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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 for the fiscal year ended December 31, 1996.
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the transition period from ____________________ TO
____________________.
COMMISSION FILE NUMBER 0-27416
RURAL CELLULAR CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MINNESOTA 41-1693295
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
3905 DAKOTA STREET
ALEXANDRIA, MINNESOTA 56308
(320) 762-2000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
CLASS A COMMON STOCK, PAR VALUE $.01 PER SHARE
(TITLE OF CLASS)
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. /X/ YES NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
Aggregate value of shares of common stock held by nonaffiliates of the
Registrant based upon the closing price on The Nasdaq National Market on March
14, 1997: $69,278,730.
Number of shares of common stock outstanding as of the close of business on
March 14, 1997:
Class A 7,502,552
Class B 1,350,744
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Company's definitive Proxy Statement relating to the 1997
Annual Meeting of Shareholders ("Proxy Statement") are incorporated
by reference into Part II, Item 9 and Part III of this report.
TABLE OF CONTENTS
Page
PART I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ITEM 1. BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ITEM 2. PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . . 9
ITEM 3. LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . . . . . 9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS. . . . . . 9
PART II. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS. . . . . . . . . . . . . . . . . . . . . .10
ITEM 6. SELECTED FINANCIAL DATA. . . . . . . . . . . . . . . . . . . .11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS. . . . . . . . . . . . . .13
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. . . . . . . . . .18
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE. . . . . . . . . . . . . .18
PART III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. . . . . .18
ITEM 11. EXECUTIVE COMPENSATION. . . . . . . . . . . . . . . . . . . .19
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT. . . . . . . . . . . . . . . . . . . .19
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. . . . . . . .19
PART IV. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K. . . . . . . . . . . . . . . . . . . . .20
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21
i
PART I
ITEM 1. BUSINESS
GENERAL
Rural Cellular Corporation ("RCC" or the "Company") was incorporated in 1990.
Effective April 1, 1991, five partnerships, each holding a license to provide
cellular service in geographically contiguous Rural Service Areas (RSAs) merged
into the Company to form a cellular service area serving most of the northern
half of Minnesota. The Company currently markets its cellular services under the
name "Cellular 2000-Registered Trademark-" and its paging services under the
name "KEYPAGE-Registered Trademark-."
In February 1996, the Company completed an initial public offering of 2,869,863
shares of its Class A Common Stock (the "Offering") and received net proceeds of
approximately $26.0 million.
In August 1996, the Company and APT Minneapolis, Inc., an affiliate of Aerial
Communications, Inc. ("Aerial"), formed a joint venture known as Wireless
Alliance, LLC ("Wireless Alliance") to construct and operate Personal
Communications Services (PCS) networks in Duluth, Minnesota, Superior,
Wisconsin, and Fargo and Grand Forks, North Dakota.
On December 23, 1996, the Company entered into an agreement to acquire, subject
to regulatory and other approvals, the Maine wireless telephone licenses,
operations and related assets of Unity Cellular Systems, Inc. ("Unity"), a
wholly-owned subsidiary of InterCel, Inc.
All discussion in Item 1 pertains to Rural Cellular Corporation including
Wireless Alliance and excluding Unity unless specifically referenced.
BUSINESS STRATEGY
The Company believes that the market for wireless telecommunication services
will continue to expand rapidly as cost and service rates decline, equipment
becomes more convenient and easy to use, and the functionality of wireless
services becomes more diverse. The wireless industry will continue to shift
from the professional and business market segments to include the broader
mass consumer markets including the substitution of existing landline
facilities with cellular services.
In order to remain a leading provider of wireless telecommunication services,
the Company intends to continue to expand its market presence and customer base
by (i) offering significant and recognizable value to its customers, (ii)
aggressively and creatively marketing a broad range of wireless
telecommunication products and services at affordable prices, and (iii)
proactively engineering the Company's network to have the most recent cellular
technologies available for customers. The Company will manage this growth with
a strong focus on positive cash flow and net earnings.
Specifically, the Company's growth strategy is to continue to expand the
Company's regional market presence by (i) continuing to increase penetration
rates and minimize churn in existing markets, (ii) acquiring additional
wireless properties that are comparable to the Company's existing market
characteristics, and (iii) entering into strategic alliances and partnerships
with other wireless service providers.
ACQUISITIONS
In August 1996, the Company and APT Minneapolis, Inc. ("APT"), an affiliate
of Aerial Communications, Inc. formed a joint venture known as Wireless
Alliance to construct and operate PCS networks in Duluth, Minnesota,
Superior, Wisconsin and Fargo and Grand Forks, North Dakota ("PSC Service
Area"). Wireless Alliance is 51% owned by the Company and 49% owned by APT.
Wireless Alliance will use 20 megahertz (MHz) of broadband spectrum within
the PCS Service Area portions of Aerial's Minneapolis Major Trading Area
(MTA) 30 MHz PCS license. RCC will be responsible for constructing,
operating, managing and marketing the networks. The Company began reselling
cellular service in
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the PCS Service Area in November 1996. Construction and operation of the PCS
networks will begin following receipt of approvals needed from the Federal
Communications Commission (FCC). Such approvals are expected in the second
quarter of 1997. The Wireless Alliance network for Fargo, Grand Forks and
Duluth-Superior is expected to be fully operational in the fourth quarter of
1997.
Wireless Alliance networks will utilize GSM (Global System for Mobile
Communications) technology, which is currently used by more than 35 million
customers in 110 countries. In addition to voice service, GSM's advanced
features include high-speed data, fax and two-way text messaging as well as
smart card capabilities. Digital GSM networks also offer calling features such
as caller ID, call forwarding and call waiting.
The cellular resale program has allowed Wireless Alliance to establish
relationships with incumbent wireless agents and resale customers in the PCS
Service Area prior to PCS deployment. The Company expects that many
customers will be transferred to Wireless Alliance PCS service when the PCS
network construction is complete and FCC and other approvals are obtained.
The Wireless Alliance PCS network and cellular network will be integrated so
that all Wireless Alliance services and features can be provided on a
virtually seamless basis.
Seen as the next generation of digital wireless communications service, PCS
is currently operational in several major cities in North America and
worldwide. Like cellular, PCS services are designed for business,
residential and mobile applications and provide mobility and compatibility
with other telephone networks.
In December 1996, the Company entered into an agreement to acquire, subject to
regulatory and other approvals, the Maine wireless telephone licenses,
operations and related assets of Unity, a wholly-owned subsidiary of Intercel,
Inc. Unity markets its wireless service under the name "Unicel, A Maine
Company." This acquisition is expected to be completed in the second quarter of
1997.
Based in Bangor, Maine's third largest city, Unity operates in an area that
encompasses the Bangor, Maine Metropolitan Statistical Area (MSA); Maine RSA
3, which includes Augusta, the state capitol; and Maine RSA 2, through
Unity's 51% interest in Northern Maine Cellular Partnership, which is
49%-owned by Cellco Partnership, an affiliate of Bell Atlantic NYNEX Mobile,
Inc. Unity's service area covers approximately 20,500 square miles of
contiguous rural territory with a population of approximately 512,000. As of
December 31, 1996, Unity served approximately 25,000 customers. Unity has
recently converted its cellular operations to digital TDMA (Time Division
Multiple Access) technology.
Unity has many of the same operating characteristics as the Company. Both serve
rural areas with low population densities and similar seasonal usage patterns
that are influenced by the weather and the flow of tourists. Interstate Highway
95, the main artery of northeastern traffic in the United States, runs through
Unity's service area. The Company believes that the similarities between the
demographics, economy, geography, and climate of Unity's service area and those
of the Company's existing service area create a strategic fit with the Company's
experience and expertise. Also, the service-oriented and customer-focused
corporate culture in place at Unity represents an excellent fit with the
Company's basic business philosophy.
MARKETING AND SALES
The Company offers a number of service plan options to its customers. Most
service plans have a fixed monthly access fee that includes a specified number
of minutes. Usually, the higher the monthly access fee, the more minutes of use
are included. Customers who subscribe to cellular service in connection with a
special promotion are typically required to enter into a one-year commitment for
service. The Company engages in ongoing analysis of its service plans and
equipment pricing to ensure competitiveness. As a result of the Wireless
Alliance joint venture, the Company has initiated three new service plans for
the combined and contiguous areas of (1) Wireless Alliance, (2) the Company's
existing service area and (3) the Minneapolis, Minnesota MSA, including
adjacent cellular markets. These service plan options are known as Cellular
2000-Registered Trademark- Northland and offer a fixed and tiered monthly peak
and off peak per minute charge with no long distance or roaming charges for
calls within the Cellular 2000-Registered Trademark- Northland area.
The Company offers a state wide personal toll free 800, 888 or 500 number
to its Cellular 2000-Registered Trademark- customers. This encourages customers
to distribute their cellular numbers and keep their phones turned on to accept
incoming calls. Many customers have their cellular number printed on their
business cards and publish them in the yellow
2
pages. With the Company's nationwide calling option, the Company's
customers can elect to pay a flat monthly fee for unlimited nationwide
calling from their cellular phone without long distance charges when calling
from Cellular 2000-Registered Trademark- service areas (airtime charges still
apply). Approximately 40% of the Company's customers subscribe to this
feature, and of those that do, usage is stimulated by 20% or more.
A majority of the Company's customers subscribe to voice mail service. There
is no charge for leaving messages or retrieving messages. The Company
believes that its voice mail strategy stimulates cellular use in the form of
returned calls. The Company offers a product known as "Main Street" that
offers lower rates within a limited local area and higher rates for calls
outside the local area. This is ideal for customers that do not need wide
area mobility but want the wireless convenience and features. The Company
offers a product known as "Talk Back" that includes access to 911, voice
mail, incoming calls and one preprogrammed outgoing number. With this product
a customer can always call for emergency assistance or call the preprogrammed
number while preventing unauthorized access to other numbers.
The Company has established preferred roaming contracts and developed system
integration with adjacent cellular carriers under the marketing name "Minnesota
Advantage." This approach permits the Company's customers to receive automatic
call delivery, call waiting, call forwarding, toll-free access to voice mail,
call hand-off and reduced roaming rates throughout Minnesota. The Company and
most other cellular carriers offer their customers Automatic Call Delivery (ACD)
and reduced roaming rates on a nationwide basis. The Company markets this
program as "Simplified Roaming." ACD allows roamers to use all of their home
features including custom calling, making their roaming experience identical to
their local service.
Since Simplified Roaming was introduced, the use of airtime by roamers has
increased, a result which the Company attributes to the ACD feature and lower
roaming rates. As adjacent carriers increase their cellular customer base,
and the industry as a whole expands, the number of roamers will continue to
increase. Simplified Roaming allows the Company to capture roaming traffic
on Interstate Highways 94, 35 and 29.
The Company markets paging services provided both through the Company-owned
system, covering northern Minnesota and eastern South Dakota, and as a reseller
of paging services covering most of Minnesota and areas within Iowa, Wisconsin,
and eastern North Dakota. The Company believes that paging services complement
and stimulate cellular usage.
DISTRIBUTION
The Company markets its cellular and paging services through approximately 130
independent sales agents, which are managed by 11 territory managers. These
sales agents include retail electronic stores, farm implement dealers,
automobile dealers, automobile parts suppliers, college and university
bookstores, video and music stores, and local telephone companies. Most of the
agents sell the Company's service in conjunction with their principal business.
The territory managers select, recruit, train, and support the independent sales
agents. The training and support provided to agents is extensive and continual.
Each year all agents must complete an "agent certification" assessment to ensure
knowledge of the Company's current product and service offerings. The Company
provides cellular telephone and paging equipment to the agents for sale or rent
to customers and participates in the agents' advertising and promotion through a
cooperative advertising program.
In an effort to market its services more effectively and to better control
customer acquisition costs, the Company added a new direct channel of
distribution in 1996 by hiring 29 direct sales representatives. In 1996, the
Company also expanded its existing distribution channels throughout its service
area with additional retail outlets and assigning Company sales representatives
to offer its services in stores of major retailers such as Wal-Mart. The
Company currently employs sales agents in eight Wal-Mart stores and anticipates
expanding into one additional Wal-Mart store in the Company's cellular service
area during 1997.
CUSTOMER SERVICE
The Company believes that easy access to highly trained and motivated customer
service professionals is essential to building and maintaining customer
satisfaction and loyalty, both of which are essential to the long-term success
of the Company. The Company's customer service center provides cellular and
paging customers with 24-hour, toll-
3
free access to professional customer service representatives who have extensive
training and information on equipment and service plan usage and are familiar
with the Company's cellular service areas. The center also manages calls from
the Company's sales representatives as well as from roamers traveling through
the Company's cellular service area. The Company's customer service center
management is available 24 hours a day to assist in resolving urgent customer
issues as quickly as possible. The Company believes its strong emphasis on
customer service contributes to its high customer retention rate.
The customer service center is responsible for processing new service orders and
service changes for existing customers. The customer service center also
maintains customer records and manages the Company's collection process. During
1997, the customer service center will implement a quality control process that
will monitor call center performance parameters and automatically balance
customer service center resources to match call center load levels.
Territory managers work closely with customer service center personnel to
maintain high standards of service for their existing customers as well as to
attract new customers. Company service center representatives attempt to
contact every new customer within 30 days from the day they begin service to
confirm customer satisfaction and elicit feedback. Customers are also
contacted periodically to offer additional calling features such as voice
mail, call waiting, and call forwarding and to recommend the best service
pricing plan for the customer's usage levels. These contact programs enhance
customer loyalty, maintain high retention, increase sales of additional
features and generate customer referrals.
SERVICE AREAS
As of December 31, 1996, the Company provides cellular service to approximately
48,000 customers and paging service to approximately 7,000 customers. The
Company's cellular service area including Wireless Alliance has a total
population of approximately 1.1 million and covers approximately 75,000 square
miles, including 240 miles of Interstate Highway 94 between Minneapolis-St. Paul
and Fargo, North Dakota, 72 miles of Interstate Highway 35 between
Minneapolis-St. Paul and Duluth, Minnesota, and 80 miles of Interstate Highway
29 between Grand Forks and Fargo, North Dakota including the Red River Valley.
ROAMING MARKETS
The Company carries traffic generated by customers of other cellular companies
who are visiting or traveling through northern Minnesota. This traffic is
profitable for the Company since the revenue is generated without any associated
marketing, customer support or acquisition fees. While approximately 13% of
cellular revenue nationally is from roaming traffic, the Company's percentage of
roaming revenue is approximately 21%. The Company believes that roaming revenues
will continue to increase as penetration in adjacent cellular markets continues
to grow.
SERVICE MARKS
The Cellular 2000-Registered Trademark- name and related marks are owned by
Cellular 2000, Inc. ("Cellular 2000"). The Company and other users of the
service mark, all of which are cellular providers in Minnesota or South Dakota,
are shareholders of Cellular 2000. The only business of Cellular 2000 is the
licensing of its service mark to its shareholders.
Each shareholder has entered into a license agreement with Cellular 2000 that
allows the shareholder to use the "CELLULAR 2000" service mark for marketing
within its cellular service area subject to certain restrictions. The license
agreements are relatively restrictive and Cellular 2000 has extensive rights to
control the use of the name. Cellular 2000 and its shareholders have entered
into a buy-sell agreement that provides, in part, that if a Cellular 2000
shareholder no longer uses CELLULAR 2000 as the principal name under which it
markets its cellular service, it must offer its shares of stock in Cellular 2000
for sale to Cellular 2000 and the other shareholders at the original cost.
The Company does not pay any license fees for the use of the "CELLULAR 2000"
service mark. The Company has registered the service mark "KEYPAGE", which it
uses to identify and promote its paging operations.
4
NETWORK OPERATIONS
CELLULAR
The Company has constructed and maintains an integrated network of continuous
cellular coverage throughout the Company's cellular service area so that a call
can be handed off from one of the Company's cell sites to another as a customer
travels. As a customer travels between cell sites, the antenna works with the
switch to automatically monitor the signal strength of the call in progress.
Call hand-off is automatic and virtually unnoticeable to customers.
As of December 31, 1996, the Company's cellular network consisted of 72 cell
sites. The Company continues to develop its cellular service area by building
new cell sites in locations that increase capacity and improve coverage. The
Company added eight cell sites during 1996 and plans to add 13 new cell sites in
1997. The additional cell sites will further expand capacity and will allow
customers to use lower-powered or hand-held portable phones throughout the
Company's service area.
The switch used in the Company's cellular network is owned by Switch 2000 LLC
("Switch 2000"). All of the Switch 2000 switching equipment is digital
and includes a Northern Telecom supernode cellular switch. The Company holds
a 40.8% ownership interest in Switch 2000, with the balance of ownership held
by other cellular providers operating in five Minnesota RSAs, one Minnesota
MSA, and one South Dakota RSA. Ownership of the switch through Switch 2000
permits owners to share the costs of building and operating the switch.
The Company currently purchases its switching services from Switch 2000 under a
Cellular Switch User Agreement which is substantially the same for each of
Switch 2000's owners/users (the "User Agreements"). According to the User
Agreements, Switch 2000 provides cellular switching and related services to the
Company, including: (i) landline telephone or microwave transmission between
cell sites and the switch; (ii) interconnection for origination and termination
of some landline traffic; and (iii) related maintenance. According to the User
Agreements, the users collectively reimburse fixed costs, transport costs, and
maintenance, operating, and administrative costs incurred by Switch 2000. The
respective portions of the cost of providing the switching and transmission
services under the User Agreements are based on a formula that incorporates
ownership ratios, the number of cell sites, the distance between each cell site
and the switch, and the number of radio channels used by each cell site over a
given period of time. These costs are estimated annually, and each user is
charged monthly based on the estimate, with annual accounting adjustments
applied based on the actual costs incurred by Switch 2000. The Company plans to
terminate the User Agreement and have its own switch installed and operational
by the third quarter of 1997.
DIGITAL CONVERSION
The Company believes that over the next five years cellular telephones will
gradually convert from analog to digital technology driven primarily by
capacity constraints in the major metropolitan markets. The Company will
begin to convert its network to digital TDMA technology in 1997. The Company
began providing its own transport services between cell sites over its new
digital microwave network in the first quarter of 1996 and the Company
anticipates that a region-wide digital microwave network will be complete by
the second quarter of 1997. This will result in the continued reduction in
the purchase of transport services required from Switch 2000 in 1997 and will
be used in conjunction with the Company's own digital switch in the third
quarter of 1997 to further reduce transport and switching costs. Also, the
Company plans to market excess network capacity beginning in the third
quarter of 1997.
PAGING
The Company's paging network, as of December 31, 1996, consisted of 39 paging
transmitters located throughout northern Minnesota and eastern North Dakota.
The paging transmitters are connected to and controlled by a paging terminal,
which is connected to the public telephone network. The paging transmitters
use a transmit-only radio frequency licensed for a given coverage contour
around the paging transmitter which allows messages to be broadcast to the
paging customer. The Company, through its wholly-owned subsidiary, RCC
Paging, Inc., holds licenses granted by the FCC, for paging and
radiotelephone service on the radio common carrier frequency of 158.100 MHz.
The Company's paging network complements the cellular service offerings.
5
PCS
In the first half of 1997, the Company will begin construction of a GSM
(Global System for Mobile communications) PCS network in the Wireless
Alliance PCS Service Area, which is expected to be operational in the fourth
quarter of 1997.
COMPETITION
The Company's current cellular competitors are Western Wireless Corporation
("Western Wireless") in northwestern Minnesota and PriCellular Corp.
("PriCellular") in the remainder of the Company's cellular service area. Both
competitors offer service under the "Cellular One-Registered Trademark-" trade
name and are members of the North American Cellular Network-TM-, a consortium of
Cellular One-Registered Trademark- service providers located throughout the
United States that reciprocally provide reduced roaming rates and automatic call
delivery. As of December 31, 1996, the Company estimates that Western Wireless
and PriCellular collectively had 53 cell sites, compared to the Company's 72
cell sites, within the operating area common to all three companies in
Minnesota.
The Company believes that Western Wireless and PriCellular compete against the
Company primarily on the basis of price and have become significantly more
aggressive during the past two years. AT&T Wireless, Inc. ("AT&T") is a
significant shareholder of PriCellular and may provide significant financial and
related support for PriCellular's network development and marketing efforts.
AT&T provides cellular service in MSAs adjacent to the Company's cellular
service area.
Several companies operate relatively small paging networks in portions of the
Company's service area. One competitor, American Paging, Inc. ("American
Paging"), covers a large area within Minnesota and eastern North Dakota. The
Company has entered into an agreement with American Paging to resell American
Paging's 900 MHz paging service in the Company's service area as an additional
paging option for the customers of the Company. This service is marketed under
the trade name "KEYPAGE PLUS" and is sold in approximately 80% of the same areas
in which the paging service of the Company, marketed under the trade name
"KEYPAGE", is provided. Both KEYPAGE and KEYPAGE PLUS provide numeric display
and alphanumeric display services. The services are differentiated by pricing
and coverage areas. Other 900 MHz regional paging systems have been licensed
within the Company's service area to other potential paging carriers, but the
Company does not believe any of the networks of these license holders are
operational.
NEW TECHNOLOGIES
The wireless telecommunications industry is experiencing significant
technological change, as evidenced by the increasing pace of improvements in the
capacity and quality of digital technology, shorter cycles for new products and
enhancements, and changes in consumer preferences and expectations. The Company
expects competition in the wireless communications industry to be intense and
dynamic as a result of the entrance of new competitors and the development of
new technologies, products, and services.
SMR (Specialized Mobile Radio) and other private radio systems, such as those
generally used by local dispatch, fleet services, and other communications
services that have the technical capability to handle mobile telephone calls,
including interconnection to the landline telephone network, may provide
competition in certain markets. In addition, ESMR (Enhanced Specialized
Mobile Radio) systems may compete with cellular service by providing higher
quality digital communication technology, lower rates, enhanced privacy, and
additional features such as built-in paging, particularly in metropolitan
markets.
The Company believes that PCS networks will be initially focused primarily in
urban areas due to capital requirements and population coverage requirements.
Narrowband PCS services typically are advanced paging and messaging services.
Broadband PCS services will consist of wireless two-way telecommunications
services for voice, data, and other transmissions employing digital
micro-cellular technology. Many broadband PCS services are expected to compete
with existing cellular systems. The FCC has issued licenses for both narrowband
and broadband PCS services. Six broadband licenses were issued in each part of
the Company's cellular service area. Under recent FCC rulings, license holders
are allowed to disaggregate the spectrum covered by their license. Accordingly,
the Company may face competition from additional providers of PCS services.
6
Continuing technological advances in telecommunications and FCC policies that
encourage the development of new spectrum-based technologies make it impossible
to predict the extent of future competition. The FCC has adopted rules that
authorize the award of a "pioneer's preference" to companies that develop new
spectrum-based communications technologies. Such a preference may encourage the
development of new technologies that compete with cellular and paging service.
In addition, the Omnibus Budget Reconciliation Act of 1993 requires, among other
things, the allocation to commercial use of a portion of 200 MHz of the spectrum
currently reserved for government use. It is possible that some portion of the
spectrum that is reallocated will be used to create new land-mobile services or
to expand existing land-mobile services.
The Company is strategically positioned to compete with other communications
technologies that now exist, such as conventional mobile telephone service, SMR
and ESMR systems and PCS, and with cellular and paging resellers. Cellular
service and paging will also compete more directly with traditional landline
telephone service providers and with cable operators that are expanding into the
offering of traditional communications services over their cable systems. The
Company may face competition from new technologies not yet readily available
such as low orbit satellite networks.
The Company anticipates that market prices for wireless communications services
will continue to decline in the future based upon increased competition and cost
reductions. The Company will compete to attract and retain customers
principally on the basis of service enhancements and features, quality and
customer service, the size and location of its service areas and price. The
Company's ability to compete successfully is dependent, in part, on its ability
to anticipate and respond to various competitive factors affecting the industry.
The Company's marketing and sales organization includes a group that carefully
monitors and analyzes competitive products and service offerings, changes in
consumer preferences, changes in demographic trends and economic conditions and
pricing strategies by competitors that could adversely affect the Company's
profitability or present strategic opportunities.
REGULATION
The Company is subject to extensive regulation as a provider of cellular and
paging services. The FCC regulates the construction, operation, and acquisition
of cellular and paging systems in the United States pursuant to the
Communications Act of 1934, as amended (the "Communications Act"), and the
rules, regulations, and policies promulgated by the FCC under the Communications
Act. A cellular system operates under a license granted by the FCC within a
market area (either an MSA or RSA) defined by the FCC. Each market is to be
served by two competing licensees. The licenses are transferable, subject to
FCC policies limiting a company that has an ownership interest in a licensee in
one market from possessing an ownership interest in the other licensee in the
same market. Paging licenses are granted for a relatively small, specific
geographic area at a particular frequency.
Near the conclusion of the initial term of a cellular license, licensees must
file applications for renewal of licenses to obtain authority to operate for up
to an additional ten-year term. Applications for license renewal may be denied
if the FCC determines that the grant of a license would not serve the public
interest, convenience, and necessity. The FCC also may revoke a license prior
to the end of its term in extraordinary circumstances. In addition, at license
renewal time, other parties may file competing applications for the
authorization. The FCC has adopted specific standards stating that a renewal
expectancy will be awarded to a cellular licensee that (i) has provided
substantial service during its license term and (ii) has substantially complied
with applicable FCC rules and policies and the Communications Act. If the FCC
awards the cellular licensee a renewal expectancy, its license renewal
application is granted and the competing applications are dismissed. The
Company's cellular licenses expire on October 1, 2000.
The Communications Act and FCC rules require the FCC's prior approval of the
assignment or transfer of control of a cellular license. Any acquisition by the
Company of an interest in any additional cellular service area may also require
the prior approval of state or local regulatory authorities having jurisdiction
over the cellular industry.
The Communications Act prohibits the holding of a common carrier license by a
corporation of which any officer or director is a non-U.S. person or any entity
of which more than 20% of the capital stock is owned directly or beneficially by
aliens. Failure to comply with these requirements may result in an FCC order to
the Company requiring divestiture of alien ownership to bring the Company into
compliance. In addition, fines, denial of renewal or revocation of the license
are possible. The Company's Articles of Incorporation permit the redemption of
the Company's Common Stock from shareholders when necessary to protect the
Company's regulatory licenses.
7
Cellular service providers also must satisfy a variety of FCC requirements
relating to technical and reporting matters, including coordination of proposed
frequency usage with adjacent cellular systems in order to avoid electrical
interference between adjacent systems. The FCC also regulates cellular service
resale practices and the terms under which certain ancillary services may be
provided through cellular facilities.
The Communications Act preempts state and local regulation of the entry of, or
the rates charged by, any commercial mobile service or any private mobile
service, which includes cellular service. The State of Minnesota does not
currently regulate the rates for any commercial mobile service, but could
petition the FCC for such authority in the future.
Cellular systems are subject to certain Federal Aviation Administration
regulations respecting the location, lighting, and construction of cellular
transmitter towers and antennas and may be subject to regulation under the
National Environmental Policy Act and the environmental regulations of the FCC.
The siting and construction of cellular transmitter towers, antennas and
equipment shelters are often subject to state or local zoning, land use and
other regulation. Such regulation may include zoning, environmental and
building permit approvals or other state or local certification. The Company
plans to use a common carrier point-to-point digital microwave network to
connect most of its cell sites and to link them to the main switch. That
facility will be separately licensed by the FCC and subject to regulation as to
technical parameters and service.
The Company's paging operations are also subject to regulation by the FCC.
The FCC issues licenses for paging operations which expire either five or ten
years from issuance and are subject to FCC approval for renewal. The Company
holds 13 FCC licenses for paging and radiotelephone service. Applications
for an additional six licenses have been approved by the FCC on a conditional
basis and will be issued on a final basis after certification by the Company
that the transmitter sites are ready for operation. The Company's paging
licenses expire between July 1, 1998 and April 1, 1999. Renewals are
generally granted to the license holder if it is in compliance with FCC
regulations. Although the Company is unaware of any circumstances that would
prevent the approval of any future renewal application, no assurance can be
given that the Company's licenses will be renewed by the FCC. Moreover,
although revocation and involuntary modification of licenses are
extraordinary measures, the FCC has the authority to restrict the operation
of a licensed facility or revoke or modify licenses. The Company's paging
licenses have never been revoked or modified. States have limited regulatory
power over paging operations.
The Telecommunications Act of 1996 (the "Act"), which modifies and amends the
Communications Act, covers virtually every element of communications.
Congress's main objective was to promote competition and reduce regulation in
order to secure lower prices and higher quality services for
telecommunications customers and to encourage the rapid deployment of new
telecommunications technologies. A substantial portion of the Act is aimed
at removing restrictions that prevent local and long distance service
providers from offering competing services in the same territory and
redefining compensation arrangements between cellular carriers such as the
Company, interexchange carriers ("IXCs"), local exchange carriers ("LECs"),
and independent local exchange carriers ("ILECs").
The impact of the Act on the Company will be to reduce costs paid by the Company
to interconnect and terminate calls on other IXC, LEC, and ILEC networks. The
Act requires such carriers to base termination charges to the Company on cost
and to compensate the Company for calls that they terminate. Legal challenges to
the FCC's proceeding to implement those portions of the Act dealing with
interconnection (Interconnection Order) have resulted in a U.S. Court of Appeals
stay of part of the Interconnection Order's pricing rules. The Court recently
lifted the stay with respect to the rules that govern the compensation received
by LECs and wireless carriers for transporting and terminating each other's
traffic.
In addition, the Act mandates cellular carriers such as the Company to pay
into the Universal Service Fund ("USF"). The purpose of the USF is to ensure
basic telephone services are available, reasonable and affordable for all
citizens. The USF will promote access to high capacity telecommunications
services for schools, libraries, and rural health providers. The FCC is in
the process of promulgating rules relating to the USF; therefore, the impact
on the Company is currently unknown. States may create their own funds
imposing charges only on intrastate service to supplement the resources
available from the USF. State governments will be responsible for
determining who will be eligible to receive such federal or state subsidies.
Most states have not finalized the rules, but it is likely that the Company
will be subject to additional state regulation should it elect to withdraw
from the fund.
8
EMPLOYEES
As of December 31, 1996 the Company had 164 employees, including 63 in sales
and marketing, 43 in customer service, 28 in network and systems operations,
18 in administration and 12 in finance and accounting. Nineteen of the
employees were part-time. In addition, the Company has approximately 130
independent sales agents. None of the Company's employees is represented by
a labor organization, and the Company's management considers its employee
relations to be good.
ITEM 2. PROPERTIES
In December 1996, the Company relocated its corporate headquarters to its new
corporate office building located at 3905 Dakota Street, Alexandria, Minnesota
56308. The new corporate headquarters, which is owned by the Company, is a
two-story, 50,000-square-foot facility with land available for a
24,000-square-foot expansion.
As of December 31, 1996, the Company had 72 cell sites, of which 36 sites are
leased, either for tower space or for land, and 36 sites are owned by the
Company. The Company anticipates that additional sites will continue to be
acquired primarily by outright purchase.
ITEM 3. LEGAL PROCEEDINGS
Except for claims asserted against the Company in the ordinary course of its
business, the outcome of which would not materially adversely affect the
Company's business, there are no legal proceedings pending or, to the best of
the Company's knowledge, threatened against the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
No matters were submitted to a vote of security-holders during the fourth
quarter of the fiscal year covered by this report.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information with regard to each of
the executive officers of the Company:
NAME AGE POSITION
Richard P. Ekstrand 47 President, Chief Executive Officer and
Director
Scott G. Donlea 37 Vice President of Sales and Marketing
Wesley E. Schultz 40 Vice President of Finance and Chief Financial
Officer
Richard P. Ekstrand has served as President, Chief Executive Officer and a
director of the Company since its inception. Mr. Ekstrand became a full-time
employee of the Company in January 1993. From June 1991 to January 1993, his
services had been provided through a management agreement between the Company
and R.P. Ekstrand Management Services Corp., a corporation wholly owned by
Mr. Ekstrand. Since 1984, Mr. Ekstrand has also served as Vice President and
a director of Lowry Telephone Co., Inc., a local telephone exchange company
and a shareholder of the Company, of which Mr. Ekstrand is the sole
shareholder. Mr. Ekstrand currently serves as chair of the Board of
Governors of Switch 2000 LLC and a director of Cellular 2000, Inc. Mr.
Ekstrand is past president and currently a director of the Minnesota
Telephone Association, past president of the Association of Minnesota
Telephone Utilities and currently a director of the Rural Cellular
Association and of the Cellular Telephone Industry Association.
Scott G. Donlea joined RCC in 1992 as Manager of Market Operations and has
served as Vice President of Sales and Marketing since August 1995. From 1990 to
1992, Mr. Donlea was regional manager for marketing and sales in Iowa and South
Dakota for CommNet Cellular, Inc., and from 1988 to 1990 he served as branch
manager for US
9
WEST Cellular, Inc. Mr. Donlea is chairperson for the Rural Cellular
Association's business and marketing committee.
Wesley E. Schultz joined RCC in May 1996 as Vice President of Finance and
Chief Financial Officer. Prior to joining the Company, Mr. Schultz had
served as acting Chief Financial Officer of Spanlink Communications, Inc.
since February 1996, as Chief Financial Officer of Nicollet Process
Engineering, Inc. from March 1995 through October 1995, as Chief Financial
Officer of Data Systems & Management, Inc. from November 1994 through March
1995, and as Vice President, Finance & Administration and Chief Financial
Officer of Serving Software, Inc. from December 1991 through October 1994.
Mr. Schultz is a CPA and served for 3 years as an auditor with Deloitte and
Touche, LLP.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Class A Common Stock began trading on The Nasdaq National Market
on February 8, 1996, under the symbol RCCC. The following table indicates the
high and low closing price for each quarter of the 1996 fiscal year, beginning
with such date:
1996 HIGH LOW
-------- ---------
First Quarter $12 1/4 $10
Second Quarter 13 1/2 11 5/32
Third Quarter 12 3/4 9 1/2
Fourth Quarter 10 1/2 8 3/4
As of March 14, 1997, there were approximately 85 holders of record of the
Company's Class A Common Stock and approximately 34 holders of record of the
Company's Class B Common Stock.
The Company has never paid dividends on its Common Stock. The Company currently
intends to retain all future earnings, if any, for the operation and expansion
of its business and does not expect to pay any cash dividends on its Common
Stock in the foreseeable future.
10
ITEM 6. SELECTED FINANCIAL DATA
The financial information set forth below should be read in conjunction with
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the Consolidated Financial Statements and related notes
thereto included in this Form 10-K. (in thousands, except per share and other
cellular operating data)
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ----------- ---------- ---------- ----------
STATEMENT OF OPERATIONS DATA:
Revenues:
Service revenues . . . . . . . . . . $ 23,120 $ 14,289 $ 9,784 $ 4,690 $ 2,578
Roamer revenues. . . . . . . . . . . 6,414 4,562 3,897 3,146 2,823
Equipment sales. . . . . . . . . . . 927 1,476 2,008 271 327
----------- ----------- ---------- ---------- ----------
Total revenues . . . . . . . . . . 30,461 20,327 15,689 8,107 5,728
----------- ----------- ---------- ---------- ----------
Operating expenses:
Network costs. . . . . . . . . . . . 6,731 4,974 3,293 2,586 2,498
Costs of equipment sales . . . . . . 1,375 1,914 2,214 372 379
Selling, general and administrative. 13,576 7,700 6,570 4,949 3,538
Depreciation and amortization. . . . 5,539 3,249 2,426 1,687 977
----------- ----------- ---------- ---------- ----------
Total operating expenses . . . . . 27,221 17,837 14,503 9,594 7,392
----------- ----------- ---------- ---------- ----------
Operating income (loss). . . . . . . . 3,240 2,490 1,186 (1,487) (1,664)
----------- ----------- ---------- ---------- ----------
Other income (expense):
Interest expense . . . . . . . . . . (281) (1,365) (1,195) (622) (316)
Interest and dividend income . . . . 335 277 170 68 16
Equity in earnings (losses) of
unconsolidated subsidiaries . . . . 52 (37) (37) (175) 159
Minority interest. . . . . . . . . . 331 - - - -
----------- ----------- ---------- ---------- ----------
Other income (expense), net. . . . 437 (1,125) (1,062) (729) (141)
----------- ----------- ---------- ---------- ----------
Income (loss) before income taxes. . . 3,677 1,365 124 (2,216) (1,805)
Income tax provision (benefit) . . . . 200 575 (486) 4 -
----------- ----------- ---------- ---------- ----------
Net income (loss). . . . . . . . . . . $ 3,477 $ 790 $ 610 $ (2,220) $ (1,805)
----------- ----------- ---------- ---------- ----------
----------- ----------- ---------- ---------- ----------
Net income (loss) per share. . . . . . $ 0.41 $ 0.13 $ 0.11 $ (0.42) $ (0.37)
----------- ----------- ---------- ---------- ----------
----------- ----------- ---------- ---------- ----------
Weighted average common shares
outstanding. . . . . . . . . . . . 8,509 5,983 5,522 5,261 4,943
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ----------- ---------- ---------- ----------
Other Operating Data:
Net capital expenditures . . . . . . $ 23,653 $ 10,011 $ 6,933 $ 2,750 $ 3,323
EBITDA(1). . . . . . . . . . . . . . $ 8,779 $ 5,739 $ 3,612 $ 200 $ (687)
Other Cellular Operating Data:(2)
Customers at year-end. . . . . . . . 45,094 26,764 17,402 9,352 3,960
Penetration. . . . . . . . . . . . . 7.5% 4.5% 2.9% 1.6% 0.7%
Average monthly revenue per
cellular customer(3) . . . . . . . $ 66 $ 69 $ 84 $ 98 $ 155
Average monthly retention rate(4). . 98.7% 99.0% 99.2% 99.0% 98.7%
Cell sites at year-end . . . . . . . 72 64 55 36 28
11
DECEMBER 31,
-------------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ----------- ---------- ---------- ----------
Balance Sheet Data:
Working capital (deficit). . . . . . $ (10,572) $ (4,415) $ 80 $ (1,230) $ 55
Net property and equipment . . . . . 41,935 23,517 16,479 11,014 9,750
Total assets . . . . . . . . . . . . 60,590 30,138 22,439 14,074 12,219
Total debt . . . . . . . . . . . . . 8,492 19,123 15,117 10,953 7,794
Total shareholders' equity . . . . . 34,996 5,458 4,668 760 2,980
- --------------------
(1) EBITDA represents earnings before interest, taxes, depreciation and
amortization. EBITDA is not intended to be a performance measure that
should be regarded as an alternative for other performance measures
and should not be considered in isolation. EBITDA is provided because
it is a measure commonly used in the cellular industry. EBITDA is not
a measurement of financial performance under generally accepted
accounting principles and does not reflect all expenses of doing
business (e.g., interest expense, depreciation). Accordingly, EBITDA
should not be considered an alternative to net income as a measure of
performance or to cash flows as a measure of liquidity. See "Item 7.
Management's Discussion and Analysis of Financial Condition and
Results of Operations."
(2) Other Cellular Operating Data excludes Wireless Alliance.
(3) Determined for each period by dividing the sum of access, airtime,
roaming, long distance, features, connection, disconnection, and other
revenues for such period by average customers for such period
(beginning customers plus ending customers, divided by two), and
dividing that result by the number of months in such period.
(4) Determined for each period by dividing total customers discontinuing
service during such period by the average customers for such period
(beginning customers plus ending customers, divided by two), dividing
that result by the number of months in the period and subtracting from
one.
12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company's principal operating strategy is to increase service revenues
and profitability by continuing to build and expand its cellular and paging
customer base and to maximize the roaming potential of the Company's cellular
service area. As of December 31, 1996, the Company's cellular customers
totaled approximately 48,000, including Wireless Alliance, while the
Company's paging customers totaled approximately 7,000.
The cellular industry has seen average revenue per customer decline during
recent years. The Company believes that this downward trend reflects new,
lower-usage customers, who use cellular service for personal convenience,
security or as an alternative communication resource backup for their
traditional landline telephone service. Although the Company also has
experienced a decline in average monthly revenues per customer to $66 in 1996
from $69 in 1995, the Company has introduced new service features to encourage
higher usage from its customers in an effort to mitigate the effects of this
trend.
The Company emphasizes customer support in an effort to maximize its customer
retention. For the year ended December 31, 1996, the Company experienced an
average monthly retention rate of 98.7%, as compared to an industry average
monthly retention rate of 98.3%, as reported in the Cellular Telephone Industry
Association (CTIA) Data Survey dated June 30, 1996. Customer retention is
expected to become a greater challenge as the Company's customer base grows and
competition increases. However, the Company believes that it will continue to
maintain relatively high retention rates by offering communication service
packages and value-added features anticipating customer needs and by providing
diligent and knowledgeable customer service.
The Company's revenues consist of charges to customers for cellular and paging
service, roaming revenues and equipment sales. Service revenues include monthly
access charges, charges for airtime used in excess of the time included in the
service package purchased, long distance charges derived from calls placed by
the Company's customers, cellular and paging equipment lease revenues, and other
charges, including activation and feature charges for such features as voice
mail, call waiting, and call forwarding.
The Company has substantially increased its service revenues over the past three
years primarily by increasing the number of its cellular customers. The Company
believes that its success in increasing its customer base results from a number
of factors, including its customer support initiative and innovative packaging
of services and features. In 1996, the Company's cellular customers increased
by 68.5%. The Company plans to continue aggressively marketing its services and
anticipates that the number of customers will continue to increase, but at a
rate more in line with that experienced by the cellular industry.
Roaming revenues consist of airtime, long distance and service fees charged for
providing service to customers of other cellular systems that place or receive a
call within the Company's cellular service area. The per minute rate paid by a
roamer, or the intercarrier exchange rate, is determined by agreement between
the Company and the roamer's cellular carrier. The Company has reciprocal
agreements with cellular licensees in adjacent cellular service areas that allow
the Company to provide service to its customers calling from or receiving calls
in these territories at favorable rates. The Company believes that roaming
revenues will continue to increase as a result of an increase in both the number
of roaming customers and roaming minutes of use as the cellular industry
matures. The Company believes these increases will more than offset an expected
decline in intercarrier exchange rates.
Equipment sales consist of cellular and paging equipment and accessory sales to
customers. From time to time the Company has provided subsidies on such
equipment to attract new customers, but these subsidies have not been
substantial. However, as the Company's market becomes more competitive, the
Company expects that discounts or subsidies relating to sales of cellular and
paging equipment to the Company's customers will increase. In September 1995,
the Company implemented a promotional program for renting equipment to customers
in order to reduce customers' perception that the cost of initiating cellular
service is prohibitive. As a result of this new rental program, the Company's
revenues from equipment sales declined in 1996, while rental revenues, which are
recognized as part of service revenues, increased.
13
During 1996, the Company continued to implement its a new agent compensation
program and expanded its distribution channel to include direct sales
employees and additional distribution through major retail outlets. Under
the new agent compensation program, a lower commission is paid upon initial
sale followed by monthly account maintenance payments. It is anticipated
that the cost of sales through additional distribution channels will be lower
than the agent compensation. Such expenses are expected to increase in
subsequent periods as additional account maintenance payments are made under
the new agent compensation program.
During 1996, the Company continued construction of a digital microwave network.
As a result of this investment during 1996, the Company's network costs as a
percentage of total revenues declined because transport costs were lower than
the Company anticipated. The increased capacity provided by the digital
microwave network will also be available to lease to business customers.
RESULTS OF OPERATIONS
The following table presents certain consolidated statements of operations data
as a percentage of total revenues for the periods indicated:
YEARS ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
------- ------- -------
Revenues:
Service revenues . . . . . . . . . . 75.9% 70.3% 62.4%
Roamer revenues. . . . . . . . . . . 21.1 22.4 24.8
Equipment sales. . . . . . . . . . . 3.0 7.3 12.8
------- ------- -------
Total revenues. . . . . . . . . . 100.0 100.0 100.0
------- ------- -------
Operating expenses:
Network costs. . . . . . . . . . . . 22.1 24.5 21.0
Cost of equipment sales. . . . . . . 4.5 9.4 14.1
Selling, general, and
administrative . . . . . . . . . 44.6 37.9 41.9
Depreciation and amortization. . . . 18.2 16.0 15.4
------- ------- -------
Total operating expenses. . . . . 89.4 87.8 92.4
------- ------- -------
Operating income . . . . . . . . . . 10.6 12.2 7.6
------- ------- -------
Other income (expense):
Interest expense . . . . . . . . . . (0.9) (6.7) (7.6)
Interest and dividend income . . . . 1.1 1.4 1.0
Equity in earnings (losses) of
unconsolidated subsidiaries . . . . 0.2 (0.2) (0.2)
Minority interest. . . . . . . . . . 1.1 - -
------- ------- -------
Other income (expense), net . . . 1.5 (5.5) (6.8)
------- ------- -------
Income before income taxes . . . . . . 12.1 6.7 0.8
Income tax provision (benefit) . . . . 0.7 2.8 (3.1)
------- ------- -------
Net income . . . . . . . . . . . . . . 11.4% 3.9% 3.9%
------- ------- -------
------- ------- -------
YEARS ENDED DECEMBER 31, 1996 AND 1995
REVENUES
Service revenues for 1996 increased 61.8% to $23,119,691 from $14,289,434 for
1995, resulting primarily from a 68.5% increase in the number of cellular
customers, partially offset by a decrease of 4.1% in the corresponding average
revenue per customer. The Company has achieved this growth through the
implementation of customer sales and service strategies and by adherence to
network service quality controls. This growth resulted in a market penetration
rate of 7.5% at December 31, 1996, up significantly from 4.5% at December 31,
1995. Service revenues include paging revenues, which increased 69.6% to
$836,177 for 1996 from $492,955 for 1995.
14
Roamer revenues for 1996 increased 40.6% to $6,413,524 from $4,561,760 for 1995.
This increase was primarily due to a 138.8% increase in the number of roamer
minutes resulting in part from expanded coverage provided by eight additional
cell sites and overall increased usage of the Company's cellular service by a
greater number of roamers in the Company's cellular service area. While total
roamer revenues increased, the average revenue per roamer declined due in part
to reductions in intercarrier exchange rates under reciprocal agreements with
certain surrounding cellular carriers.
Equipment revenues for 1996 decreased 37.2% from 1995. This decrease
reflects the growing popularity of the Company's equipment rental program
among new customers. The Company expects that equipment sales revenue will
continue to decrease while rental revenues will continue to increase.
OPERATING EXPENSES
Network costs for 1996 increased 35.3% to $6,731,130 from $4,973,598 for
1995, while as a percentage of total revenues, declined to 22.1% from 24.5%.
The increased expenses reflect additional operating expenses from new cell
sites that were added during 1995 and 1996 and higher total variable costs
resulting from increased network usage as a result of customer demand, offset
by economy of scale efficiencies. Network expenses include switching and
transport expenses and the expenses associated with the maintenance and
operation of the Company's cellular and paging network facilities.
Selling, general, and administrative ("SG&A") expenses for 1996 increased as a
percentage of total revenues to 44.6% from 37.9% for 1995 and to $13,575,347
from $7,699,964. The increases were due primarily to an increase in the number
and amount of commissions paid as a result of the Company's marketing and
promotional strategies, additional employees and incremental wage and benefit
increases. SG&A includes salaries, benefits, and operating expenses such as
marketing, commissions, customer support, accounting, administration, and
billing. Although SG&A increased due to strong customer growth, the average
acquisition cost per gross cellular customer decreased by 22.4% to $307 for 1996
from $395 for 1995 due primarily to customer growth and the decline in equipment
subsidies.
Depreciation and amortization expenses for 1996 increased 70.5% to $5,539,067
from $3,249,313 for 1995. The increases were primarily a result of the
continued increase in investments made by the Company in network facilities and
rental equipment placed into service during 1996.
OPERATING INCOME
Operating income for 1996 was $3,239,819 with an operating margin of 10.6%
compared to operating income of $2,490,371 with an operating margin of 12.2% in
1995. The increases in operating income were due primarily to the increases in
total revenues for the respective periods and lower acquisition costs per gross
cellular customer. The lower operating margin in 1996 was a result of higher
SG&A expenses.
OTHER INCOME (EXPENSE)
Interest expense for 1996 decreased 79.5% to $280,146 from $1,365,852 for
1995 as a result of the repayment of debt with proceeds from the Company's
initial public offering in February 1996. The Company reflected the minority
interest's portion of the net loss of Wireless Alliance as income during 1996.
NET INCOME
Income before income taxes for 1996 increased 169.4% to $3,676,934 from
$1,364,850 in 1995. The Company's effective tax rate is lower than the
statutory rate because of the utilization of alternative minimum tax and net
operating loss carryforwards. The provision for income taxes for the year ended
December 31, 1996 of $200,000 results from the Company's providing for federal
and state alternative minimum tax. Net income for 1996 increased 340.2% to
$3,476,934 from $789,847 in 1995. The increase in net income was due primarily
to an increase in total revenues and a decrease in interest expense as a result
of the repayment of debt.
15
YEARS ENDED DECEMBER 31, 1995 AND 1994
REVENUES
Service revenues for 1995 increased 46.1% to $14,289,434 from $9,783,821 for
1994, resulting primarily from a 53.8% increase over the prior year in the
number of cellular customers. The service revenues for the year ended December
31, 1995 include $492,955 for paging services.
Roamer revenues for 1995 increased 17.1% to $4,561,760 from $3,897,207 for 1994.
This increase was primarily due to a 34.9% increase in the number of roaming
minutes, resulting in part from expanded coverage provided by nine additional
cell sites and overall increased usage of the Company's cellular service by a
greater number of roamers in the Company's cellular service area. While total
roamer revenues increased, average revenue per roamer declined due in part to
reciprocal agreements with certain surrounding carriers in which the Company
discounted its intercarrier exchange rates.
Equipment sales for 1995 decreased 26.5% to $1,475,716 from $2,007,897 for 1994.
This decrease primarily reflects the Company's shift toward leasing equipment to
cellular customers. As the Company continues to lease equipment to cellular
customers, the Company expects that equipment sales will continue to decline.
OPERATING EXPENSES
Network costs for 1995 increased as a percentage of total revenues to 24.5% from
21.0% for 1994. These increases reflect additional operating costs from new
cell sites that were necessary to fulfill the Company's cellular geographic
service area requirements.
Cost of equipment sales for 1995 decreased as a percentage of total revenues
to 9.4% from 14.1% for 1994 and decreased by 13.6% to $1,913,664 from
$2,213,702. The equipment sales negative margin increased to 29.7% for 1995
from negative 10.2% for 1994 as a result of the Company's cellular equipment
leasing programs.
SG&A expenses decreased for 1995 as a percentage of total revenues to 37.9% from
41.9% for 1994, due to the rapid growth in revenues compared to the relatively
fixed nature of certain general and administrative expenses. SG&A expenses for
1995 increased 17.2% to $7,699,964 from $6,569,725 for 1994. Increases in SG&A
expenses reflect additional employees as well as incremental wage and benefit
increases that were partially offset by lower commission costs resulting from
the Company's new agent compensation program.
Depreciation and amortization expenses for 1995 increased 34.0% to $3,249,313
from $2,425,820 for 1994, resulting primarily from increased investment in the
Company's network.
OPERATING INCOME
Operating income for 1995 totaled $2,490,371 and operating margin increased to
12.2% as a result of a 29.6% increase in total revenues and a decrease in SG&A
expenses as a percentage of total revenues.
OTHER INCOME (EXPENSE)
Interest expense for 1995 increased to $1,365,852 from $1,194,884 for 1994,
reflecting higher debt levels required to finance network investments partially
offset by lower average interest rates. Interest and dividend income increased
to $277,352 for the year ended December 31, 1995 from $170,221 for the prior
year, reflecting higher interest income on higher average cash balances and
increased dividend income from restricted investments, which as of December 31,
1995 totaled $709,955 and consisted of stock in the St. Paul Bank for
Cooperatives, the Company's principal lender. This investment is required by
the terms of the Company's credit facility agreement with the lender.
16
NET INCOME
Income before income taxes for 1995 increased to $1,364,850 for the year ended
December 31, 1995 from $124,734 in 1995. The provision for taxes of $575,003
for 1995 results from the Company's providing for federal and state income taxes
at its effective income tax rate. Net income for 1995 increased to $789,847
from $610,334 for 1994.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary liquidity requirements are for operating expenses,
acquisitions, and for the expansion of network services and facilities to
support customer growth. As of December 31, 1996, the Company had 72 cell
sites and 39 paging transmitters. Net capital expenditures for the Company
for 1996 were $23,653,427. The Company will continue to construct additional
cell sites and purchase cellular equipment in order to increase capacity as
the number of customers and usage volumes increase. Specific capital
requirements of the Company are based on the property, equipment, and
network facilities requirements associated with the Company's expansion plans
and rate of customer growth.
The principal use of cash in fiscal year 1996 was for the purchase of property
and equipment for the Company's cellular network and construction of the digital
microwave network, which became operational in the second quarter of 1996, and
equipment purchased for the Company's cellular and paging equipment rental
program. The Company completed construction of its new corporate office
headquarters in Alexandria, Minnesota, in the fourth quarter of 1996. The total
cost of the new building was approximately $3.0 million and was funded through
additional borrowings under the line-of-credit agreement.
In February 1996, the Company completed an Offering of 2,869,863 shares of Class
A Common Stock and received proceeds of $26,061,913, net of offering expenses.
The Company used approximately $20,484,759 of the net proceeds to repay
substantially all outstanding debt. The Company has used the remaining net
proceeds of the Offering, together with the funds available under its
line-of-credit agreement, to fund planned capital expenditures and operating
expenses.
The Company expects to incur capital expenditures in 1997 of approximately $36
million primarily for additional cell sites, a digital switch, PCS networks, and
cellular and paging equipment for renting to customers.
The Company has funded network expansion with a combination of borrowings under
a credit facility with the St. Paul Bank for Cooperatives or from other
institutions, use of cash provided by operating activities, and net proceeds
from the sale of the Company's Common Stock.
The Company is currently negotiating with a commercial lending institution for a
new revolving credit facility. The purpose of the facility will be (i) to
acquire the Unity Cellular Systems, Inc. operations of Intercel, Inc., (ii) to
refinance outstanding amounts under the Company's existing loan facility, (iii)
for Wireless Alliance PCS investment requirements, and (iv) for other general
corporate purposes.
17
SEASONALITY
The Company experiences seasonal fluctuations in revenues and operating income
(loss). The Company's average monthly revenue per cellular customer has
historically increased during the second and third calendar quarters. This
increase reflects greater usage by the Company's cellular customers and roamers
who travel in the Company's cellular service area for weekend and vacation
recreation or work in seasonal industries, such as agriculture and construction.
Because the Company's cellular service area includes many seasonal recreational
areas, the Company expects that roaming revenues will continue to fluctuate
seasonally more than service revenues.
Certain unaudited quarterly results for 1996 and 1995 are set forth below (in
thousands, except average monthly revenue per cellular customer):
1996 QUARTER ENDED 1995 QUARTER ENDED
------------------------------------ ------------------------------------
Dec 31 Sep 30 June 30 Mar 31 Dec 31 Sep 30 June 30 Mar 31
------ ------ ------- ------ ------ ------ ------- ------
Total revenues . . . . . . . . . $8,287 $9,046 $7,446 $5,682 $5,466 $6,030 $4,940 $3,891
Operating income (loss). . . . . . 242 2,354 896 (252) (102) 1,533 770 289
EBITDA(1). . . . . . . . . . . . . 2,001 3,854 2,206 718 774 2398 1532 1035
Average monthly revenue
per cellular customer. . . . $62 $77 $68 $59 $66 $86 $73 $63
- ---------------------
(1) See footnote (1) on page 12 under "Item 6. Selected Financial Data" for a
description and discussion of such measurement.
FORWARD-LOOKING INFORMATION
Forward-looking statements herein are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. There are
certain important factors that could cause results to differ materially from
those anticipated by some of the statements made herein. Investors are
cautioned that all forward-looking statements involve risks and uncertainties.
Such factors include but are not limited to: economic conditions, customer
growth rates and the rate at which customer acquisition costs are recovered,
higher than planned operating expenses and capital expenditures, competition
from other cellular operators and the financial uncertainties associated with
managing the Company's market expansion through the Wireless Alliance joint
venture and the Unity acquisition.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Consolidated Financial Statements and Notes thereto commencing on Page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Information required by this item is set forth in the Proxy Statement under
the heading "Ratification of Appointment of Independent Auditors" and is
incorporated herein by reference.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding directors of the Company is set forth in the Proxy
Statement under the heading "Election of Directors" and is incorporated herein
by reference. The information regarding executive officers of the Company is
contained in Part I of this Form 10-K.
18
ITEM 11. EXECUTIVE COMPENSATION
Information required by this item is set forth in the Proxy Statement under the
headings "Election of Directors - Compensation Committee Interlocks and Insider
Participation in Compensation Decisions" and "Executive Compensation" and is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this item is set forth in the Proxy Statement under the
heading "Common Stock Ownership" and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item is set forth in the Proxy Statement under the
heading "Certain Transactions" and is incorporated herein by reference.
19
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
Page Number
in this
(a) (1) CONSOLIDATED FINANCIAL STATEMENTS Form 10-K
--------------------------------- ---------
Report of Independent Public Accountants F-1
Consolidated Balance Sheets as of
December 31, 1996 and 1995 F-2
Consolidated Statements of Operations for
the Years Ended December 31, 1996, 1995 and 1994 F-4
Consolidated Statements of Shareholders' Equity
for the Years Ended December 31, 1996, 1995 and 1994 F-5
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1996, 1995 and 1994 F-6
Notes to Consolidated Financial Statements F-7
(2) CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
-----------------------------------------
The following financial statement schedule is filed
as part of this Form 10-K:
Report of Independent Public Accountants S-1
Schedule II - Valuation and Qualifying Accounts S-2
All schedules not included are omitted either because
they are not applicable or because the information
required therein is included in Notes to Consolidated
Financial Statements.
(3) EXHIBITS
--------
See Exhibit Index on page 39.
(b) REPORTS ON FORM 8-K
None
(c) EXHIBITS
See Exhibit Index on page 39.
(d) OTHER FINANCIAL STATEMENTS
Not applicable.
20
SIGNATURES
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
/s/ Richard P. Ekstrand
-------------------------------------
RICHARD P. EKSTRAND
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Date: March 20, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed by the following persons in the capacities and on the date
indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ Richard P. Ekstrand President and
- -------------------------- Chief Executive Officer March 20, 1997
Richard P. Ekstrand (Principal Executive Officer)
and Director
/s/ Wesley E. Schultz Vice President of Finance and
- -------------------------- Chief Financial Officer March 20, 1997
Wesley E. Schultz (Principal Financial
and Accounting Officer)
/s/ George W. Wikstrom Jr. Director March 20, 1997
- --------------------------
George W. Wikstrom Jr.
/s/ Don C. Swenson Director March 20, 1997
- --------------------------
Don C. Swenson
/s/ Nicholas R. Prom Director March 20, 1997
- --------------------------
Nicholas R. Prom
/s/ Robert K. Eddy Director March 20, 1997
- --------------------------
Robert K. Eddy
/s/ Jeffrey S. Gilbert Director March 20, 1997
- --------------------------
Jeffrey S. Gilbert
/s/ Marvin C. Nicolai Director March 20, 1997
- --------------------------
Marvin C. Nicolai
/s/ George M. Revering Director March 20, 1997
- --------------------------
George M. Revering
21
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Rural Cellular Corporation:
We have audited the accompanying consolidated balance sheets of Rural Cellular
Corporation (a Minnesota corporation) and subsidiaries as of December 31, 1996
and 1995, and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the three years in the period ended December
31, 1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Rural Cellular Corporation and
subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
February 11, 1997
F-1
RURAL CELLULAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
DECEMBER 31,
--------------------------
1996 1995
----------- -----------
CURRENT ASSETS:
Cash . . . . . . . . . . . . . . . . . . . $ 237,499 $ 125,137
Accounts receivable, less allowance
of $303,000 and $163,000 . . . . . . . 6,323,637 3,019,720
Inventories. . . . . . . . . . . . . . . 1,309,862 628,016
Other current assets . . . . . . . . . . . 984,097 95,693
----------- -----------
Total current assets . . . . . . . . . 8,855,095 3,868,566
----------- -----------
PROPERTY AND EQUIPMENT:
Land . . . . . . . . . . . . . . . . . . . 1,233,007 1,075,202
Buildings and towers . . . . . . . . . . 13,680,928 8,721,385
Equipment. . . . . . . . . . . . . . . . . 35,650,325 16,066,315
Furniture and fixtures . . . . . . . . . . 3,626,247 2,193,718
Assets under construction. . . . . . . . 1,241,124 3,721,584
Less - accumulated depreciation. . . . . . (13,496,134) (8,261,125)
----------- -----------
Net property and equipment . . . . . . 41,935,497 23,517,079
----------- -----------
INVESTMENTS AND OTHER ASSETS:
Licenses, less accumulated
amortization of $18,000 and $9,000 . . . 6,710,419 266,111
Investments in unconsolidated affiliates . 1,442,569 1,165,891
Restricted investments . . . . . . . . . 884,844 709,955
Other assets, less accumulated
amortization of $35,000 and $783,000 . . 761,935 610,879
----------- -----------
Total investments and other assets . . . 9,799,767 2,752,836
----------- -----------
$60,590,359 $30,138,481
----------- -----------
----------- -----------
F-2
RURAL CELLULAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
DECEMBER 31,
--------------------------
1996 1995
----------- -----------
CURRENT LIABILITIES:
Current maturities of long-term debt . . . $ 8,447,920 $ 2,725,496
Accounts payable . . . . . . . . . . . . 8,913,734 4,041,906
Advance billings and customer deposits . . 1,399,965 964,463
Other accrued expenses . . . . . . . . . 665,919 551,902
----------- -----------
Total current liabilities. . . . . . . 19,427,538 8,283,767
LONG-TERM DEBT . . . . . . . . . . . . . . 43,886 16,397,209
----------- -----------
Total liabilities. . . . . . . . . . . 19,471,424 24,680,976
----------- -----------
MINORITY INTEREST. . . . . . . . . . . . . 6,122,583 -
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 7)
SHAREHOLDERS' EQUITY:
Undesignated shares, $.01 par value;
10,000,000 shares authorized; no shares
issued and outstanding . . . . . . . . . - -
Class A common stock; $.01 par value;
15,000,000 shares authorized; 7,502,552
and 4,302,671 shares issues and outstanding. 75,025 43,027
Class B common stock; $.01 par value;
5,000,000 shares authorized; 1,350,744
and 1,680,762 shares issued and outstanding 13,508 16,808
Additional paid-in capital. . . . . . . . . 34,445,849 8,412,634
Retained earnings (deficit) . . . . . . . . 461,970 (3,014,964)
----------- -----------
Total shareholders' equity . . . . . . . 34,996,352 5,457,505
----------- -----------
$60,590,359 $30,138,481
----------- -----------
----------- -----------
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
RURAL CELLULAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
---------------------------------------
1996 1995 1994
----------- ----------- -----------
REVENUES:
Service. . . . . . . . . . . . . . $23,119,691 $14,289,434 $ 9,783,821
Roamer . . . . . . . . . . . . . . 6,413,524 4,561,760 3,897,207
Equipment. . . . . . . . . . . . . 927,128 1,475,716 2,007,897
----------- ----------- -----------
Total revenues . . . . . . . . . 30,460,343 20,326,910 15,688,925
----------- ----------- -----------
OPERATING EXPENSES:
Network costs. . . . . . . . . . 6,731,130 4,973,598 3,293,581
Cost of equipment sales. . . . . 1,374,980 1,913,664 2,213,702
Selling, general and
administrative . . . . . . . . . 13,575,347 7,699,964 6,569,725
Depreciation and amortization. . . 5,539,067 3,249,313 2,425,820
----------- ----------- -----------
Total operating expenses . . . 27,220,524 17,836,539 14,502,828
----------- ----------- -----------
OPERATING INCOME . . . . . . . . . 3,239,819 2,490,371 1,186,097
----------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest expense . . . . . . . . (280,146) (1,365,852) (1,194,884)
Interest and dividend income . . . 334,850 277,352 170,221
Equity in earnings (losses) of
unconsolidated affiliates. . . . 51,519 (37,021) (36,700)
Minority interest. . . . . . . . . 330,892 - -
----------- ----------- -----------
Other income (expense), net. . . 437,115 (1,125,521) (1,061,363)
----------- ----------- -----------
INCOME BEFORE INCOME TAX . . . . . . 3,676,934 1,364,850 124,734
INCOME TAX PROVISION (BENEFIT) . . . 200,000 575,003 (485,600)
----------- ----------- -----------
NET INCOME . . . . . . . . . . . . . $ 3,476,934 $ 789,847 $ 610,334
----------- ----------- -----------
----------- ----------- -----------
NET INCOME PER COMMON SHARE . . . . $ 0.41 $ 0.13 $ 0.11
----------- ----------- -----------
----------- ----------- -----------
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING. . . . . . . . . . 8,508,908 5,983,420 5,522,099
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
RURAL CELLULAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
CLASS A CLASS B
COMMON STOCK COMMON STOCK ADDITIONAL RETAINED TOTAL
---------------------- ---------------------- PAID-IN EARNINGS SHAREHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) EQUITY
---------- -------- ---------- -------- ------------ ----------- -----------
BALANCE, December 31, 1993 . . . . . . . 3,796,989 $37,970 1,464,036 $14,640 $ 5,122,846 $(4,415,145) $ 760,311
Issuance of common stock, net of
offering expenses. . . . . . . . . . 352,800 3,528 151,200 1,512 2,953,680 - 2,958,720
Issuance of common stock in. . . . . .
connection with an acquisition . . . 152,882 1,529 65,526 656 336,108 - 338,293
Net income . . . . . . . . . . . . . . - - - - - 610,334 610,334
---------- -------- ---------- -------- ------------ ----------- -----------
BALANCE, December 31, 1994 . . . . . . . 4,302,671 43,027 1,680,762 16,808 8,412,634 (3,804,811) 4,667,658
Net income . . . . . . . . . . . . . . - - - - - 789,847 789,847
---------- -------- ---------- -------- ------------ ----------- -----------
BALANCE, December 31, 1995 . . . . . . . 4,302,671 43,027 1,680,762 16,808 8,412,634 (3,014,964) 5,457,505
Issuance of common stock, net of
offering expenses. . . . . . . . . . 2,869,863 28,698 - - 26,033,215 - 26,061,913
Conversion of Class B common stock
to Class A common stock. . . . . . . 330,018 3,300 (330,018) (3,300) - - -
Net income . . . . . . . . . . . . . . - - - - - 3,476,934 3,476,934
---------- -------- ---------- -------- ------------ ----------- -----------
BALANCE, December 31, 1996 . . . . . . . 7,502,552 $ 75,025 1,350,744 $ 13,508 $ 34,445,849 $ 461,970 $34,996,352
---------- -------- ---------- -------- ------------ ----------- -----------
---------- -------- ---------- -------- ------------ ----------- -----------
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
RURAL CELLULAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
---------------------------------------------
1996 1995 1994
----------- ----------- -----------
OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . . $ 3,476,934 $ 789,847 $ 610,334
Adjustments to reconcile to net cash provided by
operating activities:
Depreciation and amortization. . . . . . . . . . 5,539,067 3,249,313 2,425,820
Deferred income taxes. . . . . . . . . . . . . . . - 500,000 (500,000)
Other. . . . . . . . . . . . . . . . . . . . . . . (184,036) (186,332) -
Equity in earnings (losses) of unconsolidated
affiliates . . . . . . . . . . . . . . . . . . (51,519) 37,021 36,700
Change in minority interest. . . . . . . . . . . (330,892) - -
Change in other operating elements:
Accounts receivable. . . . . . . . . . . . . . (3,303,917) (640,326) (1,106,603)
Inventories. . . . . . . . . . . . . . . . . . . (681,846) 294,973 (459,070)
Other current assets . . . . . . . . . . . . . (888,404) (7,283) (54,193)
Accounts payable . . . . . . . . . . . . . . . 4,871,828 3,059,394 (661,143)
Advance billings and customer deposits . . . . . 435,502 145,204 329,207
Other accrued expenses . . . . . . . . . . . . 114,017 (300,600) 565,136
----------- ----------- -----------
Net cash provided by operating activities. . . 8,996,734 6,941,211 1,186,188
----------- ----------- -----------
INVESTING ACTIVITIES:
Purchases of property and equipment, net . . . . . (24,213,803) (9,312,820) (6,932,680)
Contributions to unconsolidated affiliates . . . . (225,156) (368,964) (248,066)
Purchases of restricted investments. . . . . . . . . - (101,178) (245,557)
Other, net . . . . . . . . . . . . . . . . . . . . (354,580) (121,777) (32,139)
----------- ----------- -----------
Net cash used in investing activities. . . . . (24,793,539) (9,904,739) (7,458,442)
----------- ----------- -----------
FINANCING ACTIVITIES:
Proceeds from issuance of common stock,
net of offering expenses . . . . . . . . . . . . 26,540,066 (478,153) 2,958,720
Proceeds from issuance of long-term debt . . . . . 14,740,927 4,251,648 6,153,050
Repayment of long-term debt. . . . . . . . . . . . (25,371,826) (920,952) (2,608,290)
----------- ----------- -----------
Net cash provided by financing activities. . . 15,909,167 2,852,543 6,503,480
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH. . . . . . . . . . . 112,362 (110,985) 231,226
CASH, at beginning of year . . . . . . . . . . . . . 125,137 236,122 4,896
----------- ----------- -----------
CASH, at end of year . . . . . . . . . . . . . . . . . $ 237,499 $ 125,137 $ 236,122
----------- ----------- -----------
----------- ----------- -----------
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
RURAL CELLULAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
1. ORGANIZATION AND NATURE OF BUSINESS:
Rural Cellular Corporation and its subsidiaries (the Company or RCC) are
principally engaged in providing cellular communication service in five
contiguous Rural Service Areas (RSAs) comprising most of the northern half of
Minnesota and in providing paging service in northern Minnesota and eastern
North Dakota (the Company Service Area). The Company commenced operations
effective April 1, 1991, following the merger into the Company of five
partnerships, each holding a cellular license for a separate RSA. The Company
operates its cellular and paging systems under licenses granted by the FCC, and
the Company's operations are subject to the applicable rules and regulations of
the FCC.
2. ACQUISITIONS:
WIRELESS ALLIANCE
In August 1996, the Company entered into Wireless Alliance, LLC (Wireless
Alliance), a joint venture with APT Minneapolis, Inc., an affiliate of Aerial
Communications, Inc., to construct and operate Personal Communications
Services (PCS) networks in areas adjacent to the Company's service areas
including Duluth, Minnesota and Superior, Wisconsin and Fargo and Grand
Forks, North Dakota including the Red River Valley and 80 miles of Interstate
Highway 29 in North Dakota. Wireless Alliance is owned 51 % by the Company
and 49 % by APT Minneapolis, Inc.
UNITY CELLULAR SYSTEMS, INC.
In December 1996, the Company entered into a definitive agreement to purchase
the net assets of Unity Cellular Systems, Inc., a wholly-owned subsidiary of
InterCel, Inc. for approximately $77,350,000. Unity Cellular Systems, Inc.
provides cellular service in the Bangor, Maine, MSA and Maine RSAs 2 and 3 to
approximately 25,000 customers as of December 31, 1996, under the trade name
Unicel. The acquisition, which will be accounted for under the purchase
method of accounting, is expected to be completed in the second quarter of
1997, subject to receiving regulatory and other approvals. The Company is
currently negotiating with a commercial lending institution for a revolving
credit facility to fund the acquisition.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of RCC and its
wholly-owned subsidiaries, RCC Paging, Inc., RCC Wireless Company, RCC Network,
Inc. and its majority owned subsidiary Wireless Alliance. All significant
intercompany balances and transactions have been eliminated in the consolidated
financial statements. Investments in unconsolidated affiliates represent
investments in companies in which RCC has a 20% to 50% ownership interest and
which are accounted for under the equity method.
REVENUE RECOGNITION
The Company earns revenue by providing cellular and paging service to both
customers of the Company and customers of other cellular carriers traveling
(roaming) in the Company's service area and from sales and rentals of cellular
and paging equipment and accessories. Service revenue consists of the base
monthly service fee and airtime revenue. Base monthly service fees are billed
one month in advance and are recognized in the month earned. Airtime revenue is
recognized when service is provided. Roamer revenue consists of the fee charged
to other cellular carriers' customers for roaming in the Company's Service Area
as well as related airtime revenue for use of RCC's cellular network. Roamer
revenue is recognized when the service is rendered. The Company recognizes other
service revenues from equipment installations, equipment leases and connection
fees when earned.
F-7
RURAL CELLULAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
(CONTINUED)
INCOME TAXES
The Company follows the liability method of accounting for income taxes, and
deferred income taxes are based on the estimated future tax effects of
differences between the financial statement and tax bases of assets and
liabilities based on enacted tax laws.
NET INCOME PER COMMON SHARE
Net income per common share for all periods presented was computed using the
weighted average number of outstanding shares of Class A and Class B common
stock and common equivalent shares, if dilutive. Fully diluted earnings per
share did not differ significantly from primary earnings per share for any year
presented.
INVENTORIES
Inventories consist of cellular telephone equipment, pagers and accessories and
are stated at the lower of cost, determined using the specific identification
method, or market.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Additions, improvements or major
renewals are capitalized, while expenditures which do not enhance or extend the
asset's useful life are charged to operating expense as incurred. When an asset
is retired, its cost less any proceeds from the sale is charged to accumulated
depreciation. Depreciation is computed using the straight-line, composite
method based on the estimated useful life of the asset as follows:
YEARS
-----
Buildings and towers.............. 15
Equipment......................... 3-10
Furniture and fixtures............ 3-10
The Company's network construction expenditures are recorded as assets under
construction until the system or assets are placed in service, at which time the
assets are transferred to the appropriate property and equipment category. As a
component of assets under construction, the Company capitalizes salaries of the
Company's construction employees during the construction period.
INVESTMENTS
Investments in unconsolidated affiliates are accounted for using the equity
method and represent the Company's ownership interests in Switch 2000, Inc. and
Switch 2000 LLC (Switch 2000), entities which provide cellular switching and
interconnection services to the Company, and Cellular 2000, Inc., an entity
organized to own the trade name and related trademark for Cellular 2000.
Restricted investments represent the Company's investment in stock of the St.
Paul Bank for Cooperatives and are stated at cost, which approximates fair
value. The restricted investments were purchased pursuant to the terms of a
loan agreement and are restricted as to withdrawal.
LICENSES
Licenses consist of the cost of acquiring paging licenses and the value
assigned to the Wireless Alliance PCS license. Paging licenses are being
amortized on a straight-line basis over 40 years. The Wireless Alliance PCS
license will be amortized over 40 years when the PCS network becomes
operational in 1997.
F-8
RURAL CELLULAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
(CONTINUED)
OTHER ASSETS
Other assets primarily consist of costs related to the Unity Cellular Systems,
Inc. acquisition and organizational costs. Organizational costs are being
amortized on a straight line basis over five to seven years.
BUSINESS AND CREDIT CONCENTRATIONS
The Company's customers are geographically located in the northern half of
Minnesota and eastern North Dakota and are concentrated in cellular
communications. No single customer accounted for a significant amount of
revenues or accounts receivable.
LONG-LIVED ASSETS
The Company periodically evaluates the value of all long-lived assets to
determine if events have occurred that indicate the remaining estimated useful
lives of these assets may warrant revision or whether the remaining balance may
not be recoverable. At each balance sheet date, the Company uses an estimate of
future net cash flows over the remaining useful lives of the assets to measure
recoverability.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company has estimated fair values using available market information and
appropriate valuation methods. Long-term debt fair values were determined based
on borrowing rates currently available to the Company and approximated carrying
value at December 31, 1996 and 1995.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reported periods.
Ultimate results could differ from those estimates.
RECLASSIFICATIONS
Certain 1995 and 1994 amounts in the accompanying consolidated financial
statements have been reclassified to conform to the 1996 presentation. These
reclassifications had no effect on the consolidated net income or total
shareholders' equity as previously reported.
F-9
RURAL CELLULAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
(CONTINUED)
4. LONG-TERM DEBT:
Long-term debt is as follows:
DECEMBER 31,
-----------------------
1996 1995
---------- -----------
St. Paul Bank for Cooperatives:
Seasonal loan, payable on
June 30, 1997, interest at a
variable rate (7.1% at December 31, 1996).... $8,405,000 $ -
Term loan, repaid in 1996...................... - 16,769,260
Subsidiary term loan, repaid in 1996........... - 1,082,305
Seasonal loan, repaid in 1996.................. - 500,000
Notes payable, unsecured, interest at 5% to 8%,
payable in installments through 1998........... 86,806 130,271
Capital lease obligations, repaid in 1996........ - 640,869
---------- -----------
Total........................................ 8,491,806 19,122,705
Less-current maturities.......................... 8,447,920 2,725,496
---------- -----------
$ 43,886 $16,397,209
---------- -----------
---------- -----------
The loan from the St. Paul Bank for Cooperatives was issued pursuant to a
comprehensive loan agreement (the Agreement) and is collateralized by
substantially all assets of the Company. Under the Agreement, the Company may
borrow up to a maximum of $10,000,000 as of December 31, 1996. Subsequent to
year-end, the maximum amount the Company may borrow was increased to
$15,000,000.
The Agreement requires the Company to maintain certain levels of net worth,
quarterly cash flow and other key financial ratios. In addition, the Company
may not pay dividends or make distributions to its shareholders unless the
Company is in compliance with all of the covenants under the Agreement before
and after such payment or distribution. As of December 31, 1996, the Company
was in compliance with all covenants.
5. SHAREHOLDERS' EQUITY:
AUTHORIZED SHARES
The Company's Restated Articles of Incorporation authorize the issuance of
30,000,000 shares of $.01 par value stock. Of such authorized shares,
10,000,000 have not been designated as to class as of December 31, 1996.
INITIAL PUBLIC OFFERING
During 1996, the Company completed an initial public offering (the Offering)
of 3,450,000 shares of Class A common stock, of which 2,869,863 shares were
sold by the Company and 580,137 previously issued shares were sold by certain
shareholders. The net proceeds to the Company of approximately $26.0 million
were used to repay long-term debt and to provide capital for future
expansion. In connection with the Offering, the exercise price of 150,600
employee stock options was fixed at $10.00 per share, the price at which the
stock was sold to the public in the Offering.
COMMON STOCK RIGHTS
Class A common shareholders are entitled to one vote for each share owned while
Class B common shareholders are entitled to ten votes for each share owned.
Each share of Class B common stock may at any time be converted into one share
of Class A common stock at the option of the holder. Additionally, all issued
Class B common shares will
F-10
RURAL CELLULAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
(CONTINUED)
be converted into an equivalent number of Class A common shares upon the
affirmative vote of not less than 66-2/3 of the then issued Class B common
shares. Furthermore, Class B common shares are automatically converted to an
equal number of Class A common shares if they are transferred to anyone who is
not an affiliate of the transferring shareholder of the Company.
STOCK COMPENSATION PLANS
The Company implemented stock option plans for employees and nonemployee
directors during 1995. The stock compensation plan (the Plan) for employees
authorizes the issuance of up to 890,000 shares of Class A common stock in the
form of stock options, stock appreciation rights or other stock-based awards.
The Plan provides that the exercise price of any option shall not be less than
85% of the fair market value of the Class A common stock as of the date of the
grant (100% in the case of incentive stock options). Options and other awards
granted under the Plan shall vest and become exercisable as determined by the
Board of Directors or a stock option committee.
The stock option plan for nonemployee directors authorizes the issuance of up
to 210,000 shares of Class A common stock. The plan provides that the option
price shall not be less than the fair market value of the Class A common stock
outstanding on the date of grant. The options vest and become exercisable over
one to three years and expire between four and six years from the date of grant.
The Company accounts for stock options under Accounting Principles Board
Opinion No. 25, under which no compensation cost has been recognized. Had
compensation cost for the Company's plans been determined consistent with
Statement of Financial Accounting Standards No. 123, "Accounting for Stock
Based Compensation," the Company's results of operations and net income per
share would have been reduced to the pro forma amounts indicated below for
1996:
AS REPORTED PRO FORMA
------------- ------------
Net income $ 3,476,934 $ 3,215,468
Net income per common share $ .41 $ .38
The fair value of each option grant is estimated on the date of the grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1996: expected volatility of 48.5%; risk-free
interest rates of 6.2%; and no expected dividend yield.
F-11
RURAL CELLULAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
(CONTINUED)
Options issued during 1996, which remain outstanding at December 31, 1996, have
exercise prices between $9.13 and $12.75 and a weighted average remaining
contractual life of 6.7 years. Information related to stock options is as
follows for 1996:
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
-------- -------
Outstanding, at beginning of year - $ -
Granted 549,700 10.32
Canceled (90,000) 12.00
-------- -------
Outstanding, at end of year 459,700 $ 9.99
-------- -------
-------- -------
Exercisable, at end of year 55,200 $ 9.92
-------- -------
-------- -------
Weighted average fair value of
options granted during the year $ 5.60
-------
-------
6. INCOME TAXES:
The components of the provision (benefit) for income taxes are as follows:
YEARS ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
--------- --------- ----------
Current:
Federal................. $106,000 $ 40,003 $ 85,000
State................... 94,000 35,000 16,000
--------- --------- ----------
200,000 75,003 101,000
Deferred.................... - 500,000 (586,600)
--------- --------- ----------
$200,000 $575,003 $(485,600)
--------- --------- ----------
--------- --------- ----------
A reconciliation between the federal income tax rate and the effective income
tax rate is as follows:
YEARS ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
--------- --------- ----------
Federal income tax rate. . . . 34.0% 34.0% 34.0%
Tax benefit of loss
carryforwards . . . . . . . (29.8) - (485.0)
Penalties and fines . . . . . . - (2.1) 32.3
State income taxes, net
of federal tax benefit. . . . 1.2 6.5 (4.7)
Other, net. . . . . . . . . . . - 3.7 6.7
--------- --------- ----------
5.4% 42.1% (416.7)%
--------- --------- ----------
--------- --------- ----------
F-12
RURAL CELLULAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
(CONTINUED)
The income tax effect of the items which create deferred income tax assets and
liabilities are as follows:
DECEMBER 31,
-----------------------
1996 1995
----------- ----------
Deferred income tax assets:
Operating loss carryforwards. . . . . $ 1,795,000 $3,099,000
Temporary differences:
Allowance for doubtful accounts.. 123,000 158,000
Other . . . . . . . . . . . . . . . 202,000 143,000
Valuation allowance . . . . . . . . . - (1,723,000)
----------- ----------
Total deferred income tax assets. . 2,120,000 1,677,000
Deferred income tax liabilities:
Depreciation. . . . . . . . . . . . (1,948,000) (1,496,000)
Other . . . . . . . . . . . . . . . . (172,000) (181,000)
----------- ----------
Net deferred income tax asset . . . $ - $ -
----------- ----------
----------- ----------
A valuation allowance was established for certain net operating loss
carryforwards due to the uncertainty of the realization of future tax benefits.
The valuation allowance was eliminated in 1996 due to the realization of net
operating loss carryforwards.
As of December 31, 1996, the Company had tax operating loss carryforwards of
approximately $4,435,000 available to offset future income tax liabilities.
These carryforwards expire in the years 2006 through 2010. The Tax Reform Act
of 1986 contains provisions which may limit the availability and timing of usage
of net operating loss carryforwards in the event of certain changes in the
ownership of the Company's common stock.
7. COMMITMENTS AND CONTINGENCIES:
CAPITAL EXPENDITURE COMMITMENTS
Excluding capital expenditure commitments for Unity Cellular Systems, Inc.
and Wireless Alliance, the Company had capital expenditure purchase
commitments outstanding of approximately $14,000,000 as of December 31, 1996.
EMPLOYMENT AGREEMENTS
The Company has employment agreements with executive officers and certain
other management personnel with terms ranging from two to three years. These
agreements provide for payment of amounts up to three times their annual
compensation if there is a termination of their employment as a result of
change in control of the Company, as defined in the agreement. The maximum
contingent liability under these agreements was $1,300,000 at December 31,
1996.
LEGAL AND REGULATORY MATTERS
The Company is subject to legal and regulatory matters arising in the normal
course of business. Management does not believe that any of these matters will
have a significant effect on the Company and, accordingly, no provision for any
liability that may result from these matters has been made.
F-13
RURAL CELLULAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
(CONTINUED)
LEASES
The Company leases office space, vehicles and real estate under noncancelable
operating leases. Future minimum payments under these leases as of December 31,
1996 are as follows:
YEAR
----
1997....................... $243,352
1998....................... 187,108
1999....................... 144,790
2000....................... 117,180
2001....................... 67,759
Thereafter................. 7,200
---------
---------
Total................. $767,389
---------
---------
Under the terms of the lease agreements, the Company also is responsible for
certain operating expenses and taxes. Total rent expense of $379,000, $347,000,
and $287,000 was charged to operations for the years ended December 31, 1996,
1995 and 1994.
8. INVESTMENTS IN UNCONSOLIDATED AFFILIATES:
The Company holds a 40.77% ownership interest in Switch 2000 and a 41.67%
ownership interest in Cellular 2000, Inc., an entity with no operations to date.
As of December 31, 1996, the investment in unconsolidated affiliates represents
$1,697,000 of stock and capital contributions less $254,000 of cumulative
losses. Combined condensed results of operations and net assets of these
entities are as follows:
YEARS ENDED DECEMBER 31,
-----------------------------------------
1996 1995 1994
----------- ----------- -----------
Results of Operations:
Revenues..................... $ 9,201,380 $ 7,074,877 $ 4,904,668
Operating expenses........... (9,044,303) (7,035,889) (4,865,822)
Other income (expense), net.. (11,811) (129,791) (128,863)
----------- ----------- -----------
Net income (loss).......... $ 145,266 $ (90,803) $ (90,017)
----------- ----------- -----------
----------- ----------- -----------
Company's share of net
income (loss)................. $ 51,519 $ (37,021) $ (36,700)
----------- ----------- -----------
----------- ----------- -----------
AS OF DECEMBER 31,
--------------------------
1996 1995
----------- -----------
Net assets:
Current assets.......... $ 455,292 $ 1,292,484
Noncurrent assets....... 4,064,677 3,412,257
Current liabilities..... (743,309) (1,385,347)
Noncurrent liabilities.. (228,000) (456,000)
----------- -----------
Equity............. $ 3,548,660 $ 2,863,394
----------- -----------
----------- -----------
9. RELATED-PARTY TRANSACTIONS:
AFFILIATE AGREEMENT
F-14
RURAL CELLULAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
(CONTINUED)
The Company pays Switch 2000 for cellular switching and interconnection
services. Amounts billed by Switch 2000 to the Company totaled $4,824,000,
$3,753,000 and $2,613,000 for the years ended December 31, 1996, 1995 and 1994.
ROAMING AGREEMENT
The Company has a roaming agreement with a partnership which is affiliated with
a beneficial owner of greater than 10% of the Company's common stock. The rates
of reimbursement are negotiated by the parties to the agreement and reflect
rates charged by other carriers. Roaming charges are passed through to the
customer. Net payments by the Company to the partnership were $331,000,
$306,000 and $254,000 for the years ended December 31, 1996, 1995 and 1994.
10. DEFINED CONTRIBUTION PLAN:
The Company has a defined contribution savings and profit-sharing plan for
employees who meet certain age and service requirements. Under the savings
portion of the plan, employees may elect to contribute a percentage of their
salaries to the plan with the Company contributing a matching percentage of the
employees' contributions. Under the profit-sharing portion of the plan, the
Company contributes a percentage of employees' salaries. Contributions charged
to operations for the years ended December 31, 1996, 1995 and 1994 were $74,000,
$66,000 and $43,000. The percentages the Company matches under the savings
portion of the plan and contributes under the profit-sharing portion of the plan
are determined annually by the Company's board of directors.
11. SUPPLEMENTAL CASH FLOW INFORMATION:
YEARS ENDED DECEMBER 31,
-------------------------------------------
1996 1995 1994
----------- ----------- -----------
Cash paid for:
Interest..................... $ 563,948 $1,400,722 $1,012,597
Income taxes................. 805,000 98,136 28,400
Non-cash investing and
financing activity:
Contribution by Aerial
Communications, Inc. of
PCS license........... 6,453,475 - -
F-15
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Rural Cellular Corporation:
We have audited, in accordance with generally accepted auditing standards,
the consolidated financial statements included in Rural Cellular Corporation's
Form 10-K and have issued our report thereon dated February 11, 1997. Our audit
was made for the purpose of forming an opinion on those statements taken as a
whole. The schedule listed in the index of consolidated financial statements is
the responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commissions rules and is not part of
the basic consolidated financial statements. This schedule has been subjected
to the auditing procedures applied in the audits of the basic consolidated
financial statements and, in our opinion, fairly states in all material respects
the financial data required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
February 11, 1997
S-1
RURAL CELLULAR CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS:
YEARS ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
---------- ---------- ----------
Balance, at beginning of year........... $162,845 $143,806 $126,527
Additions charged to income........... 597,291 246,156 184,576
Write-offs, net of recoveries......... (457,403) (227,117) (167,297)
---------- ---------- ----------
Balance, at end of year................. $302,733 $162,845 $143,806
---------- ---------- ----------
---------- ---------- ----------
S-2
EXHIBIT INDEX
NUMBER DESCRIPTION PAGE
2 Asset Purchase Agreement dated December 23, 1996 by and [i]
among the Registrant, Unity Cellular Systems, Inc., InterCel
Licenses, Inc. and InterCel, Inc.
3.1 Articles of Incorporation, as amended and restated to date [ii]
3.2 Bylaws, as amended and restated to date [ii]
10.1 Loan Agreement with St. Paul bank for Cooperatives dated
April 25, 1996 [iii]
10.2 Cellular Switch User Agreement, as amended [ii]
10.3 Switch 2000 LLC Cellular Equipment User Agreement [ii]
10.4 Purchase Agreement by and between RCC Network, Inc. and
Harris Corporation, Farinon Division, dated May 12, 1995 [ii]
10.5 Cell Site Purchase Agreement between Northern Telecom, Inc.
and Registrant dated November 24, 1993, as amended on
October 25, 1995 [ii]
10.6(a) Trademark and Trade Name License Agreements between
Cellular 2000, Inc. and: [ii]
(i) North Woods Cellular Partnership
(ii) Northern Lights Cellular Partnership
(iii) Great River Cellular Partnership
(iv) Cellular Five Partnership
(v) Heartland Cellular Partnership
10.6(b) Assignment and Assumption Agreements by and between the
Registrant and each partnership [ii]
10.7 Roaming Agreement with CMS of St. Cloud [ii]
*10.8 1995 Stock Compensation Plan as amended to date
*10.9 Stock Option Plan for Nonemployee Directors, as amended to date
*10.10(a) Employment Agreement with Richard P. Ekstrand effective
December 1, 1995 [ii]
*10.10(b) Amendment to Employment Agreement with Mr. Ekstrand
effective December 18, 1996
*10.11(a) Employment Agreement with Scott G. Donlea effective
December 1, 1995
*10.11(b) Amendment to Employment Agreement with Mr. Donlea
effective December 18, 1996
11 Statement Re Computation of Per Share Earnings
16 Letter from former accountants [ii]
21 Subsidiaries of Registrant
23 Consent of Independent Public Accountants
*Indicates management contract or compensatory plan or agreement required to be
filed as a exhibit to this Form.
[i] Filed as exhibit to Report on Form 8-K dated December 23, 1996 and
incorporated herein by reference.
[ii] Filed as exhibit to Registration Statement on Form S-1 (Sec. No. 33-80189)
filed December 8, 1995 and incorporated herein by reference.
[iii] Filed as exhibit to Report on Form 10-Q for the quarter ended June 30,
1996 and incorporated herein by reference.
39