ) | (900 | ) | |||
| Net cash used in investing activities | (139,442 | ) | (17,734 | ) | |||
| FINANCING ACTIVITIES: | |||||||
| Proceeds from exercise of stock options | 470 | 356 | |||||
| Proceeds from offering of common stock, net | 160,546 | — | |||||
| Proceeds from issuance of preferred stock, net | 158,167 | — | |||||
| Proceeds from issuance of long-term debt | 1,000 | 17,000 | |||||
| Repayments of long-term debt | (186,000 | ) | (2,000 | ) | |||
| Other | 104 | (108 | ) | ||||
| Net cash provided by financing activities | 134,287 | 15,248 | |||||
| NET INCREASE IN CASH | 1,486 | 1,229 | |||||
| CASH, at beginning of period | 1,285 | 2,062 | |||||
| CASH, at end of period | $ | 2,771 | $ | 3,291 | |||
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
RURAL CELLULAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1) BASIS OF PRESENTATION:
The accompanying condensed consolidated financial statements for the three months ended March 31, 2000 and 1999 have been prepared by Rural Cellular Corporation and Subsidiaries (the "Company" or "RCC") 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, 1999. The results of operations for the three months ended March 31, 2000 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:
Recently Issued Accounting Pronouncements
SFAS 133, "Accounting for Derivative Instruments and for Hedging Activities," was issued in July 1998. This standard establishes accounting and reporting standards requiring that every derivative instrument be recorded on the balance sheet as either an asset or a liability measured at fair value. SFAS 133 requires that changes in a derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement and requires that a company must formally document and designate and assess the effectiveness of transactions that receive hedge accounting treatment. SFAS 133 is effective for fiscal years beginning after June 15, 2000, and cannot be applied retroactively. The Company has not yet quantified the impacts of adopting SFAS 133 on its financial statements; however, SFAS 133 could increase the volatility of reported earnings and other comprehensive income once adopted.
In December 1999, the Securities and Exchange Commission staff released Staff Accounting Bulletin ("SAB") No. 101, Revenue Recognition, to provide guidance on the recognition, presentation and disclosure of revenue in the financial statements. The Company is in the process of assessing the impact of SAB No. 101 on its financial statements but anticipates SAB No. 101 will not have a material effect on the Company's financial position or results of operations.
3) ACQUISITIONS:
RCC follows a disciplined strategy of acquiring and developing wireless systems, primarily in rural markets. Through March 31, 2000, it has entered into a joint venture to develop and offer personal communications services, or PCS, and has completed the acquisitions of cellular systems as described below:
7
Accounting Treatment
The purchase prices for the acquisitions were allocated to the net assets based on their estimated fair values and the excess was recorded as goodwill and is being amortized over 33 to 39 years. The purchase price allocation for Glacial has been completed on a preliminary basis, subject to adjustment should new or additional facts about the business become known. 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 acquisition of Glacial had occurred as of January 1, 1999. This summary is not necessarily indicative of what the results of operations of the Company and Glacial 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 March 31, |
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|---|---|---|---|---|---|---|---|
| |
2000 |
1999 |
|||||
| |
(In thousands, except for per share data) |
||||||
| Total revenues | $ | 41,634 | $ | 32,518 | |||
| Operating income | 4,321 | 3,750 | |||||
| Net income (loss) | 867 | (1,627 | ) | ||||
| Net loss applicable to common shares | (6,020 | ) | (5,440 | ) | |||
| Basic and diluted net loss per share | $ | (0.57 | ) | $ | (0.60 | ) | |
4) LONG TERM DEBT:
The Company had the following long-term debt outstanding at March 31:
| |
March 31, 2000 |
December 31, 1999 |
||||
|---|---|---|---|---|---|---|
| |
(In thousands) |
|||||
| $300 million credit facility | $ | 28,000 | $ | 213,000 | ||
| Deferred gain on hedge agreement | 1,719 | 1,742 | ||||
| 95/8% Senior Subordinated Notes | 125,000 | 125,000 | ||||
| Long-term debt | $ | 154,719 | $ | 339,742 | ||
$300 Million 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 March 31, 2000) 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 March 31, 2000, the effective rate of interest on the Credit Facility, excluding the impact of hedge agreements, was 7.20%. 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 are 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 March 31, 2000, the Company was in compliance with all covenants under the Credit Facility.
8
On April 1, 2000, the Company replaced its $300 million existing credit facility with a new $1.2 billion credit facility. On April 1, 2000, after repaying the remaining balance under the previous $300 million credit facility and completing the Triton Cellular acquisition, the total outstanding balance under the new $1.2 billion credit facility was $1.033 billion. The terms and conditions of the new $1.2 billion credit facility are substantially the same as the $300 million credit facility.
5) COMMON AND PREFERRED STOCK SECURITIES:
In May 1998, the Company completed the placement of 125,000 shares of Senior Exchangeable Preferred Stock with a liquidation preference of $1,000 per share. An additional 25,000 shares of Senior Exchangeable Preferred Stock were issued in February 2000. Dividends on the Senior Exchangeable Preferred Stock are cumulative, accrue at 113/8% per annum, are payable quarterly, 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 Senior Exchangeable stock having an aggregate liquidation preference equal to the amount of such dividends. Thereafter, all dividends will be payable in cash only.
In February 2000, the Company completed the placement of 140,000 shares of Junior Exchangeable Preferred Stock with a liquidation preference of $1,000 per share. Dividends on the Junior Exchangeable Preferred Stock are cumulative, accrue at 121/4% per annum, are payable quarterly, and may be paid, at the Company's option, on any dividend payment date occurring on or before February 15, 2005 either in cash or by the issuance of additional shares of Junior Exchangeable stock having an aggregate liquidation preference equal to the amount of such dividends. Thereafter, all dividends will be payable in cash only.
As of March 31, 2000, the Company has accrued $2.5 million and $2.1 million, respectively, in Senior and Junior preferred stock dividends which will be distributed on May 15, 2000. The Senior 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 Junior Exchangeable Preferred Stock is junior to the Senior Exchangeable Preferred Stock and Class T convertible preferred stock while is senior to the Class M Preferred Stock and common stock with respect to dividend rights and rights on liquidation, winding-up and dissolution of the Company. The Senior and Junior Exchangeable Preferred Stock are non-voting, except as otherwise required by law and as provided in their respective Certificates of Designation.
In order to comply with the FCC's rules regarding cross-ownership of cellular licensees within a given market, the Company issued 7,541 shares of Class T convertible preferred stock to Telephone & Data Systems, Inc. ("TDS") with a par value of $1,000 on March 31, 2000 in exchange for 43,000 shares of Class A Common Stock and 105,940 shares of Class B Common Stock owned by TDS. TDS or the Company can convert the Class T preferred stock into the original number of shares of Class A or Class B Common Stock in the future if ownership by TDS of the Common Stock would then be permissible under FCC rules. Dividends on the Class T preferred stock are cumulative and have a fixed coupon rate of four percent per annum.
The Company also completed, in February 2000, a follow-on offering of 2,748,500 shares of Class A Common Stock at $617/8 per share.
6) SUPPLEMENTAL DISCLOSURE OF CONDENSED CONSOLIDATED CASH FLOW INFORMATION:
| |
Three months ended March 31, |
|||||
|---|---|---|---|---|---|---|
| |
2000 |
1999 |
||||
| |
(In thousands) |
|||||
| Cash paid during the period for interest | $ | 4,007 | $ | 3,362 | ||
| Cash paid during the period for income taxes | — | 34 | ||||
9
7) SUBSEQUENT EVENTS:
Effective April 1, 2000, the Company acquired the Alabama, Kansas, Mississippi, Oregon and Washington cellular licenses, operations and related assets of Triton Cellular for approximately $1.256 billion in cash. Under the terms of agreement with Triton Cellular, the Company acquired licenses to operate wireless systems in rural markets with a total service area of approximately 152,000 square miles, covering a total population, or POPs, of 2.3 million. All of the properties are 100% owned and the 20 rural service areas ("RSAs") are contiguous within their respective geographic regions. In addition, the acquisition includes unbuilt PCS licenses in four basic trading areas in Oregon.
In conjunction with the acquisition, RCC has entered into a new $1.2 billion credit facility arranged by TD Securities (USA) Inc., which replaces the previously existing $300 million credit facility. In addition, RCC has issued 110,000 shares of Class M preferred stock for consideration of $110 million. The purchasers included Madison Dearborn Capital Partners III, L.P., Madison Dearborn Special Equity III, L.P., Special Advisors Fund I, LLC, Boston Ventures Limited Partnership V, and Toronto Dominion Investments, Inc.
10
8) 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, 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 quarters ended March 31, 2000 and 1999 are as follows:
| |
THREE MONTHS ENDED MARCH 31, |
||||||
|---|---|---|---|---|---|---|---|
| SEGMENT INFORMATION |
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| 2000 |
1999 |
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| |
(In thousands except operating data) |
||||||
| Revenues | |||||||
| RCC Cellular | $ | 38,732 | $ | 30,091 | |||
| Wireless Alliance | 2,998 | 2,214 | |||||
| Eliminating | (96 | ) | (140 | ) | |||
| Total revenues | 41,634 | 32,165 | |||||
| Operating expenses | |||||||
| RCC Cellular | 32,389 | 24,319 | |||||
| Wireless Alliance | 5,020 | 4,266 | |||||
| Eliminating | (96 | ) | (140 | ) | |||
| Total operating expenses | 37,313 | 28,445 | |||||
| Operating income | |||||||
| RCC Cellular | 6,343 | 5,772 | |||||
| Wireless Alliance | (2,022 | ) | (2,052 | ) | |||
| Total operating income | 4,321 | 3,720 | |||||
| Depreciation and amortization | |||||||
| RCC Cellular | 9,947 | 8,450 | |||||
| Wireless Alliance | 1,253 | 1,276 | |||||
| Total depreciation and amortization | 11,200 | 9,726 | |||||
| Interest expense | |||||||
| RCC Cellular | 5,279 | 6,718 | |||||
| Wireless Alliance LLC | 712 | 673 | |||||
| Eliminating | (712 | ) | (673 | ) | |||
| Total interest expense | 5,279 | 6,718 | |||||
| *EBITDA | |||||||
| RCC Cellular | 16,290 | 14,222 | |||||
| Wireless Alliance | (769 | ) | (776 | ) | |||
| Total EBITDA | 15,521 | 13,446 | |||||
| Capital Expenditures | |||||||
| RCC Cellular | 1,581 | 3,919 | |||||
| Wireless Alliance | 939 | 1,775 | |||||
| Total capital expenditures | 2,520 | 5,694 | |||||
| Balance Sheet Data: |
|
March 31, 2000 |
|
December 31, 1999 |
|
||
| Property and equipment | |||||||
| RCC Cellular | 174,936 | 174,528 | |||||
| Wireless Alliance LLC | 25,495 | 24,727 | |||||
| Total property and equipment | 200,431 | 199,255 | |||||
| Total assets | |||||||
| RCC Cellular | 668,543 | 537,676 | |||||
| Wireless Alliance LLC | 34,628 | 34,542 | |||||
| Eliminating | (49,078 | ) | (45,940 | ) | |||
| Total assets | $ | 654,093 | $ | 526,278 | |||
11
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
Rural Cellular Corporation has materially expanded its business over the last three years through acquisitions. The acquisitions of Unity Cellular and Atlantic Cellular in 1997 and 1998, respectively, approximately doubled the number of customers at the time of each transaction, on a pro forma basis. All acquisitions have been accounted for under the purchase method of accounting and, therefore, the Company's historical results of operations include the results of operations for each acquired system subsequent to its respective acquisition date. In April 2000, RCC closed the acquisition of Triton Cellular and again approximately doubled its number of customers. Over the past three years, the financial performance, and the year-to-year comparability of such performance, has been affected by:
Accordingly, the Company does not believe the discussion and analysis of historical financial condition and results of operations set forth below are indicative nor should they be relied upon as an indicator of future performance.
GENERAL
RCC's principal operating objective is to increase revenues and profitability through the acquisition and development of new markets and increased penetration in existing markets. It believes that owning and operating wireless systems in rural markets provides growth opportunities because these systems have lower penetration rates, a higher proportion of roamer revenues, and less competition for customers than wireless systems located in larger metropolitan areas.
The Company has a strategy of acquiring wireless systems primarily in rural markets and focuses on acquiring underdeveloped wireless systems that include a high concentration of highway corridors and, as a result, tend to have a significant amount of roamer activity. It will continue to pursue acquisitions to the extent they enhance or extend its network.
The Company operates its wireless systems using a decentralized management approach that allows it to achieve marketing and distribution benefits, as well as operating efficiencies. RCC develops a local presence in the communities it serves, which enhances its competitive position and allows it to tailor products and services to meet customers' specific needs. RCC believes that its ability to customize products and services results in greater customer satisfaction, customer retention and market penetration. RCC also believes that it will be able to continue to maintain high retention rates due in part to its territory manager distribution philosophy, by offering communication service packages and value-added features anticipating customer needs, and by providing high quality and knowledgeable customer service.
RCC has continued to penetrate its existing Midwest, Atlantic, and Maine regions through sales initiatives, resulting in increased revenues in the three months ended March 31, 2000 as compared to the three months ended March 31, 1999, and intends to roll out marketing strategies throughout existing systems and newly acquired systems in the South and Northwest regions. As a result of these strategies, the Company has been able to generate strong internal growth and improve the operating and financial
12
performance of existing systems. Revenues primarily consist of service, roamer and equipment revenues, each of which is described below:
RCC's operating expenses include network costs, cost of equipment sales, selling, general and administrative expenses and depreciation and amortization, each of which is described below:
In addition to the operating expenses discussed above, RCC also incurs other income (expense), primarily interest expense related to financing and acquisition activities.
13
Preferred stock dividends are related to the Company's following issuances which were done in conjunction with the Company's acquisition activities:
Wireless Alliance is the Company's joint venture with an affiliate of Aerial Communications. RCC's accounting policies and practices for Wireless Alliance are the same as those used in RCC's other regions. The Company follows generally accepted accounting principles in accounting for the minority ownership and eliminates inter-company transactions on consolidation. Any allocable Wireless Alliance losses are first applied to reduce the carrying value of the minority interest in the joint venture and, thereafter, consolidated with Rural Cellular's operating results. As of March 31, 2000, the minority ownership interest had been fully used to offset Wireless Alliance's losses.
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 March 31, |
||||
|---|---|---|---|---|---|
| |
2000 |
1999 |
|||
| REVENUES: | |||||
| Service | 67.7 | % | 73.5 | % | |
| Roamer | 25.7 | 22.5 | |||
| Equipment | 6.6 | 4.0 | |||
| Total revenues | 100.0 | 100.0 | |||
| OPERATING EXPENSES: | |||||
| Network costs | 11.8 | 15.1 | |||
| Cost of equipment sales | 14.3 | 6.6 | |||
| Selling, general and administrative | 36.7 | 36.5 | |||
| Depreciation and amortization | 26.9 | 30.2 | |||
| Total operating expenses | 89.7 | 88.4 | |||
| OPERATING INCOME | 10.3 | 11.6 | |||
| OTHER INCOME (EXPENSE): | |||||
| Interest expense | (12.6 | ) | (20.9 | ) | |
| Interest and dividend income | 4.4 | 0.5 | |||
| Minority interest | — | 4.1 | |||
| Other | (0.1 | ) | (0.0 | ) | |
| Other expense, net | (8.3 | ) | (16.3 | ) | |
| INCOME (LOSS) BEFORE INCOME TAX | 2.0 | (4.7 | ) | ||
| INCOME TAX PROVISION | — | 0.1 | |||
| NET INCOME (LOSS) ITEM | 2.0 | (4.8 | ) | ||
| PREFERRED STOCK DIVIDEND | (16.5 | ) | (11.9 | ) | |
| NET LOSS APPLICABLE TO COMMON SHARES | (14.5 | )% | (16.7 | )% | |
| EBITDA(1) | 37.3 | % | 41.8 | % | |
14
| |
Three Months Ended March 31, |
|||||
|---|---|---|---|---|---|---|
| |
2000 |
1999 |
||||
| Other Operating Data: | ||||||
| Wireless customers at period end: | ||||||
| RCC Cellular: | ||||||
| Postpaid | 236,812 | 199,935 | ||||
| Prepaid | 3,059 | 671 | ||||
| 239,871 | 200,606 | |||||
| Wireless Alliance: | ||||||
| PCS | 15,496 | 7,727 | ||||
| Cellular reselling | 1,163 | 4,082 | ||||
| 16,659 | 11,809 | |||||
| Paging | 12,615 | 11,027 | ||||
| Total customers | 269,145 | 223,442 | ||||
| *Penetration: | ||||||
| RCC Cellular | 9.8% | 8.3% | ||||
| Wireless Alliance—PCS | 2.2% | 1.1% | ||||
| *Retention: | ||||||
| RCC Cellular | 98.2% | 98.3% | ||||
| Wireless Alliance—PCS | 96.8% | 99.1% | ||||
| *Acquisition cost per customer: | ||||||
| RCC Cellular | $ | 409 | $ | 382 | ||
| Wireless Alliance—PCS | $ | 774 | $ | 359 | ||
| *Average monthly revenue per customer: | ||||||
| RCC Cellular | $ | 50 | $ | 47 | ||
| Wireless Alliance—PCS | $ | 51 | $ | 51 | ||
| Cell Sites: | ||||||
| RCC Cellular | 268 | 236 | ||||
| Wireless Alliance—PCS | 60 | 57 | ||||
| *Prepaid customers not included in calculation |
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THREE MONTHS ENDED MARCH 31, 2000 AND 1999
Revenues
Service Revenues. Consolidated service revenues for the three months ended March 31, 2000 increased 19.3% to $28.2 million from $23.6 million in the comparable period of the prior year. The revenue growth reflects the effect of 46,000 additional net prepaid and postpaid customers added through increased penetration in existing markets. The Company expects service revenues to increase in the future primarily as a result of future acquisitions, further anticipated industry-wide growth in customers, and expansion of
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coverage. During the three month period ended March 31, 2000, Wireless Alliance generated $2.7 million in service revenues as compared to $2.1 million in the comparable period of the prior year.
Roamer Revenues. Reflecting the effect of a 90% increase in roaming minutes of use, consolidated roamer revenues for the quarter ended March 31, 2000 increased 47.6% to $10.7 million from $7.3 million in the comparable period of the prior year. Roaming minutes have increased in part due to the activation of additional cell sites and increased industry-wide wireless usage resulting from the now popular single rate calling plans. Partially offsetting the increase in roaming minutes of use during the three months ended March 31, 2000 was the decrease in roaming yield per minute, including toll, to $0.59 as compared to $0.74 in the comparable period of the prior year. Wireless Alliance generated $217,000 in PCS roamer revenue during the three months ended March 31, 2000 as compared to $75,000 in the comparable period of the prior year.
Equipment Revenues. Consolidated equipment revenues for the three months ended March 31, 2000 increased 114.2% to $2.7 million from $1.3 million in the comparable period of the prior year. This growth reflects network equipment reselling and increases in direct phone sales programs.
Key Revenue Indicators. Reflecting the addition of 37,000 cellular customers, cellular penetration increased to 9.8% at March 31, 2000 as compared to 8.3% at March 31, 1999. Wireless Alliance PCS penetration increased to 2.2% at March 31, 2000 as compared to 1.1% at March 31, 1999. Although local service revenue per customer for the three months ended March 31, 2000 has remained unchanged as compared to the three months ended March 31, 1999, strong roaming revenues increased total monthly revenue per customer for the three months ended March 31, 2000 to $50, from $47 in the comparable period of the prior year. Wireless Alliance average monthly revenue per customer for the three months ended March 31, 1999 and 2000 remained unchanged at $51.
Operating Expenses
Network Costs. Consolidated network costs for the three months ended March 31, 2000, increased 1.0% over the comparable period in the prior year to $4.9 million from $4.8 million. Reflecting the discontinuance of cellular reselling, Wireless Alliance network costs for the three months ended March 31, 2000 decreased to $984,000 from $1.3 million in the comparable period of the prior year. As a percentage of total revenues, consolidated network costs for the three months ended March 31, 2000 decreased to 11.8% from 15.1% in the comparable period 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. Cost of equipment sales for the three months ended March 31, 2000 increased 179.6% over the comparable period of the prior year to $5.9 million from $2.1 million. As a percentage of revenue, cost of equipment sales for the three months ended March 31, 2000 increased to 14.3% over 6.6% in the comparable period of the prior year. Contributing to the increase in cost of equipment sales was approximately $1.4 million in handset costs resulting from the migration of approximately 8,500 analog service customers over to digital service. In the comparable period of the prior year, digital service was not available in the Company's service areas.
Selling, General and Administrative. Selling, general and administrative expenses for the three months ended March 31, 2000 increased 30.1% over the comparable period in the prior year to $15.3 million from $11.8 million. The increase in selling, general and administrative expenses reflects RCC's ownership of Glacial's cellular operations for the full first quarter of 2000 as compared to two months during the three months ended March 31, 1999. The increase also reflects higher costs relating to more aggressive promotional activity during the three months ended March 31, 2000 as compared to the three months ended March 31, 1999. As a percentage of sales, selling, general and administrative expenses, increased modestly to 36.7% from 36.5% in the comparable period of the prior year.
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Depreciation and Amortization. Depreciation and amortization expense for the three months ended March 31, 2000 increased 15.1% over the three months ended March 31, 1999 to $11.2 million from $9.7 million. The increase reflects continued construction and acquisition efforts including the accelerated depreciation relating to the early retirement of the Atlantic service area's analog switch.
Other Income (Expense)
Interest Expense. Interest expense for the three months ended March 31, 2000 decreased 21.4% to $5.3 million as compared to $6.7 million in the comparable period of the prior year. The decrease primarily reflects lower average borrowings under the $300 million credit facility. In February 2000, proceeds from the Company's common and senior preferred stock offering were used to pay down approximately $170 million of the $213 million outstanding under the $300 million credit facility.
Interest and Dividend Income. Interest and dividend income for the three months ended March 31, 2000 increased to $1.8 million primarily reflecting interest income earned by the Company from its restricted funds in escrow. The source of restricted funds in escrow was the issuance of Senior Exchangeable Preferred Stock in February 2000. On April 1, 2000, these funds were used towards the Triton Cellular acquisition.
Preferred Stock Dividends
Preferred stock dividends increased 80.6% to $6.9 million in the three months ended March 31, 2000 from $3.8 million in the comparable period of the prior year. The increase primarily resulted from the issuance of 25,000 shares of senior exchangeable preferred stock and 140,000 shares of junior preferred stock in February 2000. The senior preferred stock dividends were paid by issuing additional shares of senior exchangeable preferred stock.
EBITDA
EBITDA increased 15.4% to $15.5 million in the three months ended March 31, 2000 as compared to $13.4 in the comparable period of the prior year. For the three months ended March 31, 2000, cellular operations generated $16.3 million in EBITDA, which was reduced by Wireless Alliance's negative EBITDA of $769,000.
Seasonality
Historically, the Company has experienced seasonal fluctuations in revenues and operating income (loss). The Company's average monthly roaming revenue for cellular customers has typically increased during the second and third calendar quarters, reflecting greater usage by roamer customers who travel in the company's cellular service areas for weekend and vacation recreation. The Company anticipates however, that the more evenly distributed year around roaming revenues demonstrated by its newly acquired South and Northwest service areas will reduce the seasonality of its consolidated operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary liquidity requirements are for working capital, capital expenditures, debt service, acquisitions, and customer growth. In the past the Company has met these requirements through cash flow from operations, sales of common and preferred stock, borrowings under its credit facility, and issuance of its senior subordinated notes. As of March 31, 2000, RCC had $28.0 million outstanding under its $300 million credit facility. On April 1, 2000, the Company replaced its $300 million existing credit facility with a new $1.2 billion credit facility. On April 1, 2000, after repaying the remaining balance under the previous $300 million credit facility and completing the Triton Cellular acquisition, the total outstanding balance under the new $1.2 billion credit facility was $1.033 billion.
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Under the new $1.2 billion credit facility, amounts may be borrowed, subject to mandatory repayments, or repaid at any time through maturity, provided that the outstanding borrowings do not exceed the total amount available.
Net cash provided by operating activities was $6.6 million for the three months ended March 31, 2000. Adjustments to the $867,000 net income to reconcile to net cash provided by operating activities included $11.2 million in depreciation and amortization, a $4.0 million increase in accounts receivable and a $3.2 million decrease in accounts payable.
Net cash used in investing activities for the three months ended March 31, 2000 was $139.4 million. The principal uses of cash included $136.2 million in pending acquisition costs for the acquisition of Triton Cellular and $2.5 million in purchases of property and equipment, of which $939,000 was attributable to Wireless Alliance capital expenditures. These purchases reflect the continued expansion of existing cellular coverage and the continued upgrading of existing cell sites and switching equipment.
Net cash provided by financing activities was $134.3 million for the three months ended March 31, 2000, consisting primarily of $160.5 million in net proceeds from a common stock offering, $158.2 million in net proceeds for the issuance of preferred stock offset by $186.0 million in repayments of long-term debt.
In February 2000, the Company sold 2,748,000 shares of Class A Common Stock at $617/8 per share, 140,000 shares of 121/4% Junior Exchangeable Preferred Stock and 25,000 shares of 113/8% Senior Exchangeable Preferred Stock at prices of $1,000.00 and $988.88 per share, respectively. The shares of preferred stock have a liquidation preference of $1,000.00 per share and are not convertible into common stock.
On April 1, 2000, RCC issued 110,000 shares of redeemable voting convertible preferred stock for consideration of $110 million. The purchasers included Madison Dearborn Capital Partners III, L.P., Madison Dearborn Special Equity III, L.P., Special Advisors Fund I, LLC, Boston Ventures Limited Partnership V and Toronto Dominion Investments, Inc.
Capital expenditures for the remaining quarters of 2000, are expected to be approximately $47.5 million (including $3.0 million for Wireless Alliance).
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
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statements 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
Rural Cellular Corporation uses Exchangeable Preferred Stock, Senior Subordinated Notes, and bank credit facilities to finance its operations. These on-balance sheet financial instruments, to the extent they provide for variable rates of interest, expose RCC 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 its bank credit facilities. RCC 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 transaction and do not constitute speculative or leveraged positions independent of these exposures.
Had the Company not entered into the interest rate swaps and holding other variables constant, such as debt levels, a one percentage rate increase in interest rates would be expected to have an estimated impact on pretax earnings and cash flows of approximately $280,000 in a given year.
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Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
As reported in the Registrant's Report on Form 8-K filed on April 14, 2000, effective April 1, 2000, the Company's wholly owned subsidiary, RCC Holdings, Inc., completed the previously announced acquisition of the licenses, operations, and related assets of Triton Cellular Partners, L.P., which includes 20 rural service areas in Alabama, Kansas, Mississippi, Oregon and Washington and unbuilt PCS licenses in four basic trading areas in Oregon.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
| (a) | Exhibits | ||
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Financial Data Schedule |
| (b) |
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Reports on Form 8-K |
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No Reports on Form 8-K were filed during the quarter ended March 31, 2000. |
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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.
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RURAL CELLULAR CORPORATION (Registrant) |
| Dated: May 15, 2000 |
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/s/ Richard P. Ekstrand |
| Richard P. Ekstrand President and Chief Executive Officer |
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| Dated: May 15, 2000 |
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/s/ Wesley E. Schultz |
| Wesley E. Schultz Senior Vice President and Chief Financial Officer (Principal Financial Officer) |
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