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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, 1997.
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the transition period from ____________________ TO
____________________.
COMMISSION FILE NUMBER 0-27416
RURAL CELLULAR CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MINNESOTA 41-1693295
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION) 3905 DAKOTA STREET
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
23, 1998 (only stock held by directors, officers and their affiliates and
holders of more than 5% of Class A and B stock are excluded): $82,716,560
Number of shares of common stock outstanding as of the close of business on
March 23, 1998:
Class A 7,612,504
Class B 1,260,668
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Company's definitive Proxy Statement relating to the 1998
Annual Meeting of Shareholders ("Proxy Statement") are incorporated by
reference into Part III of this report.
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TABLE OF CONTENTS
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PART I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ITEM 1. BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ITEM 2. PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
ITEM 3. LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . . . . . . . . . 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS. . . . . . . . . . 14
PART II. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS. . . . . . . . . . . . . . . . . . . . . . . . . . 16
ITEM 6. SELECTED FINANCIAL DATA. . . . . . . . . . . . . . . . . . . . . . . . 17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS. . . . . . . . . . . . . . . . . . 19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. . . . . . . . . . . . . . 26
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE. . . . . . . . . . . . . . . . . . 26
PART III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. . . . . . . . . . 27
ITEM 11. EXECUTIVE COMPENSATION. . . . . . . . . . . . . . . . . . . . . . . . 27
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. . . . 27
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. . . . . . . . . . . . 27
PART IV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. . . 28
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
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PART I
ITEM 1. BUSINESS
GENERAL
Rural Cellular Corporation, a Minnesota corporation ("RCC", and together with
its subsidiaries, the "Company"), is primarily engaged in the ownership,
operation and management of it's subsidiaries and sales of cellular, paging
and Personal Communications Services ("Wireless Systems"). The Company's
current Wireless Systems provide service to geographic areas with a
population served ("POPs") of approximately 1.79 million, approximately
598,000 POPs in Minnesota, 518,000 POPs in Maine, and 674,000 managed POPs in
Minnesota, North Dakota, South Dakota and Wisconsin served by Wireless
Alliance, LLC ("Wireless Alliance"). The Company also owns a paging
subsidiary, RCC Paging, Inc., which provides paging service throughout
northern Minnesota.
The Company's Wireless Systems, which include systems utilizing cellular,
Personal Communications Services ("PCS") and paging licenses, provide
communication services to vehicle installed ("mobile") ready-to-carry
("transportable") and hand-held ("personal or portable") wireless telephones
and pagers. Wireless Systems are designed to allow for significant customer
mobility. In addition to mobility, Wireless Systems provide access through
system interconnections to local and long-distance telecommunication networks
and other ancillary services such as voice mail, call waiting, call
forwarding and conference calling. These communication services can be
integrated with a variety of competing and complementary networks.
In 1997, the Company completed its acquisition of the Maine properties and
established a $140 million revolving line of credit facility and expanded the
facility to $160 million in the fourth quarter.
THE WIRELESS TELEPHONE INDUSTRY
Wireless systems use a variety of radio frequencies to transmit voice and
data. Broadly defined, the wireless communications industry includes one-way
radio applications, such as paging, and two-way radio applications, such as
cellular telephone, PCS and Enhanced Specialized Mobilized Radio ("ESMR")
networks. Historically, each application has been licensed and operates in a
distinct radio frequency block.
The Company operates its Wireless Systems pursuant to the cellular, PCS and
paging licenses it owns and manages. Wireless technology is based upon the
radio coverage of a given geographic area by a number of overlapping "cells".
Each cell contains a transmitter-receiver at a "base station" or "cell site"
that communicates by radio signal with other devices located in the cell and
is connected to a mobile telephone switching office (the "MTSO" or
"switch"), which in turn, may be connected to the local landline telephone
network. Since wireless telephone systems are fully interconnected with the
landline telephone and long-distance networks, customers can receive and
originate both local and long-distance calls from their wireless devices.
If a wireless telephone customer leaves the service area of the wireless
telephone system during a call, the call is generally continued and carried
through a technical interface established with an adjacent system through
intersystem networking arrangements. Such an arrangement is referred to as
roaming. Wireless telephone systems operate under interconnection agreements
with various local exchange carriers and interexchange carriers, which
agreements establish the manner in which the wireless telephone system
integrates with existing telecommunication systems in a given geographic area.
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Since its introduction in 1983, wireless service has grown dramatically. As
of December 31, 1997 according to the Cellular Telephone Industry Association
("CTIA") there were over 51 million cellular customers or subscribers in the
United States, representing a penetration rate of 18.7% and a growth rate of
25% from December 31, 1996.
The following table sets forth certain domestic wireless industry statistics
derived from the data survey results published semi-annually by CTIA:
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YEARS ENDED DECEMBER 31,
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CELLULAR INDUSTRY STATISTICS 1992 1993 1994 1995 1996 1997
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<S> <C> <C> <C> <C> <C> <C>
**Total Cellular Service Revenues $ 7.8 $10.9 $14.2 $19.0 $23.6 $27.7
*Cellular Customers 11.0 16.0 24.1 33.8 44.0 51.4
Cellular Customer Growth 46.0% 45.1% 50.8% 40.0% 30.4% 25.0%
Cellular Penetration 4.3% 6.2% 9.3% 13.0% 17.0% 18.7%
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* indicates in millions
** indicates in billions
Source: CTIA End-of-Year 1997 Data Survey Results
These statistics represent results for the industry as a whole including
metropolitan and rural market areas. The Company has historically experienced
similar or greater growth in comparison to the industry, even though the
Company primarily services rural markets.
In the wireless communications industry, two principal services are licensed
by the FCC for transmitting voice and data signals, "cellular" and "PCS".
Cellular systems are predominantly analog based systems. PCS is a term
commonly used to describe digital based systems.
THE COMPANY'S OPERATIONS
CELLULAR
The Company owns the licenses to provide cellular communications to five
contiguous RSAs in the northern half of Minnesota. This high roaming service
area, consisting of over 38,000 square miles, contains major segments of
interstates and corridors between Minneapolis-St.Paul, Fargo, North Dakota
and Duluth, Minnesota.
Effective May 1, 1997, the Company, through its wholly-owned subsidiary MRCC,
Inc. ("MRCC") acquired the wireless telephone operations and related assets
of Unity Cellular Systems, Inc. and related cellular and microwave licenses
from InterCel, Inc. In addition, the Company acquired the remaining 49%
interest in Northern Maine Cellular Partnership, which held the remaining
license for Maine RSA 2. The contiguous service area includes the Bangor,
Metropolitan Service Area (MSA), Rural Service Area (RSA) 3 and RSA 2, which
extends from Maine's central coastline to the northeastern part of the state,
and provides wireless communications for an important East Coast tourist
destination served by I-95 -the major north-south artery in the eastern
seaboard.
The Company currently markets its cellular services under the name Cellular
2000-Registered Trademark- in Minnesota and Unicel-Registered Trademark- in
Maine.
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The Company owns FCC licenses to provide cellular communication services to
the following markets:
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MARKETS: MSA/RSA OWNERSHIP *GROSS POPS LICENSE
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Minnesota
RSA 1 482 100% 50,000 B
RSA 2 483 100% 60,000 B
RSA 3 484 100% 57,000 B
RSA 5 486 100% 200,000 B
RSA 6 487 100% 231,000 B
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598,000
Maine
Bangor MSA 224 100% 147,000 B
RSA 2 464 100% 156,000 B
RSA 3 465 100% 215,000 B
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518,000
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Total: 1,116,000
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* SOURCE: 1990 U. S. CENSUS BUREAU OFFICIAL STATISTICS (ROUNDED TO THE
NEAREST THOUSAND).
WIRELESS ALLIANCE
In November 1996, Wireless Alliance started reselling cellular service in the
Duluth, Virginia, and Hibbing, Minnesota, Fargo and Grand Forks, North Dakota
and Superior, Wisconsin markets. 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 the Company's PCS
deployment. The Company expects that many customers will migrate to Wireless
Alliance's PCS service when the PCS network is operational in 1998. In
anticipation of this customer-desired service, the networks will be
integrated so that all Wireless Alliance services and features can be
provided on a virtually seamless basis. Some customers, however, will choose
to obtain both Wireless Alliance PCS network service and the Company's
cellular network service utilizing two wireless devices (the Company's
dual-mode service strategy).
Wireless Alliance networks will utilize Global System for Mobile
Communications ("GSM") technology, which is currently used by more than 70
million customers worldwide. Markets using GSM now cover nearly sixty
percent of the potential POPs in the United States. PCS service is
specifically designed to support hand-held usage. 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. GSM networks also offer
calling features such as caller ID, call forwarding and call waiting.
Construction of the Company's PCS networks began following the receipt of
approvals needed from the Federal Communications Commission (FCC) in 1997.
The Company expects the Wireless Alliance PCS networks to be fully
operational in 1998. The Company owns a 51% interest in Wireless Alliance
and operates, manages and markets its cellular services under Northland
Cellular 2000-Registered Trademark- and its PCS services under
Unicel-Registered Trademark- Uniting Cellular and Digital.
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The following table describes the geographic areas the Company manages
through Wireless Alliance:
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MANAGED COUNTIES: MARKETS OWNERSHIP *GROSS POPS LICENSE
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Cook, Lake, St. Louis,
Carlton (portion), Minnesota Duluth,
and Douglas, Wisconsin Minnesota 51% 270,000 PCS B
Cass, Trail, Clay, Fargo,
North Dakota North Dakota 51% 162,000 PCS B
Grand Forks, North Dakota Grand Forks,
and Polk, Minnesota North Dakota 51% 103,000 PCS B
Minnehaha and Lincoln, Sioux Falls,
South Dakota South Dakota 51% 139,000 PCS B
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Total: 674,000
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* SOURCE: 1990 US CENSUS BUREAU OFFICIAL STATISTICS (ROUNDED TO THE NEAREST
THOUSAND).
PAGING
The Company offers a paging service in northern Minnesota and eastern North
Dakota. The Company resells paging services in Minnesota, Wisconsin, North
Dakota and Maine. The Company operates its paging services under the names
"KEYPAGE-Registered Trademark-", "KEYPAGE-Registered Trademark- Plus" and
"Unicel-Registered Trademark- Paging Services".
BUSINESS GROWTH STRATEGY
The Company believes that the market for wireless services will continue to
expand as costs and service rates decline, equipment becomes more convenient
and easy to use, the functionality of wireless services becomes more diverse
and competition increases. 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 wireless services.
The Company intends to continue to expand its market presence and customer
base by offering significant and recognizable value to its customers through:
(i) aggressively and creatively marketing wireless products and services at
affordable prices, (ii) engineering the Company's network to provide the most
recent wireless technologies, (iii) rapidly deploying new services, features
and networks (critical time-to-market advantage), (iv) utilizing its
centralized management to support the combined needs of its cellular, paging
and future PCS customers, thereby further improving operating efficiencies
and economies of scale, and (v) selectively acquiring wireless properties,
primarily in contiguous markets to increase the "home" footprint or network
in which its customers travel. The Company will continue to manage this
growth with a strong focus on increasing revenues, thereby generating
positive cash flow and net earnings.
The Company's growth strategy is to (i) continue to increase the levels of
POPs served, penetration rates, and minimize churn in existing markets, (ii)
acquire additional wireless properties that are comparable to the Company's
existing market characteristics, and (iii) enter into strategic alliances and
partnerships with other wireless service providers while focusing on
balancing its growth indicators, which include penetration, retention (the
opposite of the industry's "churn"), average monthly revenue per customer
unit (known in the industry as "ARPU" or average revenue per subscriber
unit), and acquisition cost per gross customer.
Specifically, the Company has focused and expects to continue to focus on
acquiring controlling ownership interests in rural wireless telephone systems
serving RSA markets or small MSA markets contiguous or proximate to its
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current markets. The Company's strategy of clustering its wireless telephone
operations enables it to achieve operating and cost efficiencies, as well as
joint advertising and marketing benefits. Clustering also allows the Company
to offer its customers more areas of uninterrupted service as they travel
through an area or state.
In addition to expanding its existing clusters, the Company may also seek to
acquire wireless telephone systems in other rural areas and smaller cities.
The Company's joint venture with Aerial Communications, Inc. (Wireless
Alliance) enables it to significantly expand both its customer base and
geographic coverage and to offer enhanced wireless communication services
while sharing a portion of the risk of beginning a new technology venture.
The Company may also pursue other communication businesses related to its
wireless telephone and other mobile service operations as well as other
communication businesses it determines to be desirable.
The Company is implementing its growth strategy by continuing to build its
cellular systems, building its PCS systems, offering a wide range of products
and services at competitive prices, continually upgrading the quality of its
network, establishing and maintaining strong brand recognition and creating
and maintaining a strong sales, marketing and distribution program tailored
to its local markets while providing a superior level of customer service.
ACQUISITIONS
On May 1, 1997, the Company acquired the Maine wireless telephone licenses,
operations and related assets of Unity Cellular Systems, Inc. ("Unity"), a
wholly-owned subsidiary of InterCel, Inc. (now operating as Powertel),
through the Company's wholly-owned subsidiary MRCC, Inc. Based in Bangor,
Maine's third largest city, Unity's licensed market area encompasses the
Bangor MSA, Maine RSA 3, which includes Augusta, the state capitol; and 51%
of Maine RSA 2. This service area covers approximately 20,500 square miles
of contiguous rural territory. On May 1, 1997, the Company also acquired the
remaining 49% of Maine RSA 2 by purchasing the interest held by an affiliate
of Bell Atlantic NYNEX Mobile, Inc.
MRCC has many of the same operating characteristics as the Company has in
Minnesota. 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 MRCC's service area. The Company believes
that the similarities between the demographics, economy, geography, and
climate of MRCC's service area are consistent with the Company's existing
Minnesota service area creating a strategic fit with the Company's experience
and expertise. Also, the service-oriented and customer-focused corporate
culture in place at MRCC represented an excellent fit with the Company's
basic business philosophy.
On August 18, 1997, Wireless Alliance received approval from the Federal
Communications Commission ("FCC"), through spectrum and geographic
partitioning, to serve two counties including the Sioux Falls, South Dakota
market, consisting of approximately 139,000 POPs, where the Company plans
to begin reselling cellular and PCS services in 1998.
RECENT DEVELOPMENTS
On February 13, 1998, the Company entered into a definitive agreement to
acquire the Vermont, New Hampshire, New York and Massachusetts cellular
telephone licenses, operations and related assets of Atlantic Cellular, L.P.
("Atlantic Cellular") an independent provider of wireless telecommunications
services in the New England region. The Company is acquiring the Atlantic
Cellular assets for a purchase price of approximately $256 million in cash.
Long-term financing to support this acquisition has been arranged through
Toronto Dominion Bank.
Under terms of the definitive agreement, the Company will acquire a
contiguous, multi-state service area of 21,000 square miles, encompassing
approximately 1.13 million POPs. This will bring the Company's total managed
POPs to 2.92 million. In addition, the 68,000 cellular customers in the
Atlantic Cellular service area will increase the Company's customer base from
approximately 111,000 at year-end 1997 to 179,000.
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The cellular properties to be acquired from Atlantic Cellular include the
entire state of Vermont (RSA 1, RSA 2 and the Burlington MSA); western New
Hampshire (RSA 1); the northeastern corner of New York (RSA 2); and
northwestern Massachusetts (RSA 1) as well as their long-distance business.
Pending regulatory approval, the acquisition is expected to close this
summer.
On February 19, 1998, the Company entered into a definitive agreement to
purchase the outstanding stock of Western Maine Cellular, Inc. ("WMC"), a
wholly owned subsidiary of Utilities, Inc., for approximately $7.5 million.
Pending regulatory approval, the acquisition is expected to close this
summer.
Providing cellular service to western Maine RSA 1, WMC's service area will
link MRCC's existing cellular operation in central Maine, to the multi-state
cellular system of Atlantic Cellular to the west and south. WMC's 3,700
square-mile service area of western Maine encompasses 84,000 POPs and the
operation serves more than 2,400 customers at year end 1997. Including the
pending Atlantic Cellular acquisition, this would bring RCC's total managed
POPs to approximately three million and wireless customers to approximately
181,000.
The following table provides certain data regarding the pending acquisitions:
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MARKETS: MSA/RSA OWNERSHIP GROSS POPS LICENSE
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Burlington, Vermont MSA 248 100% 151,000 A
Vermont RSA 1 679 100% 212,000 A
Vermont RSA 2 680 100% 233,000 A
Massachusetts RSA 1 470 100% 71,000 A
New Hampshire RSA 1 548 100% 225,000 A
New York RSA 2 560 100% 236,000 A
Maine RSA 1 463 100% 84,000 B
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Total: 1,212,000
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* SOURCE: PAUL KAGAN WIRELESS TELECOM FINANCIAL DATABOOK, 1997.
MARKETING
The Company offers a number of service plan options to its customers. Most
service plans have a fixed monthly access fee, which includes a specified
number of minutes. Usually, the higher the monthly access fee, the more
minutes of use that 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
new service plans for the combined and contiguous areas of Wireless
Alliance's digital network and the Company's existing analog network. These
service plans are sold under Northland Cellular 2000-Registered Trademark-
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 Northland Cellular
2000-Registered Trademark- area.
The Company offers a statewide Minnesota personal toll free number to its
Cellular 2000-Registered Trademark- and Northland Cellular 2000-Registered
Trademark- customers. This encourages customers to distribute their cellular
numbers and keep their phones turned on to accept incoming calls. 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.
Due to its successful marketing efforts, many of the Company's customers are
voice mail service customers. There is no charge for leaving messages, and
the Company believes that its voice mail feature stimulates cellular usage in
the form of returned calls. The Company also offers a product known as "Main
Street" that offers lower rates
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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 also 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. In addition,
the Company offers an equipment option called "phone service." Customers can
rent phones beginning at $3.00 per month. This "phone service" approach
reduces the worry of equipment obsolescence and eliminates the up front costs
new customers may encounter.
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 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 (MobiLink).
ACD allows roamers to use all of their home features including custom calling
features, making their roaming experience identical to their local service.
Since ACD was introduced, the use of airtime by roamers has increased. As
adjacent carriers increase their cellular customer base and the industry as a
whole expands its customer base, the number of roamers will continue to
increase. ACD allows the Company to capture roaming traffic on major
interstate highways and corridors within its markets.
The Company markets paging services provided both through the Company-owned
system, covering northern Minnesota and eastern North Dakota, and as a
reseller of paging services covering most of Minnesota, Maine and areas
within Iowa, Wisconsin, and eastern North Dakota. The Company believes that
paging services complement cellular usage.
DISTRIBUTION AND SALES
The Company markets its cellular and paging services through approximately
130 independent sales agents, which are managed by its territory managers in
both its Minnesota and Maine operating areas. This territory manager
strategy is believed to be a major contribution to the Company's success.
The Company experiences higher than average industry retention levels and
lower than industry customer acquisition costs. MRCC implemented this
distribution strategy in the third quarter of 1997.
The territory managers 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, digital, and paging equipment to
the agents for sale or rent to customers and the agents market the Company's
services utilizing a cooperative advertising program. 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.
In an effort to market its services more effectively, better control customer
acquisition costs, and offer another consumer choice, the Company also uses a
direct sales channel of distribution with direct sales representatives
employed by the Company. The Company also provides its products and services
throughout its service area through retail outlets and assigning Company
sales representatives to offer its services in stores of major retailers such
as Wal-Mart. In order to optimize customer service, assistants were assigned
to territory managers to facilitate and ensure optimal customer service. The
Company further expanded its distribution channels in 1997 by opening four
corporate owned stores.
CUSTOMER SERVICE
Customer service is a significant element of the Company's operating
philosophy. The Company is committed to attracting and retaining customers by
providing consistently superior customer service. In Alexandria, Minnesota,
and Bangor, Maine, the Company maintains a sophisticated monitoring and
control system and a staff of customer
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service personnel well-trained to handle both routine and complex and
technical questions as they arise, 24 hours a day, 365 days a year, with
toll-free access. 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 centers also manage calls from the
Company's independent agents and sales representatives as well as from
roamers traveling through the Company's cellular service area. The Company's
customer service center management is available to assist in resolving urgent
customer issues as quickly as possible. The Company also believes its strong
emphasis on customer service contributes to its high customer retention rate.
The customer service centers are responsible for processing new service
orders and service changes for existing customers. The customer service
centers also maintain customer records and manage the Company's collection
process. During 1997, the customer service centers implemented a quality
control process that monitors call center performance parameters and balances
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, and increase sales of additional
features that increase customer airtime usage and generate customer referrals.
SERVICE AREAS
As of December 31, 1997, the Company provided cellular and paging services to
approximately 111,000 customers in a four-state service area, which includes
the states of Minnesota, North Dakota, Maine, and Wisconsin. The Company's
cellular service area, including Wireless Alliance, has total POPs of
approximately 1.79 million.
ROAMING MARKETS
The Company carries traffic generated by customers of other cellular
companies who are visiting or traveling through northern Minnesota and Maine.
This traffic is profitable for the Company since the revenue is generated
without any associated marketing, customer support or acquisition fees.
While approximately 10.6% of total cellular revenue nationally is from
roaming traffic, the Company's percentage of roaming revenue is approximately
17.6% of total revenues in 1997.
SERVICE MARKS
The Cellular 2000-Registered Trademark- name and related marks are owned by
Cellular 2000, Inc. ("Cellular 2000"). The Company owns 41.67% of 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 exclusive
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" trade mark.
The Company also has registered trademarks for Unicel-Registered Trademark-,
Keypage-Registered Trademark-, and Rural Cellular Corporation-Registered
Trademark-. The Company does not pay any license fees for the use of these
trademarks.
8
<PAGE>
NETWORK OPERATIONS
CELLULAR
Construction of wireless systems is capital intensive, requiring a
substantial investment for land and facilities, improvements, buildings,
towers, cell site equipment, microwave equipment, engineering, designing and
installation. Until technological limitations on total capacity are reached,
additional wireless telephone system capacity can be added in increments that
closely match demand and at less than the proportionate cost of the initial
capacity.
The Company has constructed and maintains an integrated network of contiguous
cellular coverage throughout the Company's cellular service areas so that a
call can be handed off from one of the Company's cell sites to another as a
customer travels throughout cells. 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.
The switch used in the Company's Minnesota cellular networks is owned by RCC
and located at the Company's corporate headquarters in Alexandria, Minnesota.
The Company installed a digital Northern Telecom switch in the third quarter
of 1997. The Company has invested in this digital switch so that it has the
ability to gradually increase capacity of wireless telephone systems, as
needed. Through the provision of the digital transmission the Company
decreases its cost to provide service.
The switch used in the Company's Maine cellular networks is owned by MRCC.
The Nortel, digital multi-plex switch is located in Bangor, Maine. In
accordance with its strategy of developing market clusters, the Company has
selected wireless switching systems that are capable of serving multiple
markets with a single switch and has already implemented this strategy in its
markets.
As of December 31, 1997, the Company's cellular network consisted of 121 cell
sites in Minnesota and Maine. The Company continues to develop its cellular
service area by building new cell sites in locations that increase capacity
and improve hand held coverage. The Company added 15 cell sites during 1997
and plans to add an additional 15 new cell sites in 1998. 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
areas and network.
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 is in
the process of converting certain cell sites on its network from analog to
digital technology. The Company began providing its own transport services
between cell sites over its new digital microwave network in 1996 and in
conjunction with the Company's own digital switch, installed in 1997, further
reduced transport and switching costs. Also, the Company plans to market
excess network capacity in 1998.
WIRELESS ALLIANCE
At December 31, 1997 the Company had spent $ 9.1 million to acquire land,
facilities and equipment in preparation for deploying its PCS services. The
Company had also leased land, facilities and equipment necessary for the PCS
deployment. The Company has begun construction of a GSM technology based PCS
network in the Wireless Alliance PCS Service Areas, which is expected to be
fully operational in 1998, with 80% coverage in its service areas. Wireless
Alliance will utilize Aerial Communications, Inc.'s switch to transport PCS
calls. The Company utilizes the Airtouch Communications, Inc. network to
transport it's reselling cellular airtime within these markets.
PAGING
The Company's paging network, as of December 31, 1997, consisted of 46 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
9
<PAGE>
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 service complements its
cellular service offerings.
SUPPLIERS AND EQUIPMENT PARTNERS
The Company does not manufacture any of the handsets or cell site equipment
used in the Company's operations. The high degree of compatibility among
different manufacturer's models of handsets and cell site facilities
equipment allows the Company to design, supply and operate its systems
without being dependent upon a single source of such equipment. The Company
currently purchases handsets primarily from Motorola, Inc., Ericsson, Inc.
and Nokia Telecommunications, Inc. The Company currently purchases cell site,
base station and facility equipment from Northern Telecom, Inc, Lucent
Technologies, Inc., Harris, Inc., and Nokia Telecommunications, Inc.
COMPETITION
Competition for customers is based principally upon the services and features
offered, the technical quality of the wireless system, customer service,
system coverage, capacity and price. Such competition will increase as new
technologies enter the marketplace.
The Company's current cellular competitors are Western Wireless Corporation
("Western Wireless"), PriCellular Corp. ("PriCellular"), and United States
Cellular. These competitors offer their 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.
The Company believes that Western Wireless, PriCellular and United States
Cellular 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. Pricing and coverage
areas differentiate the services. 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. The Company resells paging services in
Maine under "UNICEL-Registered Trademark-Paging Services."
The Company also competes with dispatch and conventional mobile telephone
companies, resellers and landline telephone service providers. The FCC
requires all cellular and PCS licensees to provide service to "resellers". A
reseller provides wireless services to customers but does not hold a FCC
license or own facilities. Instead, the reseller buys blocks of wireless
telephone numbers and capacity from a licensed carrier and resells service
through its own distribution network to the public. Thus, a reseller is both
a customer of a wireless licensee's service and also a competitor of that
licensee. Several small resellers currently operate in competition with the
Company's systems.
In the future in its cellular and PCS markets, the Company expects to face
increased competition from entities providing other technologies and
services, including digital mobile communications systems on existing
Specialized Mobile Radio ("SMR") frequencies, referred to as ESMR, and
satellite-based telecommunications systems.
10
<PAGE>
Although some of these technologies are currently operational, others are
being developed or may be developed in the future. The entrance of multiple
competitors in the PCS markets is mandated by the FCC.
Continuing technological advances in communications and FCC policies that
encourage the development of the spectrum-based technologies may result in
new technologies that compete with cellular and PCS systems. In addition,
the Federal Omnibus Budget Reconciliation Act of 1993 requires, among other
things, the allocation to commercial use of a portion of 20 MHz of the
spectrum currently reserved for government use. It is possible that some
portion of spectrum reallocated will be used to create new land mobile
services.
The Company anticipates that market prices for wireless communications
services and equipment 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 operations or
present strategic opportunities.
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.
Continuing technological advances in telecommunications and FCC policies that
encourage the development of new spectrum-based technologies make it
difficult 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
11
<PAGE>
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.
REGULATION
The Company is subject to extensive regulation as a provider of wireless
services. The FCC regulates the construction, operation, and acquisition of
wireless 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, or 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 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, its
license renewal application is granted and the competing applications are
dismissed. The Company's Minnesota cellular licenses expire on October 1,
2000. MRCC's Bangor, Maine, Maine 3 and Maine 2 expire January 22, 2008,
October 1, 1999, and October 1, 2001 respectively.
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 a 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 is 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.
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 States of Minnesota, Maine,
Wisconsin, South Dakota and North Dakota do 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
uses 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 is
separately licensed by the FCC and subject to regulation as to technical
parameters and service.
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<PAGE>
The Company's paging operations are also subject to regulation by the FCC.
The FCC issues licenses for paging operations that 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 wireless service. The FCC approved
applications for an additional six licenses in 1997. 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 FCC will renew the Company's paging licenses. 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 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) resulted in a U.S. Court
of Appeals affirmation of the Interconnection Order's pricing rules. The
Court affirmation is favorable to the Company and binding unless it is
appealed by the U.S Supreme Court. This action 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 that telecommunications customers, 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 Company's responsibility regarding USF, beginning January 1998, is to
collect the funds from its customers and forward the funds on to the
appropriate government entities. Therefore, there is minimal impact of the
USF on the Company. 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.
In 1997, the FCC released the revised timetables and provisions for emergency
911 service availability provided by cellular, PCS and other mobile service
providers, including "enhanced 911" services that provide the caller's
telephone number, location and other useful information. By April 1998, the
metropolitan markets must be able to provide automatic number identification
(ANI) and cell site information for 911 calls to the Public Safety Answering
Points, this mandate is effective June1, 1998 for the rural markets (Phase
I). This will have a financial impact on the Company but the exact impact is
unknown at this time because the specifications are yet to be
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<PAGE>
mandated. The schedule for Phase II of E911 was also mandated. Effective
October 1, 2001, covered carriers will be required to identify the location
of mobile units making 911 calls within a radius of no more than 125 meters.
The FCC recently adopted number portability rules that will enable
subscribers to migrate their landline and cellular telephone numbers to a PCS
carrier from a PCS carrier to another service provider. If the number
portability ruling is upheld, the Company will be adversely affected due to
the service feature offering of toll-free numbers that it gives to customers
within certain markets.
EMPLOYEES
As of December 31, 1997 the Company had 326 employees. The employees include
141 in sales and marketing, 82 in customer service, 54 in network and systems
operations, 27 in administration and 22 in finance and accounting. Thirty of
the Company's employees were part-time. In addition, the Company has
approximately 130 independent sales agents. None of the Company's employees'
are represented by a labor organization, and the Company's management
considers its employee relations to be good. Wireless Alliance has no
full-time or part-time employees but operates utilizing the Company's
employees.
In 1997, Rural Cellular Corporation submitted an Affirmative Action Plan to
the Minnesota Department of Human Rights for review and approval. On January
26, 1998 the Company received certification by the Department of Human
Rights, State of Minnesota, as having an affirmative action plan approved by
the Commissioner.
COMMUNITIES
In 1997, the Company joined the Minnesota Keystone Program as a business
entity that contributes 2% of its pre-tax earnings, back to its' communities.
The Company's relationships include its customers, employees, investors,
suppliers, partners, and the communities to which it provides services
directly, including the wireless communications industry.
ITEM 2. PROPERTIES
The Company owns its principal corporate headquarters located at 3905 Dakota
Street, Alexandria, Minnesota 56308. The headquarters, is a two-story,
50,000-square-foot facility with land available for a 24,000-square-foot
expansion. The Company also owns a 5,500 square foot facility in Maine.
As of December 31, 1997, the Company had 121 cellular cell sites in Maine and
Minnesota of which 24 sites are leased either for tower space or for land.
The Company owns 97 sites. As of December 31, 1997, the Company owned 46
operational paging transmitters. The Company anticipates that additional
sites will continue to be acquired primarily by outright purchase.
As of December 31, 1997, the Company had 33 PCS base stations constructed.
The Company owns the equipment within all of the base stations. It owns the
land of one base station site while leasing the land on the remaining 32
sites.
ITEM 3. LEGAL PROCEEDINGS
There are no material, pending legal proceedings to which the Company or any
of its subsidiaries or affiliates is a party or of which any of their
property is subject which, if adversely decided, would have a material effect
on 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.
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<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information with regard to each
of the executive officers of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Richard P. Ekstrand 48 President, Chief Executive Officer and Director
Scott G. Donlea 38 Vice President of Sales and Marketing
Wesley E. Schultz 41 Vice President of Finance, Chief Financial Officer
</TABLE>
Richard P. Ekstrand has served as President, Chief Executive Officer and a
director of the Company since its inception. 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 as 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. In addition,
he has held positions on many CTIA subcommittees, including CTIAPAC, CTIA
Small Congress, and CTIA Foundation.
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 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 three years as an auditor with Deloitte
and Touche, LLP.
15
<PAGE>
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 national market symbol RCCC. The
following table indicates the high and low closing price for each quarter of
the 1996 and 1997 fiscal years, beginning with such date:
<TABLE>
<CAPTION>
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
HI LOW HI LOW HI LOW HI LOW
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1997 11 9 3/8 10 7/8 8 5/8 13 10 1/8 13 1/4 10 3/4
1996 12 1/4 10 13 1/2 11 5/32 12 3/4 9 1/2 10 1/2 8 3/4
</TABLE>
The Company's class B Common Stock is not publicly traded.
As of March 23, 1998, there were approximately 85 holders of record of the
Company's Class A Common Stock and approximately 32 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.
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<PAGE>
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).
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Service.................................. $43,408 $23,120 $14,289 $ 9,784 $ 4,690
Roamer................................... 9,475 6,414 4,562 3,897 3,146
Equipment................................ 1,020 927 1,476 2,008 271
------- ------- ------- ------- -------
Total revenues......................... 53,903 30,461 20,327 15,689 8,107
------- ------- ------- ------- -------
Operating expenses:
Network costs............................ 11,578 6,731 4,974 3,293 2,586
Costs of equipment sales................. 2,807 1,375 1,914 2,214 372
Selling, general and administrative...... 25,225 13,576 7,700 6,570 4,949
Depreciation and amortization............ 12,458 5,539 3,249 2,426 1,687
------- ------- ------- ------- -------
Total operating expenses............... 52,068 27,221 17,837 14,503 9,594
------- ------- ------- ------- -------
Operating income (loss)................... 1,835 3,240 2,490 1,186 (1,487)
------- ------- ------- ------- -------
Other income (expense):
Interest expense......................... (6,065) (281) (1,365) (1,195) (622)
Interest and dividend income............. 232 335 277 170 68
Equity in earnings (losses) of
unconsolidated subsidiaries............ (350) 52 (37) (37) (175)
Minority interest........................ 3,082 331 - - -
------- ------- ------- ------- -------
Other income (expense), net............ (3,101) 437 (1,125) (1,062) (729)
------- ------- ------- ------- -------
Income (loss) before income taxes......... (1,266) 3,677 1,365 124 (2,216)
Income tax provision (benefit)............ - 200 575 (486) 4
------- ------- ------- ------- -------
Net income (loss)......................... $(1,266) $ 3,477 $ 790 $ 610 $(2,220)
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Basic and diluted net income (loss) per
share..................................... $ (0.14) $ 0.41 $ 0.13 $ 0.11 $ (0.42)
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Basic and diluted weighted average shares
outstanding............................... 8,853 8,509 5,983 5,522 5,261
<CAPTION>
Years ended December 31,
----------------------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Other Operating Data:
Net capital expenditures ................ $34,474 $23,653 $10,011 $ 6,933 $ 2,750
EBITDA(1) ............................... $14,293 $ 8,779 $ 5,739 $ 3,612 $ 200
Other Cellular Operating Data: (2)
Customers at year-end (3) ............... 84,600 45,094 26,764 17,402 9,352
Penetration ............................. 7.6% 7.5% 4.5% 2.9% 1.6%
Average monthly revenue per
cellular customer (4) ................. $ 55 $ 66 $ 69 $ 84 $ 98
Average monthly retention rate (5) ...... 98.4% 98.7% 99.0% 99.2% 99.0%
Cell sites at year-end .................. 121 72 64 55 36
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital (deficit) . . . . . . . . $ 513 $ (11,215) $ (4,415) $ 80 $(1,230)
Net property and equipment. . . . . . . . 77,920 41,935 23,517 16,479 11,014
Total assets. . . . . . . . . . . . . . . 181,588 60,507 30,138 22,439 14,074
Total debt. . . . . . . . . . . . . . . . 128,000 8,492 19,123 15,117 10,953
Total shareholders' equity. . . . . . . . 33,730 34,996 5,458 4,668 760
</TABLE>
- -------------------
(1) EBITDA, the sum of operating income, depreciation and amortization, is
utilized as a measurement of performance within the cellular industry.
It should not however, be used as an alternative to using operating
income or net income as an indicator of operating performance or cash
flows as a measure of liquidity. Further, EBITDA is not a GAAP-based
financial measure and should not be considered as an alternative to
GAAP-based measures of financial performance. See "Item 7.
Management's Discussion and Analysis of Financial Condition and
Results of Operations."
(2) Includes Minnesota cellular operations for 1993 to 1997 and Maine
cellular operations in 1997.
(3) In addition to the 84,600 cellular customers in Minnesota and Maine,
the Company also serves 9,312 paging and 17,167 Wireless Alliance
customers.
(4) 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.
(5) 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.
18
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following year to year comparative of Management's Discussion and
Analysis of Financial Condition and Results of Operations includes May
through December 1997 results of MRCC and the 1997 results of Wireless
Alliance. Wireless Alliance began its operations in November 1996 and was
included in 1996 fourth quarter operations
ACQUISITION
Effective May 1, 1997, the Company consummated the announced acquisition of
the Maine wireless telephone operations and related assets of Unity Cellular
Systems, Inc. and related cellular and microwave licenses from InterCel, Inc.
The Company operates its Maine operations through a wholly owned subsidiary,
MRCC. The acquired licenses cover the Bangor, Maine MSA and Maine RSA 3
(which includes Augusta, the state capitol). In addition, the Company
acquired InterCel's 51% interest in the Northern Maine Cellular Partnership,
which holds a cellular license for Maine RSA 2. The Company also acquired
the remaining 49% in Northern Maine from an unrelated third party for
approximately $7 million. Headquartered in Bangor, MRCC serves more than
31,000 wireless customers within a 20,500 square-mile service area that
encompasses approximately 518,000 POPs.
JOINT VENTURE
On August 26, 1996, the Company and Aerial Communications, Inc., formerly APT
Minneapolis, Inc., announced the signing of a letter of intent to establish a
joint venture named Wireless Alliance, LLC. Wireless Alliance will construct
and operate Personal Communications Services ("PCS") networks in Duluth,
Virginia and Hibbing Minnesota, Fargo and Grand Forks, North Dakota,
Superior, Wisconsin and Sioux Falls, South Dakota (674,000 POPs). Prior to
completion of the PCS build out, Wireless Alliance has been reselling
cellular service to its 17,000 customers. As PCS service becomes available
during 1998, customers will be given a dual mode phone service strategy as an
alternative to their existing cellular service. Wireless Alliance is 51
percent owned by the Company and 49 percent owned by Aerial Communications,
Inc. The Company is responsible for managing Wireless Alliance. Of the
$19.6 million total investment, as of December 31, 1997, the Company has
contributed $10.0 million towards its 51 percent ownership while APT has
contributed $9.6 million in PCS licenses. In addition, the Company has
contributed $8.1 million in excess of its 51 percent ownership, which is
reflected as a note receivable from Wireless Alliance eliminated in
consolidation.
GENERAL
The Company's principal operating objective is to increase revenues and
achieve profitability through the acquisition and development of new cellular
and digital markets and increased penetration in existing markets. Its total
market encompasses 1.79 million POPS. The Company has continued to penetrate
its existing Minnesota markets through innovative sales initiatives. However,
the development of the Wireless Alliance cellular reselling program and the
customers added through the acquisition of MRCC were the primary factors in
the Company's increased revenues in Fiscal 1997. Total customers increased
102% to 111,000 in 1997 as compared to 55,000 in 1996. Offsetting the
increase in customers was a decrease in the average monthly revenue per
customer from $66 in 1996 to $55 in 1997. The Company believes that this
decrease reflects an industry wide trend of adding lower-usage customers, who
use cellular service for personal convenience, security or as an alternative
communication resource for their traditional landline telephone service.
The Company intends to pursue acquisitions to the extent they enhance or
extend its network or increase shareholder value although there can be no
assurance any such acquisition will be consummated.
19
<PAGE>
The Company emphasizes customer support in an effort to maximize its customer
retention. For the year ended December 31, 1997, the Company experienced an
average monthly retention rate of 98.4%, as compared to an industry average
monthly retention rate of 97.3 %, as reported in the CTIA Data Survey dated
November 30, 1997. Customer retention continues to be a 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 due in part to its territory manager distribution philosophy and by
offering communication service packages and value-added features anticipating
customer needs and by providing high quality 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 and cellular and paging
equipment lease revenues. In addition, other charges include activation and
feature charges for such features as voice mail, call waiting, and call
forwarding.
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 an
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. Within certain markets, the Company rents equipment to
customers in order to reduce the customers' perception that the cost of
purchasing cellular service is prohibitive. This program may negatively
affect equipment sales; however, its influence is lessened by other equipment
sales programs initiated in newly acquired markets.
Operating income before depreciation and amortization ("EBITDA") increased
63% to $14.2 million in 1997 as compared to $8.8 million in 1996. Industry
analysts consider EBITDA a meaningful measure of an entity's ability to meet
long-term financial obligations and growth in EBITDA a meaningful reflection
of future profitability, especially in a capital-intensive industry such as
cellular telecommunications. The results discussed below may not be
indicative of future results.
20
<PAGE>
RESULTS OF OPERATIONS
The following table presents certain consolidated statements of operations data
as a percentage of total revenues for the periods indicated:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Revenues:
Service. . . . . . . . . . . . . . . . . . . . 80.5% 75.9% 70.3%
Roamer . . . . . . . . . . . . . . . . . . . . 17.6 21.1 22.4
Equipment. . . . . . . . . . . . . . . . . . . 1.9 3.0 7.3
----- ----- -----
Total revenues . . . . . . . . . . . . . . . 100.0 100.0 100.0
----- ----- -----
Operating expenses:
Network costs. . . . . . . . . . . . . . . . . 21.5 22.1 24.5
Cost of equipment sales. . . . . . . . . . . . 5.2 4.5 9.4
Selling, general, and administrative . . . . . 46.8 44.6 37.9
Depreciation and amortization. . . . . . . . . 23.1 18.2 16.0
----- ----- -----
Total operating expenses . . . . . . . . . . 96.6 89.4 87.8
----- ----- -----
Operating income . . . . . . . . . . . . . . . 3.4 10.6 12.2
----- ----- -----
Other income (expense):
Interest expense . . . . . . . . . . . . . . . (11.3) (0.9) (6.7)
Interest and dividend income . . . . . . . . . 0.4 1.1 1.4
Equity in earnings (losses) of
unconsolidated subsidiaries . . . . . . . (0.6) 0.2 (0.2)
Minority interest. . . . . . . . . . . . . . . 5.7 1.1 -
----- ----- -----
Other income (expense), net. . . . . . . . . (5.8) 1.5 (5.5)
----- ----- -----
Income before income taxes . . . . . . . . . . . (2.4) 12.1 6.7
Income tax provision . . . . . . . . . . . . . . - 0.7 2.8
----- ----- -----
Net income (loss). . . . . . . . . . . . . . . . (2.4)% 11.4% 3.9%
----- ----- -----
----- ----- -----
EBITDA (1) . . . . . . . . . . . . . . . . . . . 26.5% 28.8% 28.2%
</TABLE>
(1) EBITDA, the sum of operating income, depreciation and amortization, is
utilized as a performance measurement within the cellular industry. It
should not, however, be used as an alternative to using operating income or
net income as an indicator of operating performance or cash flows as a
measure of liquidity. Further, EBITDA is not a GAAP-based financial measure
and should not be considered as an alternative to GAAP-based measures of
financial performance.
YEARS ENDED DECEMBER 31, 1997 AND 1996
REVENUES
Service revenues for 1997 increased 87.7% to $43.4 million from $23.1 million
for 1996. Partially offset by a decrease of 16.7% in the corresponding
average revenue per customer, this growth was primarily due to the increase
in the number of customers. Customer growth in existing markets accounted for
25% of the increase while newly acquired markets accounted for the other 75%.
Roamer revenues for 1997 increased 47.4% to $9.5 million from $6.4 million in
1996, reflecting the increase in the number of markets served. Markets have
increased as a result of the activation of additional cell sites and
acquisitions of new service areas. Individual customer roamer remained
relatively unchanged when compared to 1996.
21
<PAGE>
Equipment revenues for 1997 increased 10.0% to $1.0 million from 1996.
Although the equipment rental program continues to remain popular in several
of the Company's markets, this increase reflects a $650,000 impact of the
phone sales program utilized in one of the Company's acquired markets.
OPERATING EXPENSES
Network costs for 1997 increased 72.0% to $11.6 million from $6.7 million for
1996. The increased expenses reflect additional operating expenses from new
cell sites and markets that were added during 1997 and higher total variable
costs resulting from increased network usage. 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. As a percentage of total revenues, network costs improved from
22.1% in 1996 to 21.5% in 1997 primarily reflecting the greater leverage of
the fixed component of network costs. Contributing to the economy of scale
efficiencies was the digital microwave network, which eliminated the reliance
on third party phone company assistance in connecting cell site communication
to the switch. In addition, the Company completed construction of its own
MTSO in the third quarter of 1997 thereby reducing the Company's reliance on
Switch 2000, Inc., an unconsolidated affiliate, for switching services.
Selling, general, and administrative ("SG&A") expenses increased 85.8% from
$13.6 million in 1996 to $25.2 million in 1997. As a percentage of total
revenues, SG&A increased from 44.6% in 1996 to 46.8% in 1997. SG&A includes
salaries, benefits, and operating expenses such as marketing, commissions,
customer support, accounting, administration, and billing. The 85.8%
increase in SG&A over the prior year primarily reflects the incorporation of
additional costs resulting from the acquisition of MRCC. However, its
increase as a percentage of sales was a result of the significant up front
costs encountered in developing new markets. As a result, the average
acquisition cost per gross cellular customer increased by 31.2% to $403 for
1997 from $307 in 1996.
Depreciation and amortization expense for 1997 increased 125% to $12.5
million from $5.5 million for 1996. The increase reflects the Company's
continued construction and acquisition efforts and in its investments in
network facilities and rental equipment. Specifically contributing to the
increase was the depreciation relating to the construction of 15 additional
cell sites and the acquisition of 35.
OPERATING INCOME
Operating income for 1997 was $1.8 million with an operating margin of 3.4%
compared to operating income of $3.2 million with an operating margin of
10.6% in 1996. The decrease in operating income was due primarily to the
increase in total depreciation incurred resulting from the Company's
acquisition of the Maine wireless telephone operations and the related assets
of Unity Cellular Systems, Inc. and the construction activity during the year.
OTHER INCOME (EXPENSE)
Interest expense for 1997 increased to $6.1 million from $280,000 for 1996.
The increase in interest expense is a result of higher average borrowings
associated with the Company's recent acquisitions and growth initiatives.
Partially offsetting the impact of increased interest expense was the
minority interest in losses of Wireless Alliance, LLC.
YEARS ENDED DECEMBER 31, 1996 AND 1995
REVENUES
Service revenues for 1996 increased 61.8% to $23.1 million from $14.3 million
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 $836,000 for 1996 from $493,000 for 1995.
22
<PAGE>
Roamer revenues for 1996 increased 40.6% to $6.4 million from $4.6 million
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.
OPERATING EXPENSES
Network costs for 1996 increased 35.3% to $6.7 million from $5.0 million 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.
SG&A expenses for 1996 increased as a percentage of total revenues to 44.6%
from 37.9% for 1995 and to $13.6 million from $7.7 million. 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. Although
SG&A increased due to strong customer growth, the average acquisition cost
per gross cellular customer decreased by 22.3% 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 $5.5
million from $3.2 million 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 $3.2 million with an operating margin of 10.6%
compared to operating income of $2.5 million with an operating margin of
12.2% in 1995. The increase in operating income was 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 $280,000 from $1.4 million 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 $3.7 million from
$1.4 million 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 $3.5 million from $790,000 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.
23
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
GENERAL
The Company's primary liquidity requirements are for operating expenses,
acquisitions, and expansion of network services and facilities to support
customer growth. As of December 31, 1997, the Company had 121 cell sites and
46 paging transmitters. The Company will continue to construct additional
cell sites and purchase cellular equipment in order to increase capacity as
customer and usage volumes increase. Specific capital requirements of the
Company are based on the property, equipment, and network facilities
requirements associated with the Company's acquisition and expansion strategy
and rate of customer growth. The Company currently estimates that it will
spend approximately $20.0 million for network expansion during 1998. While
the Company believes it will be able to borrow from third parties the amounts
required to continue its network expansion, there can be no assurance that it
can do so at acceptable terms. The failure to raise such financing would
have a material adverse effect on the Company.
FINANCING
On May 1, 1997, the Company entered into an agreement with T. D. Securities
(USA), Inc. for a $140 million Senior Secured Reducing Revolving Credit
Facility (the "Facility"). On December 30, 1997, the Company completed an
amendment to this agreement increasing the Facility to $160 million. Under
the Facility, amounts may be borrowed or repaid at any time through maturity
provided that, at no time, the aggregate outstanding borrowings exceed the
total available under the Facility. During the second quarter of 1997,
proceeds from the Facility were used to acquire the net assets of MRCC, fund
the capital expenditures of Wireless Alliance, and refinance all outstanding
amounts under the Company's previous loan facility with the St. Paul Bank for
Cooperatives. Future uses for funds available under the Facility will be to
fund Wireless Alliance, LLC, network expansion, and for other general
corporate purposes.
At the Company's discretion, advances under the Facility bear interest at
LIBOR (London Interbank Offering Rate) or Base Rate plus an applicable margin
and will be based on the Company's ratio of indebtedness to annualized
operating cash flow as of the end of the most recently completed fiscal
quarter. A commitment fee on the unused portion of the Facility is payable
quarterly. Facility security has been provided by a pledge of all the assets
of the Company including stock of all operating subsidiaries of the Company
and Wireless Alliance. Mandatory commitment reductions will be required upon
any material sale of assets. The Facility is subject to various covenants
including the ratio of indebtedness to annualized operating cash flow and the
ratio of annualized operating cash flow to interest expense. During 1997, the
Company entered into an interest hedge agreement for $80 million of the
Facility that limits interest rates to no more than 7.85% for a minimum of
two years.
CASH FLOWS
Cash flows provided by operating activities for the year ended December 31,
1997 and 1996 was $8.0 million and $9.6 million, respectively, with the
primary source being an increase in depreciation and amortization.
Net cash used in investing activities during the year ended December 31, 1997
and 1996 was $124.6 million and $25.4 million, respectively. The principal
use of cash during fiscal 1997 included the Company's acquisition of assets
from Unicel and Northern Maine Partnership, the capital expenditures of
Wireless Alliance, property and equipment purchased for the network and
switch, construction costs, and costs related to the equipment purchased for
the phone rental program.
Net cash provided by financing activities during the year ended December 31,
1997 and 1996 was $118.3 million and $15.9 million, respectively. As noted
above, during the second quarter the Company entered into a revolving credit
agreement and repaid all long-term debt outstanding under the Company's
existing loan agreement with the St. Paul Bank for Cooperatives.
24
<PAGE>
The Company is currently negotiating with a commercial lending institution
for a new revolving credit facility. The purpose of the facility will be to
acquire the assets of Atlantic Cellular Systems, Inc. and Western Maine
Cellular, Inc., for Wireless Alliance PCS investment requirements, and for
other general corporate purposes.
OTHER MATTERS
INFLATION
The impact of inflation on the Company has not been significant.
YEAR 2000 ISSUE
The Company has assessed and continues to assess the impact of the Year 2000
issue on its reporting systems and operations. The Year 2000 issue exists
because many computer systems and applications currently use two-digit fields
to designate a year. As the century date occurs, date sensitive systems will
recognize the year 2000 as 1900 or not at all. This inability to recognize
or properly treat the year 2000 may cause systems to process critical
financial and operational information incorrectly.
During fiscal 1997, the Company did not incur any cost to modify existing
computer systems and applications, and estimates that approximately $600,000
will be incurred in 1998 and 1999. The Company plans to devote the necessary
resources to resolve all significant Year 2000 issues in a timely manner. If
Year 2000 modifications are not properly completed either by the Company or
its vendors, banks or any other entities with whom the Company conducts
business, the Company could be adversely impacted.
SUBSEQUENT EVENT
On February 13, 1998, the Company entered into a definitive agreement to
purchase the net assets of Atlantic Cellular, L.P. ("Atlantic") for
approximately $256 million. The cellular properties to be acquired from
Atlantic include the entire state of Vermont (RSA 1, RSA 2 and the Burlington
Metropolitan Statistical Area); western New Hampshire (RSA 1); the
northeastern corner of New York (RSA 2); and northwestern Massachusetts (RSA
1).
On February 19, 1998, the Company entered into a definitive agreement to
purchase Western Maine Cellular (WMC), a wholly owned subsidiary of
Utilities, Inc. for approximately $7.5 million. The cellular properties
provide service to western Maine (RSA 1).
Long term financing to support both the purchases of Atlantic and WMC has
been arranged through Toronto Dominion Bank, which has also acted as a
financial advisor to the Company
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.
25
<PAGE>
Certain unaudited quarterly results for 1997 and 1996 are set forth below (in
thousands, except average monthly revenue per cellular customer):
<TABLE>
<CAPTION>
1997 QUARTER ENDED
-----------------------------------------
Mar 31 Jun 30 Sep 30 Dec 31
------ ------- ------- -------
<S> <C> <C> <C> <C>
Total revenues ............... $8,323 $13,326 $16,747 $15,507
Operating income (loss) ...... (354) 511 1,781 (103)
EBITDA(1) .................... 1,608 3,438 5,429 3,818
Average monthly revenue
per cellular customer ...... $52 $58 $61 $50
<CAPTION>
1996 QUARTER ENDED
-----------------------------------------
Mar 31 Jun 30 Sep 30 Dec 31
------ ------- ------- -------
<S> <C> <C> <C> <C>
Total revenues ............... $5,682 $ 7,446 $ 9,046 $ 8,287
Operating income (loss) ...... (252) 896 2,354 242
EBITDA(1) .................... 718 2,206 3,854 2,001
Average monthly revenue
per cellular customer ...... $59 $68 $77 $62
</TABLE>
(1) See footnote (1) on page 18 under "Item 6. Selected Financial Data" for
a definition and discussion of EBITDA.
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, the MRCC acquisition, and the
anticipated acquisition of Atlantic Cellular and Western Maine.
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
None.
26
<PAGE>
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.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this item is set forth in the Proxy Statement under
the headings "Election of Directors" 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.
27
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
Page Number
in this
Form 10-K
-----------
<S> <C> <C>
(a) (1) CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------
Report of Independent Public Accountants F-1
Consolidated Balance Sheets as of December 31, 1997 and 1996 F-2
Consolidated Statements of Operations for the Years Ended
December 31, 1997, 1996 and 1995 F-4
Consolidated Statements of Shareholders' Equity for the Years
Ended December 31, 1997, 1996 and 1995 F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1996 and 1995 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 49.
(b) REPORTS ON FORM 8-K
None
(c) EXHIBITS
See Exhibit Index on page 49.
(d) OTHER FINANCIAL STATEMENTS
Not applicable.
</TABLE>
28
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this 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 30, 1998
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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ Richard P. Ekstrand President and
- ----------------------------- Chief Executive Officer March 30, 1998
Richard P. Ekstrand (Principal Executive
Officer) and Director
/s/ Wesley E. Schultz Vice President of Finance and
- ---------------------------- Chief Financial Officer March 30, 1998
Wesley E. Schultz (Principal Financial
and Accounting Officer)
/s/ George W. Wikstrom Jr. Director March 30, 1998
- ----------------------------
George W. Wikstrom Jr.
/s/ Don C. Swenson Director March 30, 1998
- ----------------------------
Don C. Swenson
/s/ Robert K. Eddy Director March 30, 1998
- ----------------------------
Robert K. Eddy
/s/ Jeffrey S. Gilbert Director March 30, 1998
- ----------------------------
Jeffrey S. Gilbert
/s/ Marvin C. Nicolai Director March 30, 1998
- ----------------------------
Marvin C. Nicolai
/s/ George M. Revering Director March 30, 1998
- ----------------------------
George M. Revering
</TABLE>
29
<PAGE>
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, 1997 and 1996, and the related consolidated statements of
operations, shareholders' equity and cash flows for each of the three years
in the period ended December 31, 1997. 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, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1997 in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
February 6, 1998
F-1
<PAGE>
RURAL CELLULAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1997 1996
------------ -----------
<S> <C> <C>
CURRENT ASSETS:
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,994,628 $ 237,499
Accounts receivable, less allowance of $1,146,000 and $308,000. . . . . . . . . . . . 9,621,032 6,240,137
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,774,222 1,309,862
Other current assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 765,939 341,964
------------ -----------
Total current assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,155,821 8,129,462
------------ -----------
PROPERTY AND EQUIPMENT, less accumulated depreciation of $23,874,000 and $13,496,000. . 77,920,283 41,935,497
INVESTMENTS AND OTHER ASSETS:
Licenses and other intangible assets, less accumulated amortization of
$1,490,000 and $18,000. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81,348,237 6,710,419
Investments in unconsolidated affiliates. . . . . . . . . . . . . . . . . . . . . . . 1,094,531 1,442,569
Restricted investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 910,063 884,844
Other assets, less accumulated amortization of $178,000 and $35,000 . . . . . . . . . 6,159,133 1,404,068
------------ -----------
Total investments and other assets. . . . . . . . . . . . . . . . . . . . . . . . . 89,511,964 10,441,900
------------ -----------
$181,588,068 $60,506,859
------------ -----------
------------ -----------
</TABLE>
F-2
<PAGE>
RURAL CELLULAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1997 1996
------------ -----------
<S> <C> <C>
CURRENT LIABILITIES:
Current maturities of long-term debt. . . . . . . . . . . . . . . . . . . $ - $ 8,447,920
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,959,778 8,913,734
Advance billings and customer deposits. . . . . . . . . . . . . . . . . . 2,541,015 1,399,965
Accrued interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,595,212 88,892
Other accrued expenses. . . . . . . . . . . . . . . . . . . . . . . . . . 1,546,347 493,527
------------ -----------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . 13,642,352 19,344,038
LONG-TERM DEBT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128,000,000 43,886
------------ -----------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . 141,642,352 19,387,924
------------ -----------
MINORITY INTEREST . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,215,480 6,122,583
------------ -----------
COMMITMENTS AND CONTINGENCIES (Note 7)
SHAREHOLDERS' EQUITY:
Class A common stock; $.01 par value; 15,000,000 shares
Authorized; 7,592,628 and 7,502,552 shares issued and outstanding . . . 75,926 75,025
Class B common stock; $.01 par value; 5,000,000 shares
Authorized; 1,260,668 and 1,350,744 shares issued and outstanding . . . 12,607 13,508
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . . . . . 34,445,849 34,445,849
Retained earnings (accumulated deficit) . . . . . . . . . . . . . . . . . (804,146) 461,970
------------ -----------
Total shareholders' equity. . . . . . . . . . . . . . . . . . . . . . . 33,730,236 34,996,352
------------ -----------
$181,588,068 $60,506,859
------------ -----------
------------ -----------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
<PAGE>
RURAL CELLULAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
REVENUES:
Service . . . . . . . . . . . . . . . . . . . . . . . . . . $43,407,782 $23,119,691 $14,289,434
Roamer. . . . . . . . . . . . . . . . . . . . . . . . . . . 9,474,907 6,413,524 4,561,760
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . 1,020,014 927,128 1,475,716
----------- ----------- -----------
Total revenues. . . . . . . . . . . . . . . . . . . . . . 53,902,703 30,460,343 20,326,910
----------- ----------- -----------
OPERATING EXPENSES:
Network costs . . . . . . . . . . . . . . . . . . . . . . . 11,577,886 6,731,130 4,973,598
Cost of equipment sales . . . . . . . . . . . . . . . . . . 2,807,206 1,374,980 1,913,664
Selling, general and administrative . . . . . . . . . . . . 25,224,683 13,575,347 7,699,964
Depreciation and amortization . . . . . . . . . . . . . . . 12,458,286 5,539,067 3,249,313
----------- ----------- -----------
Total operating expenses. . . . . . . . . . . . . . . . . 52,068,061 27,220,524 17,836,539
----------- ----------- -----------
OPERATING INCOME. . . . . . . . . . . . . . . . . . . . . . . 1,834,642 3,239,819 2,490,371
----------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest expense. . . . . . . . . . . . . . . . . . . . . . (6,064,468) (280,146) (1,365,852)
Interest and dividend income. . . . . . . . . . . . . . . . 231,809 334,850 277,352
Equity in earnings (losses) of unconsolidated affiliates. . (350,539) 51,519 (37,021)
Minority interest . . . . . . . . . . . . . . . . . . . . . 3,082,440 330,892 -
----------- ----------- -----------
Other income (expense), net . . . . . . . . . . . . . . . (3,100,758) 437,115 (1,125,521)
----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAX . . . . . . . . . . . . . . . (1,266,116) 3,676,934 1,364,850
INCOME TAX PROVISION. . . . . . . . . . . . . . . . . . . . . - 200,000 575,003
----------- ----------- -----------
NET INCOME (LOSS) . . . . . . . . . . . . . . . . . . . . . . $(1,266,116) $ 3,476,934 $ 789,847
----------- ----------- -----------
----------- ----------- -----------
BASIC AND DILUTED NET INCOME (LOSS) PER SHARE. . . . . . . . $ (0.14) $ 0.41 $ 0.13
----------- ----------- -----------
----------- ----------- -----------
BASIC AND DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING. . . . 8,853,296 8,508,908 5,983,420
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
<PAGE>
RURAL CELLULAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
CLASS A CLASS B
COMMON STOCK COMMON STOCK ADDITIONAL
--------------------- -------------------- PAID -IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1994 . . . . . . 4,302,671 $43,027 1,680,762 $16,808 $8,412,634
Net Income . . . . . . . . . . . . . - - - - -
- ---------------------------------------------------------------------------------------------------------------
BALANCE, December 31, 1995 . . . . . . 4,302,671 43,027 1,680,762 16,808 8,412,634
Issuance of common stock,
net of offering expenses. . . . . . 2,869,863 28,698 - - 26,033,215
Conversion of Class B common
stock to Class A common stock . . . 330,018 3,300 (330,018) (3,300) -
Net Income . . . . . . . . . . . . . - - - - -
- ---------------------------------------------------------------------------------------------------------------
BALANCE, December 31, 1996 . . . . . . 7,502,552 75,025 1,350,744 13,508 34,445,849
Conversion of Class B common
stock to Class A common stock . . . 90,076 901 (90,076) (901) -
Net Income . . . . . . . . . . . . . - - - - -
- ---------------------------------------------------------------------------------------------------------------
BALANCE, December 31, 1997 . . . . . . 7,592,628 $75,926 1,260,668 $12,607 $34,445,849
<CAPTION>
RETAINED
EARNINGS TOTAL
(ACCUMULATED SHAREHOLDER'S
DEFICIT) EQUITY
- --------------------------------------------------------------------------
<S> <C> <C>
BALANCE, December 31, 1994 . . . . . . $(3,804,811) $ 4,667,658
Net Income . . . . . . . . . . . . . 789,847 789,847
- --------------------------------------------------------------------------
BALANCE, December 31, 1995 . . . . . . (3,014,964) 5,457,505
Issuance of common stock,
net of offering expenses. . . . . . - 26,061,913
Conversion of Class B common
stock to Class A common stock . . . - -
Net Income . . . . . . . . . . . . . 3,476,934 3,476,934
- --------------------------------------------------------------------------
BALANCE, December 31, 1996 . . . . . . 461,970 34,996,352
Conversion of Class B common
stock to Class A common stock . . . - -
Net Income . . . . . . . . . . . . . (1,266,116) (1,266,116)
- --------------------------------------------------------------------------
BALANCE, December 31, 1997 . . . . . . $ (804,146) $33,730,236
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
<PAGE>
RURAL CELLULAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------
1997 1996 1995
------------- ------------ -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . $ (1,266,116) $ 3,476,934 $ 789,847
Adjustments to reconcile to net cash provided by
Operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . 12,458,286 5,539,067 3,249,313
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . - - 500,000
Equity in earnings (losses) of unconsolidated affiliates . . . . 350,539 (51,519) 37,021
Change in minority interest . . . . . . . . . . . . . . . . . . . (3,082,440) (330,892) -
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (41,662) (184,036) (186,332)
Change in other operating elements:
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . (1,008,231) (3,220,417) (640,326)
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . (27,448) (681,846) 294,973
Other current assets. . . . . . . . . . . . . . . . . . . . . . (262,193) (246,271) (7,283)
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . (2,524,360) 4,871,828 3,059,394
Advance billings and customer deposits. . . . . . . . . . . . . 796,791 435,502 145,204
Other accrued expenses. . . . . . . . . . . . . . . . . . . . . 2,649,214 30,517 (300,600)
------------- ------------ -----------
Net cash provided by operating activities . . . . . . . . . . 8,042,380 9,638,867 6,941,211
------------- ------------ -----------
INVESTING ACTIVITIES:
Purchases of property and equipment, net. . . . . . . . . . . . . . (34,927,880) (24,213,803) (9,312,820)
Contributions to unconsolidated affiliates. . . . . . . . . . . . . (2,500) (225,156) (368,964)
Purchases of restricted investments . . . . . . . . . . . . . . . . - - (101,178)
Purchases of Unicel and Northern Maine. . . . . . . . . . . . . . . (85,705,736) - -
Payments made for other assets. . . . . . . . . . . . . . . . . . . (4,064,126) - -
Other, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80,845 (996,713) (121,777)
------------- ------------ -----------
Net cash used in investing activities . . . . . . . . . . . . (124,619,397) (25,435,672) (9,904,739)
------------- ------------ -----------
FINANCING ACTIVITIES:
Proceeds from issuance of common stock,
net of offering expenses. . . . . . . . . . . . . . . . . . . . . - 26,540,066 (478,153)
Proceeds from issuance of long-term debt. . . . . . . . . . . . . . 137,695,000 14,740,927 4,251,648
Repayments of long-term debt. . . . . . . . . . . . . . . . . . . . (18,161,371) (25,371,826) (920,952)
Payments of debt issuance costs . . . . . . . . . . . . . . . . . . (1,199,483) - -
------------- ------------ -----------
Net cash provided by financing activities . . . . . . . . . . 118,334,146 15,909,167 2,852,543
------------- ------------ -----------
NET INCREASE (DECREASE) IN CASH . . . . . . . . . . . . . . . . . . . 1,757,129 112,362 (110,985)
CASH, at beginning of year . . . . . . . . . . . . . . . . . . . . . 237,499 125,137 236,122
------------- ------------ -----------
CASH, at end of year . . . . . . . . . . . . . . . . . . . . . . . . $ 1,994,628 $ 237,499 $ 125,137
------------- ------------ -----------
------------- ------------ -----------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
<PAGE>
RURAL CELLULAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
(CONTINUED)
1. ORGANIZATION AND NATURE OF BUSINESS:
Rural Cellular Corporation and its subsidiaries ("Company" or "RCC") provide
cellular communication service in the northern half of Minnesota and portions
of Maine and paging service in northern Minnesota and eastern North Dakota
("Company Service Area"). The Company operates its cellular and paging
systems under licenses granted by the Federal Communications Commission
("FCC"). The Company's operations are subject to the applicable rules and
regulations of the FCC.
2. ACQUISITIONS:
WIRELESS ALLIANCE, LLC
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 selected cellular communication reselling
markets in Minnesota, Wisconsin, North Dakota and South Dakota. In addition,
these markets include 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.
Effective May 1, 1997, the Company completed the acquisition of the Maine
wireless telephone operations and related assets of Unity Cellular System,
Inc. ("Unicel") and related cellular and microwave licenses from InterCel
Licenses, Inc., both wholly owned subsidiaries of InterCel, Inc. In
addition, the Company acquired Unicel's 51% interest in Northern Maine
Cellular Partnership ("Northern Maine"). The Company operates its Maine
operations through a wholly owned subsidiary known as MRCC, Inc. Total
consideration paid for the net assets acquired was approximately $77 million
in cash. The Company also acquired the remaining 49% interest in Northern
Maine from an unrelated third party for approximately $7 million. The
acquisitions were funded with the proceeds of borrowings under a revolving
credit facility with a group of banks headed by T.D. Securities (USA), Inc.,
formerly known as Toronto-Dominion Bank. The acquisitions have been
accounted for under the purchase method of accounting. See note three for the
purchase price allocation of the acquired net assets.
The following unaudited pro forma information presents the consolidated
results of operations as if the acquisitions had occurred as of January 1,
1996. This summary is not necessarily indicative of what the results of
operations of the Company and the acquired entities had been if they were a
single entity during such periods, nor does it purport to represent results
of operations for any future periods.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1997 1996
----------- -----------
<S> <C> <C>
Total revenues .......................................... $58,720,638 $46,544,493
Operating income ........................................ 1,767,256 4,061,485
Loss before cumulative effect of accounting
change, net of tax .................................... (3,860,945) (3,096,254)
Net loss ............................................... (3,860,945) (4,349,435)
Basic net loss per share ................................ $ (.44) $ (.51)
</TABLE>
F-7
<PAGE>
RURAL CELLULAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
(CONTINUED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of RCC and its
wholly-owned subsidiaries, MRCC, Inc., 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. 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 or reselling cellular and paging
services to customers of the Company and 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.
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 (LOSS) PER COMMON SHARE
In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"),
which changed the way companies calculate their earnings per share (EPS).
SFAS 128 replaced primary EPS with basic EPS. Basic EPS is computed by
dividing net income (loss) by the weighted average number of shares
outstanding during the year. Diluted EPS is computed by including dilutive
common stock equivalents with the basic weighted average shares outstanding.
The Company adopted SFAS 128 in 1997, at which time all prior year EPS was
restated in accordance with SFAS 128.
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.
F-8
<PAGE>
RURAL CELLULAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
(CONTINUED)
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 expenses as incurred.
Depreciation is computed using the straight-line method based on the
estimated useful life of the asset. The components of property and equipment
and the useful lives of the assets are as follows as of December 31:
<TABLE>
<CAPTION>
PROPERTY AND EQUIPMENT: 1997 1996 USEFUL LIVES
---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Land $ 1,965,323 $ 1,233,007 N/A
Building and towers 23,835,317 13,680,928 15 Years
Equipment 62,164,386 35,650,325 2-10 Years
Furniture and fixtures 6,603,957 3,626,247 3-10 Years
Assets under construction 7,225,192 1,241,124 N/A
---------------------------------------------------------------------------------------
Property and equipment 101,794,175 55,431,631
Less--accumulated depreciation (23,873,892) (13,496,134)
---------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT, NET $ 77,920,283 $ 41,935,497
---------------------------------------------------------------------------------------
</TABLE>
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 and the interest expense for projects that extend beyond
one year.
INVESTMENTS
Investments in unconsolidated affiliates are accounted for using the equity
method and represent the Company's ownership interests in Switch 2000, Inc.
and Cellular 2000, Inc. Switch 2000, Inc. provides cellular switching and
interconnection services to the Company. Cellular 2000, Inc. is an entity
organized to own the trade name and related trademark for Cellular 2000.
Restricted investments represent the Company's investments 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 AND OTHER INTANGIBLE ASSETS
Licenses consist of the cost of acquiring paging licenses, the value assigned
to the Wireless Alliance PCS licenses, and the value assigned to cellular
licenses acquired through the acquisitions of Unicel and Northern Maine.
Paging licenses are being amortized on a straight-line basis over 40 years
while the Unicel and Northern Maine licenses are being amortized on a
composite, straight-line basis over 33 years. The Wireless Alliance PCS
license will be amortized over 40 years when the PCS network becomes
operational. Other intangibles, resulting primarily from the acquisitions of
Unicel and Northern Maine, include the value assigned to subscriber lists,
noncompete agreements and goodwill. Other intangibles are being amortized
on a composite, straight-line basis over 33 years.
F-9
<PAGE>
RURAL CELLULAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
(CONTINUED)
The components of licenses and other intangible assets are as follows as of
December 31:
<TABLE>
<CAPTION>
1997 1996
------------------------------------------------------------------
<S> <C> <C>
LICENSES:
Cellular $31,891,000 $ -
PCS 9,628,812 6,453,475
Paging 275,000 275,000
OTHER INTANGIBLE ASSETS 41,043,881 -
------------------------------------------------------------------
82,838,693 6,728,475
Less-accumulated amortization (1,490,456) (18,056)
------------------------------------------------------------------
LICENSES AND OTHER INTANGIBLE ASSETS $81,348,237 $6,710,419
------------------------------------------------------------------
</TABLE>
OTHER ASSETS
Other assets primarily consist of costs related to deferred financing and
spectrum relocation. Deferred financing costs are amortized over the life of
the debt agreement. Spectrum relocation costs will be amortized when the PCS
network becomes operational.
BUSINESS AND CREDIT CONCENTRATIONS
The Company's primarily cellular customers are geographically located in the
northern half of Minnesota, eastern North Dakota and central Maine. 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
long-lived 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, 1997 and 1996.
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 1996 and 1995 amounts in the accompanying consolidated financial
statements have been reclassified to conform to the 1997 presentation. These
reclassifications had no effect on consolidated net income or total
shareholders' equity as previously reported.
F-10
<PAGE>
RURAL CELLULAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
(CONTINUED)
4. LONG-TERM DEBT:
On May 1, 1997, the Company entered into an agreement with T. D. Securities
(USA), Inc. for a $140 million Senior Secured Reducing Revolving Credit
Facility (the Facility). On December 30, 1997, the Company completed an
amendment to this agreement increasing the Facility to $160 million. Under
the Facility, amounts may be borrowed or repaid at any time through maturity
provided that, at no time, the aggregate outstanding borrowings exceed the
total of the Facility. During the second quarter of 1997, proceeds from the
Facility were used to acquire the net assets of Unicel and Northern Maine and
to refinance all outstanding amounts under the Company's previous loan
facility with the St. Paul Bank for Cooperatives.
At the Company's discretion, advances under the Facility bear interest at
LIBOR (London Interbank Offering Rate) or base rate plus an applicable margin
and will be based on the Company's ratio of indebtedness to annualized
operating cash flow as of the end of the most recently completed fiscal
quarter. A commitment fee on the unused portion of the Facility is payable
quarterly. Facility security has been provided by a pledge of all the assets
of the Company including stock of all operating subsidiaries of the Company
and Wireless Alliance. Mandatory commitment reductions will be required upon
any material sale of assets. The Facility is subject to various covenants
including the ratio of indebtedness to annualized operating cash flow and the
ratio of annualized operating cash flow to interest expense. As of December
31, 1997, the Company is in compliance with all covenants under the Facility.
The Company has entered into three-year interest rate swap agreements with
two commercial banks in order to manage the relationship of its fixed rate
versus floating rate debt. Income and expense associated with swap
transactions are accrued over the periods prescribed by the contracts.
These agreements, which relate to $80 million of debt, effectively increased
the Company's interest rate on the debt by approximately .3% in fiscal year
1997. The fair values of the interest rate swap agreements as of December
31, 1997 were not significant.
Future scheduled maturities of the Company's debt are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
---------------------------------------
<S> <C>
1998 $ -
1999 10,000,000
2000 20,000,000
2001 25,000,000
2002 25,000,000
Thereafter 48,000,000
---------------------------------------
$128,000,000
---------------------------------------
---------------------------------------
</TABLE>
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, 1997.
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.
F-11
<PAGE>
RURAL CELLULAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
(CONTINUED)
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 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. Further, 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 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 authorize 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.
Options outstanding as of December 31, 1997 have exercise prices ranging
between $8.75 and $13.06 and a weighted average remaining contractual life of
10 years. Information related to stock options is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1996 1997
------------------- --------------------
Weighted Weighted
Average Average
Exercise Exercise
Options Shares Price Shares Price
------- ------------------- --------------------
<S> <C> <C> <C> <C>
Outstanding beginning of
period - $ - 459,700 $ 9.99
Granted 549,700 10.32 319,750 9.09
Exercised - - - -
Canceled (90,000) 12.00 (44,250) 8.75
------------------- --------------------
Outstanding, end of period 459,700 9.99 735,200 9.47
------------------- --------------------
Exercisable, end of period 55,200 $ 9.92 161,895 $ 9.92
------------------- --------------------
Weighted average fair value
of options granted $ 5.60 $ 6.40
</TABLE>
F-12
<PAGE>
RURAL CELLULAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
(CONTINUED)
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
(loss) per share would have been reduced to the following pro forma amounts:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1997 1996
---------------------------------
<S> <C> <C>
Net income (loss):
As reported $(1,266,116) $3,476,934
Pro forma (1,890,506) 3,215,468
Net income (loss) per share:
As reported $(.14) $.41
Pro forma (.21) .38
</TABLE>
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 1997 and 1996: expected volatility of
51.61% and 48.5%, respectively; risk-free interest rates of 6.3%; and no
expected dividend yield. The per share weighted average fair value of
options granted in 1996 and 1997 was $5.75 per share and $6.40 per share,
respectively.
6. INCOME TAXES:
The components of the Company's income tax provision are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal................... - $106,000 $ 40,003
State..................... - 94,000 35,000
-------- -------- --------
- 200,000 75,003
Deferred.................... - - 500,000
-------- -------- --------
- $200,000 $575,00
-------- -------- --------
-------- -------- --------
</TABLE>
Reconciliation between the federal income tax rate and the effective income
tax rate is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Federal income tax rate.............................. - 34.0% 34.0%
Tax benefit of loss carryforwards.................... - (29.8) -
Penalties and fines.................................. - - (2.1)
State income taxes, net of federal tax benefit....... - 1.2 6.5
Other, net........................................... - - 3.7
------ ------ ------
- 5.4% 42.1%
------ ------ ------
------ ------ ------
</TABLE>
F-13
<PAGE>
RURAL CELLULAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
(CONTINUED)
The income tax effect of the items that create deferred income tax assets and
liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1997 1996
----------- -----------
<S> <C> <C>
Deferred income tax assets:
Operating loss carryforwards........... $ 4,488,000 $ 1,795,000
Temporary differences:
Allowance for doubtful accounts...... 450,000 123,000
Other................................ 302,000 202,000
Valuation allowance.................... (400,000) -
----------- -----------
Total deferred income tax assets..... 4,840,000 2,120,000
Deferred income tax liabilities:
Depreciation........................... (3,971,000) (1,948,000)
Intangible assets...................... (724,000) -
Other.................................. (145,000) (172,000)
----------- -----------
Net deferred income tax asset........ $ - $ -
----------- -----------
----------- -----------
</TABLE>
A valuation allowance was established in 1997 for net deferred income tax
assets not expected to be offset by deferred income tax liabilities due to
the uncertainty of the realization of future tax benefits.
As of December 31, 1997, the Company had tax operating loss carryforwards of
approximately $11,091,000 available to offset future income tax liabilities.
These carryforwards expire in the years 2006 through 2012. The Tax Reform
Act of 1986 contains provisions that 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
The Company had capital expenditure purchase commitments outstanding of
approximately $8.4 million as of December 31, 1997.
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 agreements. The maximum
contingent liability under these agreements was $1.7 million at December 31,
1997.
LEGAL AND REGULATORY MATTERS
The Company is subject to various legal and regulatory matters arising in the
normal course of business. Management does not believe 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-14
<PAGE>
RURAL CELLULAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
(CONTINUED)
LEASES
The Company leases office space and real estate under noncancelable operating
leases. Future minimum payments under these leases as of December 31, 1997
are as follows:
<TABLE>
<CAPTION>
Year
----
<S> <C>
1998.................................... $ 504,000
1999.................................... 434,000
2000.................................... 347,000
2001.................................... 247,000
2002.................................... 147,000
Thereafter.............................. 619,000
----------
Total................................. $2,298,000
----------
----------
</TABLE>
Under the terms of the lease agreements, the Company also is responsible for
certain operating expenses and taxes. Total rent expense of $839,000,
$379,000, and $347,000 was charged to operations for the years ended December
31, 1997, 1996 and 1995.
8. INVESTMENTS IN UNCONSOLIDATED AFFILIATES:
The Company holds a 40.77% ownership interest in Switch 2000, Inc. and a
41.67% ownership interest in Cellular 2000, Inc., and an entity with no
operations to date. As of December 31, 1997, the investment in
unconsolidated affiliates represents $1,687,000 of stock and capital
contributions less $592,000 of cumulative losses. Combined condensed results
of operations and net assets of these entities are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Results of operations:
Revenues........................ $ 6,655,665 $ 9,201,380 $ 7,074,877
Operating expenses.............. (7,541,533) (9,044,303) (7,035,889)
Other income (expense), net..... 5,181 (11,811) (129,791)
----------- ----------- -----------
Net income (loss)............. $ (880,687) $ 145,266 $ (90,803)
----------- ----------- -----------
----------- ----------- -----------
Company's share of net income..... $ (350,539) $ 51,519 $ (37,021)
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
Net assets and liabilities:
Current assets............................ $ 549,541 $ 455,292
Noncurrent assets......................... 2,827,325 4,064,677
Current liabilities....................... (708,893) (743,309)
Noncurrent liabilities.................... - (228,000)
------------ ------------
Equity.................................. $2,667,973 $3,548,660
------------ ------------
------------ ------------
</TABLE>
F-15
<PAGE>
RURAL CELLULAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
(CONTINUED)
9. RELATED-PARTY TRANSACTIONS:
AFFILIATE AGREEMENT
The Company pays Switch 2000, Inc. for cellular switching and interconnection
services. The rates of reimbursement are negotiated by the parties to the
agreement and reflect rates charged by other service providers. Amounts
billed by Switch 2000, Inc. to the Company totaled $3,230,000, $4,824,000
and, $3,753,000 for the years ended December 31, 1997, 1996 and 1995.
ROAMING AGREEMENT
The Company has a roaming agreement with a partnership that is affiliated
with a beneficial owner of greater than 10% of the Company's common stock.
Roaming charges are passed through to the customer. The rates of
reimbursement are negotiated by the parties to the agreement and reflect
rates charged by other service providers. Net payments by the Company to the
partnership were $167,000, $331,000, and $306,000 for the years ended
December 31, 1997, 1996 and 1995.
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, 1997, 1996 and 1995
were $162,000, $74,000, and $66,000. 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:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Cash paid for:
Interest ........................................ $4,630,281 $ 563,948 $1,400,722
Income taxes .................................... 64,032 805,000 98,136
Noncash investing and financing activity:
Contribution by Aerial Communications, Inc.
of PCS licenses ............................... 3,175,337 6,453,475 -
</TABLE>
F-16
<PAGE>
RURAL CELLULAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
(CONTINUED)
12. SUBSEQUENT EVENTS:
On February 13, 1998, the Company entered into a definitive agreement to
purchase the net assets of Atlantic Cellular, L.P. ("Atlantic") for
approximately $256 million. The cellular properties to be acquired from
Atlantic include the entire state of Vermont (RSA 1, RSA 2 and the Burlington
Metropolitan Statistical Area); western New Hampshire (RSA 1); the
northeastern corner of New York (RSA 2); and northwestern Massachusetts (RSA
1).
On February 19, 1998, the Company entered into a definitive agreement to
purchase Western Maine Cellular (WMC), a wholly owned subsidiary of
Utilities, Inc. for approximately $7.5 million. The cellular properties
provide service to western Maine (RSA 1).
Long term financing to support both the purchases of Atlantic and WMC has
been arranged through Toronto Dominion Bank, which has also acted as a
financial advisor to the Company.
F-17
<PAGE>
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 6,
1998. 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 Security and
Exchange Commission's 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 6, 1998
S-1
<PAGE>
RURAL CELLULAR CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
1997 1996 1995
---------- --------- ---------
<S> <C> <C> <C>
Balance, at beginning of year......... $ 308,000 $ 162,845 $ 143,806
Additions charged to income......... 1,510,568 602,558 246,156
Write-offs, net of recoveries....... (672,568) (457,403) (227,117)
---------- --------- ---------
Balance, at end of year............... $1,146,000 $ 308,000 $ 162,845
---------- --------- ---------
---------- --------- ---------
</TABLE>
S-2
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Number Description Page
- -------------------------------------------------------------------------------
<S> <C> <C>
2.1 Asset Purchase Agreement dated December 23, 1996 by and [i]
among the Registrant, Unity Cellular Systems, Inc., InterCel
Licenses, Inc. and InterCel, Inc.
2.2 Partnership Interest Purchase Agreement dated April 18, 1997 [ii]
by and between Cellco Partnership dba Bell Atlantic NYNEX
Mobile, Inc. and MRCC, Inc.
3.1 Articles of Incorporation, as amended and restated to date [iii]
3.2 Bylaws, as amended and restated to date [iii]
10.1(a) Loan Agreement dated May 1, 1997 (the "Loan Agreement") [ii]
among the Registrant and The Toronto Dominion Bank, Bank
Boston, N.A., St. Paul Bank for Cooperatives, CoBank, Fleet
National Bank, First National Bank of Maryland, Societe
Generale, New York Branch, and Merita Bank Ltd New York
Branch (the "Banks"), BankBoston, N.A. and St. Paul Bank for
Cooperatives (the Co-Agents"), and Toronto Dominion (Texas),
Inc. (the "Administrative Agent")
10.1(b) Amendment to the Loan Agreement dated December 30, 1997
10.2 Loan Agreement with St. Paul Bank for Cooperatives dated [iv]
April 25, 1996
10.3 Cellular Switch User Agreement, as amended [iii]
10.4 Switch 2000 LLC Cellular Equipment User Agreement [iii]
10.5 Purchase Agreement by and between RCC Network, Inc. and [iii]
Harris Corporation, Farinon Division, dated May 12, 1995
10.6 Cell Site Purchase Agreement between Northern Telecom, Inc. [iii]
and Registrant dated November 24, 1993, as amended on
October 25, 1995
10.7(a) Trademark and Trade Name License Agreements between Cellular [iii]
2000, Inc. and:
(i) North Woods Cellular Partnership
(ii) Northern Lights Cellular Partnership
(ii) Great River Cellular Partnership
(iv) Cellular Five Partnership
(v) Heartland Cellular Partnership
10.7(b) Assignment and Assumption Agreements by and between the [iii]
Registrant and each partnership
10.8 Roaming Agreement with CSM of St. Cloud [iii]
*10.9 1995 Stock Compensation Plan, as amended to date [v]
*10.10 Stock Option Plan for Nonemployee Directors, as amended to [v]
date
*10.11(a) Employment Agreement with Richard P. Ekstrand effective [iii]
December 1, 1995
*10.11(b) Amendment to Employment Agreement with Mr. Ekstrand [v]
effective December 18, 1996
*10.11(c) Amendment to Employment Agreement with Mr. Ekstrand
effective December 18, 1997
*10.12(a) Employment Agreement with Scott G. Donlea effective December [v]
1, 1995
*10.12(b) Amendment to Employment Agreement with Mr. Donlea effective [v]
December 18, 1996
*10.12(c) Amendment to Employment Agreement with Mr. Donlea effective
December 18, 1997
*10.13(a) Employment Agreement with Wesley E. Schultz effective May
14, 1996
*10.13(b) Amendment to Employment Agreement with Mr. Schultz effective
December 18, 1996
*10.13(c) Amendment to Employment Agreement with Mr. Schultz effective
December 18, 1997
21 Subsidiaries of Registrant
23 Consent of Independent Public Accountants
</TABLE>
*Indicates management contract or compensatory plan or agreement required to
be filed as an exhibit to this Form.
[i] Filed as an exhibit to Report on Form 8-K dated December 23, 1996 and
incorporated herein by reference.
[ii] Filed as an exhibit to Report on Form 8-K dated May 1, 1997 and
incorporated herein by reference.
[iii] Filed as an exhibit to Registration Statement on Form S-1 (Sec. No.
33-80189) filed December 8, 1995 and incorporated herein by reference.
[iv] Filed as an exhibit to Report on Form 10-Q for the quarter ended June
30, 1996 and incorporated herein by reference.
[v] Filed as an exhibit to Report on Form 10-K for the year ended December
31, 1996 and incorporated herein by reference.
49
<PAGE>
EXHIBIT 10.1(b)
AFFIRMATION OF SECURITY DOCUMENTS
The undersigned, who are the authorized signatories of RCC NETWORK, INC.,
RCC PAGING, INC., RCC WIRELESS COMPANY AND MRCC, INC. (each a "SUBSIDIARY" and,
collectively, the "SUBSIDIARIES"), do hereby certify that they are Subsidiaries
of Rural Cellular Corporation, a Minnesota corporation (the "Borrower").
In connection with the execution and delivery of the Second Amendment to
Loan Agreement dated as of even date herewith (the "AMENDMENT") by and among the
Borrower, the Banks signatories thereto (collectively, and together with each
other financial institution which subsequently becomes a 'Bank' under the Loan
Agreement as such term is defined therein, the "Banks"), BankBoston, N.A. and
St. Paul Bank for Cooperatives, as co-agents (collectively, in such capacity,
the "CO-AGENTS"), and Toronto Dominion (Texas), Inc., as administrative agent
for the Banks (the "ADMINISTRATIVE AGENT"), the undersigned hereby further
certify and agree with the Administrative Agent, the Co-Agents and the Banks
that:
1. In connection with the Loan Agreement, the Subsidiaries of the
Borrower have executed and delivered to the Administrative Agent on behalf of
the Banks various Security Documents, including, without limitation, (a) that
certain Subsidiary Guaranty of RCC Network, Inc. dated as of May 1, 1997 (the
"RCC NETWORK GUARANTY"); (b) that certain Subsidiary Guaranty of RCC Paging,
Inc. dated as of May 1, 1997 (the "RCC PAGING GUARANTY"); (c) that certain
Subsidiary Guaranty of RCC Wireless Company dated as of May 1, 1997 (the "RCC
WIRELESS GUARANTY"); (d) that certain Subsidiary Guaranty of MRCC, Inc. dated as
of May 1, 1997 (the "MRCC GUARANTY," and collectively with the RCC Network
Guaranty, the RCC Paging Guaranty and the RCC Wireless Guaranty, the
"GUARANTIES"); (e) that certain Subsidiary Security Agreement of RCC Network,
Inc. dated as of May 1, 1997; (f) that certain Subsidiary Security Agreement of
RCC Paging, Inc. dated as of May 1, 1997; (g) that certain Subsidiary Security
Agreement of RCC Wireless Company dated as of May 1, 1997; and (h) that certain
Subsidiary Security Agreement of MRCC, Inc. dated as of May 1, 1997. Items (a)
through (h) above are hereinafter referred to, collectively, as the "PRIOR
SECURITY DOCUMENTS."
2. The security interest in the Collateral granted to the Administrative
Agent for the benefit of itself and the Banks under the Prior Security Documents
is hereby confirmed and reaffirmed.
3. The Prior Security Documents, including the Guaranties, remain in full
force and effect as of the date hereof and are enforceable in accordance with
their respective terms.
4. Each Subsidiary hereby consents to and acknowledges the Amendment and
agrees that it shall remain bound by the Prior Security Documents to which it is
a party and further agrees that the "Obligations" guaranteed by the Guaranties
include, without limitation, the Obligations as modified by the Amendment
5. Capitalized terms used herein and not otherwise defined are used as
defined in the Loan Agreement.
[THE REMAINDER OF THIS PAGE INTENTIALLY LEFT BLANK]
<PAGE>
AMENDED AND RESTATED NOTE
$26,285,714.28 DECEMBER 30, 1997
FOR VALUE RECEIVED, the undersigned, RURAL CELLULAR CORPORATION, a
Minnesota corporation (the "BORROWER"), promises to pay to the order of THE
TORONTO-DOMINION BANK (hereinafter, together with its successors and.assigns,
called the "BANK"), in immediately available funds, at such place as is
designated in or pursuant to the Loan Agreement (as hereinafter defined), the
principal sum of TWENTYSIX MILLION TWO HUNDRED EIGHTY-FIVE THOUSAND SEVEN
HUNDRED FOURT'EEN AND 28/100s DOLLARS ($26,285,714.28) of United States funds,
or, if less so much thereof as may from time to time be advanced by the Bank to
the Borrower and is outstanding hereunder, plus interest as hereinafter
provided. Such advances may be endorsed from time to time on the grid attached
hereto, but the failure to make such notations (or any error in such notation)
shall not affect the obligation of the Borrower to repay unpaid principal and
interest hereunder.
Except as otherwise defined or limited herein, capitalized terms used
herein shall have the meanings ascribed to them in that certain Loan Agreement
(as modified, amended and supplemented from time to time, the "LOAN AGREEMENT")
dated as of May 1, 1997 herewith among the Borrower, the Bank, the other
financial institutions which are from time to time parties thereto and Toronto
Dominion (Texas), Inc., as administrative agent (the "ADMINISTRATIVE AGENT").
The principal amount of this Note shall be paid in such amounts and at such
times as are set forth in Sections 2.5 and 2.7 of the Loan Agreement. A final
payment of all principal amounts and other Obligations then outstanding
hereunder shall be due and payable in full on the Maturity Date.
The Borrower shall be entitled to borrow, repay and reborrow hereunder
pursuant to the terms and conditions of the Loan Agreement. Prepayment of the
principal amount hereof may be made only as provided in the Loan Agreement. The
principal amount of each Advance shall be repaid on its Payment Date.
The Borrower hereby promises to pay interest on the unpaid principal amount
of the Loans outstanding hereunder as provided in the Loan Agreement. Interest
under this Note shall also be due and payable when this Note shall become due
(whether at maturity, by reason of acceleration or otherwise). Overdue
principal and, to the extent permitted by Applicable Law, overdue interest shall
bear interest at the Default Rate as provided in the Loan Agreement.
No provision of the Loan Agreement or this Note shall require the payment
or permit the collection of interest in excess of that permitted by Applicable
Law. If any excess amount of interest in such respect is provided for, or shall
be adjudicated to be so provided for, in connection with the Loans outstanding
hereunder, the provisions of this paragraph shall govern and prevail, and
neither the Borrower nor any sureties, guarantors, successors or assigns of the
Borrower shall be obligated to pay the excess amount of such interest or any
other excess sum paid for the use, forbearance, or detention of sums loaned
pursuant hereto. In the event the Borrower ever pays, or the Bank ever
receives, collects or applies as interest any such sum, such amount which would
be in excess of the maximum amount permitted by Applicable Law shall be applied
as a payment in the reduction of the principal, unless the Borrower shall notify
the Bank in writing that it elects to have such excess returned forthwith; and,
if the principal has been paid in full, any remaining excess shall forthwith be
returned to the Borrower. Because of the variable nature of the rates of
interest applicable to the Loans evidenced by this Note, the total interest that
will accrue hereon cannot be determined in advance. Neither the Borrower nor
the Bank intends for the Bank to contract for, charge or receive usurious
interest and, to prevent such an occurrence, any agreements which may now or
hereafter be in effect between the Borrower and the Bank regarding the payment
of fees to the Bank are hereby limited by the provisions of this paragraph. To
the extent not prohibited by Applicable Law, determination of the legal maximum
amount of interest shall at all times be made by amortizing, prorating or
allocating all interest at any time converted for, charged or received from the
Borrower in connection with the portion of the Loans outstanding hereunder until
<PAGE>
the Maturity Date, so that the actual rate of interest on account of the Loans
outstanding hereuner does not exceed the maximum amount permitted under
Applicable Law.
All parties now or hereafter liable with respect to this Note, whether the
Borrower, any guarantor, endorser or any other person or entities, hereby waive
presentment for payment, demand, notice of nonpayment or dishonor, protest and
notice of protest.
No delay or omission on the part of the Bank or any holder hereof in
exercising its rights under this Note, or delay or omission on the part of the
Bank, the Administrative Agent or the Banks collectively, in exercising its or
their rights under the Loan Agreement or any other Loan Documents, or course of
conduct relating thereto, shall operate as a waiver of such right or any other
right of the Bank or any holder hereof, nor shall any waiver by the Bank, the
Administrative Agent or the Banks collectively, or any holder hereof, of any
such right or rights on any one occasion be deemed a bar to, or waiver of, the
same right or rights on any future occasion.
The Borrower promises to pay all reasonable costs of collection, including
attorneys' fees, should this Note be collected by or through an attorney-at-law
or under advice therefrom.
Time is of the essence of this Note.
This Note evidences the Banks portion of the Loans under, and is entitled
to the benefits and subject to the terms of, the Loan Agreement which contains
provisions with respect of the acceleration of the maturity of this Note upon
the happening of certain stated events and provisions for prepayment. This Note
is secured by and is also entitled to the benefits of the Security Documents.
This Note shall be construed in accordance with and governed by the
internal laws of the State of New York applicable to contracts made and to be
performed in the State of New York.
THIS NOTE IS ONE OF SEVERAL PROMISSORY NOTES WHICH AMENDS AND RESTATES
CERTAIN PROMISSORY NOTES MADE AND GIVEN BY THE BORROWER PURSUANT TO TBE LOAN
AGREEMENT AND DOES NOT REPRESENT A NOVATION THEREOF OR THE INDEBTEDNESS
EVIDENCED THEREBY.
<PAGE>
AMENDED AND RESTATED NOTE
$20,571,428.57 DECEMBER 30, 1997
FOR VALUE RECEIVED, the undersigned, RURAL CELLULAR CORPORATION, a
Minnesota corporation (the "BORROWER"), promises to pay to the order of
BANKBOSTON, N.A. (hereinafter, together with its successors and assigns, called
the . ("BANK"), in immediately available funds, at such place as is designated
in or pursuant to the Loan Agreement (as hereinafter defined), the principal sum
of TWENTY MILLION FIVE HUNDRED SEVENTY-ONE T'HOUSAND FOUR HUNDRED TWENTY-EIGHT
AND 57/100s DOLLARS ($20,571,428.57) of United States funds, or, if less, so
much thereof as may from time to time be advanced by the Bank to the Borrower
and is outstanding hereunder, plus interest as hereinafter provided. Such
advances may be endorsed from time to time on the grid attached hereto, but the
failure to make such notations (or any error in such notation) shall not affect
the obligation of the Borrower to repay unpaid principal and interest hereunder.
Except as otherwise defined or limited herein, capitalized terms used
herein shall have the meanings ascribed to them in that certain Loan Agreement
(as modified, amended and supplemented from time to time, the "LOAN AGREEMENT")
dated as of May 1, 1997 herewith among the Borrower, the Bank, the other
financial institutions which are from time to time parties thereto and Toronto
Dominion (Texas), Inc., as administrative agent (the "ADMINISTRATIVE AGENT").
The principal amount of this Note shall be paid in such amounts and at such
times as are set forth in Sections 2.5 and 2.7 of the Loan Agreement. A final
payment of all principal amounts and other Obligations then outstanding
hereunder shall be due and payable in full on the Maturity Date.
The Borrower shall be entitled to borrow, repay and reborrow hereunder
pursuant to the terms and conditions of the Loan Agreement. Prepayment of the
principal amount hereof may be made only as provided in the Loan Agreement. The
principal amount of each Advance shall be repaid on its Payment Date.
The Borrower hereby promises to pay interest on the unpaid principal amount
of the Loans outstanding hereunder as provided in the Loan Agreement. Interest
under this Note shall also be due and payable when this Note shall become due
(whether at maturity, by reason of acceleration or otherwise). Overdue
principal and, to the extent permitted by Applicable Law, overdue interest,
shall bear interest at the Default Rate as provided in the Loan Agreement.
No provision of the Loan Agreement or this Note shall require the payment
or permit the collection of interest in excess of that permitted by Applicable
Law. If any excess amount of interest in such respect is provided for, or shall
be adjudicated to be so provided for, in connection with the Loans outstanding
hereunder, the provisions of this paragraph shall govern and prevail, and
neither the Borrower nor any sureties, guarantors, successors or assigns of the
Borrower shall be obligated to pay the excess amount of such interest or any
other excess sum paid for the use, forbearance, or detention of sums loaned
pursuant hereto. In the event the Borrower ever pays, or the Bank ever
receives, collects or applies as interest any such sum, such amount which would
be in excess of the maximum amount permitted by Applicable Law shall be applied
as a payment in the reduction of the principal, unless the Borrower shall notify
the Bank in writing that it elects to have such excess returned forthwith; and,
if the principal has been paid in full, any remaining excess shall forthwith be
returned to the Borrower. Because of the variable nature of the rates of
interest applicable to the Loans evidenced by this Note, the total interest that
will accrue hereon cannot be determined in advance. Neither the Borrower nor
the Bank intends for the Bank to contract for, charge or receive usurious
interest and, to prevent such an occurrence, any agreements which may now or
hereafter be in effect between the Borrower and the Bank regarding the payment
of fees to the Bank are hereby limited by the provisions of this paragraph. To
the extent not prohibited by Applicable Law, determination of the legal maximum
amount of interest shall at all times be made by amortizing, prorating or
allocating all interest at any time contracted for, charged or received from the
Borrower in connection with the portion of the Loans outstanding hereunder until
the Maturity Date, so that the actual rate of interest on account of the Loans
outstanding hereuder does not exceed the maximum amount permitted under
Applicable Law.
<PAGE>
All parties now or hereafter liable with respect to this Note, whether the
Borrower, any guarantor, endorser or any other person or entities, hereby waive
presentment for payment, demand, notice of nonpayment or dishonor, protest and
notice of protest.
No delay or omission on the part of the Bank or any holder hereof in
exercising its rights under this Note, or delay or omission on the part of the
Bank, the Administrative Agent or the Banks collectively, in exercising its or
their rights under the Loan Agreement or any other Loan Documents, or course of
conduct relating thereto, shall operate as a waiver of such right or any other
right of the Bank or any holder hereof, nor shall any waiver by the Bank, the
Administrative Agent or the Banks collectively, or any holder hereof, of any
such right or rights on any one occasion be deemed a bar to, or waiver of, the
same right or rights on any future occasion.
The Borrower promises to pay all reasonable costs of collection, including
attorney's fees, should this Note be collected by or through an attorney-at-law
or under advice therefrom.
Time is of the essence of this Note.
This Note evidences the Bank's portion of the Loans under, and is entitled
to the benefits and subject to the terms of, the Loan Agreement which contains
provisions with respect of the acceleration of the maturity of this Note upon
the happening of certain stated events and provisions for prepayment. This Note
is secured by and is also entitled to the benefits of the Security Documents.
This Note shall be construed in accordance with and governed by the
internal laws of the State of New York applicable to contracts made and to be
performed in the State of New York.
THIS NOTE IS ONE OF SEVERAL PROMISSORY NOTES WHICH AMENDS AND RESTATES
CERTAIN PROMISSORY NOTES MADE AND GIVEN BY THE BORROWER PURSUANT TO THE LOAN
AGREEMENT AND DOES NOT REPRESENT A NOVATION THEREOF OR THE INDEBTEDNESS
EVIDENCED THEREBY.
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
AMENDED AND RESTATED NOTE
$18,857,142.86 DECEMBER 30, 1997
FOR VALUE RECEIVED, the undersigned, RURAL CELLULAR CORPORATION, a
Minnesota corporation (the "BORROWER"), promises to pay to the order of COBANK
(hereinafter, together with its successors and assigns, called the "BANK"'), in
immediately available funds, at such place as is designated in or pursuant to
the Loan Agreement (as hereinafter defined), the principal sum of EIGHTEEN
MILLION EIGHT HUNDRED FIFTY-SEVEN THOUSAND ONE HUNDRED FORTY-TWO AND 86/100s
DOLLARS ($18,857,142.86) of United States funds, or, if less, so much thereof as
may from time to time be advanced by the Bank to the Borrower and is outstanding
hereunder, plus interest as hereinafter provided. Such advances may be endorsed
from time to time on the grid attached hereto, but the failure to make such
notations (or any error in such notation) shall not affect the obligation of the
Borrower to repay unpaid principal and interest hereunder.
Except as otherwise defined or limited herein, capitalized terms used
herein shall have the meanings ascribed to them in that certain Loan Agreement
(as modified, amended and supplemented from time to time, the "LOAN AGREEMENT")
dated as of May 1, 1997 herewith among the Borrower, the Bank, the other
financial institutions which are from time to time parties thereto and Toronto
Dominion (Texas), Inc., as administrative agent (the "ADMINISTRATIVE AGENT").
The principal amount of this Note shall be paid in such amounts and at such
times as are set forth in Sections 2.5 and 2.7 of the Loan Agreement. A final
payment of all principal amounts and other Obligations then outstanding
hereunder shall be due and payable in full on the Maturity Date.
The Borrower shall be entitled to borrow, repay and reborrow hereunder
pursuant to the terms and conditions of the Loan Agreement. Prepayment of the
principal amount hereof may be made only as provided in the Loan Agreement. The
principal amount of each Advance shall be repaid on its Payment Date.
The Borrower hereby promises to pay interest on the unpaid principal amount
of the Loans outstanding hereunder as provided in the Loan Agreement. Interest
under this Note shall also be due and payable when this Note shall become due
(whether at maturity, by reason of acceleration or otherwise). Overdue
principal and, to the extent permitted by Applicable Law, overdue interest,
shall bear interest at the Default Rate as provided in the Loan Agreement.
No provision of the Loan Agreement or this Note shall require the payment
or permit the collection of interest in excess of that permitted by Applicable
Law. If any excess amount of interest in such respect is provided for, or shall
be adjudicated to be so provided for, in connection with the Loans outstanding
hereunder, the provisions of this paragraph shall govern and prevail, and
neither the Borrower nor any sureties, guarantors, successors or assigns of the
Borrower shall be obligated to pay the excess amount of such interest or any
other excess sum paid for the use, forbearance, or detention of sums loaned
pursuant hereto. In the event the Borrower ever pays, or the Bank ever
receives, collects or applies as interest any such sum, such amount which would
be in excess of the maximum amount permitted by Applicable Law shall be applied
as a payment in the reduction of the principal, unless the Borrower shall notify
the Bank in writing that it elects to have such excess returned forthwith; and,
if the principal has been paid in full, any remaining excess shall forthwith be
returned to the Borrower. Because of the variable nature of the rates of
interest applicable to the Loans evidenced by this Note, the total interest that
will accrue hereon cannot be determined in advance. Neither the Borrower nor
the Bank intends for the Bank to contract for, charge or receive usurious
interest and, to prevent such an occurrence, any agreements which may now or
hereafter be in effect between the Borrower and the Bank regarding the payment
of fees to the Bank are hereby limited by the provisions of this paragraph. To
the extent not prohibited by Applicable Law, determination of the legal maximum
amount of interest shall at all times be made by amortizing, prorating or
allocating all interest at any time contracted for, charged or received from the
Borrower in connection with the portion of the Loans outstanding hereunder until
the Maturity Date, so that the actual rate of interest on account of the Loans
outstanding hereuder does not exceed the maximum amount permitted under
Applicable Law.
<PAGE>
All parties now or hereafter liable with respect to this Note, whether the
Borrower, any guarantor, endorser or any other person or entities, hereby waive
presentment for payment demand, notice of nonpayment or dishonor,. protest and
notice of protest.
No delay or omission on the part of the Bank or any holder hereof in
exercising its rights under this Note, or delay or omission on the part of the
Bank, the Administrative Agent or the Banks collectively, in exercising its or
their rights under the Loan Agreement or any other Loan Documents, or course of
conduct relating thereto, shall operate as a waiver of such right or any other
right of the Bank or any holder hereof, nor shall any waiver by the Bank, the
Administrative Agent or the Banks collectively, or any holder hereof, of any
such right or rights on any one occasion be deemed a bar to, or waiver of, the
same right or rights on any future occasion.
The Borrower promises to pay all reasonable costs of collection, including
attorneys' fees, should this Note be collected by or through an attorney-at-law
or under advice therefrom.
Time is of the essence of this Note.
This Note evidences the Bank's portion of the Loans under, and is entitled
to the benefits and subject to the terms of, the Loan Agreement which contains
provisions with respect of the acceleration of the maturity of this Note upon
the happening of certain stated events and provisions for prepayment. This Note
is secured by and is also entitled to the benefits of the Security Documents.
This Note shall be construed in accordance with and governed by the
internal laws of the State of New York applicable to contracts made and to be
performed in the State of New York.
THIS NOTE IS ONE OF SEVERAL PROMISSORY NOTES WHICH AMENDS AND RESTATES
CERTAIN PROMISSORY NOTES MADE AND GIVEN BY THE BORROWER PURSUANT TO THE LOAN
AGREEMENT AND DOES NOT REPRESENT A NOVATION THEREOF OR THE INDEBTEDNESS
EVIDENCED THEREBY.
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
AMENDED AND RESTATED NOTE
$20,571,428.57 DECEMBER 30, 1997
FOR VALUE RECEIVED, the undersigned, RURAL CELLULAR CORPORATION, a
Minnesota corporation (the "BORROWER"), promises to pay to the order of ST. PAUL
BANK FOR COOPERATIVES (hereinafter, together with its successors and assigns,
called the "BANK"), in immediately available funds, at such place as is
designated in or pursuant to the Loan Agreement (as hereinafter defined), the
principal sum of TVWENTY MILLION FIVE HUNDRED SEVENTY-ONE THOUSAND FOUR HUNDRED
TWENTY-EIGHT AND 57/100s DOLLARS ($20,571,428.57) of United States funds, or, if
less, so much thereof as may from time to time be advanced by the Bank to the
Borrower and is outstanding hereunder, plus interest as hereinafter provided.
Such advances may be endorsed from time to time on the grid attached hereto, but
the failure to make such notations (or any error in such notation) shall not
affect the obligation of the Borrower to repay unpaid principal and interest
hereunder.
Except as otherwise defined or limited herein, capitalized terms used
herein shall have the meanings ascribed to them in that certain Loan Agreement
(as modified, amended and supplemented from time to time, the "LOAN AGREEMENT")
dated as of May 1, 1997 herewith among the Borrower, the Bank, the other
financial institutions which are from time to time parties thereto and Toronto
Dominion (Texas), Inc., as administrative agent (the "ADMINISTRATIVE AGENT").
The principal amount of this Note shall be paid in such amounts and at such
times as are set forth in Sections 2.5 and 2.7 of the Loan Agreement. A final
payment of all principal amounts and other Obligations then outstanding
hereunder shall be due and payable in full on the Maturity Date.
The Borrower shall be entitled to borrow, repay and reborrow hereunder
pursuant to the terms and conditions of the Loan Agreement. Prepayment of the
principal amount hereof may be made only as provided in the Loan Agreement. The
principal amount of each Advance shall be repaid on its Payment Date.
The Borrower hereby promises to pay interest on the unpaid principal amount
of the Loans outstanding hereunder as provided in the Loan Agreement. Interest
under this Note shall also be due and payable when this Note shall become due
(whether at maturity, by reason of acceleration or otherwise). Overdue
principal and, to the extent permitted by Applicable Law, overdue interest shall
bear interest at the Default Rate as provided in the Loan Agreement.
No provision of the Loan Agreement or this Note shall require the payment
or permit the collection of interest in excess of that permitted by Applicable
Law. If any excess amount of interest in such respect is provided for, or shall
be adjudicated to be so provided for, in connection with the Loans outstanding
hereunder, the provisions of this paragraph shall govern and prevail, and
neither the Borrower nor any sureties, guarantors, successors or assigns of the
Borrower shall be obligated to pay the excess amount of such interest or any
other excess sum paid for the use, forbearance, or detention of sums loaned
pursuant hereto. In the event the Borrower ever pays, or the Bank ever
receives, collects or applies as interest any such sum, such amount which would
be in excess of the maximum amount permitted by Applicable Law shall be applied
as a payment in the reduction of the principal, unless the Borrower shall notify
the Bank in writing that it elects to have such excess returned forthwith; and,
if the principal has been paid in full, any remaining excess shall forthwith be
returned to the Borrower. Because of the variable nature of the rates of
interest applicable to the Loans evidenced by this Note, the total interest that
will accrue hereon cannot be determined in advance. Neither the Borrower nor
the Bank intends for the Bank to contract for, charge or receive usurious
interest and, to prevent such an occurrence, any agreements which may now or
hereafter be in effect between the Borrower and the Bank regarding the payment
of fees to the Bank are hereby limited by the provisions of this paragraph. To
the extent not prohibited by Applicable Law, determination of the legal maximum
amount of interest shall at all times be made by amortizing, prorating or
allocating all interest at any time contracted for, charged or received from the
Borrower in connection with the portion of the Loans outstanding hereunder until
<PAGE>
the Maturity Date, so that the actual rate of interest on account of the Loans
outstanding hereuder does not exceed the maximum amount permitted under
Applicable Law.
All parties now or hereafter liable with respect to this Note, whether the
Borrower, any guarantor, endorser or any other person or entities, hereby waive
presentment for payment, demand, notice of nonpayment or dishonor,. protest and
notice of protest.
No delay or omission on the part of the Bank or any holder hereof in
exercising its rights under this Note, or delay or omission on the part of the
Bank, the Administrative Agent or the Banks collectively, in exercising its or
their rights under the Loan Agreement or any other Loan Documents, or course of
conduct relating thereto, shall operate as a waiver of such right or any other
right of the Bank or any holder hereof, nor shall any waiver by the Bank, the
Administrative Agent or the Banks collectively, or any holder hereof, of any
such right or rights on any one occasion be deemed a bar to, or waiver of the
same right or rights on any future occasion.
The Borrower promises to pay all reasonable costs of collection, including
attorneys' fees, should this Note be collected by or through an attorney-at-law
or under advice therefrom.
Time is of the essence of this Note.
This Note evidences the Bank's portion of the Loans under, and is entitled
to the benefits and subject to the terms of, the Loan Agreement which contains
provisions with respect of the acceleration of the maturity of this Note upon
the happening of certain stated events and provisions for prepayment. This Note
is secured by and is also entitled to the benefits of the Security Documents.
This Note shall be construed in accordance with and governed by the
internal laws of the State of New York applicable to contracts made and to be
performed in the State of New York.
THIS NOTE IS ONE OF SEVERAL PROMISSORY NOTES WHICH AMENDS AND RESTATES
CERTAIN PROMISSORY NOTES MADE AND GIVEN BY THE BORROWER PURSUANT TO THE LOAN
AGREEMENT AND DOES NOT REPRESENT A NOVATION THEREOF OR THE INDEBTEDNESS
EVIDENCED THEREBY.
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
AMENDED AND RESTATED NOTE
$17,142,857.14 DECEMBER 30, 1997
FOR VALUE RECEIVED, the undersigned, RURAL CELLULAR CORPORATION, a
Minnesota corporation (the "BORROWER"), promises to pay to the order of MERITA
BANK LTD NEW YORK BRANCH (hereinafter, together with its successors and assigns,
called the "BANK"), in immediately available funds, at such place as is
designated in or pursuant to the Loan Agreement (as hereinafter defined), the
principal sum of SEVENTEEN MILLION ONE HUNDRED FORTY-TWO THOUSAND EIGHT HUNDRED
FIFTYSEVEN AND 14/100s DOLLARS ($17,142,857.14) of United States funds, or, if
less, so much thereof as may from time to time be advanced by the Bank to the
Borrower and is outstanding hereunder, plus interest as hereinafter provided.
Such advances may be endorsed from time to time on the grid attached hereto, but
the failure to make such notations (or any error in such notation) shall not
affect the obligation of the Borrower to repay unpaid principal and interest
hereunder.
Except as otherwise defined or limited herein, capitalized terms used
herein shall have the meanings ascribed to them in that certain Loan Agreement
(as modified, amended and supplemented from time to time, the "LOAN AGREEMENT")
dated as of May 1, 1997 herewith among the Borrower, the Bank, the other
financial institutions which are from time to time parties thereto and Toronto
Dominion (Texas), Inc., as administrative agent (the "ADMINISTRATIVE AGENT").
The principal amount of this Note shall be paid in such amounts and at such
times as are set forth in Sections 2.5 and 2.7 of the Loan Agreement. A final
payment of all principal amounts and other Obligations then outstanding
hereunder shall be due and payable in full on the Maturity Date.
The Borrower shall be entitled to borrow, repay and reborrow hereunder
pursuant to the terms and conditions of the Loan Agreement. Prepayment of the
principal amount hereof may be made only as provided in the Loan Agreement. The
principal amount of each Advance shall be repaid on its Payment Date.
The Borrower hereby promises to pay interest on the unpaid principal amount
of the Loans outstanding hereunder as provided in the Loan Agreement. Interest
under this Note shall also be due and payable when this Note shall become due
(whether at maturity, by reason of acceleration or otherwise). Overdue
principal and, to the extent permitted by Applicable Law, overdue interest,
shall bear interest at the Default Rate as provided in the Loan Agreement.
No provision of the Loan Agreement or this Note shall require the payment
or permit the collection of interest in excess of that permitted by Applicable
Law. If any excess amount of interest in such respect is provided for, or shall
be adjudicated to be so provided for, in connection with the Loans outstanding
hereunder, the provisions of this paragraph shall govern and prevail, and
neither the Borrower nor any sureties, guarantors, successors or assigns of the
Borrower shall be obligated to pay the excess amount of such interest or any
other excess sum paid for the use, forbearance, or detention of sums loaned
pursuant hereto. In the event the Borrower ever pays, or the Bank ever
receives, collects or applies as interest any such sum, such amount which would
be in excess of the maximum amount permitted by Applicable Law shall be applied
as a payment in the reduction of the principal, unless the Borrower shall notify
the Bank in writing that it elects to have such excess returned forthwith; and,
if the principal has been paid in full, any remaining excess shall forthwith be
returned to the Borrower. Because of the variable nature of the rates of
interest applicable to the Loans evidenced by this Note, the total interest that
will accrue hereon cannot be determined in advance. Neither the Borrower nor
the Bank intends for the Bank to contract for, charge or receive usurious
interest and, to prevent such an occurrence, any agreements which may now or
hereafter be in effect between the Borrower and the Bank regarding the payment
of fees to the Bank are hereby limited by the provisions of this paragraph. To
the extent not prohibited by Applicable Law, determination of the legal maximum
amount of interest shall at all times be made by amortizing, prorating or
allocating all interest at any time contracted for, charged or received from the
Borrower in connection with the portion of the Loans outstanding hereunder until
the Maturity Date, so that the actual rate of interest on account of the Loans
outstanding hereuder does not exceed the maximum amount permitted under
Applicable Law.
<PAGE>
All parties now or hereafter liable with respect to this Note, whether the
Borrower, any guarantor, endorser or any other person or entities, hereby waive
presentment for payment, demand, notice of nonpayment or dishonor, protest and
notice of protest.
No delay or omission on the part of the Bank or any holder hereof in
exercising its rights under this Note, or delay or omission on the part of the
Bank, the Administrative Agent or the Banks collectively, in exercising its or
their rights under the Loan Agreement or any other Loan Documents, or course of
conduct relating thereto, shall operate as a waiver of such right or any other
right . of the Bank or any holder hereof, nor shall any waiver by the Bank, the
Administrative Agent or the Banks collectively, or any holder hereof, of any
such right or rights on any one occasion be deemed a bar to, or waiver of, the
same right or rights on any future occasion.
The Borrower promises to pay all reasonable costs of collection, including
attorneys' fees, should this Note be collected by or through an attorney-at-law
or under advice therefrom.
Time is of the essence of this Note.
This Note evidences the Bank's portion of the Loans under, and is entitled
to the benefits and subject to the terms of, the Loan Agreement which contains
provisions with respect of the acceleration of the maturity of this Note upon
the happening of certain stated events and provisions for prepayment. This Note
is secured by and is also entitled to the benefits of the Security Documents.
This Note shall be constructed in accordance with and governed by the
internal laws of the State of New York applicable to contracts made and to be
performed in the State of New York.
THIS NOTE IS ONE OF SEVERAL PROMISSORY NOTES WHICH AMENDS AND RESTATES
CERTAIN PROMISSORY NOTES MADE AND GIVEN BY THE BORROWER PURSUANT TO THE LOAN
AGREEMENT AND DOES NOT REPRESENT A NOVATION THEREOF OR THE INDEBTEDNESS
EVIDENCED THEREBY.
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
AMENDED AND RESTATED NOTE
$18,857,142.86 DECECEMBER 30, 1997
FOR VALUE RECEIVED, the undersigned, RURAL CELLULAR CORPORATION, a
Minnesota corporation (the "BORROWER"), promises to pay to the order of FLEET
NATIONAL BANK (hereinafter, together with its successors and assigns, called the
"BANK"), in immediately available funds, at such place as is designated in or
pursuant to the Loan Agreement (as hereinafter defined), the principal sum of
EIGHTEEN MILLION EIGHT HUNDRED FIFTY-SEVEN THOUSAND ONE HUNDRED FORTY-TWO AND
86/100s DOLLARS ($18,857,142.86) of United States funds, or, if less, so much
thereof as may from time to time be advanced by the Bank to the Borrower and is
outstanding hereunder, plus interest as hereinafter provided. Such advances may
be endorsed from time to time on the grid attached hereto, but the failure to
make such notations (or any error in such notation) shall not affect the
obligation of the Borrower to repay unpaid principal and interest hereunder.
Except as otherwise defined or limited herein, capitalized terms used
herein shall have the meanings ascribed to them in that certain Loan Agreement
(as modified, amended and supplemented from time to time, the "LOAN AGREEMENT")
dated as of May 1, 1997 herewith among the Borrower, the Bank, the other
financial institutions which are from time to time parties thereto and Toronto
Dominion (Texas), Inc., as administrative agent (the "ADMINISTRATIVE AGENT").
The principal amount of this Note shall be paid in such amounts and at such
times as are set forth in Sections 2.5 and 2.7 of the Loan Agreement. A final
payment of all principal amounts and other Obligations then outstanding
hereunder shall be due and payable in full on the Maturity Date.
The Borrower shall be entitled to borrow, repay and reborrow hereunder
pursuant to the terms and conditions of the Loan Agreement. Prepayment of the
principal amount hereof may be made only as provided in the Loan Agreement. The
principal amount of each Advance shall be repaid on its Payment Date.
The Borrower hereby promises to pay interest on the unpaid principal amount
of the Loans outstanding hereunder as provided in the Loan Agreement. Interest
under this Note shall also be due and payable when this Note shall become due
(whether at maturity, by reason of acceleration or otherwise). Overdue
principal and, to the extent permitted by Applicable Law, overdue interest shall
bear interest at the Default Rate as provided in the Loan Agreement
No provision of the Loan Agreement or this Note shall require the payment
or permit the collection of interest in excess of that permitted by Applicable
Law. If any excess amount of interest in such respect is provided for, or shall
be adjudicated to be so provided for, in connection with the Loans outstanding
hereunder, the provisions of this paragraph shall govern and prevail, and
neither the Borrower nor any sureties, guarantors, successors or assigns of the
Borrower shall be obligated to pay the excess amount of such interest or any
other excess sum paid for the use, forbearance, or detention of sums loaned
pursuant hereto. In the event the Borrower ever pays, or the Bank ever
receives, collects or applies as interest any such sum, such amount which would
be in excess of the maximum amount permitted by Applicable Law shall be applied
as a payment in the reduction of the principal, unless the Borrower shall notify
the Bank in writing that it elects to have such excess returned forthwith; and,
if the principal has been paid in full, any remaining excess shall forthwith be
returned to the Borrower. Because of the variable nature of the rates of
interest applicable to the Loans evidenced by this Note, the total interest that
will accrue hereon cannot be determined in advance. Neither the Borrower nor
the Bank intends for the Bank to contract for, charge or receive usurious
interest and, to prevent such an occurrence, any agreements which may now or
hereafter be in effect between the Borrower and the Bank regarding the payment
of fees to the Bank are hereby limited by the provisions of this paragraph. To
the extent not prohibited by Applicable Law, determination of the legal maximum
amount of interest shall at all times be made by amortizing, prorating or
allocating all interest at any time construed for, charged or received from the
Borrower in connection with the portion of the Loans outstanding hereunder until
the Maturity Date, so that the -actual rate of interest on account of the Loans
outstanding hereunder does not exceed the maximum amount permitted under
Applicable Law.
<PAGE>
All parties now or hereafter liable with respect to this Note, whether the
Borrower, any guarantor, endorser or any other person or entities, hereby waive
presentment for payment, demand, notice of nonpayment or dishonor, protest and
notice of protest.
No delay or omission on the part of the Bank or any holder hereof in
exercising its rights under this Note, or delay or omission on the part of the
Bank, the Administrative Agent or the Banks collectively, in exercising its or
their rights under the Loan Agreement or any other Loan Documents, or course of
conduct relating thereto, shall operate as a waiver of such right or any other
right of the Bank or any holder hereof, nor shall any waiver by the Bank, the
Administrative Agent or the Banks collectively, or any holder hereof, of any
such right or rights on any one occasion be deemed a bar to, or waiver of, the
same right or rights on any future occasion.
The Borrower promises to pay all reasonable costs of collection, including
attorneys' fees, should this Note be collected by or through an attorney-at-law
or under advice therefrom.
Time is of the essence of this Note.
This Note evidences the Bank's portion of the Loans under, and is entitled
to the benefits and subject to the terms of, the Loan Agreement which contains
provisions with respect of the acceleration of the maturity of this Note upon
the happening of certain stated events and provisions for prepayment. This Note
is secured by and is also entitled to the benefits of the Security Documents.
This Note shall be construed in accordance with and governed by the
internal laws of the State of New York applicable to contracts made and to be
performed in the State of New York.
THIS NOTE IS ONE OF SEVERAL PROMISSORY NOTES WHICH AMENDS AND RESTATES
CERTAIN PROMISSORY NOTES MADE AND GIVEN BY T'BE BORROWER PURSUANT TO THE LOAN
AGREEMENT AND DOES NOT REPRESENT A NOVATION THEREOF OR THE INDEBTEDNESS
EVIDENCED THEREBY.
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
AMENDED AND RESTATED NOTE
$18,857,142.86 DECEMBER 30, 1997
FOR VALUE RECEIVED, the undersigned, RURAL CELLULAR CORPORATION, a
Minnesota corporation (the "BORROWER"), promises to pay to the order of FIRST
NATIONAL BANK OF MARYLAND (hereinafter, together with its successors and
assigns, called the "Bank"), in immediately available funds, at such place as is
designated in or pursuant to the Loan Agreement (as hereinafter defined), the
principal sum of EIGHTEEN MILLION EIGHT HUNDRED FIFTY- SEVEN THOUSAND ONE
HUNDRED FORTYTWO AND 86/100s DOLLARS ($18,857,142.86) of United States funds,
or, if less, so much thereof as may from time to time be advanced by the Bank to
the Borrower and is outstanding hereunder, plus interest as hereinafter
provided. Such advances may be endorsed from time to time on the grid attached
hereto, but the failure to make such notations (or any error in such notation)
shall not affect the obligation of the Borrower to repay unpaid principal and
interest hereunder.
Except as otherwise defined or limited herein, capitalized terms used
herein shall have the meanings ascribed to them in that certain Loan Agreement
(as modified, amended and supplemented from time to time, the "LOAN AGREEMENT")
dated as of May 1, 1997 herewith among the Borrower, the Bank, the other
financial institutions which are from time to time parties thereto and Toronto
Dominion (Texas), Inc., as administrative agent (the "ADMINISTRATIVE AGENT").
The principal amount of this Note shall be paid in such amounts and at such
times as are set forth in Sections 2.5 and 2.7 of the Loan Agreement. A final
payment of all principal amounts and other Obligations then outstanding
hereunder shall be due and payable in full on the Maturity Date.
The Borrower shall be entitled to borrow, repay and reborrow hereunder
pursuant to the terms and conditions of the Loan Agreement. Prepayment of the
principal amount hereof may be made only as provided in the Loan Agreement. The
principal amount of each Advance shall be repaid on its Payment Date.
The Borrower hereby promises to pay interest on the unpaid principal amount
of the Loans outstanding hereunder as provided in the Loan Agreement. Interest
under this Note shall also be due and payable when this Note shall become due
(whether at maturity, by reason of acceleration or otherwise). Overdue
principal and, to the extent permitted by Applicable Law, overdue interest,
shall bear interest at the Default Rate as provided in the Loan Agreement.
No provision of the Loan Agreement or this Note shall require the payment
or permit the collection of interest in excess of that permitted by Applicable
Law. If any excess amount of interest in such respect is provided for, or shall
be adjudicated to be so provided for, in connection with the Loans outstanding
hereunder, the provisions of this paragraph shall govern and prevail, and
neither the Borrower nor any sureties, guarantors, successors or assigns of the
Borrower shall be obligated to pay the excess amount of such interest or any
other excess sum paid for the use, forbearance, or detention of sums loaned
pursuant hereto. In the event the Borrower ever pays, or the Bank ever
receives, collects or applies as interest any such sum, such amount which would
be in excess of the maximum amount permitted by Applicable Law shall be applied
as a payment in the reduction of the principal, unless the Borrower shall notify
the Bank in writing that it elects to have such excess returned forthwith; and,
if the principal has been paid in full, any remaining excess shall forthwith be
returned to the Borrower. Because of the variable nature of the rates of
interest applicable to the Loans evidenced by this Note, the total interest that
will accrue hereon cannot be determined in advance. Neither the Borrower nor
the Bank intends for the Bank to contract for, charge or receive usurious
interest and, to prevent such an occurrence, any agreements which may now or
hereafter be in effect between the Borrower and the Bank regarding the payment
of fees to the Bank are hereby limited by the provisions of this paragraph. To
the extent not prohibited by Applicable Law, determination of the legal maximum
amount of interest shall at all times be made by amortizing, prorating or
allocating all interest at any time contracted for, charged or received from the
Borrower in connection with the portion of the Loans outstanding hereunder until
<PAGE>
the Maturity Date, so that the actual rate of interest on account of the Loans
outstanding hereuder does not exceed the maximum amount permitted under
Applicable Law.
All parties now or hereafter liable with respect to this Note, whether the
Borrower, any guarantor, endorser or any other person or entities, hereby waive
presentment for payment, demand, notice of nonpayment or dishonor, protest and
notice of protest.
No delay or omission on the part of the Bank or any holder hereof in
exercising its rights under this Note, or delay or omission on the part of the
Bank, the Administrative Agent or the Banks collectively, in exercising its or
their rights under the Loan Agreement or any other Loan Documents, or course of
conduct relating thereto, shall operate as a waiver of such right or any other
right of the Bank or any holder hereof, nor shall any waiver by the Bank, the
Administrative Agent or the Banks collectively, or any holder hereof, of any
such right or rights on any one occasion be deemed a bar to, or waiver of, the
same right or rights on any future occasion.
The Borrower promises to pay all reasonable costs of collection, including
attorneys' fees, should this Note be collected by or through an attorney-at-law
or under advice therefrom.
Time is of the essence of this Note.
This Note evidences the Bank's portion of the Loans under, and is entitled
to the benefits and subject to the terms of, the Loan Agreement which contains
provisions with respect of the acceleration of the maturity of this Note upon
the happening of certain stated events and provisions for prepayment. This Note
is secured by and is also entitled to the benefits of the Security Documents.
This Note shall be construed in accordance with and governed by the
internal laws of the State of New York applicable to contracts made and to be
performed in the State of New York.
THIS NOTE IS ONE OF SEVERAL PROMISSORY NOTES WHICH AMENDS AND RESTATES
CERTAIN PROMISSORY NOTES MADE AND GIVEN BY THE BORROWER PURSURANT TO THE LOAN
AGREEMENT AND DOES NOT REPRESENT A NOVATION THEREOF OR THE INDEBTEDNESS
EVIDENCED THEREBY.
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
AMENDED AND RESTATED NOTE
$18,857,142.86 DECEMBER 30, 1997
FOR VALUE RECEIVED, the undersigned, RURAL CELLULAR CORPORATION, a
Minnesota corporation (the "BORROWER"), promises to pay to the order of SOCIETE
GENERALE, NEW YORK BRANCH (hereinafter, together with its successors and
assigns, called the "BANK"), in immediately available funds, at such place as is
designated in or pursuant to the Loan Agreement (as hereinafter defined), the
principal sum of EIGHTEEN MILLION EIGHT HUNDRED FIFTY-SEVEN THOUSAND ONE HUNDRED
FORTY-TWO AND 86/100s DOLLARS ($18,857,142.86) of United States funds, or, if
less, so much thereof as may from time to time be advanced by the Bank to the
Borrower and is outstanding hereunder, plus interest as hereinafter provided.
Such advances may be endorsed from time to time on the grid attached hereto, but
the failure to make such notations (or any error in such notation) shall not
affect the obligation of the Borrower to repay unpaid principal and interest
hereunder.
Except as otherwise defined or limited herein, capitalized terms used
herein shall have the meanings ascribed to them in that certain Loan Agreement
(as modified, amended and supplemented from time to time, the "Loan AGREEMENT")
dated as of May 1, 1997 herewith among the Borrower, the Bank, the other
financial institutions which are from time to time parties thereto and Toronto
Dominion (Texas), Inc., as administrative agent (the "ADMINISTRATIVE AGENT").
The principal amount of this Note shall be paid in such amounts and at such
times as are set forth in Sections 2.5 and 2.7 of the Loan Agreement. A final
payment of all principal amounts and other Obligations then outstanding
hereunder shall be due and payable in full on the Maturity Date.
The Borrower shall be entitled to borrow, repay and reborrow hereunder
pursuant to the terms and conditions of the Loan Agreement. Prepayment of the
principal amount hereof may be made only as provided in the Loan Agreement. The
principal amount of each Advance shall be repaid on its Payment Date.
The Borrower hereby promises to pay interest on the unpaid principal amount
of the Loans outstanding hereunder as provided in the Loan Agreement. Interest
under this Note shall also be due and payable when this Note shall become due
(whether at maturity, by reason of acceleration or otherwise). Overdue
principal and, to the extent permitted by Applicable Law, overdue interest,
shall bear interest at the Default Rate as provided in the Loan Agreement.
No provision of the Loan Agreement or this Note shall require the payment
or permit the collection of interest in excess of that permitted by Applicable
Law. If any excess amount of interest in such respect is provided for, or shall
be adjudicated to be so provided for, in connection with the Loans outstanding
hereunder, the provisions of this paragraph shall govern and prevail, and
neither the Borrower nor any sureties, guarantors, successors or assigns of the
Borrower shall be obligated to pay the excess amount of such interest or any
other excess sum paid for the use, forbearance, or detention of sums loaned
pursuant hereto. In the event the Borrower ever pays, or the Bank ever
receives, collects or applies as interest any such sum, such amount which would
be in excess of the maximum amount permitted by Applicable Law shall be applied
as a payment in the reduction of the principal, unless the Borrower shall notify
the Bank in writing that it elects to have such excess returned forthwith; and,
if the principal has been paid in full, any remaining excess shall forthwith be
returned to the Borrower. Because of the variable nature of the rates of
interest applicable to the Loans evidenced by this Note, the total interest that
will accrue hereon cannot be determined in advance. Neither the Borrower nor
the Bank intends for the Bank to contract for, charge or receive usurious
interest and, to prevent such an occurrence, any agreements which may now or
hereafter be in effect between the Borrower and the Bank regarding the payment
of fees to the Bank are hereby limited by the provisions of this paragraph. To
the extent not prohibited by Applicable Law, determination of the legal maximum
amount of interest shall at all times be made by amortizing, prorating or
allocating all interest at any time contacted
<PAGE>
for, charged or received from the Borrower in connection with the portion of the
Loans outstanding hereunder until the Maturity Date, so that the actual rate of
interest on account of the Loans outstanding hereuner does not exceed the
maximum amount permitted under Applicable Law.
All parties now or hereafter liable with respect to this Note, whether the
Borrower, any guarantor, endorser or any other person or entities, hereby waive
presentment for payment demand, notice of nonpayment or dishonor, protest and
notice of protest. -
No delay or omission on the part of the Bank or any holder hereof in
exercising its rights under this Note, or delay or omission on the part of the
Bank, the Administrative Agent or the Banks collectively, in exercising its or
their rights under the Loan Agreement or any other Loan Documents, or course of
conduct relating thereto, shall operate as a waiver of such right or any other
right of the Bank or any holder hereof, nor shall any waiver by the Bank, the
Administrative Agent or the Banks collectively, or any holder hereof, of any
such right or rights on any one occasion be deemed a bar to, or waiver of, the
same right or rights on any future occasion.
The Borrower promises to pay all reasonable costs of collection, including
attorneys' fees, should this Note be collected by or through an attorney-at-law
or under advice therefrom.
Time is of the essence of this Note.
This Note evidences the Bank's portion of the Loans under, and is entitled
to the benefits and subject to the terms of, the Loan Agreement which contains
provisions with respect of the acceleration of the maturity of this Note upon
the happening of certain stated events and provisions for prepayment. This Note
is secured by and is also entitled to the benefits of the Security Documents.
This Note shall be construed in accordance with and governed by the
internal laws of the State of New York applicable to contracts made and to be
performed in the State of New York.
THIS NOTE IS ONE OF SEVERAL PROMISSORY NOTES WHICH AMENDS AND RESTATES
CERTAIN PROMISSORY NOTES MADE AND GIVEN BY THE BORROWER PURSUANT TO THE LOAN
AGREEMENT AND DOES NOT REPRESENT A NOVATION THEREOF OR THE INDEBTEDNESS
EVIDENCED THEREBY.
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
EXHIBIT 10.11(c)
AMENDMENT TO EMPLOYMENT AGREEMENT DATED DECEMBER 1, 1995
BY AND BETWEEN
RURAL CELLULAR CORPORATION
AND
RICHARD P. EKSTRAND
THIS AMENDMENT entered into this 18th day of December, 1997, by and between
Rural Cellular Corporation ("RCC" or "Company") and Richard P. Ekstrand (the
"Employee").
WHEREAS, RCC and the Employee entered into a written Employment Agreement
on December 1, 1995 (the "Employment Agreement");
WHEREAS, pursuant to Section 14 of the Employment Agreement, RCC and the
Employee desire to amend the Employee's Employment Agreement to extend the term
of the Agreement and to increase certain payments to Employee in the event of a
change in control of RCC;
NOW, THEREFORE, it is AGREED as follows:
1. The Employee's term of employment as set forth in Section 5 of the
Employment Agreement is hereby extended to December 31, 2000.
2. The amount to be paid to the Employee in the event of the involuntary
termination of his employment, absent Just Cause, in connection with, or within
twelve (12) months after, any change in control of RCC, as stated in Section
11(a) of the Employment Agreement, shall be equal to the product of 2.99 times
the Employee's "base amount" as defined in Section 280G(b)(3) of the Internal
Revenue Code of 1986, as amended (the "Code") and the rgulations promulgated
thereunder.
3. Capitalized terms used but not defined herein shall have the meanings
ascribed to such terms in the Employment Agreement.
4. All other terms, conditions and provisions of the Employment Agreement
remain in full force and effect.
RURAL CELLULAR CORPORATION
By: /s/ Richard P. Ekstrand
------------------------
Richard P. Ekstrand
President and Chief Executive Officer
Richard P. Ekstrand -----------------------------------------
<PAGE>
EXHIBIT 10.12(c)
AMENDMENT TO EMPLOYMENT AGREEMENT DATED DECEMBER 1, 1995
BY AND BETWEEN
RURAL CELLULAR CORPORATION
AND
SCOTT G. DONLEA
THIS AMENDMENT entered into this 18th day of December, 1997, by and between
Rural Cellular Corporation ("RCC" or "Company") and Scott G. Donlea (the
"Employee").
WHEREAS, RCC and the Employee entered into a written Employment Agreement
on December 1, 1995 (the "Employment Agreement");
WHEREAS, pursuant to Section 14 of the Employment Agreement, RCC and the
Employee desire to amend the Employee's Employment Agreement to extend the term
of the Agreement and to increase certain payments to Employee in the event of a
change in control of RCC;
NOW, THEREFORE, it is AGREED as follows:
5. The Employee's term of employment as set forth in Section 5 of the
Employment Agreement is hereby extended to December 31, 2000.
6. The amount to be paid to the Employee in the event of the involuntary
termination of his employment, absent Just Cause, in connection with, or within
twelve (12) months after, any change in control of RCC, as stated in Section
11(a) of the Employment Agreement, shall be equal to the product of 2.99 times
the Employee's "base amount" as defined in Section 280G(b)(3) of the Internal
Revenue Code of 1986, as amended (the "Code") and the rgulations promulgated
thereunder.
7. Capitalized terms used but not defined herein shall have the meanings
ascribed to such terms in the Employment Agreement.
8. All other terms, conditions and provisions of the Employment Agreement
remain in full force and effect.
RURAL CELLULAR CORPORATION
By: /s/ Richard P. Ekstrand
--------------------------
Richard P. Ekstrand
President and Chief Executive Officer
----------------------------------------
Scott G. Donlea
<PAGE>
EXHIBIT 10.13 (a)
[LOGO]
EMPLOYMENT AGREEMENT
THIS AGREEMENT entered into this 14th day of May, 1996, ("Effective Date"),
by and between Rural Cellular Corporation ("RCC") and Wesley E. Schultz (the
"Employee").
WHEREAS, Employee is experienced in the areas described in the job
description attached as Exhibit A and RCC desires to employ Employee for the
position set forth in Exhibit A; and
WHEREAS, Employee desires to be employed by RCC; and
WHEREAS, the parties desire by this writing to set forth the employment
relationship of RCC and the Employee.
NOW, THEREFORE, it is AGREED as follows:
1. EMPLOYMENT. The Employee is employed in the capacity of Vice
President Finance and Chief Financial Officer for RCC as described in the
attached Exhibit A and as customarily performed by persons situated in a similar
executive capacity. The Employee shall also promote, by entertainment or
otherwise, as and to the extent permitted by law, the business of RCC. The
Employee's other duties shall be such as the President/CEO, or his designee, may
from time to time reasonably direct. The Board of Directors may change
Employee's reporting relationship at any time.
2. BASE COMPENSATION. RCC agrees to pay the Employee during the term of
this Agreement a salary which shall be at the rate of $92,500 per annum
beginning on the Effective Date, payable not less frequently than every two
weeks; provided, that the rate of such salary shall be reviewed by the Board of
Directors not less often than annually, and Employee shall be entitled to
receive an increase at such percentage or in such an amount, if any, as the
Board of Directors in its sole discretion may decide at such time.
3. DISCRETIONARY AND INCENTIVE BONUS. The Employee shall be entitled to
participate in an equitable manner with all senior management employees of RCC
in discretionary and incentive bonuses, including, but not limited to stock
option and restricted stock awards and other cash and non-cash compensation
plans that may be authorized and declared by the Board of Directors to its
senior management employees from time to time.
4. OTHER BENEFITS.
(a) PARTICIPATION IN RETIREMENT AND MEDICAL PLANS. The Employee
shall be entitled to participate in any plan of RCC relating to
compensation, profit sharing, or other retirement benefits and medical
coverage or reimbursement plans as RCC may adopt for the benefit of its
employees.
(b) EMPLOYEE BENEFITS: EXPENSES. The Employee shall be eligible to
participate in any fringe benefits which may be or may become applicable to
RCC's senior management employees, including by example, participation in
any stock option or incentive plans adopted by the Board of Directors, and
any other benefits adopted by the Board of Directors. RCC shall reimburse
Employee for all reasonable out-of-pocket expenses which Employee shall
incur in connection with his service for RCC which are documented with
RCC's policies as set forth from time to time.
5. TERMS. The term of employment of Employee under this Agreement shall
be for the period commencing on the Effective Date and ending one year after
that date. Additionally, the term of employment under this Agreement may be
extended for one or more additional one year periods beyond the then effective
expiration date upon a determination and resolution of the Board of Directors
that the performance of the Employee has met
<PAGE>
the requirements and standards of the Board in the current term, and that the
term of such Agreement shall be extended for an additional one year term and the
acceptance by Employee of such extended term.
6. LOYALTY: NONCOMPETITION.
(a) The Employee shall devote his full time and attention to the
performance of his employment under this Agreement. During the term of
Employee's employment under this Agreement, the Employee shall not engage
in any business or activity contrary to the business affairs or interests
of RCC.
(b) Nothing contained in this Paragraph 6 shall be deemed to prevent
or limit the right of Employee to invest in the capital stock or other
securities of any business dissimilar from that of RCC, or, solely as a
passive or minority investor, in any business.
7. STANDARDS. The Employee shall perform his duties under this Agreement
in accordance with such reasonable standards expected of employees with
comparable positions in comparable organizations and as may be established from
time to time by the President/CEO.
8. VACATION AND SICK LEAVE. At such reasonable times as RCC shall in its
sole discretion permit, the Employee shall be entitled, without loss of pay, to
absent himself voluntarily from the performance under this Agreement, with all
such voluntary absences to count as vacation time; provided that:
(a) The Employee shall be entitled to annual vacation leave in
accordance with the policies as are periodically established by the Board
of Directors for senior management of RCC but in no event less than three
calendar weeks per calendar year.
(b) The Employee shall take at least five consecutive business days
of vacation in each calendar year.
(c) The Employee shall not be entitled to receive any additional
compensation from RCC on account of his failure to take vacation leave and
Employee shall not be entitled to accumulate unused vacation from one
fiscal year to the next, except in either case to the extent authorized by
the Board of Directors for senior management employees of RCC.
(d) In addition to the aforesaid paid vacations, the Employee shall
be entitled without loss of pay, to absent himself voluntarily from the
performance of his employment with RCC for such additional periods of time
and for such valid and legitimate reasons as the Board of Directors in its
discretion may determine. Further, the Board of Directors shall be
entitled to grant to the Employee a leave or leaves of absence with or
without pay at such time or times and upon such terms and conditions as the
Board of Directors in its discretion may determine.
(e) In addition, the Employee shall be entitled to an annual sick
leave benefit as established by the Board of Directors for senior
management employees of RCC. In the event that any sick leave benefit
shall not have been used during any year, such leave shall accrue to
subsequent years only to the extent authorized by the Board of Directors
for employees of RCC.
(f) The Employee is encouraged to participate in related industry
organizations and activities provided that the assumption of any
significant responsibilities for such outside activities or organizational
participation shall be approved in advance by the President/CEO.
9. TERMINATION AND TERMINATION PAY. The Employee's employment under this
Agreement shall be terminated upon any of the following occurrences:
(a) The death of the Employee during the term of this Agreement, in
which event the Employee's estate shall be entitled to receive the
compensation due the Employee through the last day of the calendar month in
which Employee's death shall have occurred, plus all accrued but unused
vacation for such calendar year, and PRO RATA payment of all bonuses or
incentive payments earned or to be awarded for such calendar year.
<PAGE>
(b) The Board of Directors may terminate the Employee's employment at
any time, but any termination by the Board of Directors other than
termination for Just Cause, as defined below, shall not prejudice the
Employee's right to compensation or other benefits under the Agreement.
The Employee shall have no right to receive compensation or other benefits
for any period after termination for Just Cause. Termination for "Just
Cause" shall include termination because of the Employee's personal
dishonesty, incompetence, willful misconduct, breach of fiduciary duty
involving personal profit, intentional failure to perform stated duties,
willful violation of any law, rule or regulation (other than traffic
violations or similar offenses) or final cease-and-desist order, or
material breach of any provision of the Agreement.
(c) Except as provided pursuant to Section 11 herein, in the event
Employee's employment under this Agreement is terminated by the Board of
Directors without Just Cause, RCC shall be obligated to continue to pay the
Employee the salary provided pursuant to Section 2 herein, up to the date
of termination of the term (including any extension of the term pursuant to
Section 5 above) of this Agreement. Notwithstanding the foregoing, in no
event shall payments to be made in accordance with this Section 9(c) be for
a period of less than 12 months following the date of termination of
employment.
(d) The voluntary termination by the Employee during the term of this
Agreement with the delivery of no less than 60 days written notice to the
Board of Directors (other than pursuant to Section 11(b)) in which case the
Employee shall be entitled to receive only the compensation, vested rights,
and all employee benefits up to the date of such termination except as
specifically provided below.
10. DISABILITY. If the Employee shall become disabled or incapacitated to
the extent that he is unable to perform his duties hereunder, by reason of
medically determinable physical or mental impairment, as determined by a doctor
engaged by the Board of Directors, Employee shall nevertheless continue to
receive the compensation and benefits provided under the terms of this Agreement
as follows: 100% of such compensation and benefits for a period of six (6)
months, but not exceeding the remaining term of the Agreement, and 65%
thereafter for the remainder of the term of the Agreement. Such benefits noted
herein shall be reduced by any benefits otherwise provided to the Employee
during such period under the provisions of disability insurance coverage in
effect for RCC employees. Thereafter, Employee shall be eligible to receive
benefits provided by RCC under the provisions of disability insurance coverage
in effect for RCC employees. Upon returning to active full-time employment, the
Employee's full compensation as set forth in this Agreement shall be reinstated
as of the date of commencement of such activities. In the event that the
Employee returns to active employment on other than a full-time basis, then his
compensation (as set forth in Paragraph 2 of this Agreement) shall be reduced
in proportion to the time spent in said employment, or as shall otherwise be
agreed to by the parties.
11. CHANGE IN CONTROL.
(a) Notwithstanding any provisions herein to the contrary, in the
event of the involuntary termination of Employee's employment under this
Agreement, absent Just Cause, in connection with, or within twelve (12)
months after, any change in control of RCC, Employee shall be paid an
amount equal to the product of 2.00 times the Employee's "base amount" as
defined in Section 280G(b)(3) of the Internal Revenue Code of 1986, as
amended (the "Code") and regulations promulgated thereunder. Said sum
shall be paid, at the option of Employee, either in one (1) lump sum within
thirty (30) days of such termination discounted to the present value of
such payment using as the discount rate the "prime rate" as published in
the WALL STREET JOURNAL EASTERN EDITION as of the date of such payment, or
in periodic payments over the next 36 months or the remaining term of this
Agreement whichever is less, as if Employee's employment had not been
terminated, and such payments shall be in lieu of any other future payments
which the Employee would be otherwise entitled to receive under Section 9
of this Agreement. Notwithstanding the foregoing, all sums payable
hereunder shall be reduced in such manner and to such extent so that no
such payments made hereunder when aggregated with all other payments to be
made to the Employee by RCC shall be deemed an "excess parachute payment"
in accordance with Section 280G of the Code, or any successor provision,
and be subject to the excise tax provided at Section 4999(a) of the Code.
The term "change in control" shall be defined as set forth in the 1995
Stock Compensation Plan, which is incorporated herein by reference.
<PAGE>
(b) Notwithstanding any other provisions of this Agreement to the
contrary, Employee may voluntarily terminate his employment under this
Agreement within twelve (12) months following a change in control of RCC,
and Employee shall thereupon be entitled to receive the payment described
in Section 11(a) of this Agreement, upon the occurrence, or within ninety
(90) days thereafter, of any of the following events, which have not been
consented to in advance by the Employee in writing; (i) if Employee would
be required to move his personal residence or perform his principal
executive functions more than fifty miles from the Employee's primary
office immediately prior to the change in control; (ii) if in the
organizational structure of RCC Employee would be required to report to a
person or persons other than the Chief Executive Officer; (iii) if RCC
should fail to maintain Employee's base compensation in effect as of the
date of the Change in Control and the existing material fringe benefit,
stock option, performance incentive and retirement plans; (iv) if Employee
would be assigned duties and responsibilities other than those normally
associated with his position as referenced at Section 1, herein; or (v) if
Employee's responsibilities or authority have in any way been materially
diminished or reduced.
12. NON-COMPETITION AGREEMENT.
(a) TERM. During the term of the Agreement and for the period ending
six (6) months after the voluntary or involuntary termination of this
Agreement, Employee agrees that he will not, without RCC's prior written
consent, directly or indirectly, within the service areas served by RCC at
the time of termination, lend his credit, advice or assistance, or engage
in any activity or act in any manner, including but not limited to, as an
individual, owner, sole proprietor, founder, associate, promoter, partner,
joint venturer, shareholder other than as a less than five percent (5%)
shareholder of a publicly traded corporation, officer, director, trustee,
manager, employer, employee, licensor, licensee, principal, agent,
salesman, broker, representative, consultant, advisor, investor or
otherwise, for the purpose of establishing, operating or managing any
business or entity that is engaged in activities competitive with the
business of the Company as carried on as of the date of termination.
(b) NON-SOLICITATION AGREEMENT. As used in this Agreement, the term
"Person" means any individual, corporation, joint venture, general or
limited partnership, association or other entity. During the period of six
(6) months from and after the date of termination, Employee agrees that he
will not, whether for his own account or for the account of any other
Person, directly or indirectly interfere with the Company's relationship
with or endeavor to divert or entice away from the Company any Person who
or which at any time during the term of Employee's employment by RCC is or
was an employee or customer of or in the habit of dealing with RCC.
(c) REASONABLENESS OF COVENANTS. Employee acknowledges and agrees
that the geographic scope and period of duration of the restrictive
covenants contained in this Agreement are both fair and reasonable and that
the interests sought to be protected by the Company are legitimate business
interests entitled to be protected.
(d) INJUNCTIVE RELIEF: ATTORNEYS' FEES. The parties agree that the
remedy of damages at law for the breach by Employee of any of the covenants
contained in this Section 12 is an inadequate remedy. In recognition of
the irreparable harm that a violation by Employee of any of the covenants,
agreements or obligations arising under this Agreement would cause RCC,
Employee agrees that in addition to any other remedies or relief afforded
by law, an injunction against an actual or threatened violation or
violations may be issued against him and every other Person concerned
thereby, it being the understanding of the parties that both damages and an
injunction shall be proper modes of relief and are not to be considered
alternative remedies. In the event of any such an actual or threatened
violation, Employee agrees to pay the costs, expenses and reasonable
attorneys' fees incurred by the Company in pursuing any of its rights with
respect to such actual or threatened violation, in addition to the actual
damages sustained by the Company as a result thereof.
(e) COMPENSATION. In the event that Employee's employment has
terminated and Employee is not entitled to receive payment under Sections
10 or 11 of this Agreement, to compensate Employee for the restrictive
covenants contained in this Agreement, RCC agrees to pay Employee the sum
of Twenty-five Thousand and 00/100 Dollars ($25,000). One-half of this
amount is payable in equal monthly payments commencing on the last day of
the month following termination and continuing thereafter on the
<PAGE>
last day of each and every month until the end of the period stated in
Section 12(a) and one-half at the end of the period stated in Section
12(a).
In the event that Employee shall breach any of his covenants,
agreements or obligations arising under this Agreement, RCC shall have the
right to discontinue making the payments to Employee provided for herein
unless and until Employee has cured any such existing breaches.
(f) RCC may waive the restrictions on Employee imposed in Section 12.
In the event of such waiver, RCC shall not be obligated to make the
payments set forth in Section 12(e) provided that, in the event of a
voluntary termination by Employee, RCC shall give notice of such waiver to
Employee within twenty (20) days of the receipt of the notice of
termination by Employee.
13. SUCCESSORS AND ASSIGNS.
(a) This Agreement shall inure to the benefit of and be binding upon
any corporation or other successor of RCC which shall acquire, directly or
indirectly, by merger, consolidation, purchase or otherwise, all or
substantially all of the assets or stock of RCC.
(b) Since RCC is contracting for the unique and personal skills of
the Employee, the Employee shall be precluded from assigning or delegating
his rights or duties hereunder without first obtaining the written consent
of RCC.
14. AMENDMENTS. No amendments or additions to this Agreement shall be
binding upon the parties hereto unless made in writing and signed by both
parties, except as herein otherwise specifically provided.
15. APPLICABLE LAW. This Agreement shall be governed by all respects
whether as to validity, construction, capacity, performance or otherwise, by the
laws of the State of Minnesota, except to the extent that Federal law shall be
deemed to apply.
16. SEVERABILITY. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
17. ARBITRATION. Any controversy or claim arising out of or relating to
this Agreement, or the breach thereof, shall be settled by arbitration in
accordance with the rules then in effect of the district office of the American
Arbitration Association ("AAA") nearest to the home office of RCC, and judgment
upon the award rendered may be entered in any court having jurisdiction thereof,
except to the extent that the parties may otherwise reach a mutual settlement of
such issue. RCC shall incur the cost of all fees and expenses associated with
filing a request for arbitration with the AAA, whether such filing is made on
behalf of RCC or the Employee, and the costs and administrative fees associated
with employing the arbitrator and related administrative expenses assessed by
the AAA. If the parties cannot mutually agree on an arbitrator, each party
shall select an arbitrator and those two arbitrators shall select a third
arbitrator and the third arbitrator shall conduct the arbitration. Otherwise,
each party shall pay its own costs and expenses, including reasonable attorneys'
fees, arising from such dispute, proceedings or actions, notwithstanding the
ultimate outcome thereof, upon delivery of a final judgment or settlement of the
dispute.
18. ENTIRE AGREEMENT. This Agreement, together with any understanding or
modifications thereof as agreed to in writing by the parties, shall constitute
the entire agreement between the parties hereto, and shall supersede all prior
understandings in writing or otherwise between the parties.
RURAL CELLULAR CORPORATION
ATTEST: /s/ Richard P. Ekstrand
----------------------------------
By: Richard P. Ekstrand
<PAGE>
- --------------------------------- President/Chief Executive Officer
Secretary
WITNESS:
/s/ Nancy A. Gilbertson
/s/ Wesley E. Schultz
- --------------------------------- ----------------------------------
Wesley E. Schultz
<PAGE>
EXHIBIT 10.13(b)
AMENDMENT TO EMPLOYMENT AGREEMENT DATED MAY 14,1996
BY AND BETWEEN
RURAL CELLULAR CORPORATION
AND
WESLEY E. SCHULTZ
THIS AMENDMENT entered into this 18th day of December, 1996, by and
between Rural Cellular Corporation ("RCC" or "Company") and Wesley E. Schultz
(the "Employee").
WHEREAS, RCC and the Employee entered into a written Employment
Agreement on May 14, 1996 (the "Employment Agreement");
WHEREAS, pursuant to Section 14 of the Employment Agreement, RCC and the
Employee desire to amend the Employee's Employment Agreement to extend the
term of the
Agreement and to increase certain payments to Employee in the event of a
change in control of RCC;
NOW, THEREFORE, it is AGREED as follows:
1. The Employee's term of employment, as set forth in Section 5 of the
Employment Agreement, is hereby extended to December 31, 1999.
2. The amount to be paid to the Employee in the event of the involuntary
termination of his employment, absent Just Cause, in connection with, or within
twelve (12) months after, any change in control of RCC, as stated in Section 1 l
(a) of the Employment Agreement, shall be equal to the product of 2.99 times the
Employee's "base amount" as defined in Section 28OG(b)(3) of the Internal
Revenue Code of 1986, as amended (the "Code") and the regulations promulgated
thereunder.
3. Capitalized terms used but not defined herein shall have the meanings
ascribed to such terms in the Employment Agreement.
4. All other terms, conditions and provisions of the Employment Agreement
remain in full force and effect.
RURAL CELLULAR CORPORATION
/s/ Richard P. Ekstrand
-------------------------
BY: Richard P. Ekstrand
President/Chief Executive Officer
/s/ Wesley E. Schultz
---------------------
Wesley E. Schultz
<PAGE>
EXHIBIT 10.13(c)
AMENDMENT TO EMPLOYMENT AGREEMENT DATED MAY 14, 1996
BY AND BETWEEN
RURAL CELLULAR CORPORATION
AND
WESLEY E. SCHULTZ
THIS AMENDMENT entered into this 18th day of December, 1997, by and between
Rural Cellular Corporation ("RCC" or "Company") and Wesley E. Schultz (the
"Employee").
WHEREAS, RCC and the Employee entered into a written Employment Agreement
on May 14, 1996 (the "Employment Agreement");
WHEREAS, pursuant to Section 14 of the Employment Agreement, RCC and the
Employee desire to amend the Employee's Employment Agreement to extend the term
of the Agreement and to increase certain payments to Employee in the event of a
change in control of RCC;
NOW, THEREFORE, it is AGREED as follows:
9. The Employee's term of employment as set forth in Section 5 of the
Employment Agreement is hereby extended to December 31, 2000.
10. The amount to be paid to the Employee in the event of the involuntary
termination of his employment, absent Just Cause, in connection with, or within
twelve (12) months after, any change in control of RCC, as stated in Section
11(a) of the Employment Agreement, shall be equal to the product of 2.99 times
the Employee's "base amount" as defined in Section 280G(b)(3) of the Internal
Revenue Code of 1986, as amended (the "Code") and the rgulations promulgated
thereunder.
11. Capitalized terms used but not defined herein shall have the meanings
ascribed to such terms in the Employment Agreement.
12. All other terms, conditions and provisions of the Employment Agreement
remain in full force and effect.
RURAL CELLULAR CORPORATION
By: /s/ Richard P. Ekstrand
--------------------------
Richard P. Ekstrand
President and Chief Executive Officer
/s/ Wesley E. Schultz
---------------------
Wesley E. Schulz
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
The Registrant has three wholly-owned subsidiaries, RCC Network, Inc., RCC
Paging, Inc. and RCC Wireless Company, all of which are incorporated in the
State of Minnesota. The Registrant also has a subsidiary, MRCC, Inc., which
is incorporated in the state of Maine. In addition, the Registrant holds a
51% interest in Wireless Alliance, LLC, a Minnesota limited liability company.
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our reports included in this Form 10-K, into Rural Cellular Corporation's
previously filed Registration Statements on Form S-8 (File Numbers 333-10815
and 333-10817).
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota
March 30, 1998
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<PAGE>
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<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,994,628
<SECURITIES> 0
<RECEIVABLES> 10,767,304
<ALLOWANCES> (1,146,272)
<INVENTORY> 1,774,222
<CURRENT-ASSETS> 14,155,821
<PP&E> 101,794,175
<DEPRECIATION> (23,873,892)
<TOTAL-ASSETS> 181,588,068
<CURRENT-LIABILITIES> 13,642,352
<BONDS> 0
0
0
<COMMON> 88,533
<OTHER-SE> 33,641,703
<TOTAL-LIABILITY-AND-EQUITY> 181,588,068
<SALES> 1,020,014
<TOTAL-REVENUES> 53,902,703
<CGS> 2,807,206
<TOTAL-COSTS> 14,385,092
<OTHER-EXPENSES> 37,682,969
<LOSS-PROVISION> 1,510,568
<INTEREST-EXPENSE> 6,064,468
<INCOME-PRETAX> (1,266,116)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,266,116)
<DISCONTINUED> 0
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<NET-INCOME> (1,266,116)
<EPS-PRIMARY> $(0.14)
<EPS-DILUTED> $(0.14)
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