<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY , 1998
REGISTRATION NO. 333-57677
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
PRE-EFFECTIVE AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------------
RURAL CELLULAR CORPORATION
(Exact Name Of Company As Specified In Its Charter)
<TABLE>
<S> <C>
MINNESOTA 41-1693295
(State Of Incorporation) (I.R.S. Employer Identification
No.)
</TABLE>
3905 DAKOTA STREET S.W.
P.O. BOX 2000
ALEXANDRIA, MN 56308-2000
(320) 762-2000
(Address, Including Zip Code, And Telephone Number, Including Area Code, Of
Company's Principal Executive Offices)
RICHARD P. EKSTRAND
PRESIDENT AND CHIEF EXECUTIVE OFFICER
RURAL CELLULAR CORPORATION
3905 DAKOTA STREET S.W.
P.O. BOX 2000
ALEXANDRIA, MN 56308-2000
(320) 762-2000
(Name, Address, Including Zip Code, And Telephone Number, Including Area Code,
Of Agent For Service)
------------------------------
Copies of all communications, including all communications sent to the Agent for
Service, should be sent to:
DEANNE M. GRECO
MOSS & BARNETT, P.A.
4800 NORWEST CENTER
90 SOUTH SEVENTH STREET
MINNEAPOLIS, MN 55402-4129
(612) 347-0287
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
------------------------------
IF THE ONLY SECURITIES BEING REGISTERED ON THIS FORM ARE BEING OFFERED IN
CONNECTION WITH THE FORMATION OF A HOLDING COMPANY AND THERE IS COMPLIANCE WITH
GENERAL INSTRUCTION G, PLEASE CHECK THE FOLLOWING BOX: / /
IF THIS FORM IS FILED TO REGISTER ADDITIONAL SECURITIES FOR AN OFFERING
PURSUANT TO RULE 462(b) UNDER THE SECURITIES ACT, PLEASE CHECK THE FOLLOWING BOX
AND LIST THE SECURITIES ACT REGISTRATION STATEMENT NUMBER OF THE EARLIER
EFFECTIVE REGISTRATION STATEMENT FOR THE SAME OFFERING: / /
IF THIS FORM IS A POST-EFFECTIVE AMENDMENT FILED PURSUANT TO RULE 462(d)
UNDER THE SECURITIES ACT, CHECK THE FOLLOWING BOX AND LIST THE SECURITIES ACT
REGISTRATION STATEMENT NUMBER OF THE EARLIER EFFECTIVE REGISTRATION STATEMENT
FOR THE SAME OFFERING: / /
IF DELIVERY OF THE PROSPECTUS IS EXPECTED TO BE MADE PURSUANT TO RULE 434,
PLEASE CHECK THE FOLLOWING BOX: / /
------------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM
AGGREGATE OFFERING PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO PRICE PER NOTE/ AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED SHARE (1) OFFERING PRICE (2) REGISTRATION FEE
<S> <C> <C> <C> <C>
9 5/8% Senior Subordinated Notes Due
2008..................................... $125,000,000 $1,000 $125,000,000 $36,875
11 3/8% Senior Exchangeable Preferred Stock
("Preferred Stock")(3)................... 125,000 Shares $1,000 $125,000,000 36,875
Total...................................... $250,000,000 $73,750
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee. Fee
calculated pursuant to Rule 457(f)(2) based on the private placement
purchase price of the 9 5/8% Notes and the 11 3/8% Senior Exchangeable
Preferred Stock to be exchanged for the securities being registered. (Note:
The 9 5/8% Notes were placed at their par value of $1,000 and the shares of
11 3/8% Senior Exchangeable Preferred Stock were placed at their liquidation
preference of $1,000 per share.)
(2) Calculated pursuant to Rule 457(f).
(3) Pursuant to Rule 416, this Registration Statement shall be deemed to cover
shares of Preferred Stock that may be issued from time to time as dividends
on the Preferred Stock being registered hereunder.
------------------------------
THE COMPANY HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE COMPANY SHALL FILE A
FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE>
PROSPECTUS
JULY 24, 1998
[LOGO]
RURAL CELLULAR CORPORATION
OFFER TO EXCHANGE 9 5/8% SERIES B SENIOR SUBORDINATED NOTES FOR ANY AND ALL
OUTSTANDING 9 5/8% SENIOR SUBORDINATED NOTES DUE 2008 AND TO EXCHANGE 11 3/8%
SERIES B SENIOR EXCHANGEABLE PREFERRED STOCK FOR ANY AND ALL OUTSTANDING 11 3/8%
SENIOR EXCHANGEABLE PREFERRED STOCK
------------------
Offer to Exchange (i) 9 5/8% Series B Senior Subordinated Notes Due 2008,
which have been registered under the Securities Act of 1933, as amended, for any
and all of its outstanding 9 5/8% Series A Senior Subordinated Notes Due 2008
and (ii) 11 3/8% Series B Senior Exchangeable Preferred Stock, which has been
registered under the Securities Act of 1933, as amended, for any and all of its
outstanding 11 3/8% Series A Senior Exchangeable Preferred Stock. The Exchange
Offer will expire at 5:00 p.m., New York City Time, on August 24, 1998 unless
extended.
Rural Cellular Corporation ("RCC" or the "Company") hereby offers, upon the
terms and subject to the conditions set forth in this Prospectus and the
accompanying letters of transmittal (each a "Letter of Transmittal" and,
collectively, the "Letters of Transmittal" and, together with this Prospectus,
the "Exchange Offer"), (i) to exchange its 9 5/8% Series B Senior Subordinated
Notes Due 2008 (the "New Notes"), which have been registered under the
Securities Act of 1933, as amended (the "Securities Act"), pursuant to a
Registration Statement of which this Prospectus is a part, for an equal
principal amount of its outstanding 9 5/8% Series A Senior Subordinated Notes
Due 2008 (the "Old Notes" and, together with the New Notes, the "Senior
Subordinated Notes"), of which, as of the date of this Prospectus, there was
outstanding $125,000,000 principal amount at maturity and (ii) to exchange
shares of its 11 3/8% Series B Senior Exchangeable Preferred Stock (the "New
Exchangeable Preferred Stock"), which have been registered under the Securities
Act, pursuant to a Registration Statement of which this Prospectus is a part,
for an equal number of shares of its outstanding 11 3/8% Series A Senior
Exchangeable Preferred Stock (the "Old Exchangeable Preferred Stock" and,
together with the New Exchangeable Preferred Stock, the "Exchangeable Preferred
Stock"). The Old Notes and the Old Exchangeable Preferred Stock were originally
sold on May 14, 1998 (the "Issue Date") to TD Securities (USA) Inc., NationsBanc
Montgomery Securities LLC, and BancBoston Securities Inc. (the "Initial
Purchasers") in a private transaction exempt from registration under the
Securities Act.
The Company will accept for exchange any and all Old Notes and shares of Old
Exchangeable Preferred Stock that are validly tendered and not withdrawn on or
prior to 5:00 p.m., New York City Time, on the date the Exchange Offer expires
(the "Expiration Date"), which will be August 24, 1998, unless the Exchange
Offer is extended. Tenders of Old Notes and shares of Old Exchangeable Preferred
Stock may be withdrawn at any time prior to 5:00 p.m., New York City Time, on
the Expiration Date. The Exchange Offer is not conditioned upon any minimum
principal amount of Old Notes or minimum number of shares of Old Exchangeable
Preferred Stock being tendered for exchange. See "The Exchange Offer."
The New Notes will be obligations of the Company evidencing the same
indebtedness as the Old Notes and will be entitled to the benefits of the same
Notes Indenture (as defined herein), which governs both the Old Notes and the
New Notes. The form and terms of the New Notes and the New Exchangeable
Preferred Stock (together, the "New Securities") are substantially identical to
the form and terms of the Old Notes and the Old Exchangeable Preferred Stock
(together, the "Old Securities" and, collectively with the New Securities, the
"Securities"), respectively, except that the offer of the New Securities will
have been registered under the Securities Act and, therefore, the New Securities
will not bear legends restricting the transfer thereof.
The net proceeds from the sale of the Old Exchangeable Preferred Stock (the
"Exchangeable Preferred Stock Offering") were used to repay a portion of
Indebtedness (as defined herein) under the Existing Credit Facility (as defined
herein). The net proceeds from the sale of the Old Notes (the "Notes Offering"
and, together with the Exchangeable Preferred Stock Offering, the "Offerings"),
together with the New Credit Facility (as defined herein), were used to finance
the acquisition of substantially all of the assets of Atlantic Cellular Company,
L.P. and one of its subsidiaries ("Atlantic"), refinance the remaining
indebtedness under the Existing Credit Facility and pay related fees and
expenses and will be used to finance the purchase of all of the outstanding
capital stock of Western Maine Cellular, Inc. ("WMC"). The acquisitions of
Atlantic and WMC are referred to, respectively, as the "Atlantic Acquisition"
and the "WMC Acquisition" and together as the "Acquisitions."
<PAGE>
Interest on the Senior Subordinated Notes will accrue from May 14, 1998 and
be payable semi-annually on May 15 and November 15 of each year, commencing on
November 15, 1998. The Senior Subordinated Notes will mature on May 15, 2008,
and are redeemable, in whole or in part, at the option of the Company, at any
time on or after May 15, 2003, at the redemption prices set forth herein, plus
accrued and unpaid interest, if any, to the date of redemption. In addition, at
any time prior to May 15, 2001, the Company, at its option, may redeem up to 25%
of the aggregate principal amount of Senior Subordinated Notes (including
Additional Notes, as defined herein) issued under the Notes Indenture, with the
net cash proceeds of a Qualifying Event (as defined herein), at a price equal to
109.625% of the aggregate principal amount thereof, plus accrued and unpaid
interest, if any, to the date of redemption; PROVIDED, HOWEVER, that at least
$90 million in aggregate principal amount of Senior Subordinated Notes remains
outstanding immediately after such redemption. Within 30 days after the
occurrence of a Change of Control (as defined herein), the Company will be
required to make an offer to purchase all outstanding Senior Subordinated Notes
at a price equal to 101% of the aggregate principal amount thereof, plus accrued
and unpaid interest, if any, to the date of purchase. See "Description of Senior
Subordinated Notes."
The Senior Subordinated Notes will be unsecured senior subordinated
obligations of the Company and will be subordinated in right of payment to all
present and future Senior Indebtedness (as defined herein) of the Company and
effectively subordinated to all obligations of the Company's subsidiaries
(including the guarantees by such subsidiaries of the Credit Facility, as
defined herein). The Senior Subordinated Notes will rank PARI PASSU in right of
payment with the Exchange Debentures, if the Exchange Debentures are issued in
exchange for the Exchangeable Preferred Stock, and the Senior Subordinated Notes
and the Exchange Debentures will rank PARI PASSU with or senior in right of
payment to all present and future Indebtedness of the Company that expressly
provides that such Indebtedness ranks PARI PASSU with or junior to the Senior
Subordinated Notes or the Exchange Debentures, as the case may be. As of March
31, 1998, on a pro forma basis after giving effect to the Acquisitions, the
Offerings and the application of the net proceeds therefrom and the replacement
of the Existing Credit Facility with the New Credit Facility, the aggregate
principal amount of Senior Indebtedness of the Company outstanding would have
been approximately $163.8 million, all of which would have represented
borrowings under the New Credit Facility (with an additional $136.2 million of
unused availability thereunder). The Company has not issued, and currently does
not have any firm arrangement to issue, any significant Indebtedness that would
be subordinate to the Senior Subordinated Notes and the Exchange Debentures.
Dividends on the Exchangeable Preferred Stock will be cumulative and accrue
from May 14, 1998, and will be payable quarterly on February 15, May 15, August
15 and November 15 of each year, commencing on August 15, 1998, at a rate per
annum of 11 3/8% of the liquidation preference per share. Dividends may be paid,
at the Company's option, on any dividend payment date occurring on or prior to
May 15, 2003, either in cash or in additional shares of Exchangeable Preferred
Stock having an aggregate liquidation preference equal to the amount of such
dividends. Thereafter, all dividends will be payable only in cash. The
Exchangeable Preferred Stock will be senior to all classes of junior preferred
stock and common stock of the Company with respect to dividend rights and rights
upon liquidation, winding-up and dissolution of the Company.
The Exchangeable Preferred Stock is redeemable, in whole or in part, at the
option of the Company, at any time on or after May 15, 2003, at the redemption
prices set forth herein, plus, without duplication, accumulated and unpaid
dividends, if any, to the date of redemption. In addition, at any time prior to
May 15, 2001, the Company, at its option, may redeem up to 25% of the aggregate
liquidation preference of all the shares of the Exchangeable Preferred Stock
(including Additional Shares and Dividend Shares, each as defined herein) issued
under the Certificate of Designation (as defined herein), with the net cash
proceeds of a Qualifying Event, at a price equal to 111.375% of the aggregate
liquidation preference thereof, plus, without duplication, accumulated and
unpaid dividends, if any, to the date of redemption; PROVIDED, HOWEVER, that at
least $75 million in aggregate liquidation preference of Exchangeable Preferred
Stock remains outstanding immediately after such redemption. The Company is
required, subject to the existence of funds legally available therefor, to
redeem all of the Exchangeable Preferred Stock outstanding on May 15, 2010, at a
price equal to 100% of the aggregate liquidation preference thereof, plus,
without duplication, accumulated and unpaid dividends, if any, to the date of
redemption. Within 30 days after the occurrence of a Change of Control, the
Company will be required to make an offer to purchase all outstanding
Exchangeable Preferred Stock at a price equal to 101% of the aggregate
liquidation preference thereof,
2
<PAGE>
plus, without duplication, accumulated and unpaid dividends, if any, to the date
of purchase. See "Description of Exchangeable Preferred Stock and Exchange
Debentures."
Subject to certain conditions, the Exchangeable Preferred Stock is
exchangeable, in whole but not in part, at the option of the Company, on any
dividend payment date, for the Company's Exchange Debentures. Interest on the
Exchange Debentures will be payable at a rate of 11 3/8% per annum and will
accrue from the date of issuance thereof. Interest on the Exchange Debentures
will be payable semi-annually on May 15 and November 15 of each year in cash or,
at the option of the Company, on or prior to May 15, 2003, in additional
Exchange Debentures, commencing on the first such date after the exchange of the
Exchangeable Preferred Stock for the Exchange Debentures. The Exchange
Debentures mature on May 15, 2010, and are redeemable, in whole or in part, at
the option of the Company, at any time on or after May 15, 2003 at the
redemption prices set forth herein, plus accrued and unpaid interest, if any, to
the date of redemption. In addition, at any time prior to May 15, 2001, the
Company may, at its option, redeem up to an aggregate of 25% of the aggregate
principal amount of Exchange Debentures then outstanding with the net cash
proceeds of a Qualifying Event at a price equal to 111.375% of the aggregate
principal amount thereof, plus accrued and unpaid interest, if any, to the date
of redemption; PROVIDED, HOWEVER, that at least $75 million in aggregate
principal amount of Exchange Debentures remains outstanding immediately after
such redemption; and PROVIDED FURTHER, HOWEVER, that the aggregate liquidation
preference of any shares of Exchangeable Preferred Stock previously redeemed out
of the net cash proceeds of a Qualifying Event shall be counted as aggregate
principal amount of Exchange Debentures issued and redeemed for purposes of the
foregoing 25% calculation. Within 30 days after the occurrence of a Change of
Control, the Company will be required to make an offer to purchase all
outstanding Exchange Debentures at a price equal to 101% of the aggregate
principal amount thereof, plus accrued and unpaid interest, if any, to the date
of purchase.
The Exchangeable Preferred Stock is subject to the restrictions on alien
ownership and the requirement of prior Federal Communications Commission (the
"FCC") approval of transfers of control contained in Section 310 of the
Communications Act of 1934, as amended (the "Communications Act"). See
"Description of Capital Stock -- Limitation on Foreign Ownership and Transfers
of Control."
The New Securities are being offered hereunder in order to satisfy certain
obligations of the Company under the Notes Exchange and Registration Rights
Agreement and the Preferred Stock Exchange and Registration Rights Agreement,
both dated May 14, 1998 (collectively, the "Registration Rights Agreements"),
among the Company and the Initial Purchasers. Based on interpretations by the
staff of the Securities and Exchange Commission (the "Commission"), as set forth
in no-action letters issued to third parties, the Company believes that the New
Securities issued pursuant to the Exchange Offer may be offered for resale,
resold or otherwise transferred by holders thereof (other than any holder that
is an "affiliate" of the Company as defined under Rule 405 of the Securities
Act), PROVIDED that such New Securities are acquired in the ordinary course of
such holders' business and such holders are not engaged in, and do not intend to
engage in, a distribution of such New Securities and have no arrangement with
any person to participate in the distribution of such New Securities. However,
the staff of the Commission has not considered the Exchange Offer in the context
of a no-action letter and there can be no assurance that the staff of the
Commission would make a similar determination with respect to the Exchange Offer
as in such other circumstances. By tendering the Old Securities in exchange for
the New Securities, each holder, other than a broker-dealer, will represent to
the Company that (i) it is not an affiliate of the Company (as defined under
Rule 405 of the Securities Act), (ii) any New Securities to be received by it
were acquired in its ordinary business and (iii) it is not engaged in, and does
not intend to engage in, a distribution of such New Securities and has no
arrangement or understanding to participate in a distribution of the New
Securities. Each broker-dealer that receives New Securities for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
Prospectus in connection with any resale of such New Securities. The Letters of
Transmittal state that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of New Securities received in exchange for Old Securities, where
such Old Securities were acquired by such broker-dealer as a result of
market-making activities or other trading activities. The Company has agreed
that, starting on the Expiration Date and ending on the close of business 90
days after the Expiration Date, it will make this Prospectus available to any
broker-dealer for use in
3
<PAGE>
connection with any such resale. In addition, until October 22, 1998, all
dealers effecting transactions in the New Notes or shares of New Exchangeable
Preferred Stock may be required to deliver a prospectus. See "Plan of
Distribution."
Prior to this Exchange Offer, there has been no public market for the Old
Securities or the New Securities. If such a market were to develop, the New
Notes and the New Exchangeable Preferred Stock could trade at prices that may be
higher or lower than their principal amount or liquidation preference,
respectively. The Company does not intend to apply for listing or quotation of
the New Notes or New Exchangeable Preferred Stock on any securities exchange or
stock market. Therefore, there can be no assurance as to the liquidity of any
trading market for the New Notes or New Exchangeable Preferred Stock or that an
active public market for the New Notes or New Exchangeable Preferred Stock will
develop. See "Risk Factors -- Risks Associated with Securities"; "Risk Factors
- -- Absence of Public Market; Possible Volatility of Price of Securities."
The Initial Purchasers have agreed that one or more of them will act as
market-makers for the New Securities. However, the Initial Purchasers are not
obligated to so act and they may discontinue any such market-making at any time
without notice. The Company will not receive any proceeds from the Exchange
Offer. The Company will pay all the expenses incident to the Exchange Offer. No
underwriter is being used in connection with the Exchange Offer.
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY HOLDERS OF
OLD SECURITIES WHO TENDER THEIR OLD SECURITIES IN THE EXCHANGE OFFER, SEE "RISK
FACTORS" BEGINNING ON PAGE 24 OF THIS PROSPECTUS.
THE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
4
<PAGE>
FORWARD-LOOKING STATEMENTS
THIS PROSPECTUS INCLUDES "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF
THE SECURITIES LAWS. ALL STATEMENTS REGARDING THE COMPANY AND ITS EXPECTED
FINANCIAL POSITION, BUSINESS AND FINANCING PLANS ARE FORWARD-LOOKING STATEMENTS.
FORWARD-LOOKING STATEMENTS CAN BE IDENTIFIED BY, AMONG OTHER THINGS, THE USE OF
FORWARD-LOOKING TERMINOLOGY SUCH AS "BELIEVES," "EXPECTS," "MAY," "WILL,"
"SHOULD," "SEEKS," "PRO FORMA," "ANTICIPATES," "INTENDS" OR THE NEGATIVE OF ANY
THEREOF, OR OTHER VARIATIONS THEREON OR COMPARABLE TERMINOLOGY, OR BY
DISCUSSIONS OF STRATEGY OR INTENTIONS. ALTHOUGH THE COMPANY BELIEVES THAT THE
EXPECTATIONS REFLECTED IN SUCH FORWARD-LOOKING STATEMENTS ARE REASONABLE, IT CAN
GIVE NO ASSURANCE THAT SUCH EXPECTATIONS WILL PROVE TO BE CORRECT. A NUMBER OF
FACTORS COULD CAUSE ACTUAL RESULTS, PERFORMANCE, ACHIEVEMENTS OF THE COMPANY OR
INDUSTRY RESULTS TO BE MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS, PERFORMANCE
OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. THESE
FACTORS INCLUDE, BUT ARE NOT LIMITED TO, THE COMPETITIVE ENVIRONMENT IN THE
WIRELESS AND TELECOMMUNICATIONS INDUSTRIES; CHANGES IN ECONOMIC CONDITIONS IN
GENERAL AND IN THE COMPANY'S BUSINESS; DEMOGRAPHIC CHANGES; CHANGES IN
PREVAILING INTEREST RATES AND THE AVAILABILITY OF AND TERMS OF FINANCING TO FUND
THE ANTICIPATED GROWTH OF THE COMPANY'S BUSINESS; THE ABILITY TO ATTRACT AND
RETAIN QUALIFIED PERSONNEL; THE SIGNIFICANT INDEBTEDNESS OF THE COMPANY; CHANGES
IN THE COMPANY'S ACQUISITION AND CAPITAL EXPENDITURE PLANS; AND OTHER FACTORS
REFERENCED HEREIN INCLUDING, WITHOUT LIMITATION, UNDER "RISK FACTORS," AND IN
THE COMPANY'S FILINGS WITH THE COMMISSION. IN ADDITION, SUCH FORWARD-LOOKING
STATEMENTS ARE NECESSARILY DEPENDENT UPON ASSUMPTIONS, ESTIMATES AND DATA THAT
MAY BE INCORRECT OR IMPRECISE AND INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES
AND OTHER FACTORS. ACCORDINGLY, ANY FORWARD-LOOKING STATEMENTS INCLUDED HEREIN
DO NOT PURPORT TO BE PREDICTIONS OF FUTURE EVENTS OR CIRCUMSTANCES AND MAY NOT
BE REALIZED. ALL SUBSEQUENT WRITTEN AND ORAL FORWARD-LOOKING STATEMENTS
ATTRIBUTABLE TO THE COMPANY OR PERSONS ACTING ON ITS BEHALF ARE EXPRESSLY
QUALIFIED IN THEIR ENTIRETY BY THE FOREGOING CAUTIONARY STATEMENTS. GIVEN THESE
UNCERTAINTIES, PROSPECTIVE INVESTORS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE
ON SUCH FORWARD-LOOKING STATEMENTS. THE COMPANY DISCLAIMS ANY OBLIGATION TO
UPDATE ANY SUCH FACTORS OR TO ANNOUNCE PUBLICLY THE RESULTS OF ANY REVISIONS TO
ANY OF THE FORWARD-LOOKING STATEMENTS CONTAINED HEREIN TO REFLECT FUTURE EVENTS
OR DEVELOPMENTS.
5
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN
CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND THE CONSOLIDATED FINANCIAL
STATEMENTS AND THE NOTES THERETO, AND OTHER FINANCIAL DATA, APPEARING ELSEWHERE
IN THIS PROSPECTUS. UNLESS THE CONTEXT OTHERWISE REQUIRES, THE TERM "COMPANY" OR
"RURAL CELLULAR," WHEN USED IN THIS PROSPECTUS, REFERS TO RURAL CELLULAR
CORPORATION, A MINNESOTA CORPORATION, AND ITS SUBSIDIARIES, INCLUDING WIRELESS
ALLIANCE, LLC ("WIRELESS ALLIANCE"), THE COMPANY'S 51%-OWNED JOINT VENTURE WITH
A WHOLLY-OWNED SUBSIDIARY OF AERIAL COMMUNICATIONS, INC. ("AERIAL
COMMUNICATIONS"), WHICH WILL BE AN UNRESTRICTED SUBSIDIARY (AS DEFINED HEREIN)
FOR PURPOSES OF THE DOCUMENTS GOVERNING THE SECURITIES. UNLESS THE CONTEXT
OTHERWISE REQUIRES, WHEN USED HEREIN WITH RESPECT TO A LICENSED AREA, "PERSONS,"
"POPULATION" AND "POPS" ARE INTERCHANGEABLE AND REFER TO THE AGGREGATE NUMBER OF
PERSONS LOCATED IN SUCH LICENSED AREA. INFORMATION ON PERSONS, POPULATION AND
POPS WAS OBTAINED FROM THE 1990 CENSUS, UPDATED FOR JULY 1, 1997 ESTIMATES, OF
THE U.S. CENSUS BUREAU. THE TERM "UPPER MIDWEST," AS IT RELATES TO THE LOCATION
OF THE COMPANY'S CLUSTERS, REFERS TO (I) THE COMPANY'S BLOCK B FREQUENCY LICENSE
("WIRELINE CELLULAR LICENSE") RURAL SERVICE AREAS ("RSAS") IN NORTHERN MINNESOTA
AND (II) PARTITIONED COUNTIES OF THE MINNEAPOLIS METROPOLITAN TRADING AREA
("MTA") SERVED BY WIRELESS ALLIANCE IN MINNESOTA, WISCONSIN, NORTH DAKOTA AND
SOUTH DAKOTA. THE TERM "NEW ENGLAND," AS IT RELATES TO THE LOCATION OF THE
COMPANY'S CLUSTERS, REFERS TO THE COMPANY'S WIRELINE CELLULAR LICENSE RSAS AND
METROPOLITAN STATISTICAL AREA ("MSA") LOCATED IN MAINE AND OPERATED THROUGH
MRCC, INC., A WHOLLY-OWNED SUBSIDIARY OF THE COMPANY ("MRCC"), THE FIVE BLOCK A
FREQUENCY LICENSE ("NON-WIRELINE CELLULAR LICENSE") RSAS AND ONE NON-WIRELINE
CELLULAR LICENSE MSA LOCATED IN VERMONT, MASSACHUSETTS, NEW HAMPSHIRE, AND NEW
YORK ACQUIRED IN THE ATLANTIC ACQUISITION AND ONE WIRELINE CELLULAR LICENSE RSA
IN MAINE BEING ACQUIRED IN THE WMC ACQUISITION. SEE "THE ACQUISITIONS."
THE COMPANY
GENERAL
The Company provides wireless communications services through its ownership,
operation and management of cellular, paging and Personal Communications
Services ("PCS") systems (collectively, "Wireless Systems"). These Wireless
Systems are concentrated in the Upper Midwest and New England regions of the
United States with a focus on RSAs and small MSAs, which the Company believes
are subject to less competition due to lower population density and provide
greater opportunity for customer growth due to lower penetration relative to
major markets. At March 31, 1998, the Company's existing Wireless Systems were
comprised of geographic areas with approximately 1.86 million total POPs,
including 636,000 cellular POPs in Minnesota; 512,000 cellular POPs in Maine;
and 708,000 managed POPs in Minnesota, North Dakota, South Dakota and Wisconsin
served by Wireless Alliance. The Company believes that clustering its wireless
operations allows it to achieve operating and cost efficiencies as well as
substantial marketing benefits. The Company's markets generally are
characterized by a concentration of small businesses, vacation destinations,
and, given the distance between population centers, substantial travel time,
particularly on interstate highways, which support strong wireless usage and
result in significant roamer revenues. As of March 31, 1998, the Company's
existing Wireless Systems provided service to approximately 114,000 customers,
which included approximately 18,000 customers of Wireless Alliance and 9,000
paging customers. The Acquisitions, which will expand the Company's existing
cluster in New England, will bring the Company's total POPs to approximately
3.05 million and increase the number of the Company's wireless customers as of
March 31, 1998, to approximately 187,000, on a pro forma basis. The Company
intends to seek additional opportunities to expand its existing clusters and,
where appropriate, pursue the acquisition of new clusters with similar
demographics and operating characteristics. The Company is currently engaged in
preliminary discussions concerning possible strategic alliances and acquisitions
of additional Wireless Systems, but there can be no assurance that the Company
will pursue or be successful in these endeavors.
For the year ended December 31, 1997, the Company reported revenues and
EBITDA (as defined herein) of $53.9 million and $14.3 million, respectively
(including 100% of Wireless Alliance's revenues of $7.3 million and negative
EBITDA of $5.6 million). After giving effect to the Atlantic Acquisition, the
MRCC Acquisitions (as defined herein), and the Offerings and the application of
the net proceeds therefrom, as if they had occurred on January 1, 1997, pro
forma adjusted revenues and Adjusted EBITDA (which adjustments exclude the
impact of Wireless Alliance because it is an Unrestricted Subsidiary under the
documents governing the Securities) would
6
<PAGE>
have been $93.5 million and $38.1 million, respectively, for the year ended
December 31, 1997. The resulting pro forma ratios, as of December 31, 1997, of
total Indebtedness to Adjusted EBITDA and total Indebtedness and preferred stock
to Adjusted EBITDA would have been 7.2 times and 10.4 times, respectively.
For the three months ended March 31, 1998, the Company reported revenues and
EBITDA of $14.8 million and $3.7 million, respectively (including 100% of
Wireless Alliance's revenues of $2.7 million and negative EBITDA of $1.1
million). After giving effect to the Atlantic Acquisition and the Offerings and
the application of the net proceeds therefrom, as if they had occurred on
January 1, 1998, pro forma adjusted revenues and Adjusted EBITDA (which
adjustments exclude the impact of Wireless Alliance because it is an
Unrestricted Subsidiary under the documents governing the Securities) would have
been $23.9 million and $10.7 million, respectively, for the three months ended
March 31, 1998. The resulting pro forma ratios, as of March 31, 1998, of total
Indebtedness to Adjusted EBITDA and total Indebtedness and preferred stock to
Adjusted EBITDA would have been 26.7 times and 38.1 times, respectively.
The Company currently provides cellular services in its Upper Midwest
cluster under the names CELLULAR 2000-Registered Trademark- and CELLULAR
2000-Registered Trademark- Northland and PCS services under the name
Unicel-Registered Trademark-. The Company's cellular services are also marketed
under the name Unicel-Registered Trademark- in the current New England cluster.
The cellular services acquired in the Atlantic Acquisition are currently
marketed under the name CELLULARONE-Registered Trademark-. The long distance
services acquired in the Atlantic Acquisition are currently marketed under the
name LONG DISTANCE BY CELLULARONE. The Company also provides paging services in
its existing markets under the service marks KEYPAGE-Registered Trademark-,
KEYPAGE-Registered Trademark- Plus and UNICEL Paging Services as a complement to
its wireless telephone services.
In 1996, the Company extended its wireless communications footprint in its
Upper Midwest cluster through the formation of Wireless Alliance with Aerial
Communications. Wireless Alliance expects its PCS network, which utilizes the
Global System for Mobile Communications ("GSM") technology platform, to be fully
operational in late 1998. Wireless Alliance recently began to market its PCS
services in Fargo, North Dakota; Moorhead, Minnesota; Duluth, Minnesota;
Hibbing, Minnesota; Virginia, Minnesota; and Superior, Wisconsin. Prior to the
launch of its PCS network, Wireless Alliance initiated a cellular resale
program, which has focused on establishing relationships with wireless agents
and resale customers in its PCS service area. The Company intends to integrate
its cellular and PCS networks to provide seamless wireless communications
services to its customers. The Company believes that the introduction of
dual-mode phones will allow for use of a single telephone number in both PCS and
cellular networks, thus creating seamless integrated wireless communications
services throughout its entire coverage area. The dual-mode phone handset is
expected to be available in mid-1998.
7
<PAGE>
WIRELESS MARKETS AND SYSTEMS
The following chart summarizes the Company's existing Wireless Systems and
the systems covered by the Acquisitions:
<TABLE>
<CAPTION>
CLUSTER SERVICE AREAS OWNERSHIP TOTAL POPS DATE OF ACQUISITION
- -------------------------------------------------------------------- --------------- ----------- -------------------
<S> <C> <C> <C>
UPPER MIDWEST CLUSTER
CELLULAR (1)
Minnesota RSA 1................................................... 100% 50,000 4/1/91
Minnesota RSA 2................................................... 100% 64,000 4/1/91
Minnesota RSA 3................................................... 100% 59,000 4/1/91
Minnesota RSA 5................................................... 100% 206,000 4/1/91
Minnesota RSA 6................................................... 100% 257,000 4/1/91
-----------
Total Upper Midwest Cellular POPs............................. 636,000
-----------
PCS (2)
DULUTH, MINNESOTA/SUPERIOR, WISCONSIN:
Cook, Lake, St. Louis and Carlton (portion) Counties in
Minnesota and Douglas County in Wisconsin..................... 51% 270,000 4/10/97
FARGO, NORTH DAKOTA/MOORHEAD, MINNESOTA:
Cass and Trail Counties in North Dakota and Clay County in
Minnesota..................................................... 51% 175,000 4/10/97
GRAND FORKS, NORTH DAKOTA:
Grand Forks County in North Dakota and Polk County in
Minnesota..................................................... 51% 102,000 4/10/97
SIOUX FALLS, SOUTH DAKOTA:
Minnehaha and Lincoln Counties in South Dakota.................. 51% 161,000 1/19/98
-----------
Total Upper Midwest PCS POPs.................................. 708,000
-----------
TOTAL UPPER MIDWEST POPS:........................................... 1,344,000
-----------
NEW ENGLAND CLUSTER
CELLULAR (1)
MRCC:
Maine, Bangor MSA............................................... 100% 143,000 5/1/97
Maine RSA 2..................................................... 100% 148,000 5/1/97
Maine RSA 3..................................................... 100% 221,000 5/1/97
-----------
Total MRCC POPs............................................... 512,000
-----------
ATLANTIC:
Massachusetts RSA 1............................................. 100% 71,000 7/1/98
New Hampshire RSA 1............................................. 100% 223,000 7/1/98
New York RSA 2.................................................. 100% 226,000 7/1/98
Vermont, Burlington MSA......................................... 100% 148,000 7/1/98
Vermont RSA 1................................................... 100% 210,000 7/1/98
Vermont RSA 2................................................... 100% 232,000 7/1/98
-----------
Total Atlantic POPs........................................... 1,110,000
-----------
WMC:
Maine RSA 1..................................................... 100% 83,000 Pending
-----------
TOTAL NEW ENGLAND POPS:............................................. 1,705,000
-----------
TOTAL POPS:................................................... 3,049,000
-----------
-----------
</TABLE>
Source: 1990 census, updated for July 1, 1997 estimates, of the U.S. Census
Bureau
- ------------------------
(1) The Company's Minnesota and Maine (including WMC) cellular licenses are
Wireline Cellular Licenses and the Atlantic cellular licenses are
Non-Wireline Cellular Licenses.
(2) The PCS licenses are for partitioned areas of the Minneapolis MTA owned and
served by Wireless Alliance.
8
<PAGE>
BUSINESS STRATEGY
The Company's objective is to become the leading full service provider of
wireless communications services in its market clusters, while maximizing
revenues and cash flows, by offering innovative products and services, extensive
coverage and superior customer service at competitive prices. The key elements
of the Company's strategy are to:
EXPAND MARKET PRESENCE THROUGH STRATEGIC ACQUISITIONS AND ALLIANCES. The
Company has focused and expects to continue to focus on acquiring controlling
ownership interests in rural Wireless Systems serving RSAs and small MSAs
contiguous or proximate to its current markets. The Company's strategy of
clustering its Wireless Systems 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 an expanded home service
territory, which enables customers to avoid certain roaming charges which would
otherwise be payable to other carriers. The Company believes that the
Acquisitions provide the opportunity to increase geographic coverage
substantially and provide significant marketing and other operational synergies.
The Company also intends to continue to pursue strategic alliances or
acquisitions that will enable it to extend its geographic coverage and enhance
its product and service offerings and, as appropriate, expand into new
geographic areas with similar demographics and operating characteristics. The
Company is currently engaged in preliminary discussions concerning possible
strategic alliances and acquisitions of additional Wireless Systems, but there
can be no assurance that the Company will pursue or be successful in these
endeavors.
FOCUS ON INNOVATIVE MARKETING STRATEGIES AND PRODUCT OFFERINGS. The Company
has implemented a number of creative marketing programs aimed at stimulating
customer airtime. These programs offer customers greater value by bundling long
distance, voice mail and personal toll-free numbers and other services at
varying competitive price points. For example, customers in the Upper Midwest
cluster can select a package that eliminates all long distance charges
throughout North Dakota, South Dakota, northwest Wisconsin and Minnesota.
Additionally, customers can select the Company's nationwide calling option,
which charges a flat fee for all long distance charges when calling from the
Company's service areas. The Company provides voice mail service, which it
believes stimulates cellular usage in the form of returned calls, to
approximately 30% of its customers in the Upper Midwest cluster. The Company
also offers an equipment option called PHONE SERVICE that allows customers to
rent cellular telephones for a nominal monthly charge with extended warranty and
insurance coverage. The Company believes that PHONE SERVICE facilitates
upgrading telephone equipment as individual needs change and reduces customers'
concerns about equipment obsolescence. The Company believes that its innovative
marketing strategies and product offerings have enhanced penetration and
customer retention, and the Company intends to continue to utilize these and
other marketing strategies in an effort to increase penetration throughout its
entire service area.
CONTINUE TO DECENTRALIZE MANAGEMENT OF SERVICE AREAS. The Company has
maintained a decentralized approach to managing its clusters to maintain a
strong local presence and deliver superior products and customer service. Each
of the Company's clusters is divided into separately managed regional business
units. The Company's decentralized management strategy allows each regional
business unit to tailor the Company's marketing and product offerings to meet
the specific needs of each regional market. Additionally, the decentralized
management approach enables the Company to maintain close customer contact and
to consistently monitor customer needs.
FOCUS ON CUSTOMER RETENTION AND SUPERIOR CUSTOMER SERVICE. The Company's
average monthly customer retention rate was 98.4% for the year ended December
31, 1997, and 98.5% for the three months ended March 31, 1998, as compared to
the industry average monthly customer retention rate of 97.9%, as calculated
using data from the Cellular Telephone Industry Association ("CTIA") semi-annual
data survey dated December 1997. In each of its markets, the Company has
implemented separate sophisticated local monitoring and control systems and
maintains separate customer service departments consisting of highly trained
personnel who are aware of the needs of the customers in those markets. The
Company's customer service personnel can be accessed toll-free, 24 hours a day,
365 days a year and are capable of handling both routine and complex technical
questions. The Company believes that easy access to its customer service
professionals is critical to maintaining a high level of customer satisfaction
and loyalty.
9
<PAGE>
CONTINUE TO DEVELOP AND MAINTAIN SUPERIOR DISTRIBUTION CAPABILITIES. The
Company's distribution network is comprised of both direct and indirect sales
channels. The Company's strategy of utilizing territory managers has enabled it
to develop strong distribution channels that are tailored to the specific
characteristics of each local market. All direct and indirect sales channels are
under the oversight of territory managers who have extensive experience and
relationships with, and who reside in, the local markets. The Company believes
that the close proximity of the distribution channel members to each market
facilitates the cultivation of local market knowledge that allows direct sales
representatives and independent agents to focus on the needs of the markets in
which they operate. This improves their ability to establish relationships with
new customers and better understand the needs of existing and potential
customers. In addition, all individuals who have customer contact in the Upper
Midwest cluster are required to complete a certification process annually in
order to continue to sell the Company's products and services or maintain
contact with customers. The Company is currently in the process of implementing
this certification process in its New England cluster. As a result, the Company
believes that its ability to increase penetration and maintain high customer
retention rates is significantly enhanced.
MAINTAIN SUPERIOR NETWORK INFRASTRUCTURE. The Company's goal is to continue
to develop and maintain a superior wireless network infrastructure capable of
providing extensive geographic coverage and enhanced capacity. The Company has
124 cell sites in Minnesota and Maine as of March 31, 1998, and plans to add 12
new cell sites in Minnesota and Maine during the remainder of 1998. As a result,
customers benefit from a high level of both regional and local hand-held
coverage, minimal call blocking and dropped calls, seamless call delivery and
hand-off, and the availability of digital voice services. Most of the Company's
cell sites are currently back-hauled through its microwave network to its
digital mobile telephone switching offices ("MTSO"), enabling the Company to
minimize transport expense and enhance network reliability. All of the Company's
networks in Maine have been upgraded to Time Division Multiple Access ("TDMA")
digital technology, and TDMA service for the Minnesota network is expected to be
available by the end of 1998.
Atlantic's cellular network consists of 85 cell sites and 45 microwave links
as of March 31, 1998, and is connected to a MTSO located in Colchester, Vermont.
This network currently utilizes analog cellular technology with the ability to
expand capacity through the deployment of Narrowband Analog Mobile Phone System
("N-AMPS") technology. N-AMPS is an enhanced technology that provides a
three-fold increase in capacity over conventional analog technology, as well as
many of the service features offered by digital cellular and PCS technology.
Although none of Atlantic's competitors are currently providing digital cellular
or PCS services in its markets, the Company intends to review Atlantic's network
infrastructure for potential digital upgrades to further enhance the quality of
the network.
MAINTAIN DISCIPLINED FINANCIAL MANAGEMENT. As the Company continues to
grow, management intends to focus on reducing leverage and increasing cash flow.
To accomplish this, management plans to actively manage customer acquisition
costs, maximize average revenue per customer ("ARPU") and penetration, and
maintain strong customer retention rates.
THE ACQUISITIONS
On July 1, 1998, the Company completed the acquisition of the Vermont, New
Hampshire, New York and Massachusetts Non-Wireline Cellular Licenses, operations
and related assets of Atlantic, one of the leading independent providers of
wireless services in the New England region for a purchase price of
approximately $256 million in cash plus the assumption of certain liabilities.
In the Atlantic Acquisition, the Company acquired a contiguous, multi-state
service area of approximately 21,000 square miles, encompassing approximately
1.11 million POPs and 71,000 customers. The cellular properties acquired from
Atlantic include: (i) the entire state of Vermont (RSA 1, RSA 2 and the
Burlington MSA); (ii) western New Hampshire (RSA 1); (iii) the northeastern
corner of New York (RSA 2); and (iv) northwestern Massachusetts (RSA 1). In
addition, the Company acquired Atlantic's long-distance business.
In February 1998, the Company entered into a definitive agreement to
purchase the outstanding stock of WMC, a wholly-owned subsidiary of Utilities,
Inc., for approximately $7.5 million in cash. WMC provides cellular
10
<PAGE>
service to western Maine RSA 1 through a Wireline Cellular License, and the
combination of WMC's service area with the Company's existing Wireline Cellular
License operations in Maine and the multi-state Non-Wireline Cellular License
system of Atlantic to the west and south will create a continuous geographic
footprint. WMC's 3,700 square-mile service area of western Maine encompasses
approximately 83,000 POPs and the operation served more than 2,400 customers as
of March 31, 1998. Subject to regulatory approval, the WMC Acquisition is
expected to close in the summer of 1998.
The Atlantic and WMC Acquisitions will increase the Company's total POPs to
approximately 3.05 million and wireless customers to approximately 187,000 as of
March 31, 1998, on a pro forma basis.
Concurrent with the closing of the Atlantic Acquisition, the Company
replaced its Existing Credit Facility with a new $300 million credit facility
(the "New Credit Facility"), which, together with the proceeds of the Notes
Offering, will be used to finance the Acquisitions and pay related fees and
expenses. The net proceeds from the Exchangeable Preferred Stock Offering were
used to repay a portion of the outstanding balance under the Existing Credit
Facility. See "Use of Proceeds" and "Description of Other Indebtedness."
RISK FACTORS
See "Risk Factors" for a discussion of factors that should be considered by
prospective investors in evaluating an investment in the Securities.
------------------------
The principal executive offices of the Company are located at 3905 Dakota
Street SW, Alexandria, Minnesota 56308 (telephone: (320) 762-2000).
11
<PAGE>
THE EXCHANGE OFFER
<TABLE>
<S> <C>
Registration Rights Agreements.... The Old Securities were sold by the Company on the Issue
Date to the Initial Purchasers, which placed such Old
Securities with qualified institutional buyers as
defined under the Securities Act. In connection
therewith, the Company executed and delivered for the
benefit of the holders of the Old Securities the
Registration Rights Agreements obligating the Company to
file with the Commission within 90 days after the Issue
Date, a registration statement under the Securities Act
relating to (i) an exchange offer for the Old Notes (the
"Notes Exchange Offer") and (ii) an exchange offer for
shares of Old Exchangeable Preferred Stock (the
"Preferred Stock Exchange Offer" and, together with the
Notes Exchange Offer, the "Exchange Offer") and to use
its best efforts to cause such registration statement to
become effective within 120 days after the Issue Date.
The Exchange Offer................ New Notes are being offered in exchange for an equal
principal amount at maturity of Old Notes. As of the
date hereof, there was outstanding $125,000,000
principal amount at maturity of Old Notes. New
Exchangeable Preferred Stock is being offered in
exchange for an equal number of shares of old
Exchangeable Preferred Stock. Because the New Notes and
New Exchangeable Preferred Stock will be recorded in the
Company's accounting records at the same carrying value
as the Old Notes and Old Exchangeable Preferred Stock,
respectively, no gain or loss will be recognized by the
Company upon the consummation of the Exchange Offer. See
"The Exchange Offer -- Accounting Treatment." Holders of
the Old Notes or Old Exchangeable Preferred Stock do not
have appraisal or dissenter's rights in connection with
the Exchange Offer under the Minnesota Business
Corporation Act (the "MBCA"), the governing law of the
state of incorporation of the Company.
Based on interpretations by the staff of the Commission,
as set forth in no-action letters issued to third
parties, the Company believes that the New Securities
issued pursuant to the Exchange Offer may be offered for
resale, resold or otherwise transferred by holders
thereof (other than any holder who is an "affiliate" of
the Company within the meaning of Rule 405 under the
Securities Act) without compliance with the registration
and prospectus delivery provisions of the Securities
Act; PROVIDED, HOWEVER, that such New Securities are
acquired in the ordinary course of the holders' business
and such holders are not engaged in, and do not intend
to engage in, a distribution of such New Securities and
have no arrangement with any person to participate in a
distribution of such New Securities. The staff of the
Commission has not considered the Exchange Offer in the
context of a no-action letter and there can be no
assurance that the staff of the Commission would make a
similar determination with respect to the Exchange
Offer. Each broker-dealer that receives New Securities
for its own account in exchange for Old Securities,
where such Old Securities were acquired by such
broker-dealer as a result of market-making activities or
other trading activities, must acknowledge that it will
deliver a prospectus in connection with any resale of
such New Securities. See "Plan of Distribution." To
comply
</TABLE>
12
<PAGE>
<TABLE>
<S> <C>
with the securities laws of certain jurisdictions, it
may be necessary to qualify for sale or register the New
Notes or New Exchangeable Preferred Stock prior to
offering or selling such New Notes or New Exchangeable
Preferred Stock. The Company has agreed, pursuant to the
Registration Rights Agreements and subject to certain
specified limitations therein, to register or qualify
the New Notes and New Exchangeable Preferred Stock for
offer or sale under the securities or "blue sky" laws of
such jurisdictions as may be necessary to permit the
holders of New Securities to trade such New Securities
without any restrictions or limitations under the
securities laws of the several states of the United
States. If a holder of Old Securities does not exchange
such Old Securities for New Securities pursuant to the
Exchange Offer, such Old Securities will continue to be
subject to the restrictions on transfer contained in the
legend thereon. In general, the Old Securities may not
be offered or sold, unless registered under the
Securities Act, except pursuant to an exemption from, or
in a transaction not subject to, the Securities Act and
applicable state securities laws. See "Risk Factors --
Consequences of Failure to Exchange."
Expiration Date................... 5:00 p.m. New York City Time, on August 24, 1998, unless
the Exchange Offer is extended, in which case the term
"Expiration Date" means the latest date and time to
which the Exchange Offer is extended.
Conditions to the Exchange
Offer........................... The Exchange Offer is subject to certain customary
conditions, which may be waived by the Company. See "The
Exchange Offer -- Conditions." Except for the
requirements of applicable Federal and state securities
laws, there are no Federal or state regulatory
requirements or approvals to be complied with or
obtained by the Company in connection with the Exchange
Offer. NO VOTE OF THE COMPANY'S SECURITY HOLDERS IS
REQUIRED TO EFFECT THE EXCHANGE OFFER AND NO SUCH VOTE
(OR PROXY THEREFOR) IS BEING SOUGHT HEREBY.
Procedures for Tendering Old
Notes........................... Each holder of Old Notes wishing to accept the Notes
Exchange Offer must complete, sign and date the
appropriate Letter of Transmittal (the "Notes Letter of
Transmittal"), or a facsimile thereof, in accordance
with the instructions contained herein and therein, and
mail or otherwise deliver such Notes Letter of
Transmittal, or such facsimile, together with the Old
Notes to be exchanged and any other required
documentation to the Notes Exchange Agent (as defined
herein) at the address set forth herein and therein. See
"The Exchange Offer -- Procedures for Tendering."
Procedures for Tendering Old
Exchangeable Preferred Stock.... Each holder of Old Exchangeable Preferred Stock wishing
to accept the Preferred Stock Exchange Offer must
complete, sign and date the appropriate Letter of
Transmittal (the "Preferred Stock Letter of
Transmittal"), or a facsimile thereof, in accordance
with the instructions contained herein and therein, and
mail or otherwise deliver such Preferred Stock Letter of
Transmittal, or such facsimile, together with the Old
Exchangeable Preferred Stock to be exchanged and any
other required documentation to the Preferred Stock
</TABLE>
13
<PAGE>
<TABLE>
<S> <C>
Exchange Agent (as defined herein) at the address set
forth herein and therein. See "The Exchange Offer --
Procedures for Tendering."
Withdrawal Rights................. Tenders of Old Securities may be withdrawn at any time
prior to 5:00 p.m., New York City Time, on the
Expiration Date. To withdraw a tender of Old Securities,
a written or facsimile transmission notice of withdrawal
must be received by the Exchange Agent (as defined
herein) at its address set forth below under "Exchange
Agent" prior to 5:00 p.m., New York City Time, on the
Expiration Date.
Acceptance of Old Securities and
Delivery of New Securities...... Subject to certain conditions, the Company will accept
for exchange any and all Old Securities which are
properly tendered in the Exchange Offer prior to 5:00
p.m. New York City Time, on the Expiration Date. The New
Securities issued pursuant to the Exchange Offer will be
delivered promptly following the Expiration Date. See
"The Exchange Offer."
Exchange Agents................... Norwest Bank Minnesota, N.A. is serving as exchange
agent (the "Notes Exchange Agent") in connection with
the Notes Exchange Offer. Norwest Bank Minnesota, N.A.
is serving as exchange agent (the "Preferred Stock
Exchange Agent") in connection with the Preferred Stock
Exchange Offer. Each of the Notes Exchange Agent and the
Preferred Stock Exchange Agent are also referred to
herein as the "Exchange Agent."
Use of Proceeds................... There will be no proceeds to the Company from the
Exchange Offer. The net proceeds to the Company from the
original sale of the Securities were approximately
$240.9 million (net of estimated fees and expenses). See
"Use of Proceeds."
</TABLE>
SUMMARY OF TERMS OF NEW NOTES AND NEW EXCHANGEABLE PREFERRED STOCK
The Exchange Offer relates to the exchange of Old Notes for an equal
principal amount at maturity of New Notes and Old Exchangeable Preferred Stock
for an equal number of shares of New Exchangeable Preferred Stock. The New Notes
will be obligations of the Company evidencing the same indebtedness as the Old
Notes and will be entitled to the benefits of the same Notes Indenture, which
governs both the Old Notes and the New Notes. The form and terms of the New
Notes and the New Exchangeable Preferred Stock are substantially identical to
the form and terms of the Old Notes and the Old Exchangeable Preferred Stock,
respectively, except that the offer of the New Securities will have been
registered under the Securities Act and, therefore, the New Securities will not
bear legends restricting the transfer thereof.
<TABLE>
<S> <C>
SENIOR SUBORDINATED NOTES:
Notes Offered..................... $125,000,000 aggregate principal amount of 9 5/8% Senior
Subordinated Notes due 2008. Up to an additional
$50,000,000 in aggregate principal amount of Senior
Subordinated Notes ("Additional Notes") may be issued
under the Notes Indenture, subject to the ability to
incur indebtedness pursuant to the first paragraph of
the "Limitation on Consolidated Indebtedness" covenant,
in amounts which are in each case no less than $25
million.
Maturity.......................... May 15, 2008.
Interest Payment Dates............ May 15 and November 15 of each year, commencing November
15, 1998. Interest on the Senior Subordinated Notes will
accrue from May 14, 1998.
</TABLE>
14
<PAGE>
<TABLE>
<S> <C>
Optional Redemption............... The Senior Subordinated Notes will be redeemable, in
whole or in part, at the option of the Company, at any
time on or after May 15, 2003 at the redemption prices
set forth herein, plus accrued and unpaid interest, if
any, to the date of redemption. In addition, at any time
prior to May 15, 2001, the Company may redeem up to 25%
of the aggregate principal amount of Senior Subordinated
Notes (including Additional Notes) issued under the
Notes Indenture with the net cash proceeds of a
Qualifying Event at a price equal to 109.625% of the
aggregate principal amount thereof, plus accrued and
unpaid interest, if any, to the date of redemption;
PROVIDED, HOWEVER, that at least $90 million in
aggregate principal amount of Senior Subordinated Notes
remains outstanding immediately after such redemption.
See "Description of Senior Subordinated Notes --
Optional Redemption."
Ranking........................... The Senior Subordinated Notes will be unsecured senior
subordinated obligations of the Company and will be
subordinated in right of payment to all present and
future Senior Indebtedness of the Company and
effectively subordinated to all obligations of the
Company's subsidiaries (including the guarantees by such
subsidiaries of the Credit Facility). The Senior
Subordinated Notes will rank PARI PASSU in right of
payment with the Exchange Debentures, if and when
issued, and the Senior Subordinated Notes and the
Exchange Debentures will rank PARI PASSU with or senior
in right of payment to all present and future
Indebtedness of the Company that expressly provides that
such Indebtedness ranks PARI PASSU with or junior in
right of payment to the Senior Subordinated Notes or the
Exchange Debentures, as the case may be. As of March 31,
1998, on a pro forma basis after giving effect to the
Acquisitions, the Offerings and the application of the
net proceeds therefrom and the replacement of the
Existing Credit Facility with the New Credit Facility,
the aggregate principal amount of Senior Indebtedness of
the Company outstanding would have been approximately
$163.8 million, all of which would have represented
borrowings under the New Credit Facility (with an
additional $136.2 million of unused availability
thereunder). The Notes Indenture will allow the Company
to incur additional Senior Indebtedness. See
"Description of Senior Subordinated Notes -- Certain
Covenants."
Certain Covenants................. The Notes Indenture imposes certain limitations on the
ability of the Company and its Restricted Subsidiaries
(as defined herein) to, among other things, incur
Indebtedness, make Restricted Payments (as defined
herein), effect certain Asset Sales (as defined herein),
enter into certain transactions with Affiliates and
Related Persons (as defined herein), incur liens, merge
or consolidate with any other person or transfer all or
substantially all of their properties and assets. See
"Description of Senior Subordinated Notes -- Certain
Covenants."
Change of Control................. Within 30 days after the occurrence of a Change of
Control, the Company will be required to make an offer
to purchase all outstanding Senior Subordinated Notes at
a price equal to 101% of
</TABLE>
15
<PAGE>
<TABLE>
<S> <C>
the aggregate principal amount thereof, plus accrued and
unpaid interest thereon, if any, to the date of
purchase.
Events of Default................. Events of Default under the Notes Indenture include
failure to pay principal of or interest on the Senior
Subordinated Notes, failure to make payments on certain
other Indebtedness, breach of certain covenants, certain
events of bankruptcy and insolvency and other customary
events. See "Description of Senior Subordinated Notes --
Events of Default and Remedies."
EXCHANGEABLE PREFERRED STOCK:
Preferred Stock Offered........... 125,000 shares of 11 3/8% Senior Exchangeable Preferred
Stock. An additional 25,000 shares of Exchangeable
Preferred Stock ("Additional Shares"), in addition to
Dividend Shares, may be issued under the Certificate of
Designation, PROVIDED that not less than all of such
Additional Shares are issued.
Liquidation Preference............ $1,000 per share, plus accumulated and unpaid dividends
from May 14, 1998.
Ranking........................... The Exchangeable Preferred Stock will be senior to all
classes of junior preferred stock and common stock of
the Company with respect to dividend rights and rights
on liquidation, winding-up and dissolution of the
Company.
Mandatory Redemption.............. In whole on May 15, 2010 (subject to certain conditions
under Minnesota law), at a price equal to 100% of the
liquidation preference thereof, plus, without
duplication, accumulated and unpaid dividends, if any,
to the date of redemption.
Optional Redemption............... The Exchangeable Preferred Stock will be redeemable in
whole or in part, at the option of the Company at any
time on or after May 15, 2003, at the redemption prices
set forth herein, plus, without duplication, accumulated
and unpaid dividends, if any, to the date of redemption.
In addition, at any time prior to May 15, 2001, the
Company, at its option, may redeem up to 25% of the
aggregate liquidation preference of all the shares of
Exchangeable Preferred Stock (including Additional
Shares and Dividend Shares) issued under the Certificate
of Designation with the net cash proceeds of a
Qualifying Event, at a price equal to 111.375% of the
aggregate liquidation preference thereof, plus, without
duplication, accumulated and unpaid dividends, if any,
to the date of redemption; PROVIDED, HOWEVER, that at
least $75 million in aggregate liquidation preference of
Exchangeable Preferred Stock remains outstanding
immediately after such redemption. See "Description of
Exchangeable Preferred Stock and Exchange Debentures --
Exchangeable Preferred Stock -- Optional Redemption."
Change of Control................. Within 30 days after the occurrence of a Change of
Control, the Company will be required to make an offer
to purchase all outstanding shares of Exchangeable
Preferred Stock at a price equal to 101% of the
aggregate liquidation preference thereof plus, without
duplication, accumulated and unpaid dividends, if any,
to the date of purchase.
</TABLE>
16
<PAGE>
<TABLE>
<S> <C>
Dividends......................... 11 3/8% per annum, payable quarterly on February 15, May
15, August 15, and November 15, commencing on August 15,
1998. Dividends on all shares of Exchangeable Preferred
Stock will be cumulative and accrue from May 14, 1998
and may be paid, at the Company's option, on any
dividend payment date occurring on or before May 15,
2003, either in cash or by the issuance of additional
shares of Exchangeable Preferred Stock ("Dividend
Shares") having an aggregate liquidation preference
equal to the amount of such dividends. Thereafter all
dividends will be payable in cash only.
Voting Rights..................... The Exchangeable Preferred Stock will be non-voting,
except as otherwise required by law and as provided in
the Certificate of Designation. The Certificate of
Designation provides that upon (i) the accumulation of
accrued and unpaid dividends, if any, on the outstanding
Exchangeable Preferred Stock in an amount equal to six
full quarterly dividends (whether or not consecutive);
(ii) the failure of the Company to satisfy any mandatory
redemption or repurchase obligation with respect to the
Exchangeable Preferred Stock; (iii) the failure of the
Company to make a Change of Control Offer (as defined
herein) on the terms and in accordance with the
provisions contained in the Certificate of Designation;
(iv) the failure of the Company to comply with any of
the other covenants or agreements set forth in the
Certificate of Designation and the continuance of such
failure for 30 consecutive days or more; or (v) the
failure of the Company or any Restricted Subsidiary to
make payments on certain Indebtedness, the holders of a
majority of the outstanding shares of Exchangeable
Preferred Stock, voting as a class, together with the
holders of any Parity Stock (as defined herein) having
similar voting rights, will be entitled to elect the
lesser of two directors and that number of directors
constituting 25% of the members of the Board of
Directors. If applicable, the voting rights will
continue until such time as, in the case of a dividend
default, all dividends in arrears on the Exchangeable
Preferred Stock are paid in full (and in the case of
dividends payable after May 15, 2003, paid in cash) and,
in all other cases, any failure giving rise to such
voting rights is remedied or waived by the holders of at
least a majority of the shares of Exchangeable Preferred
Stock then outstanding, at which time the terms of any
directors elected pursuant to such voting rights will
terminate.
The Certificate of Designation provides that the Company
will not authorize any class of Senior Stock (as defined
herein) or any class of Parity Stock without the
affirmative vote or consent of holders of at least (i)
66 2/3% of the shares of Exchangeable Preferred Stock
then outstanding with respect to Senior Stock and (ii) a
majority of the shares of Exchangeable Preferred Stock
then outstanding with respect to Parity Stock; PROVIDED,
that any shares of Exchangeable Preferred Stock
authorized for issuance under the Certificate of
Designation may be issued by the Company without the
approval of the holders of the Exchangeable Preferred
Stock.
Exchange Option................... The Exchangeable Preferred Stock may be exchanged,
subject to certain conditions in the Notes Indenture, on
any dividend payment
</TABLE>
17
<PAGE>
<TABLE>
<S> <C>
date, in whole but not in part, at the option of the
Company, for the Exchange Debentures in an aggregate
principal amount equal to the aggregate liquidation
preference of the shares of Exchangeable Preferred Stock
exchanged, plus, without duplication, accumulated and
unpaid dividends, if any, to the date of exchange (the
"Exchange Date").
EXCHANGE DEBENTURES:
Debentures Which May Be Issued.... 11 3/8% Senior Subordinated Exchange Debentures due
2010, issuable in exchange for the Exchangeable
Preferred Stock, in an aggregate principal amount equal
to the liquidation preference of the shares of
Exchangeable Preferred Stock being exchanged, plus,
without duplication, accumulated and unpaid dividends,
if any, to the Exchange Date.
Maturity.......................... May 15, 2010.
Interest Payment Dates............ May 15 and November 15 of each year, commencing with the
first of such dates to occur after the date of issuance
thereof. Interest on the Exchange Debentures will accrue
from the date of issuance thereof and may be paid, at
the Company's option, on any interest payment date
occurring on or before May 15, 2003, either in cash or
by the issuance of additional Exchange Debentures.
Optional Redemption............... The Exchange Debentures will be redeemable, in whole or
in part, at the option of the Company at any time on or
after May 15, 2003, at the redemption prices set forth
herein, plus accrued and unpaid interest, if any, to the
date of redemption. In addition, at any time prior to
May 15, 2001, the Company may redeem up to 25% of the
aggregate principal amount of Exchange Debentures issued
under the Exchange Indenture with the net cash proceeds
of a Qualifying Event at a price equal to 111.375% of
the aggregate principal amount thereof, plus accrued and
unpaid interest, if any, to the date of redemption;
PROVIDED, HOWEVER, that at least $75 million in
aggregate principal amount of the Exchange Debentures
remains outstanding immediately after such redemption;
and PROVIDED FURTHER, HOWEVER, that the aggregate
liquidation preference of any shares of Exchangeable
Preferred Stock previously redeemed out of the net cash
proceeds of a Qualifying Event shall be counted as
aggregate principal amount of Exchange Debentures issued
and redeemed for purposes of the foregoing 25%
calculation. See "Description of Exchangeable Preferred
Stock and Exchange Debentures -- Exchange Debentures --
Optional Redemption."
Ranking........................... The Exchange Debentures will be unsecured senior
subordinated obligations of the Company and will be
subordinated in right of payment to all present and
future Senior Indebtedness of the Company and
effectively subordinated to all obligations of the
Company's subsidiaries (including the guarantees by such
subsidiaries of the Credit Facility). The Exchange
Debentures will rank PARI PASSU in right of payment with
the Senior Subordinated Notes, and the Exchange
Debentures and the Senior Subordinated Notes will rank
PARI PASSU with or senior in right of payment to all
present and future Indebtedness of the Company that
expressly provides that such
</TABLE>
18
<PAGE>
<TABLE>
<S> <C>
Indebtedness ranks PARI PASSU with or junior to the
Exchange Debentures or the Senior Subordinated Notes, as
the case may be. The Exchange Indenture (as defined
herein) will allow the Company to incur additional
Senior Indebtedness. See "Description of Exchangeable
Preferred Stock and Exchange Debentures -- Exchange
Debentures -- Certain Covenants."
Certain Covenants................. The Exchange Debentures, if issued, will impose certain
limitations on the ability of the Company and its
Restricted Subsidiaries to, among other things, incur
Indebtedness, effect certain Asset Sales, enter into
certain transactions with Affiliates and Related
Persons, incur liens, merge or consolidate with any
other person or transfer all or substantially all of
their properties and assets. See "Description of
Exchangeable Preferred Stock and Exchange Debentures --
Exchange Debentures -- Certain Covenants."
Change of Control................. Within 30 days after the occurrence of a Change of
Control, the Company will be required to make an offer
to purchase all outstanding Exchange Debentures at a
price equal to 101% of the aggregate principal amount
thereof, plus accrued and unpaid interest thereon, if
any, to the date of repurchase.
Events of Default................. Events of Default under the Exchange Indenture include
failure to pay principal of or interest on the Exchange
Debentures, failure to make payments on certain other
indebtedness, breach of certain covenants, certain
events of bankruptcy and insolvency and other customary
events. See "Description of Exchangeable Preferred Stock
and Exchange Debentures -- Exchange Debentures -- Events
of Default and Remedies."
Registration Requirements......... The Exchange Debentures may not be issued unless such
issuance is registered under the Securities Act or is
exempt from registration. See "Description of
Exchangeable Preferred Stock and Exchange Debentures --
Exchangeable Preferred Stock -- Exchange."
</TABLE>
COMPARISON WITH OLD NOTES AND OLD EXCHANGEABLE PREFERRED STOCK
<TABLE>
<S> <C>
Freely Transferable............... Generally, the New Securities will be freely
transferable under the Securities Act by holders who are
not affiliates of the Company. The New Notes and New
Exchangeable Preferred Stock otherwise will be
substantially identical in all material respects to the
Old Notes and Old Exchangeable Preferred Stock,
respectively. See "The Exchange Offer -- Terms of the
Exchange Offer."
Registration Rights............... The holders of Old Securities currently are entitled to
certain registration rights pursuant to the Registration
Rights Agreements. However, upon consummation of the
Exchange Offer, subject to certain exceptions, holders
of Old Securities who do not exchange their Old
Securities for New Securities in the Exchange Offer will
no longer be entitled to registration rights and will
not be able to offer or sell their Old Securities,
unless such Old Securities are subsequently registered
under the Securities Act (which, subject to certain
limited exceptions, the Company will have no obligation
to do), except pursuant to an exemption from, or in a
transaction not subject to, the Securities Act and
applicable state securities laws. See "Risk Factors --
Consequence of Failure to Exchange."
</TABLE>
19
<PAGE>
SUMMARY FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT OPERATING DATA)
<TABLE>
<CAPTION>
PRO FORMA
-------------------------------------
HISTORICAL THREE
------------------------------------------------ MONTHS
YEAR ENDED ENDED MARCH
YEAR ENDED DECEMBER 31, THREE MONTHS DECEMBER 31, 31,
------------------------------- ENDED MARCH 31, ------------------------ -----------
1995 1996 1997 1998 1997 (1) 1997 (2) 1998 (3)
--------- --------- --------- --------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
THE COMPANY
STATEMENT OF OPERATIONS DATA:
Revenues:
Service...................... $ 14,289 $ 23,120 $ 43,408 $ 12,719 $ 47,745 $ 76,044 $ 12,719
Roamer....................... 4,562 6,414 9,475 1,758 9,823 21,007 1,758
Equipment.................... 1,476 927 1,020 320 1,153 3,735 320
--------- --------- --------- --------------- ----------- ----------- -----------
Total revenues............. 20,327 30,461 53,903 14,797 58,721 100,786 14,797
--------- --------- --------- --------------- ----------- ----------- -----------
Operating expenses:
Network costs................ 4,974 6,731 11,578 3,628 12,312 18,214 3,628
Costs of equipment sales..... 1,914 1,375 2,807 884 3,354 6,990 884
Selling, general and
administrative............. 7,700 13,576 25,225 6,590 27,424 43,056 6,590
Depreciation and
amortization............... 3,249 5,539 12,458 4,219 13,864 23,568 4,219
--------- --------- --------- --------------- ----------- ----------- -----------
Total operating expenses... 17,837 27,221 52,068 15,321 56,954 91,828 15,321
--------- --------- --------- --------------- ----------- ----------- -----------
Operating income (loss)........ 2,490 3,240 1,835 (524) 1,767 8,958 (524)
--------- --------- --------- --------------- ----------- ----------- -----------
Other income (expense):
Interest expense............. (1,365) (281) (6,065) (2,410) (138) (24,940) (270)
Interest and dividend
income..................... 277 335 232 279 232 232 279
Equity in earnings (losses)
of unconsolidated
subsidiaries............... (37) 52 (350) (149) (350) (350) (149)
Minority interest............ -- 331 3,082 738 3,082 3,082 738
--------- --------- --------- --------------- ----------- ----------- -----------
Other income (expense),
net...................... (1,125) 437 (3,101) (1,542) 2,826 (21,976) 598
--------- --------- --------- --------------- ----------- ----------- -----------
Income (loss) before income
taxes...................... 1,365 3,677 (1,266) (2,066) 4,593 (13,018) 74
Income tax provision......... 575 200 -- -- -- -- --
--------- --------- --------- --------------- ----------- ----------- -----------
Net income (loss)............ $ 790 $ 3,477 $ (1,266) $ (2,066) $ 4,593 $ (13,018) $ 74
--------- --------- --------- --------------- ----------- ----------- -----------
--------- --------- --------- --------------- ----------- ----------- -----------
Ratio of earnings to fixed
charges (5).................... 2.00 14.09 0.77 0.16 0.20 0.26 0.06
BALANCE SHEET DATA:
Working capital (deficit)...... $ 514 $ (144) $ 514 $ (705) $ (144)
Property and equipment, net.... 77,920 83,237 77,920 108,248 83,237
Total assets................... 181,588 186,410 181,588 453,302 186,410
Total debt..................... 128,000 135,000 7,375 274,344 14,375
Total liabilities.............. 141,642 149,074 21,017 293,798 28,449
Exchangeable preferred stock... -- -- 120,625 120,625 120,625
Total shareholders' equity..... 33,730 31,858 33,730 32,663 31,858
OTHER FINANCIAL DATA:
EBITDA (6)..................... $ 5,739 $ 8,779 $ 14,293 $ 3,695 $ 15,631 $ 32,526 $ 3,695
Adjusted EBITDA (6)............ 5,739 9,450 19,860 4,773 21,198 38,093 6,339
Adjusted EBITDA margin (6)..... 28.2% 31.3% 42.7% 39.6% 41.3% 40.8% 52.6%
Capital expenditures........... $ 10,011 $ 23,653 $ 34,474 $ 8,970 $ 35,196 $ 37,942 $ 8,970
Adjusted capital expenditures
(7).......................... 10,011 23,289 25,673 5,833 26,445 29,191 5,833
Total indebtedness/Adjusted
EBITDA....................... 0.3x 7.2x 0.6x
Total indebtedness and
preferred stock/Adjusted
EBITDA....................... 6.0x 10.4x 5.3x
<CAPTION>
1998 (4)
-----------
<S> <C>
THE COMPANY
STATEMENT OF OPERATIONS DATA:
Revenues:
Service...................... $ 20,378
Roamer....................... 5,066
Equipment.................... 1,126
-----------
Total revenues............. 26,570
-----------
Operating expenses:
Network costs................ 5,198
Costs of equipment sales..... 1,703
Selling, general and
administrative............. 10,189
Depreciation and
amortization............... 6,760
-----------
Total operating expenses... 23,850
-----------
Operating income (loss)........ 2,720
-----------
Other income (expense):
Interest expense............. (6,448)
Interest and dividend
income..................... 279
Equity in earnings (losses)
of unconsolidated
subsidiaries............... (149)
Minority interest............ 738
-----------
Other income (expense),
net...................... (5,580)
-----------
Income (loss) before income
taxes...................... (2,860)
Income tax provision......... --
-----------
Net income (loss)............ $ (2,860)
-----------
-----------
Ratio of earnings to fixed
charges (5).................... 0.30
BALANCE SHEET DATA:
Working capital (deficit)...... $ (293)
Property and equipment, net.... 112,926
Total assets................... 457,020
Total debt..................... 281,344
Total liabilities.............. 300,079
Exchangeable preferred stock... 120,625
Total shareholders' equity..... 30,838
OTHER FINANCIAL DATA:
EBITDA (6)..................... $ 9,480
Adjusted EBITDA (6)............ 10,557
Adjusted EBITDA margin (6)..... 44.3%
Capital expenditures........... $ 9,605
Adjusted capital expenditures
(7).......................... 6,468
Total indebtedness/Adjusted
EBITDA....................... 6.7x
Total indebtedness and
preferred stock/Adjusted
EBITDA....................... 9.5x
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA
-------------------------------------
HISTORICAL THREE
------------------------------------------------ MONTHS
YEAR ENDED ENDED MARCH
YEAR ENDED DECEMBER 31, THREE MONTHS DECEMBER 31, 31,
------------------------------- ENDED MARCH 31, ------------------------ -----------
1995 1996 1997 1998 1997 (1) 1997 (2) 1998 (3)
--------- --------- --------- --------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA (8):
Customers at period end (9).... 26,764 45,094 84,600 86,850 84,600 152,764 86,850
Penetration (10)............... 4.5% 7.5% 7.6% 7.6% 7.6% 6.8% 7.6%
Average monthly retention rate
(11)......................... 99.0% 98.7% 98.4% 98.5% 98.4% 98.4% 98.5%
Average monthly revenue per
cellular customer (12)....... $ 69 $ 66 $ 55 $ 46 $ 55 $ 54 $ 46
Acquisition cost per cellular
customer (13)................ 395 307 403 444 403 383 444
Roamer revenue as a percentage
of total revenue (14)........ 24.2% 21.9% 20.8% 15.0% 19.6% 23.4% 15.0%
Cell sites..................... 64 72 121 124 121 203 124
ATLANTIC
PRO FORMA OPERATING DATA (15):
Customers at period end........ 39,715 55,009 68,164 70,492
Penetration (10)............... 3.6% 4.9% 6.0% 6.3%
Average monthly retention rate
(11)......................... 98.4% 98.1% 98.4% 98.4%
Average monthly revenue per
cellular customer (12)....... $ 63 $ 58 $ 53 $ 53
Acquisition cost per cellular
customer (13)................ 376 355 361 344
Roamer revenue as a percentage
of total revenue (14)........ 32.3% 29.2% 28.3% 30.2%
Cell sites..................... 61 71 82 85
<CAPTION>
1998 (4)
-----------
<S> <C>
OPERATING DATA (8):
Customers at period end (9).... 157,342
Penetration (10)............... 6.9%
Average monthly retention rate
(11)......................... 98.4%
Average monthly revenue per
cellular customer (12)....... $ 49
Acquisition cost per cellular
customer (13)................ 396
Roamer revenue as a percentage
of total revenue (14)........ 22.3%
Cell sites..................... 209
ATLANTIC
PRO FORMA OPERATING DATA (15):
Customers at period end........
Penetration (10)...............
Average monthly retention rate
(11).........................
Average monthly revenue per
cellular customer (12).......
Acquisition cost per cellular
customer (13)................
Roamer revenue as a percentage
of total revenue (14)........
Cell sites.....................
</TABLE>
- ------------------------------
(1) Includes the historical operations of the Company and gives effect to the
following as if they occurred as of January 1, 1997: (i) the MRCC
Acquisitions, (ii) the Exchangeable Preferred Stock Offering, and (iii) the
repayment of $120.6 million of the Existing Credit Facility.
(2) Includes the historical operations of the Company and gives effect to the
following as if they occurred as of January 1, 1997: (i) the MRCC
Acquisitions, (ii) the Exchangeable Preferred Stock Offering, (iii) the
Notes Offering, (iv) the borrowings under the New Credit Facility, (v) the
repayment in full and termination of the Existing Credit Facility, and (vi)
the Atlantic Acquisition.
(3) Includes the historical operations of the Company and gives effect to the
following as if they had occurred as of January 1, 1998: (i) the
Exchangeable Preferred Stock Offering and (ii) the repayment of $120.6
million of the Existing Credit Facility. For the three months ended March
31, total indebtedness/Adjusted EBITDA was determined by dividing total
indebtedness by annualized Adjusted EBITDA.
(4) Includes the historical operations of the Company and gives effect to the
following as if they had occurred as of January 1, 1998: (i) the
Exchangeable Preferred Stock Offering, (ii) the Notes Offering, (iii) the
borrowings under the New Credit Facility, (iv) the repayment in full and
termination of the Existing Credit Facility, and (v) the Atlantic
Acquisition. For the three months ended March 31, total indebtedness and
preferred stock/Adjusted EBITDA was determined by dividing total
indebtedness and preferred stock by annualized Adjusted EBITDA.
(5) For purposes of computing the ratio of earnings to fixed charges and pro
forma earnings to fixed charges, "earnings" are defined as earnings before
extraordinary items and accounting changes, interest expense, amortization
of deferred financing costs, taxes and the portion of rent expense
representing interest. Fixed charges consist of interest expense,
amortization of deferred financing costs and the portion of rent expense
representing interest. On a pro forma basis, the Company would include
preferred stock dividend requirements in computing its ratio of earnings to
fixed charges and preferred stock dividends.
(6) EBITDA is the sum of earnings before interest, taxes, depreciation and
amortization and is utilized as a performance measure within the cellular
industry. EBITDA is not intended to be a performance measure that should be
regarded as an alternative for other performance measures and should not be
considered in isolation. EBITDA is not a measurement of financial
performance under generally accepted accounting principles and does not
reflect all expenses of doing business (e.g., interest expense,
depreciation). Accordingly, EBITDA should not be considered as having
greater significance than or as an alternative to net income or operating
income as an indicator of operating performance or to cash flows as a
measure of liquidity. Moreover, "EBITDA," as used herein, may differ from
"Operating Cash Flow," as used in calculating the covenants set forth in
the documents governing the Securities. See "Description of Senior
Subordinated Notes -- Certain Definitions," "Description of Exchangeable
Preferred Stock and Exchange Debentures -- Exchangeable Preferred Stock --
Certain Definitions" and "Description of Exchangeable Preferred Stock and
Exchange Debentures -- Exchange Debentures --
21
<PAGE>
Certain Definitions." Adjusted EBITDA represents EBITDA excluding Wireless
Alliance's EBITDA. Wireless Alliance is an Unrestricted Subsidiary under
the documents governing the Securities. Adjusted EBITDA margin represents
Adjusted EBITDA divided by revenues of the Company (excluding Wireless
Alliance revenues). See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
(7) Adjusted capital expenditures represents capital expenditures excluding
Wireless Alliance capital expenditures.
(8) Represents the Company's Minnesota cellular operations for 1995 through
1998 and MRCC's operations in 1997 and 1998, except as otherwise noted.
(9) In addition to the 86,850 cellular customers in Minnesota and Maine as of
March 31, 1998, the Company also served 9,487 paging and 17,999 Wireless
Alliance customers at such date.
(10) Represents the ratio of cellular customers at the end of the period to
total POPs.
(11) Determined for each period by dividing total cellular customers
discontinuing service during such period by the average cellular customers
for such period (customers at the beginning of the period plus customers
at the end of the period, divided by two), dividing that result by the
number of months in the period, and subtracting such result from one.
(12) 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 cellular customers for such period
(customers at the beginning of the period plus customers at the end of the
period, divided by two), and dividing that result by the number of months
in such period.
(13) Determined for each period by dividing selling and marketing expenses,
cost of equipment sales, and depreciation of rental telephone equipment by
the gross cellular customers added during such period.
(14) Determined for each period by dividing roamer revenues for such period by
total revenues excluding equipment sales and, in the case of the Company,
Wireless Alliance revenues.
(15) In the Atlantic Acquisition, the Company acquired substantially all the
assets of Atlantic Cellular Company, L.P. and its subsidiary, Atlantic
Cellular/New Hampshire RSA Number One Limited Partnership. The Company did
not acquire the operations of certain other subsidiaries in the Atlantic
Acquisition. See note (b) of Notes to Unaudited Pro Forma Condensed
Consolidated Financial Data appearing elsewhere in this Prospectus. All
Atlantic Pro Forma Operating Data set forth in the table exclude the
operations that were not acquired by the Company.
22
<PAGE>
RISK FACTORS
PROSPECTIVE PURCHASERS OF THE SECURITIES SHOULD CAREFULLY CONSIDER THE
FOLLOWING MATTERS, AS WELL AS THE OTHER INFORMATION CONTAINED IN THIS
PROSPECTUS, BEFORE MAKING AN INVESTMENT IN THE SECURITIES. INFORMATION CONTAINED
IN THIS PROSPECTUS CONTAINS "FORWARD-LOOKING STATEMENTS." SEE "FORWARD-LOOKING
STATEMENTS" FOR A DISCUSSION OF CERTAIN QUALIFICATIONS REGARDING SUCH
STATEMENTS.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Old Notes or Old Exchangeable Preferred Stock who do not exchange
their Old Notes or Old Exchangeable Preferred Stock for New Notes or New
Exchangeable Preferred Stock pursuant to the Exchange Offer will continue to be
subject to the restrictions on transfer of such Old Notes and Old Exchangeable
Preferred Stock as set forth in the legend thereon as a consequence of the
issuance of the Old Notes and Old Exchangeable Preferred Stock pursuant to
exemptions from, or in transactions not subject to, the registration
requirements of the Securities Act and applicable state securities laws. In
general, the Old Notes and Old Exchangeable Preferred Stock may not be offered
or sold unless registered under the Securities Act, except pursuant to an
exemption from, or in a transaction not subject to, the Securities Act and
applicable state securities laws. The Company does not currently anticipate that
it will register the Old Notes or Old Exchangeable Preferred Stock under the
Securities Act. Based on interpretations by the staff of the Commission, as set
forth in no-action letters to third parties, the Company believes that the New
Notes and New Exchangeable Preferred Stock issued pursuant to the Exchange Offer
in exchange for Old Notes and Old Exchangeable Preferred Stock may be offered
for resale, resold or otherwise transferred by the holders thereof (other than
any such holder that is an "affiliate" of the Company within the meaning of Rule
405 under the Securities Act) without compliance with the registration and
prospectus delivery requirements of the Securities Act, provided that such New
Notes or New Exchangeable Preferred Stock is acquired in the ordinary course of
such holders' business and such holders are not engaged in, and do not intend to
engage in, a distribution of such New Notes or New Exchangeable Preferred Stock.
The staff of the Commission has not considered the Exchange Offer in the context
of a no-action letter and there can be no assurance that the staff of the
Commission would make a similar determination with respect to the Exchange
Offer. Each broker-dealer that receives New Notes or New Exchangeable Preferred
Stock for its own account pursuant to the Exchange Offer must acknowledge that
it will deliver a prospectus in connection with any resale of such New Notes or
New Exchangeable Preferred Stock. The Letter of Transmittal states that by so
acknowledging and by delivering a prospectus a broker-dealer will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
This Prospectus, as it may be amended or supplemented from time to time, may be
used by a broker-dealer in connection with resales of New Notes or New
Exchangeable Preferred Stock received in exchange for Old Notes or Old
Exchangeable Preferred Stock where such Old Notes or Old Exchangeable Preferred
Stock was acquired by such broker-dealer as a result of market-making activities
or other trading activities. The Company has agreed that, for a period of 90
days after the Expiration Date, it will make this Prospectus available to any
broker-dealer for use in connection with any such resale. See "Plan of
Distribution." However, to comply with the securities laws of certain
jurisdictions, if applicable, the New Notes and New Exchangeable Preferred Stock
may not be offered or sold unless they have been registered or qualified for
sale in such jurisdictions or an exemption for registration or qualification is
available and is complied with. To the extent that Old Notes or Old Exchangeable
Preferred Stock is tendered and accepted in the Exchange Offer, the trading
market for the untendered and the tendered but unaccepted Old Notes or Old
Exchangeable Preferred Stock could be adversely affected.
SUBSTANTIAL LEVERAGE; ABILITY TO SERVICE DEBT; COVENANTS AND RESTRICTIONS;
CAPITAL REQUIREMENTS
The Company has significant indebtedness and is highly leveraged. As of
March 31, 1998, after giving pro forma effect to the Acquisitions and the
related financings (including the Offerings), the Company would have had
outstanding total Indebtedness of approximately $288.8 million, including $163.8
million under the New Credit Facility. In addition, the Company would have had
outstanding Exchangeable Preferred Stock with an aggregate liquidation
preference of $125 million and shareholders' equity of approximately $30.8
million. See "Capitalization."
23
<PAGE>
The significant indebtedness expected to be incurred as a result of the
Acquisitions will have several important consequences to the holders of the
Securities, including, without limitation: (i) the Company's ability to obtain
additional financing in the future for working capital, capital expenditures,
acquisitions or other purposes may be impaired; (ii) the Company's level of
indebtedness could limit its flexibility to expand, fund capital expenditures
and react to changes in the wireless communications industry and general
economic conditions; and (iii) the ability of the Company to satisfy its
obligations pursuant to such indebtedness will be dependent upon factors
affecting the business and operations of the Company, some of which are not in
the control of the Company.
The ability of the Company to service or retire at maturity its indebtedness
(including the Senior Subordinated Notes and, if issued, the Exchange
Debentures) and to pay cash dividends on and redeem at maturity the Exchangeable
Preferred Stock will depend on the future operating performance and financial
results of the Company, which are subject, in part, to factors beyond the
control of the Company, such as prevailing economic conditions, financial
performance and other factors. There can be no assurance that the Company's
business will generate cash flow at the levels necessary, together with
available additional financings, if any, to allow the Company to meet its
anticipated requirements for working capital, capital expenditures and debt
service. A substantial portion of the Company's assets consist of intangible
assets, principally licenses granted by the FCC, the value of which will depend
upon a variety of factors (including the success of the Company's cellular
business and of Wireless Alliance and the wireless telecommunications industry
in general). In addition, transfers of interests in such licenses are subject to
FCC approval. As a result, there can be no assurance that the Company's assets
could be sold quickly enough, or for sufficient amounts, to enable the Company
to meet its obligations, including its obligations with respect to any of the
Securities.
The instruments governing certain indebtedness of the Company impose
significant operating and financial restrictions on the Company. Such
restrictions will affect, and in many respects significantly limit or prohibit,
among other things, the ability of the Company to incur additional indebtedness,
pay dividends, repay indebtedness prior to stated maturities, sell assets, make
investments, engage in transactions with shareholders and affiliates, issue
capital stock, create liens or engage in mergers or acquisitions. In addition,
the Credit Facility requires the Company to maintain certain financial ratios.
These restrictions could also limit the ability of the Company to effect future
financings, make needed capital expenditures, withstand a future downturn in the
Company's business or the economy in general, or otherwise conduct necessary
corporate activities. A failure by the Company to comply with these restrictions
could lead to a default under the terms of such indebtedness and the Senior
Subordinated Notes (and, if issued, the Exchange Debentures), notwithstanding
the ability of the Company to meet its debt service obligations. In the event of
a default, the holders of such indebtedness could elect to declare all such
indebtedness to be due and payable together with accrued and unpaid interest, if
any. In such event, a significant portion of the Company's indebtedness
(including the Senior Subordinated Notes and, if issued, the Exchange
Debentures) may become immediately due and payable, and there can be no
assurance that the Company and its subsidiaries would be able to make such
payments or borrow sufficient funds from alternative sources to make any such
payment. Even if additional financing could be obtained, there can be no
assurance that it would be on terms acceptable to the Company. In addition, the
Company's indebtedness under the Credit Facility is secured by a pledge of
certain assets of the Company. The pledge of such collateral to existing lenders
could impair the Company's ability to obtain favorable additional financing. See
"Description of Other Indebtedness."
The Company has required, and will likely continue to require, substantial
capital in connection with the further development and expansion of its Wireless
Systems. The Company may require additional financing for future acquisitions
and for buildout requirements related to the Wireless Alliance PCS licenses.
Sources of additional capital may include cash flow from operations, public and
private equity, and debt financings by the Company, including vendor financing.
The extent of additional financing required will depend on the success of the
Company's operations. There can be no assurance that additional financing will
be available to the Company or, if available, that it can be obtained on terms
acceptable to the Company and within the limitations contained in the documents
governing the Securities, the Credit Facility, and the Company's other
indebtedness, or that may be contained in any future financing arrangements. See
"Risk Factors -- Risks Associated with Securities -- Subordination; Priority of
Secured Indebtedness; Ranking of Preferred Stock" and "Description of Other
Indebtedness."
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RISKS ASSOCIATED WITH ACQUISITIONS AND ABILITY TO MANAGE GROWTH
The Company is subject to risks that acquired Wireless Systems will not
perform as expected and that the returns from such Wireless Systems will not
support indebtedness incurred or securities issued (including, without
limitation, the Securities) to acquire, or the capital expenditures needed to
develop, the Wireless Systems. In addition, expansion of the Company's
operations may strain the Company's management, financial and other resources.
The Company's ability to manage future growth will depend upon its ability to
monitor operations, control costs, maintain effective quality controls and
significantly expand the Company's internal management, technical and accounting
systems, all of which will result in higher operating expenses. There can be no
assurance that the Company will be able to successfully integrate the Wireless
Systems acquired or that any such acquired business will not experience high
employee or customer turnover rates after the acquisition. Moreover, with
respect to the Atlantic Acquisition, unlike most acquisition transactions, which
provide for recovery against the seller in the event that representations or
warranties are discovered after closing to be untrue, the representations and
warranties by Atlantic in the Atlantic Acquisition expired as of the closing
date.
COMPETITION
The wireless communications industry is highly competitive. Many of the
Company's competitors and potential competitors have substantially greater
financial, personnel, technical, marketing and other resources than those of the
Company, as well as other competitive advantages. Current policies of the FCC
authorize only two cellular licensees to operate in each license area.
Accordingly, in each of its markets the Company competes with one other cellular
licensee. Competition for customers is based principally upon services and
features offered, technical quality of wireless systems, strength of
distribution channels, customer service, system coverage, capacity and price.
The Company also competes, although to a lesser extent, with dispatch and
conventional mobile telephone companies, resellers of wireless services, paging
companies and landline telephone service providers. There can be no assurance
that the Company will be able to continue to compete successfully or that new
technologies and products that are more commercially effective than the
Company's will not be developed. Some competitors may market other services such
as cable television access or landline local exchange or long distance services
with their wireless offerings. There has been an industry trend of declining
average revenue per customer, as competition between service providers has led
to reductions in rates for airtime and subscriptions and other charges. See
"Business -- Competition" for more detailed information on the competitive
environment in which the Company operates.
The Company expects to face increased competition in the future in its
cellular markets from other cellular licensees and entities providing other
technologies and services, including digital mobile communication systems using
Enhanced Specialized Mobile Radio ("ESMR") licenses and broadband PCS licenses.
The Company's PCS operations will face competition from incumbent cellular
providers, ESMR licensees and other broadband PCS licensees. The Company's
operations may also face competition from other technologies developed in the
future including, but not limited to, fixed wireless and satellite systems.
Moreover, there can be no assurance that one or more of the technologies
currently utilized by the Company in its business will not become inferior or
obsolete at some time in the future. See "Business -- Competition."
RAPID TECHNOLOGICAL CHANGES
The wireless communications industry is subject to rapid and significant
changes in technology, including advancements protected by intellectual property
laws. In particular, the wireless telecommunications industry is experiencing
significant technological change, as evidenced by the increasing pace of digital
upgrades in existing analog wireless systems, evolving industry standards, the
availability of new radio frequency spectrum allocations in which to develop
wireless services, ongoing improvements in the capacity and quality of digital
technology, shorter development cycles for new products and enhancements, and
changes in end-user requirements and preferences. The effect of technological
changes on the business of the Company cannot be predicted, and there can be no
assurance that technological developments will not have a material adverse
effect on the business of the Company.
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RELIANCE ON USE OF THIRD-PARTY SERVICE MARKS
The Company uses various service marks in its business, some of which it
owns and some of which are licensed from third parties. If any licenses with
third parties are not renewed upon expiration, or if the Company fails to meet
the applicable operating or service quality standards or otherwise loses the
rights to use any licensed service marks, the Company's ability both to attract
new customers and to retain existing customers could be impaired. See "Business
- -- Service Marks."
POTENTIAL FOR ADVERSE REGULATORY CHANGE AND NEED FOR REGULATORY APPROVALS
The licensing, construction, operation, acquisition and sale of cellular and
PCS systems, as well as the number of wireless licensees permitted in each
market, are regulated by the FCC. Changes in the regulation of wireless
activities and other wireless carriers, the licensing of additional connecting
carriers in the Company's service areas or the loss by the Company of any
license or licensed area could have a material adverse effect on the Company's
operations. The FCC continues to license additional spectra on which wireless
communications can be offered. In addition, all cellular and PCS licenses in the
United States are subject to renewal upon expiration of their initial ten-year
term. The Company's license for the Bangor, Maine MSA has been renewed for a
ten-year term, which expires in 2008. The Company's cellular licenses for RSAs
will expire beginning in 1999. Wireless Alliance's PCS licenses will expire in
2005. The licenses to be acquired in the Acquisitions will expire at varying
dates beginning in 2000. The Company will apply for renewal of its respective
licenses, and while the Company believes that each of these licenses will be
renewed based upon FCC rules establishing a presumption in favor of licensees
that have complied with their regulatory obligations during the initial license
period, there can be no assurance that the Company's licenses will be renewed.
See "Business -- Regulation."
The Company must obtain a number of other approvals, licenses and permits in
the operation of its business, including determinations of no hazard to air
navigation from the Federal Aviation Administration (the "FAA") in connection
with the construction of cellular and PCS towers. Additionally, the wireless
communications industry is subject to certain state and local government
regulation. Operating costs are also affected by other governmental actions that
are beyond the Company's control. There is no assurance that the various
federal, state and local agencies responsible for granting required licenses,
approvals and permits will do so or that, once granted, will not revoke or fail
to renew them. The absence of such licenses, approvals and permits would
adversely affect the Company's existing operations and could delay commencement
of or prohibit business operations proposed by the Company.
In addition, the Communications Act and FCC regulations restrict ownership
of capital stock of the Company by non-U.S. citizens. See "Description of
Capital Stock -- Limitation on Foreign Ownership and Transfers of Control."
The wireless communications industry is subject to continually evolving
regulation. As new regulations are promulgated, the Company may be required to
modify its business plans or operations in order to comply with any such
regulations. There can be no assurance that the Company will be able to do so in
a cost effective manner, if at all.
COMMUNICATIONS ASSISTANCE FOR LAW ENFORCEMENT ACT; NUMBER PORTABILITY
Telecommunications carriers are required to comply with the Communications
Assistance for Law Enforcement Act ("CALEA"), which requires carriers to modify
and design their equipment, facilities and services to support lawful electronic
surveillance. To date, however, no technical standard for upgrades has been
determined. Carriers must complete changes required by CALEA by October 25,
1998. The Federal Bureau of Investigation ("FBI") and the FCC already have
adopted rules relating to the implementation of CALEA, and the FCC has a
proceeding underway to adopt additional implementing rules. Several carriers and
industry organizations have urged the FBI to delay the implementation date and
also have sought relief from the FCC, due to, among other things, the
unavailability of compliant equipment. To date, however, the deadline for
compliance has not been extended. There can be no assurance that the compliance
deadline will be extended or, if extended, that such
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extension will provide the Company with adequate time to comply with CALEA. If
the Company is not able to comply with CALEA prior to the deadline, the Company
could be fined up to $10,000 per day. See "Business -- Regulation."
Cellular and broadband PCS service providers are required to implement
number portability during 1998 and 1999. Number portability would enable
customers to change broadband Commercial Mobile Radio Service ("CMRS") providers
and services without changing their telephone number. Based upon financial and
technological considerations and the current level of competition in the
marketplace, several parties have requested that the FCC forbear from requiring
broadband CMRS carriers to implement service provider number portability until
PCS carriers have completed their five-year buildout requirements. There can be
no assurance that the FCC will extend the implementation deadline or that, if
extended, the extension would provide the Company with adequate time to comply
with its number portability obligation. The failure to comply with this
obligation could result in fines or revocation of the Company's licenses. See
"Business -- Regulation."
RADIO FREQUENCY EMISSION CONCERNS
Media reports have suggested that certain radio frequency ("RF") emissions
from portable cellular telephones may be linked to cancer and may interfere with
pacemakers and other medical devices. Concerns over RF emissions may have the
effect of discouraging the use of wireless telephones, which could have a
material adverse effect on the Company's business. By order effective in
September 1997, the FCC updated the guidelines and methods used for evaluating
RF emissions from radio equipment, including cellular and PCS telephones and
transmitting facilities. To date, the Company believes that these guidelines
have not had a material impact on its operations. However, the FCC's new rules
impose more restrictive standards on RF emissions from lower power devices such
as portable cellular and PCS telephones. Although there is no assurance of
continuing compliance with evolving standards, the Company believes that all
cellular and PCS telephones currently provided by the Company to its customers,
as well as the Company's transmitting facilities, comply with the proposed new
standards. See "Business -- Regulation."
YEAR 2000
The Year 2000 issue exists because many computer systems and applications
currently use two-digit fields to designate a year. When the century date
occurs, date sensitive systems may recognize the year 2000 as 1900 or not at
all. This inability to recognize or properly treat the Year 2000 may cause
systems to process critical financial and operational information incorrectly.
The Company continues to assess the impact of the Year 2000 issue on its
computer systems and estimates that approximately $600,000 will be incurred in
1998 and 1999 to address this issue, although there is no assurance that the
costs it incurs will be limited to such amounts. If Year 2000 modifications are
not properly completed either by the Company or any of the entities with whom
the Company conducts business, the Company could be adversely affected. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Other Matters -- Year 2000."
DEPENDENCE ON KEY PERSONNEL
The Company's business is managed by a small number of key management and
operating personnel, the loss of any of whom could have a material adverse
effect on the Company. The Company believes that its ability to manage its
planned growth successfully will depend in large part on its continued ability
to attract and retain highly skilled and qualified personnel. See "Management."
EQUIPMENT FAILURE; NATURAL DISASTER
Although the Company carries "business interruption" insurance, major
equipment failure or a natural disaster affecting the Company's switches,
microwave links or certain cell sites could have a material adverse effect on
the Company. Although the Company has not incurred any material adverse effect
from equipment failures or natural disasters to date, there is no assurance that
the Company will not experience such events in the future.
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FRAUDULENT CONVEYANCE STATUTES
Various laws enacted for the protection of creditors may apply to the
Company's incurrence of indebtedness and other obligations in connection with
the Acquisitions, including the issuance of the Senior Subordinated Notes. If a
court were to find in a lawsuit by an unpaid creditor or representative of
creditors of the Company that the Company did not receive fair consideration or
reasonably equivalent value for incurring such indebtedness or obligation and,
at the time of such incurrence, the Company: (i) was insolvent; (ii) was
rendered insolvent by reason of such incurrence; (iii) was engaged in a business
or transaction for which the assets remaining in the Company constituted
unreasonably small capital; or (iv) intended to incur or believed it would incur
obligations beyond its ability to pay such obligations as they mature, such
court, subject to applicable statutes of limitation, could determine to
invalidate, in whole or in part, such indebtedness and obligations as fraudulent
conveyances or subordinate such indebtedness and obligations to existing or
future creditors of the Company.
The measure of insolvency for purposes of the foregoing will vary depending
on the law of the jurisdiction being applied. Generally, however, the Company
would be considered insolvent at a particular time if the sum of its debts was
then greater than all of its property at a fair valuation or if the present fair
saleable value of its assets was then less than the amount that would be
required to pay its probable liabilities on its existing debts as they became
absolute and matured. On the basis of its historical financial information, its
recent operating history as discussed in "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and other factors, the
Company's management believes that, after giving effect to indebtedness incurred
in connection with the Offerings and the Acquisitions, the Company will not be
rendered insolvent, will have sufficient capital for the business in which it
will be engaged and will be able to pay its debts as they mature; however,
management has not obtained any independent opinion regarding such issues. In
addition, there can be no assurance as to what standard a court would apply in
making such determinations.
SEASONALITY
The Company, and the wireless communications industry in general, have
historically experienced significant customer growth during the fourth calendar
quarter. Accordingly, during that period the Company experiences greater losses
on equipment sales and increases in sales and marketing expenses. In addition,
the Company's financial performance during the first quarter has been negatively
affected by reduced minutes of use and roamer revenues. The Company has
historically experienced its highest usage and revenue per customer during the
summer months. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Other Matters -- Seasonality."
RISKS ASSOCIATED WITH SECURITIES
SUBORDINATION; PRIORITY OF SECURED INDEBTEDNESS; RANKING OF PREFERRED
STOCK. The Senior Subordinated Notes (and, if issued, the Exchange Debentures)
will be unsecured and subordinated in right of payment to all existing and
future Senior Indebtedness of the Company, including all indebtedness under the
Credit Facility. The Exchangeable Preferred Stock will rank junior in right of
payment upon liquidation to all existing and future indebtedness of the Company
and senior in right of payment to the common stock of the Company. By reason of
such subordination, in the event of the insolvency, liquidation or other
reorganization of the Company, the Senior Indebtedness must be paid in full
before repayment of the principal of, premium, if any, or interest on the Senior
Subordinated Notes (and, if issued, the Exchange Debentures) and the Senior
Indebtedness and the Senior Subordinated Notes must be paid in full before
redemption of the Exchangeable Preferred Stock. As of March 31, 1998, after
giving pro forma effect to the Acquisitions and the related financings
(including the Offerings), the aggregate amount of Senior Indebtedness would
have been $163.8 million and the unused balance under the Credit Facility would
have been $136.2 million. The obligations of the Company on the Senior
Subordinated Notes and the Exchangeable Preferred Stock (or, if issued, the
Exchange Debentures) will be effectively subordinated in right of payment to all
obligations of the Company's subsidiaries (including the guarantees by such
subsidiaries of the Credit Facility). As of March 31, 1998, the only material
indebtedness of such subsidiaries (excluding the guarantees by such subsidiaries
of the Credit Facility) was $12.0 million of intercompany Indebtedness owing to
the Company which was incurred by Wireless
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Alliance. The documents governing the Securities will permit the Company to
incur additional Senior Indebtedness and will permit the subsidiaries to incur a
limited amount of indebtedness if certain conditions are met. See "Description
of Senior Subordinated Notes -- Certain Covenants," "Description of Exchangeable
Preferred Stock and Exchange Debentures -- Exchangeable Preferred Stock --
Certain Covenants" and "Description of Exchangeable Preferred Stock and Exchange
Debentures -- Exchange Debentures -- Certain Covenants." In addition, the
Company has pledged the stock of certain of its subsidiaries to secure the
borrowings under the Credit Facility, and the Company and certain of its
subsidiaries have granted liens on substantially all of their assets as security
for the obligations under the Credit Facility. If the Company becomes insolvent
or is liquidated, or if payment under the Credit Facility is accelerated, the
lenders under the Credit Facility would be entitled to exercise the remedies
available to a secured lender under applicable law and pursuant to instruments
governing such indebtedness. Accordingly, such lenders will have a prior claim
on the Company's assets. In any such event, because the Senior Subordinated
Notes (and, if issued, the Exchange Debentures) will not be secured by any of
the Company's assets, it is possible that there would be no assets remaining
from which claims of the holders of such Senior Subordinated Notes (and, if
issued, the Exchange Debentures) could be satisfied, or, if any such assets
remained, such assets might be insufficient to satisfy such claims in full.
In the event of a default in the payment of principal or interest on any
Senior Indebtedness of the Company, the Company will not be permitted to make
any payment with respect to the principal of, or premium, if any, or interest on
the Senior Subordinated Notes (or, if issued, the Exchange Debentures) unless
and until such default has been cured or waived. In the event of any other
default permitting the acceleration of Designated Senior Indebtedness (as
defined herein) or indebtedness under the Credit Facility where notice of such
default has been given to the Company, the Company may not make any payment with
respect to the principal of or premium, if any, or interest on the Senior
Subordinated Notes (or, if issued, the Exchange Debentures) unless and until
such default has been cured or waived; PROVIDED, HOWEVER, that such other
default will not prevent the making of payments on the Senior Subordinated Notes
(or, if issued, the Exchange Debentures) for more than 179 consecutive days
after notice of such default has been given to the Company. Upon any payment or
distribution of assets of the Company upon a total or partial liquidation,
dissolution, reorganization or similar proceeding, the holders of Senior
Indebtedness will be entitled to receive payment in full before the holders of
the Senior Subordinated Notes (and, if issued, the Exchange Debentures) are
entitled to receive any payment. See "Description of Senior Subordinated Notes
- -- Subordination."
LIMITATION ON ABILITY TO PAY CASH DIVIDENDS. The ability of the Company to
pay cash dividends and to redeem the Exchangeable Preferred Stock when required
is substantially restricted under various covenants contained in documents
governing the Senior Subordinated Notes and the Credit Facility. In addition,
under Minnesota law, the Company is permitted to pay dividends on its capital
stock, including the Exchangeable Preferred Stock, only if the board of
directors of the Company determines that the Company will be able to pay its
debts in the ordinary course of business after paying such dividends. The
Company cannot predict what the value of its assets or the amount of its
liabilities will be in the future and, accordingly, there can be no assurance
that the Company will be able to pay cash dividends, redeem the Exchangeable
Preferred Stock or exchange the Exchangeable Preferred Stock for the Exchange
Debentures.
LIMITATION ON REMEDIES APPLICABLE TO EXCHANGEABLE PREFERRED STOCK. The
Certificate of Designation provides that in certain circumstances, including the
accumulation of accrued and unpaid dividends on the outstanding Exchangeable
Preferred Stock in an amount equal to six quarterly dividends (whether or not
consecutive) and the failure of the Company to satisfy any obligation with
respect to the Exchangeable Preferred Stock, the sole remedy of the holders of
the Exchangeable Preferred Stock will be the election of directors to the
Company's board of directors. See "Description of Exchangeable Preferred Stock
and Exchange Debentures -- Exchangeable Preferred Stock -- Voting Rights."
REPURCHASE OF SECURITIES UPON A CHANGE OF CONTROL. The Company must offer
to purchase (separately) the Securities within 30 days after the occurrence of a
Change of Control at a purchase price equal to (i) 101% of the aggregate
principal amount of all outstanding Senior Subordinated Notes (and, if issued,
the Exchange Debentures) plus accrued and unpaid interest, if any, to the date
of repurchase and (ii) 101% of the aggregate liquidation
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preference of all outstanding shares of Exchangeable Preferred Stock, plus,
without duplication, accumulated and unpaid dividends, if any, to the date of
repurchase. See "Description of the Senior Subordinated Notes -- Change of
Control," "Description of Exchangeable Preferred Stock and Exchange Debentures
- -- Exchangeable Preferred Stock -- Change of Control" and "Description of
Exchangeable Preferred Stock and Exchange Debentures -- Exchange Debentures --
Change of Control."
The Credit Facility prohibits the Company from prepaying or redeeming the
Securities and the Notes Indenture limits the ability of the Company to redeem
the Exchangeable Preferred Stock, including prepayments pursuant to a Change of
Control offer, as described above. Prior to commencing such an offer to
purchase, the Company would be required to (i) repay in full all indebtedness of
the Company that would prohibit the Company from prepaying or redeeming the
Securities, including indebtedness under the Credit Facility, or (ii) obtain any
requisite consent to permit the repurchase. In addition, under Minnesota law,
the Company is permitted to repurchase outstanding shares of its capital stock,
including the Exchangeable Preferred Stock, only if the board of directors of
the Company determines that the Company will be able to pay its debts in the
ordinary course of business after repurchasing such shares of capital stock. If
the Company is unable to repay such indebtedness or is unable to obtain the
necessary consents, then the Company will be unable to offer to purchase the
Senior Subordinated Notes or to redeem the Exchangeable Preferred Stock (or, if
the Exchange Debentures are issued, offer to purchase the Exchange Debentures),
and such failure will constitute an Event of Default under the Notes Indenture
and a Voting Rights Triggering Event under the Certificate of Designation (or,
if the Exchange Debentures are issued, an event of default under the Exchange
Indenture). There can be no assurance that the Company will have sufficient
funds available at the time any Change of Control offer, as described above, is
required to repurchase the Senior Subordinated Notes and, as applicable,
repurchase the Exchangeable Preferred Stock or repurchase the Exchange
Debentures, as described above.
The events that constitute a Change of Control may also be events of default
under the Credit Facility or other indebtedness of the Company. Such events may
permit the lenders under such indebtedness to accelerate the indebtedness and,
if the indebtedness is not paid, to enforce security interests in the assets of
the Company, thereby limiting the Company's ability to raise cash to repurchase
the Senior Subordinated Notes or Exchangeable Preferred Stock (or, if issued,
the Exchange Debentures) and reducing the practical benefit of the offer to
purchase provisions to the holders of the Senior Subordinated Notes and the
Exchangeable Preferred Stock (or, if issued, the Exchange Debentures). See
"Description of Other Indebtedness."
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS. Dividends on the
Exchangeable Preferred Stock that are paid to Non-U.S. Holders may be subject to
a 30% withholding tax. Unless a Non-U.S. Holder provides the Company with
appropriate documentation indicating its exemption from the withholding tax, in
the event any distribution is made with respect to the Exchangeable Preferred
Stock in the form of additional shares of Exchangeable Preferred Stock, such
Non-U.S. Holder will be required to pay the Company the amount of any such
withholding tax and, in the event such payment is not timely made, the Company
will withhold a number of shares of Exchangeable Preferred Stock sufficient to
reimburse it for the withholding tax obligation. For purposes of this
Prospectus, a Non-U.S. Holder is any holder that is not a "U.S. Holder" as
defined under "Certain United States Federal Income Tax Considerations." See
"Certain United States Federal Income Tax Considerations."
ABSENCE OF A PUBLIC MARKET; POSSIBLE VOLATILITY OF PRICE OF SECURITIES. The
Company does not intend to apply for listing of the Securities on any securities
exchange or for inclusion of the Securities in any automated quotation system.
Although the Company has been advised by the Initial Purchasers that they
currently intend to make a market in the Securities, they are not obligated to
do so and any such market-making activities may be discontinued at any time
without notice. Accordingly, there can be no assurance as to the development or
liquidity of any market for the Securities. If a market for any of the
Securities were to develop, the Securities could trade at prices that may be
higher or lower than their initial offering prices, depending upon many factors,
including prevailing interest rates, the Company's operating results and the
markets for similar securities. Historically, the market for non-investment
grade securities has been subject to disruptions that have caused substantial
volatility in the prices of securities similar to the Securities. There can be
no assurance that if a market for the Securities were to develop, such a market
would not be subject to similar disruptions.
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THE EXCHANGE OFFER
GENERAL
In connection with the sale of the Old Securities pursuant to a Purchase
Agreement dated as of May 7, 1998, between the Company and the Initial
Purchasers, the Initial Purchasers and their assignees became entitled to the
benefits of the Registration Rights Agreements.
Under the Registration Rights Agreements, the Company is obligated to (i)
file the Registration Statement of which this Prospectus is a part (the
"Exchange Offer Registration Statement") for a registered exchange offer with
respect to an issue of New Notes and New Exchangeable Preferred Stock with terms
substantially identical in all material respects to the Old Notes and Old
Exchangeable Preferred Stock, respectively (except that such New Notes and New
Exchangeable Preferred Stock will not contain terms with respect to transfer
restrictions), within 90 days after the Issue Date and (ii) use its best efforts
to cause the Registration Statement to be declared effective within 120 days
after the Issue Date. For each Old Note surrendered pursuant to the Notes
Exchange Offer, the holder of such Old Note will receive a New Note having a
principal amount at maturity equal to that of the surrendered Old Note. For each
share of Old Exchangeable Preferred Stock surrendered pursuant to the Preferred
Stock Exchange Offer, the holder of such share of Old Exchangeable Preferred
Stock will receive a share of New Exchangeable Preferred Stock having a
liquidation preference equal to that of the surrendered share of Old
Exchangeable Preferred Stock. The Exchange Offer being made hereby if commenced
and consummated within such applicable time periods will satisfy those
requirements under the Registration Rights Agreements.
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letters of Transmittal (which together constitute the Exchange
Offer), the Company will accept for exchange all Old Securities validly tendered
and not withdrawn prior to 5:00 p.m., Eastern Standard Time, on the Expiration
Date. The Company will issue New Notes in exchange for an equal principal amount
at maturity of outstanding Old Notes accepted in the Exchange Offer and will
issue New Exchangeable Preferred Stock in exchange for an equal number of shares
of outstanding Old Exchangeable Preferred Stock accepted in the Exchange Offer.
As of the date of this Prospectus, there was outstanding $125,000,000 aggregate
principal amount at maturity of Old Notes and 125,000 shares of Old Exchangeable
Preferred Stock.
This Prospectus, together with the Letters of Transmittal, is being sent to
all registered holders as of July 24, 1998. The Company's obligation to accept
Old Securities for exchange pursuant to the Exchange Offer is subject to certain
condition as set forth herein under "-- Conditions."
The Company shall be deemed to have accepted validly tendered Old Notes
when, as and if the Company has given oral or written notice thereof to the
Notes Exchange Agent. The Notes Exchange Agent will act as agent for the
tendering holders of Old Notes for the purposes of receiving the New Notes from
the Company and delivering New Notes to such holders. The Company shall be
deemed to have accepted validly tendered Old Exchangeable Preferred Stock when,
as and if the Company has given oral or written notice thereof to the Preferred
Stock Exchange Agent. The Preferred Stock Exchange Agent will act as agent for
the tendering holders of Old Exchangeable Preferred Stock for the purposes of
receiving the New Exchangeable Preferred Stock from the Company and delivering
New Exchangeable Preferred Stock to such holders.
In the event the Exchange Offer is consummated, subject to certain limited
exceptions, the Company will not be required to register the Old Securities. In
such event, holders of Old Securities seeking liquidity in their investment
would have to rely on exemptions to registration requirements under the federal
and state securities laws. See "Risk Factors -- Consequences of Failure to
Exchange."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean August 24, 1998, unless the Company,
in its sole discretion, extends the Exchange Offer, in which case the term
"Expiration Date" shall mean the latest date to which the Exchange Offer is
extended. In order to extend the Expiration Date, the Company will notify each
Exchange Agent of any extension by oral or written notice and will mail to the
record holders of Old Securities an announcement thereof,
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<PAGE>
each prior to 9:00 a.m., New York City Time, on the next business day after the
previously scheduled Expiration Date. Such announcement may state that the
Company is extending the Exchange Offer for a specified period of time.
Notwithstanding any extension of the Exchange Offer, if for any reason the
Exchange Offer is not consummated before December 10, 1998, the Company will, at
its own expense, (a) as promptly as practicable, file a shelf registration
statement covering resales of the Old Securities (a "Shelf Registration
Statement"), (b) use its best efforts to cause a Shelf Registration Statement to
be declared effective under the Securities Act and (c) keep the Shelf
Registration Statement effective until the earlier of 24 months following the
Issue Date and such time as all of the Old Securities have been sold thereunder,
or otherwise can be sold pursuant to Rule 144 without any limitations under
clauses (c), (e), (f) and (h) of Rule 144. The Company will, in the event a
Shelf Registration Statement is filed, among other things, provide to each
holder for whom such Shelf Registration Statement was filed copies of the
prospectus which is a part of such Shelf Registration Statement, notify each
such holder when such Shelf Registration Statement has become effective and take
certain other actions as are required to permit unrestricted resales of the Old
Securities. A holder selling such Old Securities pursuant to the Shelf
Registration Statement generally would be required to be named as a selling
security holder in the related prospectus and to deliver a prospectus to
purchasers, will be subject to certain of the civil liability provisions under
the Securities Act in connection with such sales and will be bound by the
provisions of the Registration Rights Agreements which are applicable to such a
holder (including certain indemnification obligations).
The Company reserves the right (i) to delay accepting any Old Securities, to
extend the Exchange Offer or to terminate the Exchange Offer and not accept Old
Securities not previously accepted if any of the conditions set forth herein
under "-- Conditions" shall have occurred and shall not have been waived by the
Company, by giving oral or written notice of such delay, extension or
termination to the Exchange Agent or (ii) to amend the terms of the Exchange
Offer in any manner deemed by it to be advantageous to the holders of the Old
Securities. Any such delay in acceptance, extension, termination or amendment
will be followed as promptly as practicable by oral or written notice thereof.
If the Exchange Offer is amended in a manner determined by the Company to
constitute a material change, the Company will promptly disclose such amendment
in a manner reasonably calculated to inform the holders of the Old Securities of
such amendment and the Company will extend the Exchange Offer for a period of
five to ten business days, depending upon the significance of the amendment and
the manner of disclosure to holders of the Old Securities, if the Exchange Offer
would otherwise expire during such five to ten business day period.
Without limiting the manner in which the Company may choose to make public
announcement of any delay, extension, amendment or termination of the Exchange
Offer, the Company shall have no obligation to publish, advertise, or otherwise
communicate any such public announcement, other than by making a timely release
to an appropriate news agency.
NO VOTE OF THE COMPANY'S SECURITY HOLDERS IS REQUIRED UNDER APPLICABLE LAW
TO EFFECT THE EXCHANGE OFFER AND NO SUCH VOTE (OR PROXY THEREFOR) IS BEING
SOUGHT HEREBY.
Holders of Old Securities do not have any appraisal or dissenters' rights in
connection with the Exchange Offer under the MBCA, the governing law of the
state of incorporation of the Company.
PROCEDURES FOR TENDERING
To tender in the Exchange Offer, a holder must complete, sign and date the
Notes Letter of Transmittal or Preferred Stock Letter of Transmittal, as the
case may be, or a facsimile thereof, have the signatures thereon guaranteed if
required by such Letter of Transmittal and mail or otherwise deliver such Letter
of Transmittal or such facsimile, together with any other required documents, to
the Notes Exchange Agent or Preferred Stock Exchange Agent, as the case may be,
prior to 5:00 p.m. New York City Time, on the Expiration Date. In addition,
either (i) certificates for such tendered Old Securities must be received by the
Exchange Agent along with the Letter of Transmittal, (ii) a timely confirmation
of a book-entry transfer (a "Book-Entry Confirmation") of such Old
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<PAGE>
Securities, if such procedure is available, into the Exchange Agent's account at
the Depository Trust Company (the "Book-Entry Transfer Facility") pursuant to
the procedure for book-entry transfer described below, must be received by the
Exchange Agent prior to the Expiration Date or (iii) the holder must comply with
the guaranteed delivery procedures described below. THE METHOD OF DELIVERY OF
OLD SECURITIES, LETTERS OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS IS AT
THE ELECTION AND RISK OF THE HOLDERS. IF SUCH DELIVERY IS BY MAIL, IT IS
RECOMMENDED THAT REGISTERED MAIL, PROPERLY INSURED, WITH RETURN RECEIPT
REQUESTED, BE USED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE
TIMELY DELIVERY. NO LETTERS OF TRANSMITTAL OR OLD SECURITIES SHOULD BE SENT TO
THE COMPANY. To be tendered effectively, the Old Securities, the Letter of
Transmittal and all other required documents must be received by the appropriate
Exchange Agent prior to 5:00 p.m., New York City Time, on the Expiration Date.
Delivery of all documents must be made to the appropriate Exchange Agent at the
addresses set forth below. Holders may also request their respective brokers,
dealers, commercial banks, trust companies or nominees to effect such tender for
such holders.
The tender by a holder of Old Securities will constitute an agreement
between such holder and the Company in accordance with the terms and subject to
the conditions set forth therein and in the Letter of Transmittal.
Only a holder of Old Securities may tender such Old Securities in the
Exchange Offer. The term "holder" with respect to the Exchange Offer means any
person in whose name Old Notes or Old Exchangeable Preferred Stock is registered
on the books of the Company or any other person who has obtained a properly
completed bond or stock power from the registered holder.
Any beneficial owner whose Old Securities are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender shall contact such registered holder promptly and instruct such
registered holder to tender on his behalf. If such beneficial owner wishes to
tender on his own behalf, such beneficial owner must, prior to completing and
executing the Letter of Transmittal and delivering his Old Securities, either
make appropriate arrangements to register ownership of the Old Securities in
such owner's name or obtain a properly completed bond or stock power from the
registered holder. The transfer of registered ownership may take considerable
time.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, must be guaranteed by any member firm of a registered national
securities exchange or of the National Association of Securities Dealers, Inc.
or a commercial bank or trust company having an office or correspondent in the
U.S. (an "Eligible Institution") unless the Old Securities tendered pursuant
thereto are tendered (i) by a registered holder who has not completed the box
entitled "Special Issuance Instructions" or "Special Delivery Instructions" on
the Letter of Transmittal or (ii) for the account of an Eligible Institution. In
the event that signatures on a Letter of Transmittal or a notice of withdrawal,
as the case may be, are required to be guaranteed, such guarantee must be by an
Eligible Institution.
If the Letter of Transmittal is signed by a person other than the registered
holder of any Old Securities listed therein, such Old Securities must be
endorsed or accompanied by bond powers or stock powers, as the case may be, and
a proxy which authorizes such person to tender the Old Securities on behalf of
the registered holder, in each case as the name of the registered holder or
holders appears on the Old Securities.
If the Letter of Transmittal of any Old Securities, bond powers or stock
powers are signed by trustees, executors, administrators, guardians,
attorneys-in-fact, officers of corporations or others acting in a fiduciary or
representative capacity, such person should so indicate when signing, and unless
waived by the Company, evidence satisfactory to the Company of their authority
to so act must be submitted with the Letter of Transmittal.
All questions as the validity, form, eligibility (including time of receipt)
and withdrawal of the tendered Old Securities will be determined by the Company
in its sole discretion, which determination will be final and binding. The
Company reserves the absolute right to reject any and all Old Securities not
properly tendered or any Old Securities which, if accepted by the Company,
would, in the opinion of counsel for the Company, be unlawful. The Company also
reserves the right to waive any irregularities or conditions of tender as to
particular Old Securities. The Company's interpretation of the terms and
conditions of the Exchange Offer (including the instructions in the Letters of
Transmittal) will be final and binding on all parties. Unless waived, any
defects or irregularities in
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<PAGE>
connection with tenders of Old Securities must be cured within such time as the
Company shall determine. None of the Company, the Notes Exchange Agent, the
Preferred Stock Exchange Agent or any other person shall be under any duty to
give notification of defects or irregularities with respect to tenders of Old
Securities, nor shall any of them incur any liability for failure to give such
notification. Tenders of Old Securities will not be deemed to have been made
until such irregularities have been cured or waived. Any Old Securities received
by an Exchange Agent that are not properly tendered and as to which the defects
or irregularities have not been cured or waived will be returned without cost to
such holder by such Exchange Agent to the tendering holders of such Old
Securities, unless otherwise provided in the Letter of Transmittal, as soon as
practicable following the Expiration Date.
In addition, the Company reserves the right in its sole discretion, subject
to the provisions of the Notes Indenture and the Certificate of Designation, to
(i) purchase or make offers for any Old Securities that remain outstanding
subsequent to the Expiration Date or, as set forth under "-- Conditions," to
terminate the Exchange Offer in accordance with the terms of the Registration
Rights Agreements and (ii) to the extent permitted by applicable law, purchase
Old Securities in the open market, in privately negotiated transactions or
otherwise. The terms of any such purchase or offers could differ from the terms
of the Exchange Offer.
By tendering, each holder will represent to the Company that (i) it is not
an affiliate of the Company (as defined under Rule 405 of the Securities Act),
(ii) any New Securities to be received by it were acquired in the ordinary
course of its business and (iii) at the time of commencement of the Exchange
Offer, it was not engaged in, and did not intend to engage in, a distribution of
such New Securities and had no arrangement or understanding with any person to
participate in a distribution (within the meaning of the Securities Act) of the
New Securities. If a holder of Old Securities is an affiliate of the Company,
and is engaged in or intends to engage in a distribution of the New Securities
or has any arrangement or understanding with respect to the distribution of the
New Securities to be acquired pursuant to the Exchange Offer, such holder could
not rely on the applicable interpretations of the staff of the Commission and
must comply with the registration and prospectus delivery requirement of the
Securities Act in connection with any secondary resale transaction. Each broker
or dealer that receives New Securities for its own account in exchange for old
Securities, where such Old Securities were acquired by such broker or dealer as
a result of market-making activities, or other trading activities, must
acknowledge that it will deliver a prospectus in connection with any resale of
such New Securities. See "Plan of Distribution."
ACCEPTANCE OF OLD SECURITIES FOR EXCHANGE; DELIVERY OF NEW SECURITIES
Upon satisfaction or waiver of all of the conditions to the Exchange Offer,
the Company will accept, promptly after the Expiration Date, all Old Securities
properly tendered and will issue the New Securities promptly after acceptance of
the Old Securities. See "-- Conditions" below. For purposes of the Exchange
Offer, the Company shall be deemed to have accepted validly tendered Old Notes
for exchange when, as and if the Company has given oral or written notice
thereof to the Notes Exchange Agent, and shall be deemed to have accepted
validly tendered Old Exchangeable Preferred Stock for exchange when, as and if
the Company has given oral or written notice thereof to the Preferred Stock
Exchange Agent.
For each Old Note tendered for exchange, the holder of such Old Note will
receive a New Note having a principal amount at maturity equal to that of the
surrendered Old Note, and for each share of Old Exchangeable Preferred Stock
tendered for exchange, the holder of such share will receive a share of New
Exchangeable Preferred Stock having a liquidation preference equal to that of
the surrendered share of Old Exchangeable Preferred Stock.
If (i) by August 12, 1998 (90 days after the Issue Date), the Exchange Offer
Registration Statement has not been filed with the Commission, (ii) by September
11, 1998 (120 days after the Issue Date), neither the Exchange Offer
Registration Statement nor, if applicable, the Shelf Registration Statement has
been declared effective, (iii) the Expiration Date has not occurred within 45
days after the Exchange Offer Registration Statement has been declared
effective, or (iv) after either the Exchange Offer Registration Statement or the
Shelf Registration Statement has been declared effective, such Registration
Statement thereafter ceases to be effective or usable (subject to certain
exceptions) in connection with resales of Old Securities or New Securities in
accordance with and during the periods specified in the Registration Rights
Agreements (each such event referred to in clauses (i) through (iv) a
"Registration Default"), additional interest or dividends, as the case may be,
will accrue or
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<PAGE>
accumulate on the applicable Senior Subordinated Notes and Exchangeable
Preferred Stock at the rate of 0.50% per annum from and including the date on
which any such Registration Default shall occur to but excluding the date on
which all Registration Defaults have been cured. Such interest or dividends, as
the case may be, will be payable in cash (or in kind to the extent permitted
under the Certificate of Designation) and will be in addition to any other
interest or dividends payable from time to time with respect to the Senior
Subordinated Notes and the Exchangeable Preferred Stock. Such dividend or
interest rate shall be increased by an additional 0.50% per annum for each
additional 90-day period that a Registration Default continues, to a maximum of
2.0% per annum.
In all cases, issuance of New Securities for Old Securities that are
accepted for exchange pursuant to the Exchange Offer will be made only after
timely receipt by the appropriate Exchange Agent of certificates for such Old
Securities or a timely Book-Entry Confirmation of such Old Securities into such
Exchange Agent's account at the Book-Entry Transfer Facility, a properly
completed and duly executed Letter of Transmittal and all other required
documents. If any tendered Old Securities are not accepted for any reason set
forth in the terms and conditions of the Exchange Offer or if Old Securities are
submitted for a greater principal amount or larger number of shares, as the case
may be, than the holder desires to exchange, such unaccepted or nonexchanged Old
Securities will be returned without expense to the tendering holder thereof (or,
in the case of Old Securities tendered by book-entry transfer procedures
described below, such nonexchanged Old Securities will be credited to an account
maintained with such Book-Entry Transfer Facility) as promptly as practicable
after the expiration or termination of the Exchange Offer.
BOOK-ENTRY TRANSFER
The Notes Exchange Agent and the Preferred Stock Exchange Agent will make a
request to establish an account with respect to the Old Notes and the Old
Exchangeable Preferred Stock, respectively, at the Book-Entry Transfer Facility
for purposes of the Exchange Offer within two business days after the date of
this Prospectus. Any financial institution that is a participant in the
Book-Entry Transfer Facility's system may make book-entry delivery of Old
Securities by causing the Book-Entry Transfer Facility to transfer such Old
Securities into the appropriate Exchange Agent's account at the Book-Entry
Transfer Facility in accordance with such Book-Entry Transfer Facility's
procedures for transfer. However, although delivery of Old Securities may be
effected through book-entry transfer at the Book-Entry Transfer Facility, the
Letter of Transmittal or facsimile thereof with any required signature
guarantees and any other required documents must, in any case, be transmitted to
and received by the appropriate Exchange Agent at one of the addresses set forth
below under "-- Exchange Agents" on or prior to the Expiration Date or the
guaranteed delivery procedures described below must be complied with.
GUARANTEED DELIVERY PROCEDURES
If a registered holder of the Old Securities desires to tender such Old
Securities, and the Old Securities are not immediately available, or time will
not permit such holder's Old Securities or other required documents to reach the
appropriate Exchange Agent before the Expiration Date, or the procedures for
book-entry transfer cannot be completed on a timely basis, a tender may be
effected if (i) the tender is made through an Eligible Institution, (ii) prior
to the Expiration Date, the Exchange Agent receives from such Eligible
Institution a properly completed and duly executed Letter of Transmittal (or a
facsimile thereof) and Notice of Guaranteed Delivery, substantially in the form
provided by the Company (by facsimile transmission, mail or hand delivery),
setting forth the name and address of the holder of such Old Securities and the
amount of Old Securities tendered, stating that the tender is being made thereby
and guaranteeing that within five New York Stock Exchange ("NYSE") trading days
after the date of execution of the Notice of Guaranteed Delivery, the
certificates for all physically tendered Old Securities, in proper form to
transfer, or a Book-Entry Confirmation, as the case may be, and any other
documents required by the Letter of Transmittal will be deposited by the
Eligible Institution with the appropriate Exchange Agent and (iii) the
certificate for all physically tendered Old Securities, in proper form for
transfer, or a Book-Entry Confirmation, as the case may be, and all other
documents required by the Letter of Transmittal are received by the appropriate
Exchange Agent within five NYSE trading days after the date of execution of the
Notice of Guaranteed Delivery.
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<PAGE>
WITHDRAWAL OF TENDERS
Tenders of Old Securities may be withdrawn at any time prior to 5:00 p.m.
New York City Time, on the Expiration Date.
For a withdrawal to be effective, a written notice of withdrawal must be
received by the appropriate Exchange Agent at one of the addresses set forth
below under "-- Exchange Agents." Any such notice of withdrawal must specify the
name of the person having tendered the Old Securities to be withdrawn, identify
the Old Securities to be withdrawn (including the principal amount of such Old
Notes and the number of shares of such Old Exchangeable Preferred Stock) and
(where certificates for Old Securities have been transmitted) specify the name
in which such Old Securities are registered, if different from that of the
withdrawing holder. If certificates for the Old Securities have been delivered
or otherwise identified to an Exchange Agent, then, prior to the release of such
certificates, the withdrawing holder must also submit the serial numbers of the
particular certificates to be withdrawn and a signed notice of withdrawal with
signatures guaranteed by an Eligible Institution unless such holder is an
Eligible Institution. If Old Securities have been tendered pursuant to the
procedures of book-entry transfer described above, any notice of withdrawal must
specify the name and number of the account at the Book-Entry Transfer Facility
to be credited with the withdrawn Old Securities and otherwise comply with the
procedures of such facility. All questions as to the validity, form and
eligibility (including time of receipt) of such notices will be determined by
the Company, whose determination shall be final and binding on all parties. Any
Old Securities so withdrawn will be deemed not to have been validly tendered for
exchange for purposes of the Exchange Offer. Any Old Securities which have been
tendered for exchange but which are not exchanged for any reason will be
returned to the holder thereof without cost to such holder (or, in the case of
Old Securities tendered by book-entry transfer into the Exchange Agent's account
at the Book-Entry Transfer Facility pursuant to the book-entry transfer
procedures described above, such Old Securities will be credited to an account
maintained with such Book-Entry Transfer Facility for the Old Securities) as
soon as practicable after withdrawal, rejection of tender or termination of the
Exchange Offer. Properly withdrawn Old Securities may be retendered by following
one of the procedures described under the "-- Procedures for Tendering" above at
any time on or prior to the Expiration Date.
CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Company will not
be required to accept for exchange, or to issue New Securities in exchange for,
any Old Securities and may terminate or amend the Exchange Offer as provided
herein before the acceptance of such Old Securities, if because of any changes
in law, or applicable interpretations thereof by the Commission, the Company
determines that it is not permitted to effect the Exchange Offer. In addition,
the Company has no obligation to, and will not knowingly, accept tenders of Old
Securities from affiliates of the Company (within the meaning of Rule 405 under
the Securities Act) or from any other holder or holders who are not eligible to
participate in the Exchange Offer under applicable law or interpretations
thereof by the Commission, or if the New Securities to be received by such
holder or holders of Old Securities in the Exchange Offer, upon receipt, will
not be tradable by such holder without restriction under the Securities Act and
the Exchange Act and without material restriction under the "blue sky" or
securities laws of substantially all of the states.
EXCHANGE AGENTS
Norwest Bank Minnesota, N.A. has been appointed as Notes Exchange Agent in
connection with the Notes Exchange Offer. Questions and requests for assistance
in connection with the Notes Exchange Offer and requests
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<PAGE>
for additional copies of this Prospectus or of the Notes Letter of Transmittal
should be directed to the Notes Exchange Agent addressed as follows:
<TABLE>
<S> <C>
BY REGISTERED OR CERTIFIED IN PERSON:
MAIL: Northstar East Bldg.
Norwest Bank Minnesota, 608 2nd Ave. S.
National Association 12th Floor
Corporate Trust Operations Corporate Trust Services
P.O. Box 1517 Minneapolis, MN 55479-0113
Minneapolis, MN 55480-1517
BY OVERNIGHT COURIER OR BY BY FACSIMILE (FOR ELIGIBLE
HAND: INSTITUTIONS ONLY):
Norwest Bank Minnesota, (612) 667-4927
National Association CONFIRM RECEIPT OF NOTICE OF
Corporate Trust Operations GUARANTEED DELIVERY BY TELEPHONE:
Norwest Center (612) 667-9764
Sixth and Marquette
Minneapolis, MN 55479-0113
</TABLE>
Norwest Bank Minnesota, N.A. has been appointed as Preferred Stock Exchange
Agent in connection with the Preferred Stock Exchange Offer. Questions and
requests for assistance in connection with the Preferred Stock Exchange Offer
and requests for additional copies of this Prospectus or of the Preferred Stock
Letter of Transmittal should be directed to the Preferred Stock Exchange Agent
addressed as follows:
BY REGISTERED OR CERTIFIED MAIL;
BY OVERNIGHT COURIER; OR BY HAND:
Norwest Bank Minnesota, N.A.
161 N. Concord Exchange
South St. Paul MN 55075
Attention: Reorganization Department
BY FACSIMILE: (612) 450-4078
Attention: Reorganization Department
Telephone: (612) 450-4064
FEES AND EXPENSES
The expenses of soliciting tenders pursuant to the Exchange Offer will be
borne by the Company. The principal solicitation for tender pursuant to the
Exchange Offer is being made by mail; however, additional solicitations may be
made by telegraph, telephone, telecopy or in person by officers and regular
employees of the Company.
The Company will not make any payments to brokers, dealers or other persons
soliciting acceptances of the Exchange Offer. The Company, however, will pay
each Exchange Agent reasonable and customary fees for its services and will
reimburse such Exchange Agent for its reasonable out-of-pocket expenses in
connection therewith. The Company may also pay brokerage houses and other
custodians, nominees and fiduciaries the reasonable out-of-pocket expenses
incurred by them in forwarding copies of the Prospectus and related documents to
the beneficial owners of the Old Securities, and in handling or forwarding
tenders for exchange.
The expenses to be incurred in connection with the Exchange Offer will be
paid by the Company, including fees and expenses of each Exchange Agent, the
Trustee (as defined herein), the Transfer Agent (as defined herein) and
accounting, legal printing and related fees and expenses.
The Company will pay all transfer taxes, if any, applicable to the exchange
of Old Securities pursuant to the Exchange Offer. If, however, certificates
representing New Securities or Old Securities for principal amounts not tendered
or accepted for exchange are to be delivered to, or are to be registered or
issued in the name of, any person other than the registered holder of the Old
Securities tendered, or if tendered Old Securities are registered in the name of
any person other than the person signing the Letter of Transmittal, or if a
transfer tax is imposed for any reason other than exchange of Old Securities
pursuant to the Exchange Offer, then the amount of any such transfer
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<PAGE>
taxes (whether imposed on the registered holder or any other persons) will be
payable by the tendering holder. If satisfactory evidence of payment of such
taxes or exemption therefrom is not submitted with the Letter of Transmittal,
the amount of such transfer taxes will be billed directly to such tendering
holder.
ACCOUNTING TREATMENT
The New Notes and New Exchangeable Preferred Stock will be recorded in the
Company's accounting records at the same carrying values as the Old Notes and
Old Exchangeable Preferred Stock, respectively, as reflected in the Company's
accounting records on the date of the exchange. Accordingly, no gain or loss for
accounting purposes will be recognized upon the consummation of the Exchange
Offer. The expense of the Exchange Offer will be amortized by the Company over
the term of the New Notes and New Exchangeable Preferred Stock in accordance
with generally accepted accounting principles.
THE ACQUISITIONS
ATLANTIC ACQUISITION
In February 1998, the Company entered into a definitive agreement (the
"Atlantic Agreement") to acquire the Vermont, New Hampshire, New York and
Massachusetts Non-Wireline Cellular Licenses, operations and related assets of
Atlantic, one of the leading independent providers of wireless communications
services in the New England region for a purchase price of approximately $256
million in cash, plus the assumption of certain liabilities. The Company closed
on the acquisition on July 1, 1998.
Pursuant to the Atlantic Agreement, the Company acquired a contiguous,
multi-state service area of approximately 21,000 square miles, encompassing
approximately 1.11 million POPs and 71,000 customers. The cellular properties
acquired from Atlantic 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). In addition, the
Company acquired Atlantic's long-distance business. The assets acquired by the
Company from Atlantic constituted substantially all of the assets of Atlantic,
and in connection therewith, the Company assumed Atlantic's current liabilities
and all contract obligations of Atlantic entered into in the ordinary course of
business. The Company did not assume the bank debt or long-term liabilities of
Atlantic.
WMC ACQUISITION
In February 1998, the Company entered into a definitive agreement (the "WMC
Agreement") to purchase all of the outstanding stock of WMC for approximately
$7.5 million in cash. WMC provides cellular service to western Maine RSA 1
through a Wireline Cellular License, and the addition of WMC's service area to
the Company's existing Wireline Cellular License operations in Maine and the
multi-state Non-Wireline Cellular License system of Atlantic to the west and
south will create a continuous geographic footprint. WMC's 3,700 square-mile
service area of western Maine encompasses 83,000 POPs, and as of March 31, 1998,
WMC served more than 2,400 customers.
Pursuant to the WMC Agreement, the $7.5 million purchase price for the
outstanding stock of WMC is subject to certain adjustments. Any such adjustment
will be paid to the Company from a $600,000 escrow established pursuant to the
WMC Agreement. The escrowed funds will also be available to satisfy breaches of
seller's representations and warranties in the WMC Agreement, subject to a $1.5
million limit on the seller's liability.
Closing is expected to occur in the summer of 1998 following the latest of
(a) the first day of the month which is at least ten days after the receipt of
the last required consent (e.g., FCC or state regulator approval and the like)
or (b) the date on which all other conditions to closing set forth in the WMC
Agreement have been satisfied. The WMC Agreement may be terminated by either
party if closing has not occurred on or before December 31, 1998.
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<PAGE>
USE OF PROCEEDS
The Company will not receive any proceeds from the issuance of the New Notes
or the New Exchangeable Preferred Stock offered hereby. In consideration for
issuing the New Notes and New Exchangeable Preferred Stock as contemplated in
this Prospectus, the Company will receive in exchange Old Notes and Old
Exchangeable Preferred Stock in the like principal or liquidation preference
amount, the term and form of which are identical in all material respects to the
New Notes and New Exchangeable Preferred Stock. The Old Notes and Old
Exchangeable Preferred Stock surrendered in exchange for New Notes or the New
Exchangeable Preferred Stock will be retired and cancelled and cannot be
reissued. Accordingly, issuance of the New Notes and New Exchangeable Preferred
Stock will not result in any increase in the indebtedness of the Company.
The net proceeds from the sale of the Old Notes and Old Exchangeable
Preferred Stock were approximately $240.9 million (net of estimated fees and
expenses of approximately $9.1 million). The Company used the net proceeds from
the Exchangeable Preferred Stock Offering to repay indebtedness under the
Existing Credit Facility. The Company used the net proceeds from the Notes
Offering, together with the New Credit Facility, to finance the Atlantic
Acquisition, refinance the remaining indebtedness under the Existing Credit
Facility, and pay related fees and expenses and to finance the pending WMC
Acquisition.
SOURCES AND USES OF FUNDS
(IN THOUSANDS)
<TABLE>
<CAPTION>
<S> <C>
SOURCES:
New Credit Facility............................................................... $ 163,844(1)
Senior Subordinated Notes......................................................... 125,000
Exchangeable Preferred Stock...................................................... 125,000
----------
Total sources................................................................... $ 413,844
----------
----------
USES:
Atlantic Purchase Price........................................................... $ 256,000
WMC Purchase Price................................................................ 7,500
Estimated fees and expenses of the Acquisitions and the Offerings................. 15,344(2)
Repayment of Existing Credit Facility in full..................................... 135,000
----------
Total uses...................................................................... $ 413,844
----------
----------
</TABLE>
- ------------------------
(1) Includes $7.5 million to finance the WMC Acquisition. The WMC Acquisition is
not included in the Unaudited Pro Forma Condensed Consolidated Financial
Data included in this Prospectus as it does not meet the significant
subsidiary criteria for that presentation. As a result, the amount of
indebtedness included in the sources and uses table does not reconcile to
the Unaudited Pro Forma Condensed Consolidated Financial Data.
(2) Represents estimates of $9.1 million for underwriting and other expenses
related to the Offerings, $3.4 million for fees related to the New Credit
Facility, and $2.8 million for fees related to the Acquisitions.
39
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of March
31, 1998 on (i) an actual basis, (ii) a pro forma as adjusted basis after giving
effect to the Exchangeable Preferred Stock Offering and (iii) a pro forma as
adjusted basis after giving effect to the Offerings, the Acquisitions, the New
Credit Facility and the repayment in full and termination of the Existing Credit
Facility. This table should be read in conjunction with the consolidated
financial statements of the Company, including the notes thereto, and the
"Unaudited Pro Forma Condensed Consolidated Financial Data" and notes thereto,
included elsewhere herein.
<TABLE>
<CAPTION>
MARCH 31, 1998
-----------------------------------------
PRO FORMA AS PRO FORMA AS
ACTUAL ADJUSTED (1) ADJUSTED (2)
----------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash............................................... $ 3,305 $ 3,305 $ 3,305
----------- ------------- -------------
----------- ------------- -------------
Existing Credit Facility........................... $ 135,000 $ 14,375 $ --
New Credit Facility................................ -- -- 163,844
Senior Subordinated Notes.......................... -- -- 125,000
----------- ------------- -------------
Total debt..................................... 135,000 14,375 288,844(3)
----------- ------------- -------------
Minority Interest.................................. 5,478 5,478 5,478
----------- ------------- -------------
Exchangeable Preferred Stock....................... -- 120,625 120,625
----------- ------------- -------------
Shareholders' Equity:
Class A Common Stock............................. 76 76 76
Class B Common Stock............................. 13 13 13
Additional paid-in capital....................... 34,639 34,639 34,639
Accumulated deficit.............................. (2,870) (2,870) (3,890)
----------- ------------- -------------
Total shareholders' equity..................... 31,858 31,858 30,838
----------- ------------- -------------
Total capitalization......................... $ 172,336 $ 172,336 $ 445,785
----------- ------------- -------------
----------- ------------- -------------
</TABLE>
- ------------------------
(1) Includes the historical capitalization of the Company and gives effect to
the following: (i) the Exchangeable Preferred Stock Offering and (ii) the
temporary repayment of $120.6 million of the Existing Credit Facility.
(2) Includes the historical capitalization of the Company and gives effect to
the following: (i) the Exchangeable Preferred Stock Offering and (ii) the
Notes Offering, the borrowings under the New Credit Facility, the repayment
in full and termination of the Existing Credit Facility and the
Acquisitions.
(3) Includes $7.5 million to finance the WMC Acquisition. The WMC Acquisition is
not included in the Unaudited Pro Forma Condensed Consolidated Financial
Data included in this Prospectus as it does not meet the significant
subsidiary criteria for that presentation. As a result, the amount of
indebtedness included in the "Capitalization" table does not reconcile to
the Unaudited Pro Forma Condensed Consolidated Financial Data.
40
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data are derived from the historical
consolidated financial statements of the Company. The consolidated financial
statements for each of the five years ended December 31 have been derived from
the Company's consolidated financial statements, which have been audited by
Arthur Andersen LLP. The financial data for the three months ended March 31,
1997 and 1998, are derived from unaudited consolidated financial statements. In
the opinion of management, the unaudited consolidated financial statements
include all adjustments, consisting of normal recurring adjustments, which the
Company considers necessary for a fair presentation of the financial position
and the results of operations for the periods presented. Operating results for
the three months ended March 31, 1998 are not necessarily indicative of the
results that may be expected for the entire year. The MRCC Acquisitions, which
were consummated by the Company effective May 1, 1997, materially affect the
comparability of data from one period to another. The data set forth below
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Company's consolidated
financial statements and accompanying notes included elsewhere in this
Prospectus. No cash dividends or distributions were declared or paid during the
periods presented.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------------------- ---------------------
1993 1994 1995 1996 1997 1997 1998
--------- --------- --------- --------- --------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Service.......................... $ 4,690 $ 9,784 $ 14,289 $ 23,120 $ 43,408 $ 6,908 $ 12,719
Roamer........................... 3,146 3,897 4,562 6,414 9,475 1,317 1,758
Equipment........................ 271 2,008 1,476 927 1,020 97 320
--------- --------- --------- --------- --------- --------- ----------
Total revenues................. 8,107 15,689 20,327 30,461 53,903 8,322 14,797
--------- --------- --------- --------- --------- --------- ----------
Operating expenses:
Network costs.................... 2,586 3,293 4,974 6,731 11,578 2,000 3,628
Costs of equipment sales......... 372 2,214 1,914 1,375 2,807 287 884
Selling, general and
administrative................. 4,949 6,570 7,700 13,576 25,225 4,427 6,590
Depreciation and amortization.... 1,687 2,426 3,249 5,539 12,458 1,963 4,219
--------- --------- --------- --------- --------- --------- ----------
Total operating expenses....... 9,594 14,503 17,837 27,221 52,068 8,677 15,321
--------- --------- --------- --------- --------- --------- ----------
Operating income (loss)............ (1,487) 1,186 2,490 3,240 1,835 (355) (524)
--------- --------- --------- --------- --------- --------- ----------
Other income (expense):
Interest expense................. (622) (1,195) (1,365) (281) (6,065) (215) (2,410)
Interest and dividend income..... 68 170 277 335 232 62 279
Equity in earnings (losses) of
unconsolidated subsidiaries.... (175) (37) (37) 52 (350) 19 (149)
Minority interest................ -- -- -- 331 3,082 449 738
--------- --------- --------- --------- --------- --------- ----------
Other income (expense), net.... (729) (1,062) (1,125) 437 (3,101) 315 (1,542)
--------- --------- --------- --------- --------- --------- ----------
Income (loss) before income
taxes............................ (2,216) 124 1,365 3,677 (1,266) (40) (2,066)
Income tax provision (benefit)..... 4 (486) 575 200 -- -- --
--------- --------- --------- --------- --------- --------- ----------
Net income (loss).................. $ (2,220) $ 610 $ 790 $ 3,477 $ (1,266) $ (40) $ (2,066)
--------- --------- --------- --------- --------- --------- ----------
--------- --------- --------- --------- --------- --------- ----------
Ratio of earnings to fixed charges
(1).............................. 1.10 2.00 14.09 0.77 0.81 0.16
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------------------ ---------------------
1993 1994 1995 1996 1997 1997 1998
--------- --------- --------- --------- ---------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)....... $ (1,230) $ 80 $ (4,415) $ (11,215) $ 514 $ (144)
Property and equipment, net..... 11,014 16,479 23,517 41,935 77,920 83,237
Total assets.................... 14,074 22,439 30,138 60,507 181,588 186,410
Total long-term debt, less
current maturities............ 10,400 13,725 16,397 44 128,000 135,000
Total liabilities............... 13,314 17,772 24,681 19,388 141,642 149,074
Total shareholders' equity...... 760 4,668 5,458 34,996 33,730 31,858
OTHER FINANCIAL DATA:
EBITDA (2)...................... $ 200 $ 3,612 $ 5,739 $ 8,779 $ 14,293 $ 1,608 $ 3,695
Adjusted EBITDA (2)............. 200 3,612 5,739 9,450 19,860 2,469 4,773
Adjusted EBITDA margin (2)...... 2.5% 23.0% 28.2% 31.3% 42.7% 32.9% 39.6%
Capital expenditures............ $ 2,750 $ 6,933 $ 10,011 $ 23,653 $ 34,474 $ 3,607 $ 8,970
Adjusted capital expenditures
(3)........................... 2,750 6,933 10,011 23,289 25,673 3,093 5,833
OTHER OPERATING DATA (4):
Customers at period end (5)..... 9,352 17,402 26,764 45,094 84,600 47,730 86,850
Penetration (6)................. 1.6% 2.9% 4.5% 7.5% 7.6% 8.0% 7.6%
Average monthly retention rate
(7)........................... 99.0% 99.2% 99.0% 98.7% 98.4% 98.8% 98.5%
Average monthly revenue per
cellular customer (8)......... $ 98 $ 84 $ 69 $ 66 $ 55 $ 52 $ 46
Acquisition cost per cellular
customer (9).................. 586 448 395 307 403 389 444
Roamer revenue as a percentage
of total revenue (10)......... 40.1% 28.5% 24.2% 21.9% 20.8% 17.8% 15.0%
Cell sites...................... 36 55 64 72 121 74 124
</TABLE>
42
<PAGE>
ATLANTIC
The following selected financial data were derived solely from unaudited
information obtained by the Company from Atlantic for the three months ended
March 31, 1997 and 1998, and from the historical Consolidated Statements of
Operations. The historical Consolidated Statements of Operations for each of the
three years in the period ended December 31, 1997 have been audited by KPMG Peat
Marwick LLP, independent auditors. The following selected financial data reflect
the reclassification of revenues and expenses to conform to the Company's
historical consolidated financial statement presentation and exclude the
operations of subsidiaries of Atlantic Cellular Company, L.P. not being acquired
by the Company in the Atlantic Acquisition, all of which information,
reclassifications and exclusions were provided to the Company by Atlantic. The
data should be read in conjunction with the Unaudited Pro Forma Condensed
Consolidated Financial Data, Atlantic's Consolidated Financial Statements and
accompanying notes, and other financial information included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------- --------------------
1995 1996 1997 1997 1998
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Service....................... $ 16,945 $ 23,356 $ 28,299 $ 6,450 $ 7,659
Roamer........................ 8,095 9,643 11,184 2,293 3,308
Equipment..................... 1,274 1,507 2,582 500 806
--------- --------- --------- --------- ---------
Total revenues.............. 26,314 34,506 42,065 9,243 11,773
--------- --------- --------- --------- ---------
Operating expenses:
Network costs................. 3,552 3,892 5,902 1,289 1,570
Costs of equipment sales...... 3,485 3,835 3,636 964 819
Selling, general and
administrative.............. 12,978 16,482 18,210 4,099 4,122
Depreciation and
amortization................ 7,970 8,917 9,367 2,457 2,457
--------- --------- --------- --------- ---------
Total operating expenses.... 27,985 33,126 37,115 8,809 8,968
--------- --------- --------- --------- ---------
Operating income (loss)......... $ (1,671) $ 1,380 $ 4,950 $ 434 $ 2,805
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
OTHER FINANCIAL DATA:
EBITDA (2)(11)................ $ 6,299 $ 10,297 $ 14,317 $ 2,891 $ 5,262
OTHER OPERATING DATA:
Customers at period-end....... 39,715 55,009 68,164 58,129 70,492
Penetration (6)............... 3.6% 4.9% 6.0% 5.1% 6.3%
Average monthly retention rate
(7)......................... 98.4% 98.1% 98.4% 98.4% 98.4%
Average monthly revenue per
customer (8)................ $ 63 $ 58 $ 53 $ 52 $ 53
Acquisition cost per customer
(9)......................... 376 355 361 397 344
Roamer revenue as a percentage
of total revenue (10)....... 32.3% 29.2% 28.3% 26.2% 30.2%
Cell sites.................... 61 71 82 77 85
</TABLE>
- ------------------------
(1) For purposes of computing the ratio of earnings to fixed charges,
"earnings" are defined as earnings before extraordinary items and
accounting changes, interest expense, amortization of deferred financing
costs, taxes and the portion of rent expense representing interest. Fixed
charges consist of interest expense, amortization of deferred financing
costs and the portion of rent expense representing interest. The deficiency
of earnings to fixed charges was $1.0 million for the year ended December
31, 1993.
43
<PAGE>
(2) EBITDA is the sum of earnings before interest, taxes, depreciation and
amortization and is utilized as a performance measure within the cellular
industry. EBITDA is not intended to be a performance measure that should be
regarded as an alternative for other performance measures and should not be
considered in isolation. EBITDA is not a measurement of financial
performance under generally accepted accounting principles and does not
reflect all expenses of doing business (e.g., interest expense,
depreciation). Accordingly, EBITDA should not be considered as having
greater significance than or as an alternative to net income or operating
income as an indicator of operating performance or to cash flows as a
measure of liquidity. Moreover, "EBITDA," as used herein, may differ from
"Operating Cash Flow," as used in calculating the covenants set forth in
the documents governing the Securities. See "Description of Senior
Subordinated Notes -- Certain Definitions," "Description of Exchangeable
Preferred Stock and Exchange Debentures -- Exchangeable Preferred Stock --
Certain Definitions" and "Description of Exchangeable Preferred Stock and
Exchange Debentures -- Exchange Debentures -- Certain Definitions."
Adjusted EBITDA represents EBITDA excluding Wireless Alliance's EBITDA.
Wireless Alliance will be an Unrestricted Subsidiary under the documents
governing the Securities. Adjusted EBITDA margin represents Adjusted EBITDA
divided by revenues of the Company (excluding Wireless Alliance revenues).
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
(3) Adjusted capital expenditures represents capital expenditures excluding
Wireless Alliance capital expenditures.
(4) Represents the Company's Minnesota cellular operations for 1993 through
1998 and MRCC's operations in 1997 and 1998, except as otherwise noted.
(5) In addition to the 86,850 cellular customers in Minnesota and Maine as of
December 31, 1997, the Company also served 9,487 paging and 17,999 Wireless
Alliance customers at such date.
(6) Represents the ratio of cellular customers at the end of the period to
total POPs.
(7) Determined for each period by dividing total cellular customers
discontinuing service during such period by the average cellular customers
for such period (customers at the beginning of the period plus customers at
the end of the period, divided by two), dividing that result by the number
of months in the period, and subtracting such result from one.
(8) 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 cellular customers for such period (customers at the
beginning of the period plus customers at the end of the period, divided by
two), and dividing that result by the number of months in such period.
(9) Determined for each period by dividing selling and marketing expenses, cost
of equipment sales, and depreciation of rental telephone equipment by the
gross cellular customers added during such period.
(10) Determined for each period by dividing roamer revenue for such period by
total revenues excluding equipment sales and, in the case of Company,
Wireless Alliance revenues.
(11) Includes an allocation of corporate overhead of $2.6 million in 1995, $3.0
million in 1996, $4.1 million in 1997, $728,000 for the three months ended
March 31, 1997 and $899,000 for the three months ended March 31, 1998.
44
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA
The following unaudited pro forma condensed consolidated statements of
operations for the year ended December 31, 1997 and the three months ended March
31, 1998 include the historical operations of the Company and give effect to the
following as if they occurred as of January 1, 1997: (i) the Unity Cellular
System, Inc. and Northern Maine Cellular Partnership acquisitions ("MRCC
Acquisitions"), (ii) the Exchangeable Preferred Stock Offering, and (iii) the
Notes Offering, the borrowings under the New Credit Facility, the repayment in
full and termination of the Existing Credit Facility, and the Atlantic
Acquisition. The following unaudited pro forma condensed consolidated balance
sheet as of March 31, 1998 includes the historical accounts of the Company and
gives effect to the following as if they occurred as of March 31, 1998: (i) the
Exchangeable Preferred Stock Offering and (ii) the Notes Offering, the
borrowings under the New Credit Facility, the repayment in full and termination
of the Existing Credit Facility, and the Atlantic Acquisition. The unaudited pro
forma condensed consolidated financial information gives effect to the MRCC
Acquisitions and the Atlantic Acquisition using the purchase method of
accounting and to the assumptions in the accompanying notes.
The unaudited pro forma condensed consolidated balance sheet as of March 31,
1998 and statements of operations for the year ended December 31, 1997 and the
three months ended March 31, 1998 have been prepared by the Company based in
part on information provided by (i) Powertel, Inc. (formerly Intercel, Inc.) for
the period prior to the consummation of the MRCC Acquisitions on May 1, 1997 and
(ii) Atlantic. The related pro forma adjustments have been prepared by the
Company's management based on its assumptions and the best available information
provided by Powertel, Inc. and Atlantic.
The unaudited pro forma condensed consolidated financial data have been
prepared by the Company's management. The unaudited pro forma condensed
consolidated financial statements are not designed to represent and do not
represent what the Company's financial position or results of operations
actually would have been had the aforementioned transactions been completed as
of the date or the beginning of the period indicated, or to project the
Company's results of operations at any future date or for any future period.
The unaudited pro forma condensed consolidated financial data should be read
in conjunction with the consolidated financial statements and notes thereto
contained elsewhere in this Prospectus of Rural Cellular Corporation and
Subsidiaries, Atlantic Cellular Company, L.P. and Subsidiaries and Unity
Cellular System, Inc. and Subsidiary.
The WMC Acquisition is not included in the following unaudited pro forma
condensed consolidated financial data because the WMC Acquisition does not meet
the significant subsidiary criteria for presentation. As a result, the following
unaudited pro forma condensed consolidated financial data do not reconcile to
the sources and uses table or the pro forma capitalization of the Company as of
March 31, 1998. See "Use of Proceeds" and "Capitalization."
45
<PAGE>
RURAL CELLULAR CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS
FOR
EXCHANGEABLE
MRCC PREFERRED
COMPANY ACQUISITIONS COMPANY STOCK PRO FORMA
HISTORICAL HISTORICAL (a) COMBINED OFFERING COMBINED
---------- -------------- -------- ------------ ---------
<S> <C> <C> <C> <C> <C>
REVENUES:
Service......................................... $43,408 $ 4,337 $47,745 $ -- $ 47,745
Roamer.......................................... 9,475 348 9,823 -- 9,823
Equipment and other............................. 1,020 133 1,153 -- 1,153
---------- ------- -------- ------------ ---------
Total revenues................................ 53,903 4,818 58,721 -- 58,721
---------- ------- -------- ------------ ---------
OPERATING EXPENSES:
Network costs................................... 11,578 734 12,312 -- 12,312
Cost of equipment sales......................... 2,807 547 3,354 -- 3,354
Selling, general and administrative............. 25,225 2,199 27,424 -- 27,424
Depreciation and amortization................... 12,458 1,406(f) 13,864 -- 13,864
---------- ------- -------- ------------ ---------
Total operating expenses...................... 52,068 4,886 56,954 -- 56,954
---------- ------- -------- ------------ ---------
OPERATING INCOME (LOSS)........................... 1,835 (68) 1,767 -- 1,767
---------- ------- -------- ------------ ---------
OTHER INCOME (EXPENSE):
Interest expense................................ (6,065) (2,527)(h) (8,592) 8,454(i) (138)
Interest and dividend income.................... 232 -- 232 -- 232
Equity in earnings (losses) of unconsolidated
affiliates.................................... (350) -- (350) -- (350)
Minority interest............................... 3,082 -- 3,082 -- 3,082
Other........................................... -- -- -- -- --
---------- ------- -------- ------------ ---------
Other income (expense), net................... (3,101) (2,527) (5,628) 8,454 2,826
---------- ------- -------- ------------ ---------
NET INCOME (LOSS) (See Note k).................... (1,266) $(2,595) $(3,861) 8,454 4,593
------- --------
------- --------
PREFERRED STOCK DIVIDEND
REQUIREMENTS AND ACCRETION...................... -- (14,584)(i) (14,584)
---------- ------------ ---------
NET LOSS APPLICABLE TO
COMMON SHAREHOLDERS............................. $(1,266) $ (6,130) $ (9,991)
---------- ------------ ---------
---------- ------------ ---------
NET LOSS PER SHARE APPLICABLE
TO COMMON SHAREHOLDERS.......................... $ (0.14) $ (0.69) $ (1.12)
---------- ------------ ---------
---------- ------------ ---------
NUMBER OF SHARES USED TO
COMPUTE PER SHARE DATA.......................... 8,853 8,853 8,853
---------- ------------ ---------
---------- ------------ ---------
<CAPTION>
PRO FORMA
ADJUSTMENTS
FOR THE NOTES
OFFERING, NEW
ATLANTIC (b) CREDIT
------------------------------------ FACILITY AND
PRO FORMA ATLANTIC PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA ACQUISITION AS ADJUSTED
---------- ----------- --------- ------------- -----------
<S> <C> <C> <C> <C> <C>
REVENUES:
Service......................................... $45,087 $ 13,734(c) $28,299 $ -- $ 76,044
3,054(d)
Roamer.......................................... -- (11,102)(c) 11,184 -- 21,007
(82)(d)
Equipment and other............................. -- (2,632)(c) 2,582 -- 3,735
50(d)
---------- ----------- --------- ------------- -----------
Total revenues................................ 45,087 3,022 42,065 -- 100,786
---------- ----------- --------- ------------- -----------
OPERATING EXPENSES:
Network costs................................... 25,604 (19,273)(c) 5,902 -- 18,214
(429)(d)
Cost of equipment sales......................... -- 3,855(c) 3,636 -- 6,990
(219)(d)
Selling, general and administrative............. 4,079 15,418(c) 18,210 (2,578)(e) 43,056
(1,287)(d)
Depreciation and amortization................... 9,885 (518)(d) 9,367 337(g) 23,568
---------- ----------- --------- ------------- -----------
Total operating expenses...................... 39,568 (2,453) 37,115 (2,241) 91,828
---------- ----------- --------- ------------- -----------
OPERATING INCOME (LOSS)........................... 5,519 569 4,950 2,241 8,958
---------- ----------- --------- ------------- -----------
OTHER INCOME (EXPENSE):
Interest expense................................ (4,170) 328(c) (4,498) (20,304)(j) (24,940)
Interest and dividend income.................... 201 201(d) -- -- 232
Equity in earnings (losses) of unconsolidated
affiliates.................................... 8 8(c) -- -- (350)
Minority interest............................... 152 152(d) -- -- 3,082
Other........................................... 28,669 (328)(c) -- -- --
28,997(d)
---------- ----------- --------- ------------- -----------
Other income (expense), net................... 24,860 29,358 (4,498) (20,304) (21,976)
---------- ----------- --------- ------------- -----------
NET INCOME (LOSS) (See Note k).................... $30,379 $ 29,927 $ 452 $(18,063) (13,018)
---------- ----------- --------- -------------
---------- ----------- --------- -------------
PREFERRED STOCK DIVIDEND
REQUIREMENTS AND ACCRETION...................... (14,584)
-----------
NET LOSS APPLICABLE TO
COMMON SHAREHOLDERS............................. $(27,602)
-----------
-----------
NET LOSS PER SHARE APPLICABLE
TO COMMON SHAREHOLDERS.......................... $ (3.12)
-----------
-----------
NUMBER OF SHARES USED TO
COMPUTE PER SHARE DATA.......................... 8,853
-----------
-----------
</TABLE>
46
<PAGE>
RURAL CELLULAR CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS FOR
EXCHANGEABLE
COMPANY PREFERRED STOCK PRO FORMA
HISTORICAL OFFERING COMBINED
----------- --------------- -----------
<S> <C> <C> <C>
REVENUES:
Service.................................................................... $ 12,719 $ -- $ 12,719
Roamer..................................................................... 1,758 -- 1,758
Equipment and other........................................................ 320 -- 320
----------- ------- -----------
Total revenues........................................................... 14,797 -- 14,797
----------- ------- -----------
OPERATING EXPENSES:
Network costs.............................................................. 3,628 -- 3,628
Cost of equipment sales.................................................... 884 -- 884
Selling, general and administrative........................................ 6,590 -- 6,590
Depreciation and amortization.............................................. 4,219 -- 4,219
----------- ------- -----------
Total operating expenses................................................. 15,321 -- 15,321
----------- ------- -----------
OPERATING INCOME (LOSS)...................................................... (524) -- (524)
----------- ------- -----------
OTHER INCOME (EXPENSE):
Interest expense........................................................... (2,410) 2,140(i) (270)
Interest and dividend income............................................... 279 -- 279
Equity in earnings (losses) of unconsolidated affiliates................... (149) -- (149)
Minority interest.......................................................... 738 -- 738
Other...................................................................... -- -- --
----------- ------- -----------
Other income (expense), net.............................................. (1,542) 2,140 598
----------- ------- -----------
NET INCOME (LOSS) (See Note k)............................................... (2,066) 2,140 74
PREFERRED STOCK DIVIDEND
REQUIREMENTS AND ACCRETION................................................. -- (3,646)(i) (3,646)
----------- ------- -----------
NET LOSS APPLICABLE TO
COMMON SHAREHOLDERS........................................................ $ (2,066) $ (1,506) $ (3,572)
----------- ------- -----------
----------- ------- -----------
NET LOSS PER SHARE APPLICABLE
TO COMMON SHAREHOLDERS..................................................... $ (.23) $ (.17) $ (.40)
----------- ------- -----------
----------- ------- -----------
NUMBER OF SHARES USED TO
COMPUTE PER SHARE DATA..................................................... 8,868 8,868 8,868
----------- ------- -----------
----------- ------- -----------
<CAPTION>
ATLANTIC (b)
---------------------------------------
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
----------- ------------- -----------
<S> <C> <C>
REVENUES:
Service.................................................................... $ 11,773 $ 4,114(c) $ 7,659
Roamer..................................................................... -- (3,308)(c) 3,308
Equipment and other........................................................ -- (806)(c) 806
----------- ------------- -----------
Total revenues........................................................... 11,773 -- 11,773
----------- ------------- -----------
OPERATING EXPENSES:
Network costs.............................................................. 5,614 (4,044)(c) 1,570
Cost of equipment sales.................................................... -- 819(c) 819
Selling, general and administrative........................................ 897 3,225(c) 4,122
Depreciation and amortization.............................................. 2,482 (25)(d) 2,457
----------- ------------- -----------
Total operating expenses................................................. 8,993 (25) 8,968
----------- ------------- -----------
OPERATING INCOME (LOSS)...................................................... 2,780 (25) 2,805
----------- ------------- -----------
OTHER INCOME (EXPENSE):
Interest expense........................................................... (718) 82(c) (800)
Interest and dividend income............................................... 48 48(d) --
Equity in earnings (losses) of unconsolidated affiliates................... -- -- (c) --
Minority interest.......................................................... 18 18(d) --
Other...................................................................... 182 (82)(c) --
264(d)
----------- ------------- -----------
Other income (expense), net.............................................. (470) 330 (800)
----------- ------------- -----------
NET INCOME (LOSS) (See Note k)............................................... $ 2,310 $ 305 $ 2,005
----------- ------------- -----------
----------- ------------- -----------
PREFERRED STOCK DIVIDEND
REQUIREMENTS AND ACCRETION.................................................
NET LOSS APPLICABLE TO
COMMON SHAREHOLDERS........................................................
NET LOSS PER SHARE APPLICABLE
TO COMMON SHAREHOLDERS.....................................................
NUMBER OF SHARES USED TO
COMPUTE PER SHARE DATA.....................................................
<CAPTION>
PRO FORMA
ADJUSTMENTS
FOR THE NOTES
OFFERING, NEW
CREDIT
FACILITY AND
ATLANTIC PRO FORMA AS
ACQUISITION ADJUSTED
------------- -------------
REVENUES:
Service.................................................................... $ -- $ 20,378
Roamer..................................................................... -- 5,066
Equipment and other........................................................ -- 1,126
------------- -------------
Total revenues........................................................... -- 26,570
------------- -------------
OPERATING EXPENSES:
Network costs.............................................................. -- 5,198
Cost of equipment sales.................................................... -- 1,703
Selling, general and administrative........................................ (523)(e) 10,189
Depreciation and amortization.............................................. 84(g) 6,760
------------- -------------
Total operating expenses................................................. (439) 23,850
------------- -------------
OPERATING INCOME (LOSS)...................................................... 439 2,720
------------- -------------
OTHER INCOME (EXPENSE):
Interest expense........................................................... (5,378)(j) (6,448)
Interest and dividend income............................................... -- 279
Equity in earnings (losses) of unconsolidated affiliates................... -- (149)
Minority interest.......................................................... -- 738
Other...................................................................... -- --
------------- -------------
Other income (expense), net.............................................. (5,378) (5,580)
------------- -------------
NET INCOME (LOSS) (See Note k)............................................... $ (4,939) (2,860)
-------------
-------------
PREFERRED STOCK DIVIDEND
REQUIREMENTS AND ACCRETION................................................. (3,646)
-------------
NET LOSS APPLICABLE TO
COMMON SHAREHOLDERS........................................................ $ (6,506)
-------------
-------------
NET LOSS PER SHARE APPLICABLE
TO COMMON SHAREHOLDERS..................................................... $ (.73)
-------------
-------------
NUMBER OF SHARES USED TO
COMPUTE PER SHARE DATA..................................................... 8,868
-------------
-------------
</TABLE>
47
<PAGE>
RURAL CELLULAR CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF MARCH 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS
FOR
EXCHANGEABLE
COMPANY PREFERRED PRO FORMA
HISTORICAL STOCK OFFERING COMBINED
---------- -------------- ---------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash............................................ $ 3,305 $ -- $ 3,305
Accounts receivable, net........................ 8,504 -- 8,504
Inventories..................................... 1,504 -- 1,504
Other current assets............................ 617 -- 617
---------- -------------- ---------
Total current assets.......................... 13,930 -- 13,930
---------- -------------- ---------
PROPERTY AND EQUIPMENT, net....................... 83,237 -- 83,237
---------- -------------- ---------
INVESTMENTS AND OTHER ASSETS:
Licenses and other intangible assets, net....... 80,797 -- 80,797
Investments in unconsolidated affiliates........ 938 -- 938
Restricted investments.......................... 1,013 -- 1,013
Other assets, net............................... 6,495 -- 6,495
---------- -------------- ---------
Total investments and other assets............ 89,243 -- 89,243
---------- -------------- ---------
Total assets.................................. $186,410 $ -- $186,410
---------- -------------- ---------
---------- -------------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................ $ 8,082 $ -- $ 8,082
Advance billings and customer deposits.......... 2,589 -- 2,589
Accrued interest................................ 1,702 -- 1,702
Other accrued expenses.......................... 1,701 -- 1,701
---------- -------------- ---------
Total current liabilities..................... 14,074 -- 14,074
LONG-TERM DEBT.................................... 135,000 120,625(p) 14,375
---------- -------------- ---------
Total liabilities............................. 149,074 120,625 28,449
---------- -------------- ---------
MINORITY INTEREST................................. 5,478 -- 5,478
---------- -------------- ---------
EXCHANGEABLE PREFERRED STOCK...................... -- (120,625)(p) 120,625
---------- -------------- ---------
SHAREHOLDERS' EQUITY.............................. 31,858 -- 31,858
---------- -------------- ---------
Total liabilities and shareholders' equity.... $186,410 $ -- $186,410
---------- -------------- ---------
---------- -------------- ---------
<CAPTION>
PRO FORMA
ADJUSTMENTS
FOR THE NOTES
OFFERING, NEW
ATLANTIC (b) CREDIT
-------------------------------------- FACILITY AND
PRO FORMA ATLANTIC PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA ACQUISITION AS ADJUSTED
---------- ----------- --------- ------------- -----------
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash............................................ $ 1,010 $ (993)(d) $ 17 $ (17)(l) $ 3,305
-- (m)
Accounts receivable, net........................ 3,624 -- 3,624 -- 12,128
Inventories..................................... 476 476 -- 1,980
Other current assets............................ 333 3,721(c) 412 -- 1,029
(3,642)(d)
---------- ----------- --------- ------------- -----------
Total current assets.......................... 5,443 (914) 4,529 (17) 18,442
---------- ----------- --------- ------------- -----------
PROPERTY AND EQUIPMENT, net....................... 134,554 (104,865)(c) 29,689 -- 112,926
---------- ----------- --------- ------------- -----------
INVESTMENTS AND OTHER ASSETS:
Licenses and other intangible assets, net....... -- 104,865(c) 94,868 134,392(n) 310,057
(9,997)(d)
Investments in unconsolidated affiliates........ 300 (300)(d) -- -- 938
Restricted investments.......................... -- -- -- -- 1,013
Other assets, net............................... 1,556 -- 1,556 7,149(o) 13,644
(1,556)(l)
---------- ----------- --------- ------------- -----------
Total investments and other assets............ 1,856 94,568 96,424 139,985 325,652
---------- ----------- --------- ------------- -----------
Total assets.................................. $141,853 $ (11,211) $130,642 $ 139,968 $457,020
---------- ----------- --------- ------------- -----------
---------- ----------- --------- ------------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................ $ 21 $ (2,380)(c) $ 2,380 $ -- $ 10,462
21(d)
Advance billings and customer deposits.......... -- (536)(c) 536 -- 3,125
Accrued interest................................ 130 -- 130 130(l) 1,702
Other accrued expenses.......................... 1,274 (751)(c) 1,789 44(l) 3,446
236(d)
---------- ----------- --------- ------------- -----------
Total current liabilities..................... 1,425 (3,410) 4,835 174 18,735
LONG-TERM DEBT.................................... 38,011 -- 38,011 (228,958)(q) 281,344
---------- ----------- --------- ------------- -----------
Total liabilities............................. 39,436 (3,410) 42,846 (228,784) 300,079
---------- ----------- --------- ------------- -----------
MINORITY INTEREST................................. 7,519 7,519(d) -- -- 5,478
---------- ----------- --------- ------------- -----------
EXCHANGEABLE PREFERRED STOCK...................... -- -- -- -- 120,625
---------- ----------- --------- ------------- -----------
SHAREHOLDERS' EQUITY.............................. 94,898 7,102(d) 87,796 88,816(r) 30,838
---------- ----------- --------- ------------- -----------
Total liabilities and shareholders' equity.... $141,853 $ 11,211 $130,642 $(139,968) $457,020
---------- ----------- --------- ------------- -----------
---------- ----------- --------- ------------- -----------
</TABLE>
48
<PAGE>
RURAL CELLULAR CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS)
For purposes of determining the pro forma effect of the transactions described
in the previous pages on the Company's unaudited pro forma condensed
consolidated financial data as of March 31, 1998 and for the year ended December
31, 1997 and the three months ended March 31, 1998, the following adjustments
have been made:
(a) Represents the results of operations of the MRCC Acquisitions for
the period prior to the MRCC Acquisitions from January 1, 1997 through April
30, 1997 and excludes assets and liabilities not acquired by the Company and
the related income and expenses, as provided for in the related purchase
agreements.
(b) The historical data is derived from the consolidated financial
statements of Atlantic Cellular Company, L.P. ("ACC") and Subsidiaries. In
the Atlantic Acquisition, the Company acquired substantially all the assets
of ACC and its subsidiary, Atlantic Cellular/New Hampshire RSA Number One
Limited Partnership ("ACNH"). The Company did not acquire the operations of
ACC's other subsidiaries, ACC Cellular Holdings, L.P., ACC Wireless, L.P.
(including its investment in Michiana Partnership, L.P.), Mountain Cellular,
L.P., and ACC Wireless Holdings, L.P. (collectively, the "Excluded
Operations"). Pro forma adjustments represent the exclusion of the assets
and liabilities and related income and expenses of the Excluded Operations
and reflect the reclassifications as described in note (c) below.
(c) Represents reclassifications of certain assets, liabilities,
revenues and expenses to conform to the Company's historical consolidated
financial statement presentation.
(d) Reflects the exclusion of assets and liabilities and the related
income and expenses of the Excluded Operations.
(e) Reflects the elimination of corporate overhead expenses charged to
Atlantic that would not have been incurred by the Company which have been
offset by expenses expected to be incurred by the Company.
(f) Represents amortization of intangible assets over a composite life
of 33 years.
(g) Reflects (i) the elimination of historical amortization expense on
Atlantic intangible assets which were amortized over 25 years and (ii) the
resulting intangible assets from the Atlantic Acquisition which are being
amortized over an estimated 40 years for licenses and goodwill and 10 years
for subscriber lists.
<TABLE>
<CAPTION>
FOR THE FOR THE
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, 1997 MARCH 31, 1998
------------------ -------------------
<S> <C> <C>
Elimination of historical Atlantic amortization...... $ (4,841) $ (1,210)
Amortization of intangible assets from Atlantic
Acquisition........................................ 5,178 1,294
------- -------
$ 337 $ 84
------- -------
------- -------
</TABLE>
(h) Represents (i) the incremental interest expense resulting from
borrowings under the Existing Credit Facility, (ii) the elimination of
historical interest expense under a loan agreement with St. Paul Bank for
Cooperatives, and (iii) the amortization of deferred financing costs over
eight years.
<TABLE>
<S> <C>
Interest expense related to borrowings under the Existing Credit
Facility.......................................................... $ 2,625
Elimination of historical interest expense.......................... (143)
Amortization of deferred financing costs............................ 45
---------
$ 2,527
---------
---------
</TABLE>
(i) Reflects (i) the issuance of $125,000 in liquidation preference of
Exchangeable Preferred Stock at an effective annual dividend rate of 11 3/8%
compounded quarterly, (ii) the accretion related to issuance fees and
49
<PAGE>
RURAL CELLULAR CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS)
represents the amount required to accrete the Exchangeable Preferred Stock
to its redemption value at the mandatory redemption date, and (iii) the
elimination of historical interest expense under the Existing Credit
Facility at a rate of 7.5%.
<TABLE>
<CAPTION>
FOR THE FOR THE
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, 1997 MARCH 31, 1998
------------------ -------------------
<S> <C> <C>
Issuance of Exchangeable Preferred Stock............. $ 14,219 $ 3,555
Accretion of issuance fees........................... 365 91
------- -------
14,584 3,646
Elimination of historical interest expense........... (8,454) (2,140)
------- -------
$ 6,130 $ 1,506
------- -------
------- -------
</TABLE>
(j) Represents incremental interest expense related to:
<TABLE>
<CAPTION>
FOR THE FOR THE
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, 1997 MARCH 31, 1998
------------------ -------------------
<S> <C> <C>
Issuance of Senior Subordinated Notes at 9 5/8%...... $ 12,031 $ 3,008
Borrowings under the New Credit Facility at 8%....... 11,948 2,987
Elimination of Atlantic historical interest expense.. (4,498) (587)
Elimination of historical interest expense under the
Existing Credit Facility........................... (138) (270)
Amortization of deferred financing costs over 8.5
years.............................................. 961 240
------- ------
$ 20,304 $ 5,378
------- ------
------- ------
</TABLE>
If the interest rate on the variable rate New Credit Facility were to change
by 1/8 of one percent, interest expense would change by approximately $187
for the year ended December 31, 1997 and $49 for the three months ended
March 31, 1998.
(k) The pro forma condensed consolidated statements of operations for
the year ended December 31, 1997 and the three months ended March 31, 1998
do not include a tax benefit related to the pro forma losses. Such losses
would be carried forward and their realization would be dependent upon
future taxable income.
(l) Reflects the exclusion of those assets and liabilities of ACC and
ACNH not acquired by the Company in the Atlantic Acquisition and the related
income and expense, as provided for in the Atlantic Agreement.
(m) Represents the net adjustment to cash as a result of the following:
<TABLE>
<S> <C>
Issuance of Senior Subordinated Notes............................ $ 125,000
Borrowings under the New Credit Facility......................... 156,344
Completion of Atlantic Acquisition............................... (256,000)
Repayment of the Existing Credit Facility........................ (14,375)
Payment of deferred financing costs.............................. (8,169)
Payment of direct acquisition costs.............................. (2,800)
---------
$ --
---------
---------
</TABLE>
50
<PAGE>
RURAL CELLULAR CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS)
(n) The allocation of the total acquisition costs for Atlantic of $258.8
million (including related fees and expenses of $2.8 million) assumes that
the fair value of Atlantic's assets and liabilities equal their net book
value (which is management's best judgment at this time). Accordingly, the
net purchase consideration has been reflected as licenses and other
intangible assets as a result of the Atlantic Acquisition. The precise
allocation of the purchase price to the acquired assets and liabilities is
expected to be finalized by December 31, 1998.
(o) Represents the net adjustment to deferred financing costs as a
result of:
<TABLE>
<S> <C>
Issuance of Senior Subordinated Notes............................... $ 4,794
Borrowings under the New Credit Facility............................ 3,375
Write-off as a result of the early extinguishment of the Existing
Credit Facility................................................... (1,020)
---------
$ 7,149
---------
---------
</TABLE>
<TABLE>
<S> <C>
(p) Proceeds of the Exchangeable Preferred Stock, net of issuance
fees of $4,375.................................................. $ 120,625
---------
---------
</TABLE>
(q) Represents the net effect on long-term debt resulting from:
<TABLE>
<S> <C>
Issuance of Senior Subordinated Notes............................ $(125,000)
Borrowings under the New Credit Facility......................... (156,344)
Repayment of the Existing Credit Facility........................ 14,375
Elimination of Atlantic debt not assumed......................... 38,011
---------
$(228,958)
---------
---------
</TABLE>
(r) Represents the net adjustment to shareholders' equity as a result
of:
<TABLE>
<S> <C>
Elimination of partner capital in connection with the Atlantic
Acquisition...................................................... $ 87,796
Write-off of deferred financing costs associated with the early
extinguishment of the Existing Credit Facility................... 1,020
---------
$ 88,816
---------
---------
</TABLE>
51
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THE
COMPANY'S AND ATLANTIC'S CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES THERETO
APPEARING ELSEWHERE IN THIS PROSPECTUS. AS A RESULT OF THE MRCC ACQUISITIONS,
THE ATLANTIC ACQUISITION AND THE WMC ACQUISITION, THE COMPANY'S OPERATING
RESULTS FOR THE PERIODS DISCUSSED MAY NOT BE INDICATIVE OF FUTURE PERFORMANCE.
THE COMPANY
GENERAL
The Company's revenues consist of charges to customers for cellular and
paging services, roamer 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 as well as cellular and paging equipment lease
revenues. Additional charges include activation and charges for such features as
voice mail, call waiting and call forwarding.
Roamer 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 other 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 roamer revenues will continue to increase as a result of an increase in
both the number of roaming customers and roamer 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
as an alternative to selling such cellular equipment. This program has reduced
equipment sales as a percentage of total revenues; however, the Company believes
its equipment rental policy enhances customer retention and market penetration,
reduces acquisition cost, and increases revenue per customer.
EBITDA increased 62.8% to $14.3 million in 1997 as compared to $8.8 million
in 1996. In 1997, the Company's cellular operations in Minnesota and Maine
generated $19.9 million in EBITDA, which was partially offset by Wireless
Alliance's negative EBITDA of $5.6 million due to the significant costs
associated with its initial customer growth. 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 wireless
telecommunications.
EBITDA increased 129.9% to $3.7 million in the three months ended March 31,
1998 as compared to $1.6 million for the comparable period in 1997. In 1998, the
Company's cellular operations in Minnesota and Maine generated $4.8 million in
EBITDA, which was partially offset by Wireless Alliance's negative EBITDA of
$1.1 million due to the significant costs associated with its initial customer
growth. The Company expects that Wireless Alliance will continue to have
negative EBITDA in the remaining quarters of 1998.
WIRELESS ALLIANCE
In 1996, the Company and Aerial Communications formed a joint venture named
Wireless Alliance. See "Business -- General" and "Business -- Network Operations
- -- Wireless Alliance." Wireless Alliance is 51% owned by the Company and 49%
owned by Aerial Communications. The Company is responsible for managing Wireless
Alliance. As of March 31, 1998, the Company had invested $10.0 million in cash
in Wireless Alliance while Aerial Communications had contributed PCS licenses
valued at $9.6 million. In addition, as of March 31, 1998, the Company had
loaned Wireless Alliance $12.0 million, which is evidenced by a note receivable
and is eliminated in the Company's consolidated financial statements. Wireless
Alliance, which is treated as an
52
<PAGE>
Unrestricted Subsidiary under the documents governing the Securities, is
included in the Company's consolidated financial statements.
MRCC ACQUISITIONS
Effective May 1, 1997, the Company consummated the acquisition of the Maine
wireless telephone operations and related assets of Unity Cellular Systems, Inc.
("Unity") 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 Unity's
51% interest in Northern Maine Cellular Partnership, which holds a cellular
license for Maine RSA 2. The Company also acquired the remaining 49% interest in
Northern Maine Cellular Partnership from an unrelated third party. Headquartered
in Bangor, Maine, MRCC serves more than 33,000 wireless customers within a
20,500 square-mile service area that encompasses approximately 512,000 POPs.
HISTORICAL RESULTS OF OPERATIONS
The following table presents certain consolidated statement of operations
data as a percentage of total revenues for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------- ----------------------
1995 1996 1997 1997 1998
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Revenues:
Service................................. 70.3% 75.9% 80.5% 83.0% 86.0%
Roamer.................................. 22.4 21.1 17.6 15.8 11.9
Equipment............................... 7.3 3.0 1.9 1.2 2.1
----- ----- ----- ----- -----
Total revenues........................ 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- -----
Operating expenses:
Network costs........................... 24.5 22.1 21.5 24.0 24.5
Cost of equipment sales................. 9.4 4.5 5.2 3.5 6.0
Selling, general, and administrative.... 37.9 44.6 46.8 53.2 44.5
Depreciation and amortization........... 16.0 18.2 23.1 23.6 28.5
----- ----- ----- ----- -----
Total operating expenses.............. 87.8 89.4 96.6 104.3 103.5
----- ----- ----- ----- -----
Operating income (loss)................... 12.2 10.6 3.4 (4.3) (3.5)
----- ----- ----- ----- -----
Other income (expense):
Interest expense........................ (6.7) (0.9) (11.3) (2.6) (16.3)
Interest and dividend income............ 1.4 1.1 0.4 0.8 1.9
Equity in earnings (losses) of
unconsolidated subsidiaries........... (0.2) 0.2 (0.6) 0.2 (1.0)
Minority interest....................... -- 1.1 5.7 5.4 5.0
----- ----- ----- ----- -----
Other income (expense), net........... (5.5) 1.5 (5.8) 3.8 (10.4)
----- ----- ----- ----- -----
Income (loss) before income taxes......... 6.7 12.1 (2.4) (0.5) (13.9)
Income tax provision...................... 2.8 0.7 -- -- --
----- ----- ----- ----- -----
Net income (loss)......................... 3.9% 11.4% (2.4)% 10.5% (13.9)%
----- ----- ----- ----- -----
----- ----- ----- ----- -----
EBITDA (1)................................ 28.2% 28.8% 26.5% 19.3% 25.0%
Adjusted EBITDA (1)....................... 28.2% 31.3% 42.7% 32.6% 39.6%
</TABLE>
- ------------------------
(1) EBITDA is the sum of earnings before interest, taxes, depreciation and
amortization and is utilized as a performance measure within the cellular
industry. EBITDA is not intended to be a performance measure that should be
regarded as an alternative for other performance measures and should not be
considered in isolation.
53
<PAGE>
EBITDA is not a measurement of financial performance under generally
accepted accounting principles and does not reflect all expenses of doing
business (e.g., interest expense, depreciation). Accordingly, EBITDA should
not be considered as having greater significance than or as an alternative
to net income or operating income as an indicator of operating performance
or to cash flows as a measure of liquidity. Moreover, "EBITDA," as used
herein, may differ from "Operating Cash Flow," as used in calculating the
covenants set forth in the documents governing the Securities. See
"Description of Senior Subordinated Notes -- Certain Definitions,"
"Description of Exchangeable Preferred Stock and Exchange Debentures --
Exchangeable Preferred Stock -- Certain Definitions" and "Description of
Exchangeable Preferred Stock and Exchange Debentures -- Exchange Debentures
-- Certain Definitions." Adjusted EBITDA represents EBITDA excluding
Wireless Alliance's EBITDA. Wireless Alliance is an Unrestricted Subsidiary
under the documents governing the Securities. Adjusted EBITDA margin
represents Adjusted EBITDA divided by revenues of the Company (excluding
Wireless Alliance revenues).
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
REVENUES
Service revenues for the three months ended March 31, 1998 increased 84.1%
to $12.7 million from $6.9 million for the comparable period in 1997. This
growth was primarily due to the increase in the number of customers, primarily
as a result of the MRCC Acquisitions, partially offset by a decrease of 11.9% in
the average revenue per customer. The rate at which new customers were added to
existing markets decreased to 2.9% in 1998 from 10.5% in 1997. There were no
markets acquired during the first quarter of 1998 or 1997. During the three
months ended March 31, 1998, Wireless Alliance generated service revenues of
$2.7 million.
Roamer revenues for the three months ended March 31, 1998 increased 33.5% to
$1.8 million from $1.3 million for the comparable period in 1997. Roamer
revenues have increased due to the activation of additional cell sites and
acquisitions of new service areas. As a result of the inclusion of MRCC during
the first quarter of 1998, roamer revenues as a percentage of cellular revenues
(excluding equipment sales and the impact of Wireless Alliance) declined to
15.0% from 17.8% when compared to 1997. Wireless Alliance had no roamer revenues
in either 1998 or 1997 because it was exclusively engaged in reselling cellular
services. The Company expects Wireless Alliance to generate roamer revenues in
the third and fourth quarters of 1998.
OPERATING EXPENSES
Network costs include switching and transport expenses and the expenses
associated with the maintenance and operation of the Company's wireless network
facilities, as well as charges from other service providers for resold minutes
and services. Network costs for the three months ended March 31, 1998, increased
81.4% to $3.6 million from $2.0 million for the comparable period in 1997, and
increased as a percentage of total revenues to 24.5% in 1998 from 24.0% in 1997.
The increase in network costs resulted primarily from expenses incurred by
Wireless Alliance and MRCC, which more than offset network cost reductions in
the Company's Minnesota operations. Contributing to the reduction of network
costs in the Minnesota service area was the completed installation of the
Company's MTSO in the third quarter of 1997, thereby reducing the Company's
network costs for switching services provided by Switch 2000, LLC, an
unconsolidated affiliate. Network costs for Wireless Alliance increased to $2.1
million for the three months ended March 31, 1998 from $647,000 in 1997. The
increase is attributed to additional network costs associated with increased
customers.
Selling, general, and administrative ("SG&A") expenses include salaries,
benefits, and operating expenses such as marketing, commissions, customer
support, accounting, administration, and billing. SG&A expenses for the three
months ended March 31, 1998 increased 48.9% to $6.6 million from $4.4 million
for the comparable period in 1997. The increase in SG&A over the prior year
resulted primarily from additional costs related to MRCC and a $682,000 increase
in costs of Wireless Alliance. As a percentage of total revenue, SG&A decreased
to 44.5% in 1998 from 53.2% in 1997 reflecting economies gained through the
acquisition of MRCC and Wireless Alliance.
Depreciation and amortization expense for three months ended March 31, 1998
increased 115.0% to $4.2 million from $2.0 million for the comparable period in
1997. The increase reflects the Company's continued
54
<PAGE>
construction and acquisition efforts and its investments in network facilities,
including the Company's newly installed MTSO, and rental equipment.
For the three months ended March 31, 1998, the average acquisition cost per
cellular customer, excluding Wireless Alliance customers, was $444 as compared
to $389 in 1997. The increase resulted primarily from higher acquisition costs
in MRCC and increased depreciation on the Company's rental telephones.
OTHER INCOME (EXPENSE)
Interest expense for the three months ended March 31, 1998 increased to $2.4
million from $215,000 for the comparable period in 1997. The increase in
interest expense was a result of higher average borrowings under the Existing
Credit Facility to finance the MRCC Acquisitions, the construction of 15 cell
sites during the second and third quarter of 1997 and for the Company's cellular
network and other growth initiatives. Other income also includes the minority
interest in losses of Wireless Alliance.
YEARS ENDED DECEMBER 31, 1997 AND 1996
REVENUES
Service revenues for 1997 increased 87.8% to $43.4 million from $23.1
million in 1996. This growth was primarily due to the increase in the number of
customers partially offset by a decrease of 16.7% in the average revenue per
customer. Customer growth in existing markets accounted for approximately 25% of
the increase in customers while newly acquired or developing markets accounted
for the other 75%. Newly acquired or developing markets include customers gained
through the MRCC Acquisitions and the formation of Wireless Alliance. In 1997,
Wireless Alliance generated service revenues of $7.3 million.
Roamer revenues for 1997 increased 47.7% to $9.5 million from $6.4 million
in 1996. Roamer revenues have increased due to the activation of additional cell
sites and acquisitions of new service areas. Roamer revenues as a percentage of
total revenues (excluding equipment sales and the impact of Wireless Alliance)
declined modestly from 21.9% to 20.8% when compared to 1996. Wireless Alliance
had no roamer revenues in either 1996 or 1997 because it was exclusively engaged
in reselling cellular services. The Company expects Wireless Alliance to have
roamer revenues in 1998.
OPERATING EXPENSES
Network costs for 1997, which increased 72.0% to $11.6 million from $6.7
million in 1996, improved as a percentage of total revenues from 22.1% in 1996
to 21.5% in 1997. The increase in network costs resulted primarily from expenses
incurred by Wireless Alliance and MRCC, which more than offset network cost
reductions in the Company's Minnesota cellular operations. Contributing to the
reduction of network costs in the Minnesota service area was the substantial
completion in late 1996 of the digital microwave network, which reduced the
Company's reliance on third-party assistance in connecting cell site
communication to the MTSO. In addition, the Company completed installation of
its own MTSO in the third quarter of 1997, thereby reducing the Company's
network costs for switching services provided by Switch 2000, Inc., an
unconsolidated affiliate. Network costs for Wireless Alliance increased to $6.0
million in 1997 from $220,000 in 1996. The increase is attributable to
additional network costs associated with increased customers.
SG&A expenses for 1997 increased 85.8% to $25.2 million from $13.6 million
in 1996. The increase in SG&A over the prior year results primarily from
additional costs from MRCC and a $6.2 million increase in costs of Wireless
Alliance.
Depreciation and amortization expense for 1997 increased 124.9% to $12.5
million from $5.5 million in 1996. The increase reflects the Company's continued
construction and acquisition efforts and its investments in network facilities,
including the Company's newly installed MTSO, and rental equipment. Contributing
to the increase was the depreciation relating to the construction of 15
additional cell sites and the acquisition of 35 cell sites in Maine.
55
<PAGE>
In addition, the Company shortened the depreciation life from three years to two
years for new rental telephones placed in service during 1997.
In 1997, the average acquisition cost per cellular customer, excluding
Wireless Alliance customers, was $403 as compared to $307 in 1996. The increase
resulted primarily from higher acquisition costs for MRCC and increased
depreciation on the Company's rental telephones in 1997.
OTHER INCOME (EXPENSE)
Interest expense for 1997 increased to $6.1 million from $281,000 in 1996.
The increase in interest expense was a result of higher average borrowings under
the Existing Credit Facility to finance the MRCC Acquisitions, the construction
of 15 cell sites for the Company's cellular network and other growth
initiatives. Other income also includes an increase in 1997 in the minority
interest in losses of Wireless Alliance.
YEARS ENDED DECEMBER 31, 1996 AND 1995
REVENUES
Service revenues for 1996 increased 61.8% to $23.1 million from $14.3
million in 1995, resulting primarily from a 68.5% increase in the number of
cellular customers, partially offset by a decrease of 4.3% in the corresponding
average revenue per cellular customer. The Company achieved this growth through
the implementation of customer sales and service strategies and by adherence to
network service quality standards.
Roamer revenues for 1996 increased 40.6% to $6.4 million from $4.6 million
in 1995. This increase was primarily due to a 138.8% increase in the number of
roamer minutes, partially offset by a reduction in intercarrier exchange rates.
OPERATING EXPENSES
Network costs for 1996 increased 35.3% to $6.7 million from $5.0 million in
1995 and declined as a percentage of total revenues to 22.1% from 24.5%. The
increased expenses reflect expenses from new cell sites that were added during
1995 and 1996 and increased network usage.
SG&A expenses for 1996 increased 76.3% to $13.6 million from $7.7 million
and, expressed as a percentage of total revenues, increased to 44.6% from 37.9%
in 1995. The increases were due primarily to increased commissions paid as a
result of the Company's marketing and promotional strategies, additional
employees and incremental wage and benefit increases.
Depreciation and amortization expenses for 1996 increased 70.5% to $5.5
million from $3.2 million in 1995. The increase was primarily due to continued
expenditures for network facilities and new rental telephones placed into
service during 1996.
OTHER INCOME (EXPENSE)
Interest expense for 1996 decreased 79.4% to $281,000 from $1.4 million in
1995 as a result of the repayment of indebtedness with proceeds from the
Company's initial public offering in February 1996. Other income also includes
the minority interest in losses of Wireless Alliance during 1996.
INCOME TAX PROVISION
The Company's effective tax rate in 1996 was lower than the statutory rate
because of the utilization of net operating loss carryforwards. The provision
for income taxes for the year ended December 31, 1996 resulted from federal and
state alternative minimum tax.
56
<PAGE>
ATLANTIC OPERATIONS
The following discussion and analysis is based upon information obtained
from Atlantic and reflects the Company's current understanding of Atlantic,
which the Company has only recently acquired.
GENERAL
Atlantic's RSAs and MSA cover a contiguous geographic area with
approximately 1.11 million POPs. Total cellular customers increased 21.3% to
70,492 as of March 31, 1998 from 58,129 as of March 31, 1997. Total cellular
customers increased 23.9% to 68,164 as of December 31, 1997 as compared to
55,009 as of December 31, 1996. Average monthly revenue per customer increased
to $53 for the three months ended March 31, 1998 from $52 in the comparable
period of 1997 due to increased usage as a result of extreme weather conditions.
Offsetting the impact of increased cellular customers for the year ended
December 31, 1997 was a decrease in the average monthly revenue per customer
from approximately $58 in 1996 to approximately $53 in 1997. The decrease in
average monthly revenue per customer reflects an industry wide trend of adding
lower use customers, who use cellular service for personal convenience, security
or as an alternative communications resource for their traditional landline
telephone service.
EBITDA increased 82.0% to $5.3 million for the three months ended March 31,
1998 as compared to $2.9 million in the comparable period of 1997 and includes
an allocation of corporate overhead of $899,000 for the three months ended March
31, 1998 and $728,000 for the comparable period of 1997. EBITDA increased 39.0%
to $14.3 million in 1997 as compared to $10.3 million in 1996 and includes an
allocation of corporate overhead of $4.1 million in 1997 and $3.0 million in
1996.
RESULTS OF OPERATIONS
The following table presents certain consolidated statement of operations
data as a percentage of total revenues for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------- ----------------------
1995 1996 1997 1997 1998
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Revenues:
Service................................. 64.4% 67.7% 67.3% 69.8% 65.1%
Roamer.................................. 30.8 27.9 26.6 24.8 28.1
Equipment and other..................... 4.8 4.4 6.1 5.4 6.8
----- ----- ----- ----- -----
Total revenues........................ 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- -----
Operating expenses:
Network costs........................... 13.5 11.3 14.0 13.9 13.3
Costs of equipment sales................ 13.2 11.1 8.6 10.4 7.0
Selling, general, and administrative.... 49.3 47.8 43.3 44.3 35.0
Depreciation and amortization........... 30.3 25.8 22.3 26.7 20.9
----- ----- ----- ----- -----
Total operating expenses.............. 106.3 96.0 88.2 95.3 76.2
----- ----- ----- ----- -----
Operating income (loss)................... (6.3)% 4.0% 11.8% 4.7% 23.8%
----- ----- ----- ----- -----
----- ----- ----- ----- -----
EBITDA (1)................................ 23.9% 29.8% 34.0% 31.3% 44.7%
</TABLE>
- ------------------------
(1) EBITDA is the sum of earnings before interest, taxes, depreciation and
amortization and is utilized as a performance measure within the cellular
industry. EBITDA is not intended to be a performance measure that should be
regarded as an alternative for other performance measures and should not be
considered in isolation. EBITDA is not a measurement of financial
performance under generally accepted accounting principles and does not
reflect all expenses of doing business (e.g., interest expense,
depreciation). Accordingly, EBITDA
57
<PAGE>
should not be considered as having greater significance than or as an
alternative to net income or operating income as an indicator of operating
performance or to cash flows as a measure of liquidity. Moreover, "EBITDA,"
as used herein, may differ from "Operating Cash Flow," as used in
calculating the covenants set forth in the documents governing the
Securities. See "Description of Senior Subordinated Notes -- Certain
Definitions," "Description of Exchangeable Preferred Stock and Exchange
Debentures -- Exchangeable Preferred Stock -- Certain Definitions" and
"Description of Exchangeable Preferred Stock and Exchange Debentures --
Exchange Debentures -- Certain Definitions."
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
REVENUES
Service revenues for the three months ended March 31, 1998 increased 18.7%
to $7.7 million from $6.5 million for the comparable period in 1997. The
increase in service revenues resulted from a 21.3% increase in the number of
cellular customers to 70,492 in 1998 from 58,129 in 1997, combined with an
increase of 1.9% in the average revenue per customer.
Roamer revenues for the three months ended March 31, 1998 increased 44.3% to
$3.3 million from $2.3 million for the comparable period in 1997. Roamer
revenues increased as a result of the activation of additional cell sites and a
46.6% increase in roaming minutes from 2.0 million in 1997 to 3.0 million in
1998.
Equipment and other revenues for the three months ended March 31, 1998
increased 61.2% to $806,000 from $500,000 in 1997, reflecting a $284,000
increase in long distance service revenues.
OPERATING EXPENSES
Network costs include switching and transport expenses and the expenses
associated with the maintenance and operation of Atlantic cellular network
facilities and long distance service. Network costs for the three months ended
March 31, 1998, increased 21.8% to $1.6 million from $1.3 million in 1997. The
increased expenses reflect additional operating expenses from new cell sites
that were added during 1998, higher total variable costs resulting from
increased network usage and increased costs to support long distance services.
SG&A expenses for the three months ended March 31, 1998 remained unchanged
at $4.1 million when compared to the comparable period in 1997. As a percentage
of total revenues, SG&A decreased to 35.0% in 1998 from 44.3% in 1997. The
moderate change reflects decreased spending within the sales and marketing
division of Atlantic offset by an increase in corporate overhead.
Depreciation and amortization expense for the three months ended March 31,
1998 remained unchanged at $2.5 million as compared to the comparable period in
1997.
YEARS ENDED DECEMBER 31, 1997 AND 1996
REVENUES
Service revenues for 1997 increased 21.2% to $28.3 million from $23.4
million in 1996. The increase in service revenues resulted from a 23.9% increase
in the number of cellular customers from 55,009 in 1996 to 68,164 in 1997 and
was partially offset by a decrease of 8.6% in the average revenue per customer.
Roamer revenues for 1997 increased 16.0% to $11.2 million from $9.6 million
in 1996. Roamer revenues increased as a result of the activation of additional
cell sites and a 22.9% increase in roaming minutes from 7.8 million in 1996 to
9.6 million in 1997.
Equipment and other revenues increased 71.3% from $1.5 million in 1996 to
$2.6 million in 1997, reflecting a $1.2 million increase in long distance
service revenues.
58
<PAGE>
OPERATING EXPENSES
Network costs for 1997 increased 51.6% to $5.9 million from $3.9 million in
1996. The increased expenses reflect additional operating expenses from new cell
sites that were added during 1997, higher total variable costs resulting from
increased network usage and increased costs to support long distance services.
SG&A expenses increased 10.5% from $16.5 million in 1996 to $18.2 million in
1997. However, as a percentage of total revenues, SG&A decreased from 47.8% in
1996 to 43.3% in 1997. The increase primarily reflects higher corporate overhead
charged to Atlantic by its affiliate, Atlantic Cellular Management Company, and
increased customer service costs.
Depreciation and amortization expense for 1997 increased 5.0% to $9.4
million as compared to $8.9 million in 1996. The increased depreciation resulted
from the construction of cell sites in 1996 and 1997.
YEARS ENDED DECEMBER 31, 1996 AND 1995
REVENUES
Service revenues for 1996 increased 37.8% to $23.4 million as compared to
$16.9 million in 1995. This increase primarily resulted from a 38.5% increase in
the number of cellular customers from 39,715 in 1995 to 55,009 in 1996, which
was partially offset by a decrease of 7.9% in the average revenue per customer.
Roamer revenues for 1996 increased 19.1% to $9.6 million from $8.1 million
in 1995. This increase was primarily due to the activation of additional cell
sites and a 30.8% increase in roamer minutes, partially offset by a reduction in
intercarrier exchange rates.
OPERATING EXPENSES
Network costs for 1996 increased 9.6% to $3.9 million from $3.6 million in
1995. However, network costs decreased as a percentage of revenues from 13.5% in
1995 to 11.3% in 1996, reflecting greater operating leverage. The increased
expenses reflect additional operating expenses from new cell sites that were
added during 1996 and higher total variable costs resulting from increased
network usage.
SG&A expenses increased 27.0% to $16.5 million from $13.0 million in 1995.
The increase over the prior year resulted primarily from higher costs associated
with the increase in customers during the year.
Depreciation and amortization expenses for 1996 increased 11.9% to $8.9
million from $8.0 million in 1995. The increase reflects Atlantic's continued
investment in network facilities.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company's primary liquidity requirements have been for
working capital, capital expenditures, debt service and customer growth. These
requirements have been met through cash flow from operations and borrowings
under the Existing Credit Facility. As of March 31, 1998, the Company had $135
million outstanding under its $160 million Existing Credit Facility. The Company
used the $120.6 million net proceeds from the Exchangeable Preferred Stock
Offering to repay outstanding borrowings under the Existing Credit Facility.
Following the closing of the Acquisitions, the Company's primary liquidity
requirements are expected to be for working capital; debt service under the New
Credit Facility and the Senior Subordinated Notes; cash interest, if any, on the
Exchange Debentures, if issued; cash dividends, if any, on the Exchangeable
Preferred Stock, and funding customer growth.
Coincident with the signing of the purchase agreements for the Acquisitions,
the Company received a commitment from an affiliate of TD Securities (USA) Inc.
to replace the $160 million Existing Credit Facility with a $450 million New
Credit Facility, which would be sufficient to close the Acquisitions, to
refinance certain indebtedness, to pay related fees and expenses and provide
additional liquidity. Concurrent with the closing of the Atlantic Acquisition,
the Company reduced the size of the New Credit Facility to $300 million.
59
<PAGE>
The Company used the proceeds from the Notes Offering and borrowings under
the New Credit Facility to finance the $256.0 million purchase price of the
Atlantic Acquisition, refinance the remaining indebtedness under the Existing
Credit Facility, and pay related fees and expenses, and will use such proceeds
and borrowings to finance the $7.5 million purchase price of the WMC
Acquisition. See "Description of Other Indebtedness" for a summary of the terms
of the Credit Facility.
The Company expects capital expenditures for the remainder of 1998 to be
approximately $38.2 million (including approximately $16.7 million for Wireless
Alliance). Capital expenditures and debt service are expected to be funded
through internally generated cash flows and, if necessary, borrowings under the
New Credit Facility. The Company believes that it will have adequate capital
resources to satisfy all its liquidity requirements for at least the next twelve
months.
OTHER MATTERS
INFLATION
The Company does not believe that inflation has had a significant impact on
the Company's operations.
YEAR 2000
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. When the century date occurs, date-sensitive systems may
recognize the year 2000 as 1900 or not at all. This inability to recognize or
properly treat the year 2000 may cause systems to process critical financial and
operational information incorrectly.
During 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 to address this issue. The Company plans to devote the
necessary resources to resolve all significant Year 2000 issues in a timely
manner. If Year 2000 modifications are not properly completed either by the
Company or any of the entities with whom the Company conducts business, the
Company could be adversely affected. See "Risk Factors -- Year 2000."
SEASONALITY
The Company experiences seasonal fluctuations in revenues and operating
income (loss). The Company, and the wireless communications industry in general,
have historically experienced significant customer growth during the fourth
calendar quarter. Accordingly, during such periods the Company experiences
greater losses on equipment sales and increases in sales and marketing expenses.
In addition, the Company's financial performance during the first calendar
quarter has been negatively affected by reduced minutes of use and roamer
revenues. The Company's average monthly revenue per cellular customer has
historically increased during the second and third calendar quarters. This
increase reflects greater usage by the Company's cellular customers and roamers
who travel in the Company's cellular service area for weekend and vacation
recreation or work in seasonal industries, such as agriculture and construction.
Because the Company's cellular service area includes many seasonal recreational
areas, the Company expects that roamer revenues will continue to fluctuate
seasonally to a greater degree than service revenues.
60
<PAGE>
Certain unaudited quarterly results of the Company for 1997 and 1996 are set
forth below:
<TABLE>
<CAPTION>
1997 QUARTER ENDED
--------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
----------- --------- ------------ ------------
(IN THOUSANDS, EXCEPT AVERAGE MONTHLY REVENUE PER
CUSTOMER)
<S> <C> <C> <C> <C>
Total revenues............................. $ 8,322 $ 13,326 $ 16,748 $ 15,507
Operating income (loss).................... (355) 511 1,782 (103)
EBITDA (1)................................. 1,608 3,438 5,429 3,818
Adjusted EBITDA (1)........................ 2,469 4,698 7,233 5,460
Average monthly revenue per customer....... 52 58 61 50
</TABLE>
<TABLE>
<CAPTION>
1996 QUARTER ENDED
----------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
----------- --------- ------------- -------------
(IN THOUSANDS, EXCEPT AVERAGE MONTHLY REVENUE PER
CUSTOMER)
<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
Adjusted EBITDA (1)......................... 718 2,206 3,854 2,672
Average monthly revenue per customer........ 59 68 77 62
</TABLE>
- ------------------------
(1) EBITDA is the sum of earnings before interest, taxes, depreciation and
amortization and is utilized as a performance measure within the cellular
industry. EBITDA is not intended to be a performance measure that should be
regarded as an alternative for other performance measures and should not be
considered in isolation. EBITDA is not a measurement of financial
performance under generally accepted accounting principles and does not
reflect all expenses of doing business (e.g., interest expense,
depreciation). Accordingly, EBITDA should not be considered as having
greater significance than or as an alternative to net income or operating
income as an indicator of operating performance or to cash flows as a
measure of liquidity. Moreover, "EBITDA," as used herein, may differ from
"Operating Cash Flow," as used in calculating the covenants set forth in the
documents governing the Securities. See "Description of Senior Subordinated
Notes -- Certain Definitions," "Description of Exchangeable Preferred Stock
and Exchange Debentures -- Exchangeable Preferred Stock -- Certain
Definitions" and "Description of Exchangeable Preferred Stock and Exchange
Debentures -- Exchange Debentures -- Certain Definitions." Adjusted EBITDA
represents EBITDA excluding Wireless Alliance's EBITDA. Wireless Alliance is
an Unrestricted Subsidiary under the documents governing the Securities.
Adjusted EBITDA margin represents Adjusted EBITDA divided by revenues of the
Company (excluding Wireless Alliance revenues).
FORWARD-LOOKING INFORMATION
Forward-looking statements herein are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. See
"Forward-Looking Statements" for a discussion of certain qualifications
regarding such statements.
61
<PAGE>
BUSINESS
GENERAL
The Company provides wireless communications services through its ownership,
operation and management of Wireless Systems. These Wireless Systems are
concentrated in the Upper Midwest and New England regions of the United States
with a focus on RSAs and small MSAs, which the Company believes are subject to
less competition due to lower population density and provide greater opportunity
for customer growth due to lower penetration relative to major markets. At March
31, 1998, the Company's existing Wireless Systems were comprised of geographic
areas with approximately 1.86 million total POPs, including 636,000 cellular
POPs in Minnesota, 512,000 cellular POPs in Maine, and 708,000 managed POPs in
Minnesota, North Dakota, South Dakota and Wisconsin served by Wireless Alliance.
The Company believes that clustering its wireless operations allows it to
achieve operating and cost efficiencies as well as substantial marketing
benefits. The Company's markets generally are characterized by a concentration
of small businesses, vacation destinations, and, given the distance between
population centers, substantial travel time, particularly on interstate
highways, which support strong wireless usage and result in significant roamer
revenues. As of March 31, 1998, the Company's existing Wireless Systems provided
service to approximately 114,000 customers, which included approximately 18,000
customers of Wireless Alliance and 9,000 paging customers. The Acquisitions,
which will expand the Company's existing cluster in New England, will bring the
Company's total POPs to approximately 3.05 million and increase the number of
the Company's wireless customers as of March 31, 1998 to approximately 187,000,
on a pro forma basis. The Company intends to seek additional opportunities to
further expand its existing clusters and, where appropriate, pursue the
acquisition of new clusters with similar demographics and operating
characteristics. The Company is currently engaged in preliminary discussions
concerning possible strategic alliances and acquisitions of additional Wireless
Systems, but there can be no assurance that the Company will pursue or be
successful in these endeavors.
For the year ended December 31, 1997, the Company reported revenue and
EBITDA of $53.9 million and $14.3 million, respectively (including 100% of
Wireless Alliance's revenues of $7.3 million and negative EBITDA of $5.6
million). After giving effect to the Atlantic Acquisition, the MRCC Acquisitions
and the Offerings and the application of the net proceeds therefrom, as if they
had occurred on January 1, 1997, pro forma adjusted revenues and Adjusted EBITDA
(which adjustments exclude the impact of Wireless Alliance because it is an
Unrestricted Subsidiary under the documents governing the Securities) would have
been $93.5 million and $38.1 million, respectively, for the year ended December
31, 1997. The resulting pro forma ratios, as of December 31, 1997, of total
Indebtedness to Adjusted EBITDA and total Indebtedness and preferred stock to
Adjusted EBITDA would have been 7.2 times and 10.4 times, respectively.
For the three months ended March 31, 1998, the Company reported revenue and
EBITDA of $14.8 million and $3.7 million, respectively (including 100% of
Wireless Alliance's revenues of $2.7 million and negative EBITDA of $1.1
million). After giving effect to the Atlantic Acquisition and the Offerings and
the application of the net proceeds therefrom, as if they had occurred on
January 1, 1998, pro forma adjusted revenues and Adjusted EBITDA (which
adjustments exclude the impact of Wireless Alliance because it is an
Unrestricted Subsidiary under the documents governing the Securities) would have
been $23.9 million and $10.7 million, respectively, for the three months ended
March 31, 1998. The resulting pro forma ratios, as of March 31, 1998, of total
Indebtedness to Adjusted EBITDA and total Indebtedness and preferred stock to
Adjusted EBITDA would have been 26.7 times and 38.1 times, respectively.
The Company was founded in 1990 and commenced operations effective April 1,
1991, following the merger into the Company of five partnerships, each holding a
cellular license for a specific RSA. In February 1996, the Company completed an
initial public offering of 2,869,863 shares of its Class A Common Stock and
received net proceeds of approximately $26.0 million. The Company has the
following wholly-owned subsidiaries in addition to its 51% interest in the
Wireless Alliance joint venture: RCC Licenses, Inc. (a Minnesota corporation);
RCC Paging, Inc. (a Minnesota corporation); RCC Network, Inc. (a Minnesota
corporation); RCC Atlantic Long Distance, Inc. (a Minnesota corporation); RCC
Atlantic, Inc. (a Minnesota corporation); and MRCC, Inc. (a Maine corporation).
62
<PAGE>
In 1996, the Company extended its wireless communications footprint in its
Upper Midwest cluster through the formation of Wireless Alliance with Aerial
Communications. Wireless Alliance expects its PCS network, which utilizes the
GSM technology platform, to be fully operational in late 1998. Wireless Alliance
recently began to market its PCS services in Fargo, North Dakota; Moorhead,
Minnesota; Duluth, Minnesota; Hibbing, Minnesota; Virginia, Minnesota; and
Superior, Wisconsin. Prior to the launch of its PCS network, Wireless Alliance
initiated a cellular resale program, which has focused on establishing
relationships with wireless agents and resale customers in its PCS service area.
The Company intends to integrate its cellular and PCS networks to provide
seamless wireless communications services to its customers. The Company believes
that the introduction of dual-mode phones will allow for use of a single
telephone number in both PCS and cellular networks, thus creating seamless
integrated wireless communications services throughout its entire coverage area.
The dual-mode phone handset is expected to be available in mid-1998.
63
<PAGE>
WIRELESS MARKETS AND SYSTEMS
The following chart summarizes the Company's existing Wireless Systems and
the systems covered by the Acquisitions:
<TABLE>
<CAPTION>
DATE OF
CLUSTER SERVICE AREAS OWNERSHIP TOTAL POPS ACQUISITION
- ----------------------------------------------------------------------- ------------- ----------- -----------
<S> <C> <C> <C>
UPPER MIDWEST CLUSTER
CELLULAR (1)
Minnesota RSA 1...................................................... 100% 50,000 4/1/91
Minnesota RSA 2...................................................... 100% 64,000 4/1/91
Minnesota RSA 3...................................................... 100% 59,000 4/1/91
Minnesota RSA 5...................................................... 100% 206,000 4/1/91
Minnesota RSA 6...................................................... 100% 257,000 4/1/91
-----------
Total Upper Midwest Cellular POPs.................................. 636,000
-----------
PCS (2)
DULUTH, MINNESOTA/SUPERIOR, WISCONSIN:
Cook, Lake, St. Louis and Carlton (portion) Counties in Minnesota
and Douglas County in Wisconsin.................................. 51% 270,000 4/10/97
FARGO, NORTH DAKOTA/MOORHEAD, MINNESOTA:
Cass and Trail Counties in North Dakota and Clay County in
Minnesota........................................................ 51% 175,000 4/10/97
GRAND FORKS, NORTH DAKOTA:
Grand Forks County in North Dakota and Polk County in Minnesota.... 51% 102,000 4/10/97
SIOUX FALLS, SOUTH DAKOTA:
Minnehaha and Lincoln Counties in South Dakota..................... 51% 161,000 1/19/98
-----------
Total Upper Midwest PCS POPs..................................... 708,000
-----------
TOTAL UPPER MIDWEST POPS:.............................................. 1,344,000
-----------
NEW ENGLAND CLUSTER
CELLULAR (1)
MRCC:
Maine, Bangor MSA.................................................. 100% 143,000 5/1/97
Maine RSA 2........................................................ 100% 148,000 5/1/97
Maine RSA 3........................................................ 100% 221,000 5/1/97
-----------
Total MRCC POPs.................................................. 512,000
-----------
ATLANTIC:
Massachusetts RSA 1................................................ 100% 71,000 7/1/98
New Hampshire RSA 1................................................ 100% 223,000 7/1/98
New York RSA 2..................................................... 100% 226,000 7/1/98
Vermont, Burlington MSA............................................ 100% 148,000 7/1/98
Vermont RSA 1...................................................... 100% 210,000 7/1/98
Vermont RSA 2...................................................... 100% 232,000 7/1/98
-----------
Total Atlantic POPs.............................................. 1,110,000
-----------
WMC:
Maine RSA 1........................................................ 100% 83,000 Pending
-----------
TOTAL NEW ENGLAND POPS:................................................ 1,705,000
-----------
TOTAL POPS:............................................................ 3,049,000
-----------
-----------
</TABLE>
Source: 1990 census, updated for July 1, 1997 estimate of the U.S. Census
Bureau
- ------------------------
(1) The Company's Minnesota and Maine (including WMC) cellular licenses are
Wireline Cellular Licenses and the Atlantic cellular licenses are
Non-Wireline Cellular Licenses.
(2) The PCS licenses are for partitioned areas of the Minneapolis MTA served by
Wireless Alliance.
64
<PAGE>
BUSINESS STRATEGY
The Company's objective is to become the leading full service provider of
wireless communications services in its market clusters, while maximizing
revenues and cash flows, by offering innovative products and services, extensive
coverage and superior customer service at affordable prices. The key elements of
the Company's strategy are to:
EXPAND MARKET PRESENCE THROUGH STRATEGIC ACQUISITIONS AND ALLIANCES. The
Company has focused and expects to continue to focus on acquiring controlling
ownership interests in rural Wireless Systems serving RSAs and small MSAs
contiguous or proximate to its current markets. The Company's strategy of
clustering its Wireless Systems 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 an expanded home service
territory, which enables customers to avoid certain roaming charges which would
otherwise be paid to other carriers. The Company believes that the Acquisitions
will provide the opportunity to increase geographic coverage substantially and
provide significant marketing and other operational synergies. The Company also
intends to continue to pursue strategic alliances or acquisitions that will
enable it to extend its geographic coverage and enhance its product and service
offerings and, as appropriate, expand into new geographic areas with similar
demographics and operating characteristics. The Company is currently engaged in
preliminary discussions concerning possible strategic alliances and acquisitions
of additional Wireless Systems, but there can be no assurance that the Company
will pursue or be successful in these endeavors.
FOCUS ON INNOVATIVE MARKETING STRATEGIES AND PRODUCT OFFERINGS. The Company
has implemented a number of creative marketing programs aimed at stimulating
customer airtime. These programs offer customers greater value by bundling long
distance, voice mail and personal toll-free numbers and other services at
varying competitive price points. For example, customers in the Upper Midwest
cluster can select a package that eliminates all long distance charges
throughout North Dakota, South Dakota, northwest Wisconsin and Minnesota.
Additionally, customers can select the Company's nationwide calling option,
which charges a flat fee for all long distance charges when calling from the
Company's service areas. The Company provides its voice mail service, which it
believes stimulates cellular usage in the form of returned calls, to
approximately 30% of its customers in the Upper Midwest cluster. The Company
also offers an equipment option called PHONE SERVICE that allows customers to
rent cellular telephones for a nominal monthly charge with extended warranty and
insurance coverage. The Company believes that PHONE SERVICE facilitates
upgrading telephone equipment as individual needs change and reduces customers'
concerns about equipment obsolescence. The Company believes that its innovative
marketing strategies and product offerings have enhanced penetration and
customer retention, and the Company intends to continue to utilize these and
other marketing strategies in an effort to increase penetration throughout its
entire service area.
CONTINUE TO DECENTRALIZE MANAGEMENT OF SERVICE AREAS. The Company has
maintained a decentralized approach to managing its clusters to maintain a
strong local presence and deliver superior products and customer service. Each
of the Company's clusters is divided into separately managed regional business
units. The Company's decentralized management strategy allows each regional
business unit to tailor the Company's marketing and product offerings to meet
the specific needs of each regional market. Additionally, the decentralized
management approach enables the Company to maintain close customer contact and
to consistently monitor customer needs.
FOCUS ON CUSTOMER RETENTION AND SUPERIOR CUSTOMER SERVICE. The Company's
average monthly customer retention rate was 98.4% for the year ended December
31, 1997, and 98.5% for the three months ended March 31, 1998, as compared to
the industry average monthly customer retention rate of 97.9%, as calculated
using data from the CTIA semi-annual data survey dated December 1997. In each of
its markets, the Company has implemented separate sophisticated local monitoring
and control systems and maintains separate customer service departments
consisting of highly trained personnel who are aware of the needs of customers
in those markets. The Company's customer service personnel can be accessed
toll-free, 24 hours a day, 365 days a year and are capable of handling both
routine and complex technical questions. The Company believes that easy access
to its customer service professionals is critical to maintaining a high level of
customer satisfaction and loyalty.
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CONTINUE TO DEVELOP AND MAINTAIN SUPERIOR DISTRIBUTION CAPABILITIES. The
Company's distribution network is comprised of both direct and indirect sales
channels. The Company's strategy of utilizing territory managers has enabled it
to develop strong distribution channels that are tailored to the specific
characteristics of each local market. All direct and indirect sales channels are
under the oversight of territory managers who have extensive experience and
relationships with, and who reside in, the local markets. The Company believes
that the close proximity of the distribution channel members to each market
facilitates the cultivation of local market knowledge that allows direct sales
representatives and independent agents to focus on the needs of the markets in
which they operate. This improves their ability to establish relationships with
new customers and better understand the needs of existing and potential
customers. In addition, all individuals who have customer contact in the Upper
Midwest cluster are required to complete a certification process annually in
order to continue to sell the Company's products and services or maintain
contact with customers. The Company is currently in the process of implementing
this certification process in its New England cluster. As a result, the Company
believes that its ability to increase penetration and maintain high customer
retention rates is significantly enhanced.
MAINTAIN SUPERIOR NETWORK INFRASTRUCTURE. The Company's goal is to continue
to develop and maintain a superior wireless network infrastructure capable of
providing extensive geographic coverage and enhanced capacity. The Company has
124 cell sites in Minnesota and Maine as of March 31, 1998, and plans to add 12
new cell sites in Minnesota and Maine during the remainder of 1998. As a result,
customers benefit from a high level of both regional and local hand-held
coverage, minimal call blocking and dropped calls, seamless call delivery and
hand-off, and the availability of digital voice services. Most of the Company's
cell sites are currently back-hauled through its microwave network to its MTSO
enabling the Company to minimize transport expense and enhance network
reliability. All of the Company's networks in Maine have been upgraded to TDMA
digital technology and the TDMA service for the Minnesota network is expected to
be available by the end of 1998.
Atlantic's cellular network consists of 85 cell sites and 45 microwave links
as of March 31, 1998, and is connected to a MTSO located in Colchester, Vermont.
This network currently utilizes analog cellular technology with the ability to
expand capacity through the deployment of N-AMPS technology. N-AMPS is an
enhanced technology that provides a three-fold increase in capacity over
conventional analog technology, as well as many of the service features offered
by digital cellular and PCS technology. Although none of Atlantic's competitors
is currently providing digital cellular or PCS services in its markets, the
Company intends to review Atlantic's network infrastructure for potential
digital upgrades to further enhance the quality of the network.
MAINTAIN DISCIPLINED FINANCIAL MANAGEMENT. As the Company continues to
grow, management intends to focus on reducing leverage and increasing cash flow.
To accomplish this, management plans to actively manage customer acquisition
costs, maximize ARPU and penetration, and maintain strong customer retention
rates.
THE WIRELESS COMMUNICATIONS INDUSTRY
OVERVIEW
Wireless communications 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 services, and two-way radio
applications, such as cellular telephones, PCS and ESMR networks. Historically,
each application has been licensed and operated in a distinct radio frequency
block.
As of December 31, 1997, according to CTIA there were over 55.3 million
wireless (cellular, PCS and ESMR) customers in the United States, representing a
growth rate of 25.6% from December 31, 1996. The following chart illustrates the
annual growth in United States wireless (cellular, PCS and ESMR) customers
through December 31, 1997.
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EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
US WIRELESS CUSTOMERS
<S> <C>
Ending Customers (in
millions)
1984 0.1
1985 0.3
1986 0.7
1987 1.2
1988 2.1
1989 3.5
1990 5.3
1991 7.6
1992 11.0
1993 16.0
1994 24.1
1995 33.8
1996 44.0
1997 55.3
</TABLE>
- ------------------------
Source: CTIA
The following table sets forth certain domestic wireless industry statistics
(cellular, PCS and ESMR) derived from the data survey results published
semi-annually by CTIA. These statistics represent results for the industry as a
whole. Average monthly service revenue per customer represents service revenue
per customer, including roamer revenue. Average monthly revenue per customer
represents revenue per customer, excluding roamer revenue. In general, rural
markets, where the Company concentrates its wireless operations, were licensed
later by the FCC than urban markets and, consequently, have a shorter operating
and financial history.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------
1991 1992 1993 1994 1995 1996 1997
------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Total service revenues (in billions).................................. $ 5.7 $ 7.8 $ 10.9 $ 14.2 $ 19.1 $ 23.6 $ 27.5
Ending customers (in millions)........................................ 7.6 11.0 16.0 24.1 33.8 44.0 55.3
Customer growth....................................................... 43.0% 46.0% 45.1% 50.8% 40.0% 30.4% 25.7%
Average monthly service revenue per customer.......................... $74.10 $70.13 $67.13 $59.08 $54.88 $50.61 $46.11
Average monthly revenue per customer.................................. $64.96 $61.40 $58.74 $51.48 $47.57 $44.66 $41.12
Ending penetration.................................................... 3.0% 4.4% 6.2% 9.3% 12.9% 16.3% 20.2%
</TABLE>
- ------------------------
Although cellular telephones have remained the technology of choice for
wireless communications, potential users of cellular systems may find their
communications needs satisfied by other current and developing technologies,
particularly broadband PCS. PCS operators providing digital communication
technology may compete with cellular service with regard to rates, enhanced
privacy, and additional features such as electronic mail and built-in paging.
One-way paging or beeper services that feature voice message and data display as
well as tones may be adequate for potential customers who do not need to speak
to the caller. In the future, cellular service may also compete more directly
with traditional landline telephone service providers.
CELLULAR
Since its introduction in 1983, cellular service has grown dramatically and
now dominates the wireless communications market. Cellular communication service
is a form of telecommunication capable of providing high quality, high capacity
voice and data communications to and from vehicle-mounted and hand-held radio
telephones. Cellular communication systems generally offer customers the
features offered by the most technologically
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advanced landline telephone services. Two significant features of cellular
communication systems are frequency reuse, which enables the simultaneous use of
the same frequency in two adequately separated cells, and call handoff. A
cellular communication system's frequency reuse and call handoff features result
in highly efficient use of available frequencies and enable cellular
communication systems to process more simultaneous calls and service more users
over a greater area than conventional mobile communication systems.
Cellular communication technology is based upon the division of a given
market area into a number of smaller geographic areas or "cells." Each "cell"
has a "base station" or "cell site" that is equipped with a relatively low power
transmitter, a receiver and other equipment that communicates by radio signal
with cellular equipment located within range of the cell. Cells have a maximum
operating range of up to 25 miles, while the standard operating range is four to
ten miles. Cells are typically designed on a grid, although terrain factors,
including natural and man-made obstructions, signal coverage patterns and
capacity constraints may result in irregularly shaped "cells" and overlaps or
gaps in coverage.
Each cell site is connected by microwave link or telephone line to an MTSO,
which, in turn, is connected to the local landline telephone network. Because
cellular communications systems are fully interconnected with the landline
telephone network and long distance systems, customers can receive and originate
both local and long distance calls from the cellular equipment on a worldwide
basis. When a customer in a particular cell dials a number, the cellular
equipment sends the call by radio signal to the cell's transmitter-receiver,
which in turn transmits it to the MTSO. The MTSO then completes the call by
connecting it with the landline telephone network or another cellular unit.
Incoming calls are received by the MTSO from the landline telephone office
(unless the call is originated by another cellular telephone), which instructs
the appropriate cell to complete the communications link by radio signal between
the transmitter-receiver of a cell and the cellular equipment.
The MTSO and the base stations periodically monitor the signal strength of
calls in progress. The signal strength of the transmission between a customer
and the base station in any cell declines as the unit moves away from the base
station. When the signal strength of a call declines to a pre-determined level,
the MTSO automatically determines if the signal strength is greater in an
adjacent cell and, if so, hands off the call in a fraction of a second to the
base station of another cell. This handoff is virtually unnoticeable to the
user. If a wireless telephone user 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 where such arrangements have been
established. Such an intersystem network arrangement is referred to as
"roaming." If a roaming arrangement has not been established with an adjacent
system, the call will be disconnected.
FCC rules require that all cellular telephones be functionally compatible
with cellular telephone systems in all markets within the United States and with
all frequencies allocated for cellular use, allowing a cellular telephone to be
used wherever a customer is located, subject to appropriate arrangements for
service charges. The cellular system providing service to the roamer generally
receives 100% of the revenues from such service.
Cellular telephone systems operate under interconnection agreements with
various local exchange carriers ("LECs") and interexchange (long distance)
carriers. The interconnection agreements establish the manner in which the
cellular system integrates with other telecommunication systems. The cellular
operator and the local landline telephone company must cooperate in the
interconnection between the cellular and landline telephone systems to permit
cellular customers to call landline customers and vice versa. The technical and
financial details of such interconnection arrangements are subject to
negotiation, vary from system to system and, to the present time, generally have
not been subject to FCC regulation or oversight. However, the implementation of
the Telecommunications Act of 1996 (the "1996 Act") by the FCC is expected to
result in arrangements between cellular carriers and local exchange carriers of
interconnection services at rates more closely related to cost.
On August 1, 1996, the FCC adopted rules implementing the interconnection
policies imposed by the 1996 Act. Various aspects of the orders have been
overturned by the U.S. Court of Appeals for the Eighth Circuit ("Eighth
Circuit"), which decision is under review by the U.S. Supreme Court. However,
certain of the rules adopted in the FCC's orders remain in effect as to
interconnection of CMRS carriers to the local exchange. The
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Eighth Circuit's decision creates uncertainty regarding the pricing, terms and
conditions of interconnection. This uncertainty may make the negotiation of
interconnection agreements more difficult and may require renegotiation of
existing agreements. The Company is not able to predict how or when the Supreme
Court will act upon the appeals of the Eighth Circuit's decision, and there can
be no assurance that the Supreme Court's decision will not have an adverse
effect on the Company.
The rapid growth of the industry's cellular customer base has begun to
strain the call-processing capacity of many existing analog systems, especially
in densely populated urban areas. Each cellular network is designed to meet a
certain level of customer density and traffic demand. Once these traffic levels
are exceeded, the operator must take steps to increase the network capacity.
Capacity can be increased initially by using techniques such as sectorization
and cell splitting. Network operators and infrastructure manufacturers are
developing a number of additional solutions, which are expected to increase
network capacity and coverage.
Within certain limitations, increasing demand may be met by simply adding
available frequency capacity to cells as required or by using directional
antennae to divide a cell into multiple sectors or coverage areas, thereby
reducing the required distance between cells using the same frequency. Further,
an area within a cellular telephone system may be served by more than one cell
through procedures that utilize available channels in adjacent cells. When all
possible channels are in use, further growth can be accomplished through a
process called "cell splitting." Cell splitting entails dividing a single cell
into a number of smaller cells served by lower-power transmitters, thereby
increasing the reuse factor and the number of calls that can be handled in a
given area.
Network capacity can also be enhanced through the development of newer
technologies like N-AMPS analog technology (which triples call carrying capacity
over conventional analog technology) and TDMA or code division multiple access
("CDMA") digital technology (which significantly increases call carrying
capacity). In each case, these advanced technologies allow cellular carriers to
add customers without degrading service quality. Digital technology offers
advantages including improved voice quality, larger system capacity and perhaps
lower incremental costs for additional customers. The conversion from analog to
digital radio technology is expected to be an industry-wide process that will
take a number of years. Some cellular service providers currently utilize
digital radio technology in addition to analog technology.
PCS
PCS is a term commonly used in the United States to describe a portion of
radio spectrum (1850-1990 MHz). This portion of radio spectrum is used by PCS
licensees to provide wireless communications services. PCS competes directly
with existing cellular telephone, paging and specialized mobile radio services.
There are at least six potential broadband PCS providers in each PCS service
area. Licensing areas for broadband PCS are divided into 51 MTAs and 493 smaller
Basic Trading Areas ("BTAs") based on the geographic divisions in the 1992 Rand
McNally Commercial Atlas & Marketing Guide. Two licenses were awarded to
entities qualifying for participation in an "Entrepreneur's Block." The A, B,
and C Blocks, which are 30 MHz frequency blocks, permit licensees to offer a
broad range of two-way voice, data and related communications services employing
digital micro-cellular technology. Three 10 MHz frequency blocks, known as the
D, E, and F Blocks, were licensed in each BTA. It is anticipated that the 10 MHz
licensees will provide niche services or will be purchased by existing CMRS
providers, including cellular operators, for added spectrum. More PCS providers
are possible if the FCC approves a disaggregation of spectrum in any license in
a PCS service area, or if any C Block licensee elected to surrender, pursuant to
a special FCC program, 15 MHz of its 30 MHz license. Cellular carriers are
subject to a 45 MHz spectrum cap for their combined cellular and PCS spectrum in
areas where they offer both services.
PCS spectrum was auctioned by the FCC beginning with the A and B Blocks,
which were auctioned by the FCC in late 1994 and 1995. In late 1995 and 1996 the
C Block was auctioned (and certain BTAs were re-auctioned following the defaults
of participants) and the FCC completed simultaneous auctions of the D, E, and F
Blocks in 1997. The FCC is expected to reauction, in late 1998 or 1999, C Block
spectrum that was surrendered to the FCC either in 15 MHz blocks through a
disaggregation opportunity or as full 30 MHz licenses if so recovered by the
FCC.
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PCS systems also use digital technology. The FCC has not mandated a single
national digital standard for PCS (as it did with the analog Advanced Mobile
Phone System used in cellular systems) and, as a result, the following three
distinct technologies have evolved as standards and are being deployed
nationally in PCS systems:
1. GSM--Global System for Mobile is the digital standard that originated in
Europe and is being widely deployed by 1.9 GHz license holders such as
BellSouth Corporation, Powertel, Inc. and Aerial Communications, Inc.
2. TDMA--Time Divisional Multiple Access is the standard adopted and
certified by CTIA. It is the digital standard being deployed nationally
by AT&T Wireless, Inc. ("AT&T"). TDMA is the most widely supported and
enhanced digital standard utilized domestically today, with support from
all of the large infrastructure providers, such as Northern Telecom, Inc.
("Northern Telecom"), Lucent Technologies Inc. and Ericsson, Inc. TDMA
encodes three voice calls on a single 30 KHz channel effectively yielding
a spectral-efficient, three-fold increase in system capacity.
3. CDMA--Code Divisional Multiple Access is a spread-spectrum technology
that is predominantly being used by Sprint Corporation and Bell Atlantic
Corporation.
Digital technology increases system capacity while simultaneously providing
architecture that supports delivery of revenue enhancing features and services.
Digital PCS features include extended 60+ hours battery life on hand-held model
telephones, improved call security, intelligent system selection/zone billing,
alpha-numeric paging, internet based electronic mail receipt, presentation of
calling party identification, voice mail message waiting information and
enhanced data/facsimile transmission.
MARKETING OF PRODUCTS AND SERVICES
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 and maximize revenues.
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 PCS network and the Company's existing cellular network. These
service plans are sold under CELLULAR 2000-Registered Trademark- Northland and
offer a fixed and tiered monthly peak and off peak per minute charge with no
long distance or roaming charges for calls within the CELLULAR 2000-Registered
Trademark-Northland area.
The Company offers a regional personal toll-free number to its CELLULAR
2000-Registered Trademark- and Wireless Alliance customers. This encourages
customers to distribute their cellular numbers and keep their telephones turned
on to accept incoming calls. Additionally, customers can elect the Company's
nationwide calling option, which charges a flat fee for all long distance
charges when calling from the Company's Upper Midwest service area.
Due to its successful marketing efforts, many of the Company's customers are
voice mail service customers. There is no charge for leaving or retrieving
messages, and the Company believes that its voice mail feature stimulates
cellular usage. The Company also offers a product known as TALK BACK that
includes access to 911, voice mail, incoming calls and one preprogrammed
outgoing number. This product allows a customer to call for emergency assistance
or call the preprogrammed number while preventing unauthorized access to other
numbers. In addition, the Company offers customers the option to rent telephones
for a nominal monthly charge. This service reduces customers' concerns regarding
equipment obsolescence and enables the Company to compete with its competitors'
free telephone offers.
The Company has established preferred roaming contracts and developed system
integration with adjacent cellular carriers under the marketing name SIMPLIFIED
ROAMING. This approach permits the Company's customers to receive automatic call
delivery ("ACD"), call forwarding, toll-free access to voice mail, call hand-off
and reduced
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roaming rates nationwide. ACD allows roamers to use all of their home features
including custom calling features, making their roaming experience more
convenient.
Since ACD was introduced, the use of airtime by roamers has increased
generally in the industry. 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 highly-traveled 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
increase cellular usage.
DISTRIBUTION AND SALES
The Company markets its wireless services through independent sales agents,
direct sales personnel and Company-owned stores, which are managed by district
and territory managers in both its Upper Midwest and New England clusters. The
Company believes that its territory manager strategy is a major contributor to
the Company's success. The Company experiences higher than industry average
retention levels and lower than industry average customer acquisition costs.
MRCC implemented this distribution strategy in the third quarter of 1997. As of
June 22, 1998, the Company had approximately 106 sales agents, 15 direct sales
personnel and 6 Company-owned stores.
The territory managers recruit, train, and support the independent sales
agents. The training and support provided to agents is extensive and continual.
Currently, all individuals who have customer contact in the Upper Midwest
cluster are required to complete a certification process annually in order to
continue to sell the Company's products and services or maintain any contact
with customers. The Company is currently in the process of implementing this
process in its New England cluster. 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.
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 has implemented sophisticated local monitoring and
control systems and maintains customer service departments consisting of highly
trained personnel who are aware of the needs of the customers in its local
markets. The Company's customer service personnel can be accessed 24 hours a
day, 365 days a year, and are capable of handling both routine and complex
technical questions. The Company believes that easy access to its customer
service professionals is essential to maintain a high level of customer
satisfaction and loyalty and that its strong emphasis on customer service
contributes to its high customer retention rate.
The customer service centers are also 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 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 the customer begins 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
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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.
ROAMING MARKETS
The Company believes that attractively priced regional roaming is important
to the development of customers for all cellular carriers. Accordingly, where
possible, the Company attempts to arrange reciprocal roaming rates that allow
customers to roam at competitive prices. The Company believes this increases
usage on all cellular systems, including the Company's systems. Roamer revenues
are a substantial source of incremental revenue for the Company due, in part, to
the fact that a number of the Company's cellular systems are located along major
travel and commuting corridors. While there is an industry trend to reduce
roaming rates, the Company is addressing this trend through its roaming
agreements, which are usually reciprocal in nature and are at or near home
rates. The Company believes that the Acquisitions will create significant
opportunities to offer enhanced roamer services in the New England cluster
because of the multi-state and contiguous footprint that will result. While on
an industry-wide basis approximately 10.6% of total cellular revenue nationally
is from roaming traffic, the Company's percentage of roamer revenue was
approximately 17.6% of revenues for the year ended December 31, 1997, and 11.9%
of revenues for the three months ended March 31, 1998.
SERVICE MARKS
The Company uses the registered service mark CELLULAR 2000-Registered
Trademark- (and the service mark CELLULAR 2000-Registered Trademark-NORTHLAND)
to provide the cellular services it offers in its Minnesota cellular markets and
for Wireless Alliance resale operations in Duluth, Minnesota and Fargo and Grand
Forks, North Dakota. 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 Cellular 2000 shareholder has entered into a license agreement with
Cellular 2000 that allows the shareholder to use the CELLULAR 2000-Registered
Trademark- 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-Registered Trademark- 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-Registered Trademark-
mark.
The Company uses the registered service mark UNICEL-Registered Trademark- to
market PCS services in its Upper Midwest cluster and to market cellular services
in the current New England cluster. This mark is owned by the Company.
Atlantic's cellular services are marketed under the service mark
CELLULARONE-Registered Trademark- and its long distance services are marketed
under the service mark LONG DISTANCE BY CELLULARONE. The Company's use of the
CELLULARONE-Registered Trademark- and LONG DISTANCE BY CELLULARONE service marks
is governed by licenses between the Company and Cellular One Group, the owner of
the service marks.
The Company also provides paging services under the service marks
KEYPAGE-Registered Trademark-, KEYPAGE-Registered Trademark- PLUS and UNICEL
Paging Services as a complement to its wireless services. These marks are owned
by the Company.
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
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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 handoff is automatic and virtually unnoticeable to
customers.
The Company installed a digital Northern Telecom MTSO in the third quarter
of 1997. The MTSO used in the Company's Minnesota cellular network is owned by
the Company and is located in Alexandria, Minnesota. The Company has invested in
this digital MTSO so that it has the ability to increase capacity of wireless
telephone systems, as needed. Through the provision of the digital transmission
the Company expects to decrease its cost of providing services.
The MTSO used in MRCC's cellular network is a digital Northern Telecom MTSO
owned by MRCC and located in Bangor, Maine. In accordance with its strategy of
developing market clusters, the Company has selected wireless MTSOs that are
capable of serving multiple markets.
As of March 31, 1998, the Company's cellular network consisted of 124 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
three sites during the three months ended March 31, 1998 and plans to add an
additional 12 new cell sites during the remainder of 1998. The additional cell
sites will further expand capacity and will allow customers to use lower-powered
or hand-held portable telephones throughout the Company's service areas and
network.
Atlantic's cellular network consists of 85 cell sites and 45 microwave links
as of March 31, 1998, and is connected to a MTSO located in Colchester, Vermont.
This network currently utilizes analog cellular technology with the ability to
expand capacity through the deployment of Narrowband Analog Mobile Phone System
("N-AMPS") technology. N-AMPS is an enhanced technology that provides a
three-fold increase in capacity over conventional analog technology, as well as
many of the service features offered by digital cellular and PCS technology.
Although none of Atlantic's competitors are currently providing digital cellular
or PCS services in its markets, the Company intends to review Atlantic's network
infrastructure for potential digital upgrades to further enhance the quality of
the network.
WIRELESS ALLIANCE
At March 31, 1998, Wireless Alliance had spent $12.6 million to acquire
land, facilities and equipment in preparation for deploying its PCS services.
Wireless Alliance has also leased land, facilities and equipment necessary for
PCS deployment. Wireless Alliance has begun construction of a GSM
technology-based PCS network in its PCS service areas, which is expected to be
fully operational in late 1998. Wireless Alliance will utilize the Aerial
Communications MTSO to switch PCS calls. Wireless Alliance utilizes the AirTouch
Communications, Inc. ("AirTouch") network to transport its resale of cellular
airtime within these markets.
PAGING
The Company's paging network, as of March 31, 1998, 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, that
is connected to the public telephone network. The paging transmitters use a
transmit-only radio frequency licensed for a given coverage contour around the
paging transmitter that 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 in Minnesota.
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SUPPLIERS AND EQUIPMENT PARTNERS
The Company does not manufacture any customer or network equipment. The high
degree of compatibility among different manufacturers' models of handsets and
network 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 network
equipment from Northern Telecom, Lucent Technologies Inc., Harris, Inc., and
Nokia Telecommunications, Inc.
COMPETITION
The wireless communications industry is highly competitive. 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. See "Risk Factors -- Competition."
In the Upper Midwest cluster, the Company's current cellular competitors are
Western Wireless Corporation ("Western Wireless"), PriCellular Corp.
("PriCellular"), and AirTouch. These competitors offer their service under the
CELLULARONE-Registered Trademark- trade name and are members of the North
American Cellular Network-TM-, a consortium of CELLULARONE-Registered Trademark-
service providers located throughout the United States that reciprocally provide
reduced roaming rates and ACD. The Company believes that Western Wireless,
PriCellular and AirTouch compete against the Company primarily on the basis of
price and have become significantly more aggressive during the past two years.
AT&T is a significant shareholder of PriCellular and may provide significant
financial and related support for PriCellular's network development and
marketing efforts.
MRCC and Atlantic currently compete with several other wireless service
providers in the New England cluster, including United States Cellular
Corporation ("U.S. Cellular") in Maine and New Hampshire, Bell Atlantic/NYNEX
Corporation in Vermont, Frontier Communications, Inc. in New York, and Southern
New England Telecommunications Corporation in Massachusetts. The Company
believes it currently has a majority position for both market share and customer
acquisition share in its Maine markets. Additionally, combining the existing
Maine network with the Atlantic network to be acquired in the Atlantic
Acquisition will create a contiguous market cluster more extensive than that of
any of the current competitors in the New England cluster.
The Atlantic Wireless Systems are authorized by the FCC to operate with
Block A frequencies, and the Company's existing Maine systems as well as the WMC
systems are authorized to operate with Block B frequencies. In order to provide
the Company's cellular customers with service in all of the Company's markets in
the New England cluster, the Company plans to program the cellular telephones of
its customers to prefer the Block A frequencies where the Company operates Block
A cellular systems and to prefer Block B frequencies where the Company operates
Block B cellular systems.
The Company also competes to a lesser extent with dispatch and conventional
mobile telephone companies, Specialized Mobile Radio Service ("SMR") providers,
resellers, paging companies 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, the Company expects to face increased competition for its
cellular and PCS services from entities providing other technologies and
services, including digital mobile communications systems on ESMR frequencies,
fixed wireless services, and satellite-based telecommunications systems, as well
as other cellular and PCS providers. 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.
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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 200 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'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.
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-Registered Trademark- 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-Registered Trademark-, is provided. Both
KEYPAGE-Registered Trademark- and KEYPAGE-Registered Trademark- 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.
The Company resells paging services in Maine using the UNICEL name.
Other potential competitors for customers of the Company are licensees of
narrowband PCS systems. Such systems may be designed to provide a customer with
a receiving device, which plays a recorded voice message for the customer, and
provide the customer with various response options. No such system is currently
operational in the Company's service areas, although the FCC has issued licenses
which allow for narrowband PCS systems in all areas of the United States.
TECHNOLOGIES
The wireless communications 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 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 systems may compete with cellular service by providing high
quality digital communication technology, lower rates, enhanced privacy, and
additional features such as 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.
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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. 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 believes that it is strategically positioned to compete with
other communications technologies that now exist, such as SMR and ESMR systems
and PCS, and with cellular and paging resellers. Cellular service and paging
will also compete more directly with traditional landline telephone service
providers and with cable operators that are expanding into the offering of
traditional communications services over their cable systems. The Company may
face competition from new technologies not yet readily available such as
satellite networks.
REGULATION
THE FOLLOWING SUMMARY OF REGULATORY DEVELOPMENTS AND LEGISLATION DOES NOT
PURPORT TO DESCRIBE ALL PRESENT AND PROPOSED FEDERAL, STATE, AND LOCAL
REGULATION AND LEGISLATION AFFECTING THE TELECOMMUNICATIONS INDUSTRY. OTHER
EXISTING FEDERAL AND STATE LEGISLATION AND REGULATIONS ARE CURRENTLY THE SUBJECT
OF JUDICIAL PROCEEDINGS, LEGISLATIVE HEARINGS AND ADMINISTRATIVE PROPOSALS WHICH
COULD CHANGE, IN VARYING DEGREES, THE MANNER IN WHICH THIS INDUSTRY OPERATES.
NEITHER THE OUTCOME OF THESE PROCEEDINGS NOR THEIR IMPACT UPON THE
TELECOMMUNICATIONS INDUSTRY OR THE COMPANY CAN BE PREDICTED AT THIS TIME.
OVERVIEW
The Company's services are subject to varying degrees of Federal, state and
local regulation. The FCC exercises jurisdiction over all facilities of, and
services offered by, telecommunications common carriers such as the Company, to
the extent those facilities are used to provide, originate or terminate
interstate or international communications. State regulatory commissions retain
jurisdiction over most of the same facilities and services to the extent they
are used to originate or terminate intrastate communications. In addition, many
of the regulations issued by these regulatory bodies may be subject to judicial
review, the result of which review the Company is unable to predict.
FEDERAL REGULATION
The Company must comply with the requirements of common carriage under the
Communications Act. Comprehensive amendments to the Communications Act were made
by the 1996 Act. The 1996 Act effected plenary changes in regulation at both the
Federal and state levels that affect virtually every segment of the
telecommunications industry. The stated purpose of the 1996 Act is to promote
competition in all areas of telecommunications and to reduce unnecessary
regulation to the greatest extent possible. While management believes it will
take years for the industry to feel the full impact of the 1996 Act, it is
already clear the legislation provides the Company with both opportunities and
challenges.
The 1996 Act greatly expands the FCC's interconnection requirements on the
incumbent local exchange carriers ("ILECs"). The 1996 Act requires the ILECs to:
(i) provide physical co-location; (ii) unbundle and provide access to components
of their local service networks to other providers of local service; and (iii)
establish "wholesale" rates for the services they offer at retail; and requires
all local exchange carriers ("LECs") to: (i) establish number portability; (ii)
establish dialing parity; and (iii) provide nondiscriminatory access to
telephone poles, ducts, conduits and rights-of-way. In addition, the 1996 Act
requires LECs to compensate telecommunications carriers for traffic originated
by the LECs and terminated on the other carriers' networks. The 1996 Act
requires all telecommunications carriers, including the Company, to provide
interconnection upon reasonable request.
LECs are required to negotiate in good faith with carriers requesting any or
all of the above arrangements. If a requesting carrier and the LEC cannot reach
an agreement within the prescribed time, either carrier may request binding
arbitration by the appropriate state commission. Where an agreement cannot been
reached, carriers remain
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subject to the interconnection obligations established by the FCC and state
telecommunications regulatory commissions.
The FCC is charged with establishing national guidelines to implement the
1996 Act. The FCC issued its interconnection orders on August 8, 1996 (the
"Interconnection Orders"), which established detailed rules regarding rates,
terms and conditions for interconnection between telecommunications carriers and
LECs and regarding the implementation of dialing parity. The Interconnection
Orders were appealed to the U.S. Court of Appeals for the Eighth Circuit. On
July 18, 1997, the Court issued a decision vacating many of the interconnection
pricing rules and the "most favored nation" rule as well as certain other
interconnection rules. The Court affirmed certain rules as they pertain to CMRS
providers. The Eighth Circuit decision creates uncertainty about the rules
governing pricing, terms and conditions of interconnection agreements and could
make negotiation and enforcement of such agreements more difficult and
protracted and may require renegotiation of existing agreements. Several parties
have appealed the Eighth Circuit decision to the United States Supreme Court.
The Supreme Court granted petitions for certiorari filed in several of those
appeals. It is not possible at this time to determine how or when the Supreme
Court will act on these appeals.
Since certain of the 1996 Act's interconnection requirements apply to all
providers of telecommunications services, including the Company, it may provide
the Company with the ability to reduce its own access costs by interconnecting
directly with non-ILECs, but may also cause the Company to incur additional
administrative and regulatory expenses in replying to interconnection requests.
The FCC also regulates the construction, operation and acquisition of CMRS
systems in the United States. Cellular and PCS systems operate under licenses
granted by the FCC within a specified market area. Paging licenses currently are
granted for generally smaller areas, based upon the area served by a particular
facility. The FCC has adopted rules pursuant to which paging systems will be
licensed on a market-wide basis in the future. There is an application freeze in
place with respect to paging services pending the implementation of the market
area licensing scheme. The FCC's rules have been appealed to the United States
Court of Appeals for the District of Columbia Circuit. The current application
freeze and proposed transition to a market area based licensing scheme for
paging services may hinder the Company's ability to modify existing facilities
and secure authorization for additional facilities. The licenses are generally
transferable, subject to certain limitations prescribed by the FCC.
Near the conclusion of the initial term of a cellular, PCS, or paging
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 CMRS 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 CMRS licensee a renewal expectancy, 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 licenses expire January 22, 2008, October 1, 1999, and October 1, 2001,
respectively. The Company holds 13 FCC licenses for paging services. 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. Wireless
Alliance's PCS licenses will expire on June 23, 2005. The licenses acquired in
the Atlantic Acquisition expire at varying dates beginning in 2000.
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 any of the Company's 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. None of the Company's licenses has ever been revoked or involuntarily
modified.
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The Communications Act and FCC rules require the FCC's prior approval of the
assignment or transfer of control of CMRS licenses. Any acquisition by the
Company of an interest in any CMRS authorization may also require the prior
approval of state or local regulatory authorities having jurisdiction over the
CMRS industry.
CMRS providers also must satisfy a variety of FCC requirements relating to
technical and reporting matters, including coordination of proposed frequency
usage with adjacent systems in order to avoid electrical interference between
adjacent systems. The FCC also requires licensees to secure FCC consent to
system modifications in certain instances.
CMRS systems are subject to certain FAA regulations respecting the location,
marking, lighting, and construction of transmitter towers and antennas and may
be subject to regulation under the National Environmental Policy Act and the
environmental regulations of the FCC. Effective September 1997, the FCC updated
the guidelines and methods it uses for evaluating RF emissions from radio
equipment. While the FCC's new rules impose more restrictive standards on RF
emissions from low power devices such as the Company's wireless devices, the
Company believes that all wireless devices currently provided by the Company to
its customers comply with the new standards.
The 1996 Act mandates that telecommunications carriers, such as the Company,
pay into the federal Universal Service Fund ("USF"). The purpose of the USF is
to ensure that basic telephone services are available and affordable for all
citizens. The USF will promote access to communications services in high cost
areas and for low income persons, schools, libraries, and rural health care
providers. The Company also is required to contribute to state universal service
funds. The federal USF is administered jointly by the FCC, the fund
administrator, and state regulatory authorities, many of which are still in the
process of establishing their administrative rules. While the FCC has commenced
collecting contributions for the first and second quarters of 1998 and has
announced contribution factors applicable to contributions during the third
quarter of 1998, the financial effect of these regulations on the Company cannot
be determined at this time. However, as the Company is permitted to collect the
required contribution amounts from its customers, the Company expects that its
obligation to contribute to the USF will have a minimal financial impact on the
Company.
The Company also is required to contribute annually to the
Telecommunications Relay Service Fund and the North American Numbering Plan
Administration fund and to remit regulatory fees to the FCC with respect to its
operations. The Company does not expect that these contribution obligations will
have a material financial impact on the Company.
Cellular and broadband CMRS providers also must comply with the FCC's rules
regarding emergency 911 service. In 1997, the FCC released revised timetables
and provisions for emergency 911 service availability provided by cellular, PCS
and other mobile service providers, including "enhanced 911" ("E911") services
that provide the caller's telephone number, location and other useful
information. Phase I of implementation requires that by April 1998, the
metropolitan markets must be able to provide automatic number identification
(ANI) and cell site information for 911 calls to the 911 dispatch points, called
Public Safety Answering Points. This mandate is effective June 1, 1998 for rural
markets. Phase II provides that by October 1, 2001, covered carriers must have
the capability to identify the location of mobile units making 911 calls within
a radius of no more than 125 meters. The implementation by the Company of its
E911 obligations may have a financial impact on the Company. The Company is not
yet able to predict the extent of that impact.
Cellular and broadband PCS service providers are required to implement
number portability during 1998 and 1999. Number portability would enable
customers to change broadband CMRS providers and services without changing their
telephone number. Based upon financial and technological considerations and the
current level of competition in the marketplace, several parties have requested
that the FCC forbear from requiring broadband CMRS carriers to implement service
provider number portability until PCS carriers have completed their five-year
buildout requirements. To date, the FCC has not generally extended this
deadline. Although the failure to comply with this obligation could result in a
fine or revocation of the Company's licenses, the Company is not yet able to
predict whether it will be able to comply with the number portability
requirements prior to the existing deadline.
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PCS licensees must comply with microwave relocation rules. For a period of
up to ten years after the grant of a PCS license (subject to extension), a PCS
licensee will be required to share spectrum with existing licensees that operate
certain fixed microwave systems which exist within the PCS licensee's markets.
To secure a sufficient amount of unencumbered spectrum to operate its PCS
systems efficiently, the Company may need to negotiate agreements to relocate
many of these existing licensees. In places where relocation is necessary to
permit operation of the Company's PCS system, any delay in the relocation of
such licensees may adversely affect the Company's ability to commence timely
commercial operation of its PCS systems. In an effort to balance the competing
interests of existing microwave users and newly authorized PCS licensees, the
FCC has adopted (i) a transition plan to relocate such microwave operators to
other spectrum blocks and (ii) a cost sharing plan so that if the relocation of
an incumbent benefits more than one PCS licensee, the benefiting PCS licensees
will share the costs of the relocation. In the case of A and B Block PCS license
holders, this transition plan allows most microwave users to operate in the PCS
spectrum for a two-year voluntary negotiation period and an additional one-year
mandatory negotiation period. For public safety entities dedicating a majority
of their system communications for police, fire or emergency medical services
operations, the voluntary negotiation period is three years, with a two-year
mandatory negotiation period. Parties unable to reach agreement within these
time periods may refer the matter to the FCC for resolution, but the existing
microwave user is permitted to continue its operations until final FCC
resolution of the matter. The transition and cost sharing plans expire on April
4, 2005 for A and B Block licenses, at which time remaining incumbents in the
PCS spectrum will be responsible for their costs to relocate to alternate
spectrum locations. The FCC has shortened the voluntary negotiation period to
one year (for non-public safety entities) for all Blocks other than A and B. The
Company believes that it is in compliance with applicable spectrum relocation
requirements enacted by the FCC.
Telecommunications carriers also are required to comply with CALEA. CALEA
requires carriers to modify and design their equipment, facilities and services
to support lawful electronic surveillance. To date no technical standard for
upgrade has been determined. Carriers must complete changes required by CALEA by
October 25, 1998. The FBI and the FCC already have adopted rules relating to the
implementation of CALEA, and the FCC has a proceeding underway to adopt
additional implementing rules. Several carriers and industry organizations have
urged the FBI to delay the implementation date and also have sought relief from
the FCC, due to, among other things, the unavailability of compliant equipment.
To date, however, the deadline for compliance has not been extended. If the
Company is not able to comply with CALEA prior to the deadline, the Company
could be fined up to $10,000 per day.
Telecommunications carriers also must comply with the FCC's rules regarding
the use and protection of customer proprietary network information ("CPNI"). The
FCC's new rules regarding CPNI became effective May 24, 1998. These rules
substantially increase the regulation of the Company's use of CPNI. The Company
expects that its implementation of measures to comply with these new CPNI rules
will have a financial impact upon the Company, but it does not expect that
impact to be material.
LIMITATION ON FOREIGN OWNERSHIP
Ownership of the capital stock of the Company by non-U.S. citizens is
subject to limitations under the Communications Act and FCC regulations. See
"Description of Capital Stock -- Limitation on Foreign Ownership and Transfers
of Control."
STATE AND LOCAL REGULATION
The Company is also subject to certain regulation by state and local
government bodies. The extent of such regulation varies from state to state. The
Communications Act preempts state and local regulation of, the entry of, or the
rates charged by, any CMRS provider, subject to the ability of a state to
petition the FCC for authority to regulate rates due to local market conditions.
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. The siting and construction
of CMRS transmitter towers, antennas and equipment
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shelters are often subject to state or local zoning, land use, and other
regulation. Such regulation may include environmental and building permit
approvals or other state or local certification.
EMPLOYEES
As of June 22, 1998, the Company had 321 employees. The employees include
101 in sales and marketing, 91 in customer service, 56 in network and systems
operations, 49 in administration and 24 in finance and accounting. Thirty of the
Company's employees were part-time. In addition, the Company has approximately
106 independent sales agents. None of the Company's employees is represented by
a labor organization, and the Company's management believes it has excellent
relations with its employees. Wireless Alliance has no full-time or part-time
employees but operates utilizing the Company's employees.
COMMUNITIES
In 1997, the Company joined the Minnesota Keystone Program as a business
entity that returns 2% of its pre-tax earnings to the communities in which it
provides services. The Company's beneficiaries include its customers, employees,
agents, investors, suppliers, partners, and the communities to which it provides
services directly, including the wireless communications industry.
PROPERTIES
The Company owns its principal corporate headquarters located at 3905 Dakota
Street SW, 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 storage facility in Maine.
As of March 31, 1998, the Company had 124 cellular cell sites in Maine and
Minnesota, of which 24 sites are subject to leases either for tower space or
land. The Company owns 100 sites. The Company anticipates that additional sites
will be acquired primarily by outright purchase.
As of March 31, 1998, the Company owned 46 operational paging transmitters
for its paging business.
As of March 31, 1998, Wireless Alliance had 33 PCS base stations
constructed. The Company owns the equipment within all of the base stations.
Wireless Alliance owns the land of one base station site and leases the land on
the other 32 base station sites.
LEGAL PROCEEDINGS
The Company is a party to routine filings and customary regulatory
proceedings with the FCC and state regulatory agencies from time to time. Also,
the Company is involved in legal proceedings from time to time relating to
claims arising out of its operations in the normal course of business. There are
no pending legal proceedings to which the Company is a party or of which any of
its property is subject which, if adversely decided, would have a material
effect on the Company.
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MANAGEMENT
<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 and Chief Financial
Officer
George W. Wikstrom................... 61 Vice President and Director
Don C. Swenson....................... 56 Secretary and Director
Jeffrey S. Gilbert................... 48 Director
Marvin C. Nicolai.................... 57 Director
George M. Revering................... 56 Director
</TABLE>
RICHARD P. EKSTRAND has served as President, Chief Executive Officer and a
director of the Company since 1990. Since 1984, Mr. Ekstrand has also served as
Vice President and a director of Lowry Telephone Co., Inc., a local exchange
telephone 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 ("Switch 2000") and as a director of Cellular 2000.
Mr. Ekstrand is past president of the Minnesota Telephone Association ("MnTA")
and the Association of Minnesota Telephone Utilities. He currently serves as a
director of the Rural Cellular Association ("RCA") and is active in CTIA,
serving on its Board of Directors, Executive Committee, Small Operators
Committee and Foundation Committee.
SCOTT G. DONLEA has served as Vice President of Sales and Marketing since
August 1995. Mr. Donlea joined the Company in 1992 as Manager of Market
Operations. From 1990 to 1992, Mr. Donlea was regional manager for CommNet
Cellular, Inc., responsible for marketing and sales in Iowa and South Dakota.
From 1988 to 1990, Mr. Donlea served as branch manager for US WEST Cellular,
Inc., in Sioux Falls, South Dakota. Mr. Donlea currently serves as chairperson
of the RCA's business and marketing committee.
WESLEY E. SCHULTZ joined the Company 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.
GEORGE W. WIKSTROM has been a director of the Company since 1990 and Vice
President since 1991. Mr. Wikstrom is a shareholder and has been Vice President
of Wikstrom Telephone Company, Incorporated, a local exchange telephone company
and a shareholder of the Company, for more than ten years. He also serves as
president and a director of Cellular 2000 and as a governor of Switch 2000. Mr.
Wikstrom has been the Commissioner of the Northwest Regional Development
Commission since 1979 and is serving as a director of the Association of
Minnesota Telephone Utilities and Minnesota Equal Access Network Services, Inc.
("MEANS").
DON C. SWENSON has been a director of the Company since 1990 and Secretary
of the Company since June 1995. Mr. Swenson has been with Arvig Communication
Systems, a local exchange telephone company and a shareholder of the Company,
since 1981, serving most recently as Director of Operations of that company. Mr.
Swenson also serves as a director of Arvig Enterprises, Inc. and Cellular 2000
and as a governor of Switch 2000. He is also on the Board of Directors of United
Community Bank, Perham, Minnesota.
JEFFREY S. GILBERT has been a director of the Company since June 1995. Since
September 1996, he has served as Assistant Manager of Paul Bunyan Rural
Telephone Cooperative ("Paul Bunyan") and General Manager of Northern
Communications, Inc., a wholly-owned subsidiary of Paul Bunyan. Both Paul Bunyan
and Northern Communications, Inc. are shareholders of the Company. He previously
served as General Manager of Deer River
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Telephone Co., Inc., a local exchange telephone company and formerly a
subsidiary of Paul Bunyan and a shareholder of the Company, since January 1993
and as a manager and in other positions with that Company since 1982. He is also
a director of Cellular 2000 and the MnTA and a member of the Board of Governors
of Switch 2000 and Rural Vision LLC, a DBS Company.
MARVIN C. NICOLAI has been a director of the Company since June 1995. He
became General Manager of Consolidated Telephone Company ("Consolidated"), a
local exchange telephone company and a shareholder of the Company, and Northland
Communications Corporation ("Northland"), a wholly-owned subsidiary of
Consolidated, in January 1995. From 1988 to 1995, he was a manager of Northland.
Mr. Nicolai is also a director of Cellular 2000, MEANS and Independent
Information Services Corp., and is a member of the Board of Governors of
Independent Emergency Services LLC.
GEORGE M. REVERING has been a director of the Company since 1990. Mr.
Revering has been President and General Manager of Midwest Information Systems,
Inc. ("MISI") since 1976 and is General Manager of Midwest Telephone Company and
President of Peoples Telephone Company of Big Fork, both subsidiaries of MISI
and shareholders of the Company, and President of Osakis Telephone Company, a
subsidiary of MISI. Mr. Revering is also President and a director of Revering
Group, Inc., which provides cellular service in South Dakota, and of each of its
subsidiaries. He is a director of MEANS and President of Means Telecom, a
subsidiary of MEANS.
COMMITTEES OF THE BOARD OF DIRECTORS
The Company's Board of Directors has established an Audit Committee and a
Compensation Committee. Messrs. Gilbert (Chair), Nicolai and Revering currently
serve on the Audit Committee. The Audit Committee's duties include examination
of matters relating to the financial affairs of the Company, including reviewing
the Company's annual financial statements, the scope of the independent annual
audit, and the independent accountant's letter to management concerning the
effectiveness of the Company's internal financial and accounting controls.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS
Don C. Swenson (Chair), former director Robert K. Eddy, and George W.
Wikstrom served on the Compensation Committee in fiscal 1997. Messrs. Wikstrom
and Swenson serve as a Vice President and Secretary of the Company,
respectively. Mr. Swenson is Director of Operations for Arvig Communication
Systems, which together with certain affiliates holds more than 5% of the
Company's Class B Common Stock and has engaged in various transactions with the
Company, all of which are more fully described under "Certain Transactions." Mr.
Eddy serves as Chairman of the Partners Committee of Cellular Mobile Systems of
St. Cloud ("CMS"), which is party to a roaming agreement with the Company.
Payments made by the Company and CMS pursuant to that agreement are described
under "Certain Transactions." The Compensation Committee's duties include
consideration of and recommendations to the Company's Board of Directors with
respect to programs for executive compensation, employee benefit and incentive
plans, and other compensation matters and policies.
COMPENSATION OF DIRECTORS
DIRECTORS' FEES. Each nonemployee director of the Company is paid an annual
fee of $3,000. In addition, each non-employee director is paid $400 for each
Board meeting attended in person, $250 for each Board meeting attended via
telephone conference and each committee meeting attended in person, and $150 for
each committee meeting attended via telephone conference, and is reimbursed for
travel and other expenses incurred in attending meetings and serving as a
director. Total fees paid to all nonemployee directors as a group for services
rendered during 1997 were $59,300.
DIRECTORS' STOCK OPTION PLAN. Directors who are not otherwise employees of
the Company are eligible to be granted options under the Company's Stock Option
Plan for Nonemployee Directors (the "Directors Plan"). The Directors Plan
provides that all nonemployee directors serving as of the day following an
annual meeting will be granted options to purchase 5,250 shares of Class A
Common Stock on that date. Pursuant to the Directors Plan,
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nonemployee directors serving as of the day following the 1997 Annual Meeting
were granted options to purchase an aggregate of 31,500 shares of Class A Common
Stock at $8.75 per share.
SUMMARY COMPENSATION TABLE
The following table sets forth information with regard to compensation paid
to Richard P. Ekstrand, the Company's President and Chief Executive Officer, and
to each other executive officer whose total annual salary and bonus exceeded
$100,000 during fiscal 1997 (the "Named Executive Officers") for services
rendered during the last three fiscal years.
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
AWARDS
-------------------- --------------- ALL OTHER
NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY BONUS OPTIONS COMPENSATION (1)
- ---------------------------------------------- -------------- --------- --------- --------------- -------------------
<S> <C> <C> <C> <C> <C>
Richard P. Ekstrand .......................... 1997 $ 176,000 $ 54,559 11,750 $ 4,207
President and Chief Executive Officer 1996 120,000 52,000 81,000 4,255
1995 104,673 30,000 69,000 2,700
Scott G. Donlea .............................. 1997 $ 113,000 $ 51,587 2,500 $ 4,116
Vice President -- Sales and Marketing 1996 84,100 35,000 64,600 3,170
1995 73,080 25,000 20,400 3,042
Wesley E. Schultz ............................ 1997 $ 126,000 $ 30,738 6,500 $ 2,908
Vice President Finance, Chief Financial 1996(2) 56,567 13,333 90,000 --
Officer
</TABLE>
- ------------------------
(1) For all years, all other compensation consists of Company contributions on
behalf of each Named Executive Officer to the Company's 401(k) plan.
(2) Mr. Schultz joined the Company as Vice President, Finance and Chief
Financial Officer on May 14, 1996.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information regarding options granted
to the Named Executive Officers during the 1997 fiscal year.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
---------------------------------------------------------- POTENTIAL REALIZABLE
NUMBER OF VALUE AT ASSUMED ANNUAL
SECURITIES RATES OF STOCK PRICE
UNDERLYING PERCENT OF TOTAL APPRECIATION FOR OPTION
OPTIONS OPTIONS GRANTED EXERCISE TERM
GRANTED TO EMPLOYEES IN PRICE EXPIRATION ------------------------
NAME (#) (1) FISCAL YEAR ($/SHARE) DATE 5%($) (2) 10%($) (2)
- ------------------------------------- ------------- ----------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Richard P. Ekstrand.................. 11,750(3) 4.1% $ 13.06 12/31/07 $ 96,507 244,568
Scott G. Donlea...................... 2,500(4) 0.9% 13.06 12/31/07 20,533 52,036
Wesley E. Schultz.................... 6,500(5) 2.3% 13.06 12/31/07 53,387 135,293
</TABLE>
- ------------------------
(1) The number indicated is the number of shares of Class A Common Stock that
can be acquired upon the exercise of options. The Company has not granted
any SARs.
(2) The assumed rates of 5% and 10% are hypothetical rates of stock price
appreciation selected by the Commission and are not intended to, and do not,
forecast or assume actual future stock prices. The Company believes that
future stock appreciation, if any, is unpredictable and is not aware of any
formula that will determine with any reasonable accuracy the present value
of stock options based on future factors which are unknowable and volatile.
No gain to optionees is possible without an appreciation in stock prices,
and any such increase will benefit all shareholders commensurably. There can
be no assurance that the amounts reflected in this table will be achieved.
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<PAGE>
(3) Consists of an incentive stock option for 3,800 shares and a nonqualified
stock option for 7,950 shares. Each option has a term of ten years, but
provides for early termination upon termination of employment, is not
transferable, and becomes exercisable in two equal installments on December
31, 1997 and January 1, 1998.
(4) An incentive stock option, which has a term of ten years, but provides for
early termination upon termination of employment, is not transferable, and
becomes exercisable in two equal installments on December 31, 1997, and
January 1, 1998.
(5) Consists of an incentive stock option for 5,500 shares and a nonqualified
stock option for 1,000 shares. Each option has a term of ten years, but
provides for early termination upon termination of employment, is not
transferable, and becomes exercisable in two equal installments on December
31 1997, and January 1, 1998.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table provides information relating to the number and value of
shares of Common Stock subject to options held by the Named Executive Officers
as of December 31, 1997.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL IN-THE-MONEY OPTIONS AT
SHARES ACQUIRED VALUE REALIZED YEAR-END(#) (1) FISCAL YEAR-END($) (2)
NAME ON EXERCISE(#) ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- -------------------------------- ----------------- ------------------- ------------------------ ------------------------
<S> <C> <C> <C> <C>
Richard P. Ekstrand............. -- -- 68,075/93,675 $204,663/$325,588
Scott G. Donlea................. -- -- 27,770/59,730 92,523/ 224,315
Wesley E. Schultz............... -- -- 25,250/71,250 86,625/ 267,750
</TABLE>
- ------------------------
(1) The Company has not granted any SARs.
(2) Value is calculated as the difference between the closing price of Class A
Common Stock on December 31, 1997 ($13 1/16) and the related option exercise
price multiplied by the number of shares underlying the option.
STOCK OPTION PLAN
The Company has adopted a 1995 Stock Compensation Plan (the "Plan"), under
which 1,400,000 shares of Class A Common Stock have been reserved for the grant
of options and other stock-based awards to employees of the Company. The Plan
provides for grants of both incentive stock options, intended to qualify as such
under Section 422 of the Internal Revenue Code of 1986 (the "Code"), and
nonstatutory stock options, stock appreciation rights, and other stock-based
awards. Except for the authority to grant incentive stock options, which expires
in 2005, the Plan has no expiration date but may be terminated by the Board of
Directors at any time, subject to the rights of the holders of options or other
awards previously granted under the Plan. The Board anticipates granting
additional options to management employees, including employees of companies
that the Company acquires, as part of its incentive program.
EMPLOYMENT AGREEMENTS
The Company has employment agreements with each of Messrs. Ekstrand, Schultz
and Donlea.
Mr. Ekstrand's employment agreement terminates on December 31, 2000. Mr.
Ekstrand's base annual salary is set by the Company's Board of Directors at
least annually, subject to a minimum specified in the agreement. The Board of
Directors set Mr. Ekstrand's base annual salary for 1997 at $176,000 and for
1998 at $275,000.
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<PAGE>
Mr. Schultz' employment agreement terminates December 31, 2000. Mr. Schultz'
base annual salary is set by the Company's Board of Directors at least annually,
subject to a minimum specified in the agreement. The Board of Directors set Mr.
Schultz' base annual salary for 1997 at $126,000 and for 1998 at $185,000.
Mr. Donlea's employment agreement terminates on December 31, 2000. Mr.
Donlea's base annual salary is set by the Company's Board of Directors at least
annually, subject to a minimum specified in the agreement. The Board of
Directors set Mr. Donlea's base annual salary for 1997 at $113,000 and for 1998
at $140,000.
Pursuant to each of the aforementioned employment agreements, if any of the
agreements is terminated for other than "just cause" ( as defined in the
employment agreements), the Company is obligated to continue payment of salary
and certain other benefits for the greater of twelve months or the remainder of
the term. Each agreement prohibits the employee from engaging in any activity
competitive with the business of the Company or soliciting customers or
employees of the Company during the term of and for a specified period of time
following termination of the agreement. Under the terms of each of the
agreements, if the employee is involuntarily terminated for other than "just
cause" in connection with or within twelve months following a "change of
control" of the Company (as defined in the 1995 Stock Compensation Plan, as
amended), he will be entitled to receive compensation equal to 2.99 times his
"base amount" of compensation (as defined in Section 280G(b)(3) of the Internal
Revenue Code of 1986, as amended).
CERTAIN TRANSACTIONS
SWITCHING SERVICES
One of the switches used in the Company's cellular network is owned by
Switch 2000, of which the Company holds a 40.8% ownership interest. Richard P.
Ekstrand, President, Chief Executive Officer, and a director of the Company,
serves as Chair of the Board of Governors of Switch 2000. Under a user agreement
with Switch 2000, the Company is obligated to pay its portion of the costs of
cellular switching and related services. During 1995, 1996, and 1997, charges to
the Company from Switch 2000 for switching services and related equipment
totaled approximately $3.8 million, $4.8 million, and $3.2 million,
respectively. During 1997 the Company activated a new mobile telephone switching
office and has reduced its reliance on services provided by Switch 2000. During
1998, the Company anticipates paying Switch 2000 approximately $600,000 pursuant
to the terms of the user agreement.
The Company is also required to make capital contributions to Switch 2000.
In 1995 and 1996, these contributions totaled $368,964 and $220,156,
respectively. No contribution was made in 1997.
TRANSACTIONS WITH MANAGEMENT AND SECURITY HOLDERS
The Company has entered into various arrangements with shareholders or their
affiliates. Arrangements involving shareholders or their affiliates that
beneficially own more than 5% of any class of the Company's Common Stock and in
which total payments for all such arrangements exceeded $60,000 in fiscal 1997
are described below. Except as may be otherwise indicated below, the Company
anticipates that amounts earned or incurred in 1998 will be similar to the 1997
amounts.
LEASES, TRANSMISSION SERVICES, AND AGENCY AGREEMENTS. The Company has
arrangements with several of its shareholders for leasing cell sites and using
telephone lines for transmission between cell sites and the switch serving the
Company's cellular network. The Company formerly leased space for its retail
store in Brainerd, Minnesota, from a subsidiary of Consolidated Telephone
Company and currently leases office space in Detroit Lakes, Minnesota, from an
affiliate of Arvig Enterprises, Inc. In addition, several of the Company's
shareholders and their affiliates serve as agents for the sale of the Company's
cellular and paging services. During 1995, 1996, and 1997, the Company was
charged $338,176, $535,759, and $1,092,247, respectively, by Arvig Enterprises,
Inc. and its affiliates for all such services. Arvig Enterprises, Inc. is the
beneficial owner of more than 5% of the Company's outstanding Class B Common
Stock. Don C. Swenson, a director of the Company, serves as a director of Arvig
Enterprises, Inc. During 1995, 1996, and 1997, the Company was charged $99,051,
$266,646, and $554,706, respectively, by Consolidated Telephone Company and its
affiliates for all such services. Consolidated Telephone
85
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Company beneficially owns more than 5% of the Company's outstanding Class B
Common Stock. Marvin C. Nicolai, a director of the Company, is the General
Manager of Consolidated Telephone Company. During 1996 and 1997, the Company was
charged $76,015 and $90,168, respectively, by Paul Bunyan Rural Telephone
Cooperative ("Paul Bunyan") and its affiliates, which beneficially own more than
5% of the Company's outstanding Class B Common Stock, for all such services.
Jeffrey S. Gilbert, a director of the Company, is General Manager of Northern
Communications, Inc., a subsidiary of Paul Bunyan, and Assistant Manager of Paul
Bunyan. During 1995 and 1996, the Company was charged $22,852 and $207,313,
respectively, by affiliates of Telephone and Data Systems, Inc. ("TDS"), which
beneficially owns more than 5% of the Company's outstanding Common Stock, for
such services.
TOWER PURCHASE. In 1995 the Company purchased a transmission tower from a
subsidiary of Consolidated Telephone Company. The total purchase price was
$67,000, of which payments of $17,000 were made in each of 1995, 1996 and 1997.
The remainder of the purchase price was paid on January 1, 1998. The Company
paid interest on any outstanding balance of the purchase price at 5% per annum.
ROAMING ARRANGEMENTS. The Company has a roaming agreement with CMS, a
partnership for which Robert K. Eddy, one of the Company's directors, serves as
Chairman of the Partners' Committee. The Company also has roaming agreements
with U.S. Cellular, a subsidiary of TDS. Under the roaming agreements, the
Company pays for service provided to its customers in areas served by CMS or
U.S. Cellular and receives payment for service provided to customers of CMS or
U.S. Cellular in the Company's cellular service area. The rates of reimbursement
are negotiated by the parties to the agreements and reflect rates charged by all
carriers. Roaming charges are passed through to the customer. During 1995, 1996,
and 1997, charges to the Company's customers for services provided by CMS
totaled $81,934, $989,254, and $1,045,266, respectively, and charges for
services provided by U.S. Cellular totaled $713,057, $99,920, and $50,258,
respectively, and charges by the Company to customers of CMS totaled $417,623,
$658,403, and $1,201,552, respectively, and charges to customers of U.S.
Cellular totaled $45,970, $39,179, and $108,819, respectively.
RESALE OF PAGING SERVICE. The Company has entered into an agreement with
American Paging, a subsidiary of TDS, to resell certain paging service provided
by American Paging. Under the terms of this agreement, the Company was charged
$15,214, $78,272, and $94,658 during 1995, 1996, and 1997, respectively, for
wholesale access fees and paging equipment.
CELLULAR AND PAGING SERVICE AND EQUIPMENT. Several of the Company's
shareholders are customers of the Company for cellular and paging services and,
in connection therewith, also purchase or lease cellular telephones and pagers
from the Company. During 1995, 1996 and 1997, Arvig Enterprises, Inc. and its
affiliates, were billed $253,709, $82,114, and $1,643, respectively, and
Consolidated Telephone Company and its affiliates were billed $61,277, $15,200,
and $8,366, respectively, for such services and equipment. In 1996 and 1997 Paul
Bunyan and its affiliates were billed $16,508 and $11,193, respectively, for
such services and equipment.
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<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth certain information provided to the Company
by the beneficial owners or contained in the Company's stock ownership records
regarding beneficial ownership of the Company's Common Stock as of July 21, 1998
(except as noted below) by (i) each person known by the Company to be the
beneficial owner of more than 5% of the Company's outstanding Class A or Class B
Common Stock; (ii) the Named Executive Officers; (iii) each director of the
Company; and (iv) all directors and executive officers of the Company as a
group. Unless otherwise indicated, each person has sole voting and investment
power with respect to the shares listed. In accordance with the rules of the
Commission, a person is deemed to be the beneficial owner of shares that such
person has a right to acquire beneficial ownership of within 60 days of the date
of determination through the exercise of an option to purchase such shares
("currently exercisable option").
<TABLE>
<CAPTION>
CLASS A CLASS B
COMMON STOCK COMMON STOCK
------------------------ -------------------------- PERCENTAGE OF
NUMBER PERCENTAGE NUMBER PERCENTAGE COMBINED
NAME AND ADDRESS OF BENEFICIAL OWNER OF SHARES OF CLASS OF SHARES OF CLASS VOTING POWER
- ---------------------------------------------------- --------- ------------- ----------- ------------- -----------------
<S> <C> <C> <C> <C> <C>
Franklin Resources, Inc. (1) ....................... 953,080 12.5% -- -- 4.7%
777 Mariners Island Boulevard
San Mateo, CA 94404
Baron Capital Group, Inc. (2) ...................... 892,000 11.7 -- -- 4.4
767 Fifth Avenue
24th Floor
New York, NY 10153
Telephone & Data Systems, Inc. (3) ................. 671,799 8.8 137,398 10.9% 10.1
30 North LaSalle Street
Chicago, IL 60602
T. Rowe Price (4) .................................. 511,400 6.7 -- -- 2.5
100 E. Pratt Street
Baltimore, MD 21202
Goldman Sachs & Co. (5) ............................ 495,800 6.5 -- -- 2.5
85 Broad Street
New York, NY 10004
Arvig Enterprises, Inc.(6) ......................... 358,893 4.7 121,664 9.7 7.8
160 2nd Ave. S.W.
Perham, MN 56573
Consolidated Telephone Company ..................... 201,107 2.6 86,189 6.8 5.3
1102 Madison Street
Brainerd, MN 56401
Melrose Telcom, Inc. ............................... 185,487 2.4 79,493 6.3 4.8
320 East Main Street
Melrose, MN 56352
Paul Bunyan Rural Telephone Cooperative (7) ........ 94,106 1.2 85,332 6.8 4.7
1831 Anne Street NW
Bemidji, MN 56601
West Central CelCom, Inc. .......................... -- * 79,857 6.3 3.9
209 Minnesota Avenue
Sebeka, MN 56477
Richard P. Ekstrand (8)............................. 173,226 2.3 32,708 2.6 2.5
</TABLE>
87
<PAGE>
<TABLE>
<CAPTION>
CLASS A CLASS B
COMMON STOCK COMMON STOCK
------------------------ -------------------------- PERCENTAGE OF
NUMBER PERCENTAGE NUMBER PERCENTAGE COMBINED
NAME AND ADDRESS OF BENEFICIAL OWNER OF SHARES OF CLASS OF SHARES OF CLASS VOTING POWER
- ---------------------------------------------------- --------- ------------- ----------- ------------- -----------------
<S> <C> <C> <C> <C> <C>
Jeffrey S. Gilbert (9).............................. 30,885 * -- -- *
Marvin C. Nicolai (10).............................. 212,607 2.8% 86,189 6.8% 5.3%
George M. Revering (11)............................. 25,994 * 38,538 3.1 2.0
Don C. Swenson (12)................................. 374,257 4.9 121,664 9.7 7.9
George W. Wikstrom (13)............................. 93,535 1.2 34,944 2.8 2.2
Scott G. Donlea (14)................................ 29,024 * -- -- *
Wesley E. Schultz (15).............................. 46,083 * -- -- *
All directors and executive officers as a group
(8 persons) (16).................................. 985,611 12.6 314,043 24.9 20.0
</TABLE>
- ------------------------
* Denotes less than 1%.
(1) Based on Schedule 13G dated January 30, 1998, filed jointly by Franklin
Resources, Inc., Charles B. Johnson and Rupert H. Johnson, Jr., principal
shareholders of Franklin Resources, Inc., and Franklin Advisers, Inc., a
subsidiary of Franklin Resources, Inc. Franklin Advisers, Inc. has sole
voting and dispositive power over such shares, which are held for the
benefit of investment advisory clients.
(2) Based on Schedule 13G dated May 11, 1998, filed jointly by The Baron
Capital Group, Inc. ("BCG"), BAMCO, Inc. ("BAMCO"), Baron Small Cap Fund
("BSCF"), and Ronald Baron ("Baron"), all of which share voting and
dispositive power over such shares. Baron owns a controlling interest in
BCG; BAMCO is a subsidiary of BCG, and BSCF is an investment advisory
client of BAMCO. BCG and Baron disclaim beneficial ownership of shares held
by their controlled entities to the extent such shares are held by persons
other than BCG and Baron. BAMCO disclaims beneficial ownership of shares
held by its clients to the extent such shares are not held by BAMCO or its
affiliates.
(3) Includes 100% of Rural Cellular Corporation Class A and B shares owned by
Arvig Cellular, Inc. (172,348 Class A and 70,243 Class B); Mid-State
Telephone Co. (74,746 Class A and 31,177 Class B); Minnesota Invco RSA #5
(339,705 Class A and 31,177 Class B); and Hancock Cellular Telephone
Company (85,000 Class A and 4,801 Class B). Telephone and Data Systems,
Inc. owns (i) 100% of TDS Telecommunications Corporation, which owns 100%
of Arvig Telcom, Inc., which in turn owns 100% of Arvig Cellular, Inc., and
100% of Mid-State Telephone Co. and (ii) approximately 80% of the issued
and outstanding shares of United States Cellular Corporation, which owns
100% of United States Cellular Investment Company, which owns 100% of
Minnesota Invco RSA #5, Inc., and 30% of Hancock Telephone Company.
(4) Based on Schedule 13G dated February 12, 1998. According to a statement
provided by T. Rowe Price Associates, Inc., "These securities are owned by
various individual and institutional investors which T. Rowe Price
Associates, Inc. (Price Associates) serves as investment advisor with power
to direct investments and/or sole power to vote the securities. For
purposes of the reporting requirements of the Securities Exchange Act of
1934, Price Associates is deemed to be a beneficial owner of such
securities; however, Price Associates expressly disclaims that it is, in
fact, the beneficial owner of such securities."
(5) Based on Schedule 13G dated February 14, 1998, filed jointly by Goldman
Sachs & Co. and The Goldman Sachs Group, LP, which have shared voting and
shared dispositive powers over such shares which are held for the benefit
of investment advisory clients.
(6) Includes 259,120 shares of Class A Common Stock and 96,930 shares of Class
B Common Stock owned by East Otter Tail Telephone Co. and 99,773 shares of
Class A Common Stock and 24,734 shares of Class B Common Stock owned by
Twin Valley-Ulen Telephone Company, both wholly-owned subsidiaries of Arvig
Enterprises, Inc.
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<PAGE>
(7) Includes 19,285 shares of Class A Common Stock owned by a subsidiary of
Paul Bunyan Rural Telephone Cooperative.
(8) Includes 97,276 shares of Class A Common Stock and 32,708 shares of Class B
Common Stock owned by Lowry Telephone Co., Inc., of which Mr. Ekstrand is
the sole shareholder and Vice President, and 1,500 shares of Class A Common
Stock held by or on behalf of Mr. Ekstrand's children. Also includes 73,950
shares of Class A Common Stock that may be purchased upon exercise of
currently exercisable options.
(9) Includes 19,285 shares of Class A Common Stock owned by Northern
Communications, Inc., of which Mr. Gilbert is the General Manager. Mr.
Gilbert disclaims beneficial ownership of these shares. Also includes
10,500 shares of Class A Common Stock that may be purchased upon exercise
of currently exercisable options.
(10) Includes 201,107 shares of Class A Common Stock and 86,189 shares of Class
B Common Stock owned by Consolidated Telephone Company, of which Mr.
Nicolai is the General Manager. Mr. Nicolai disclaims beneficial ownership
of these shares. Also includes 10,500 shares of Class A Common Stock that
may be purchased upon exercise of currently exercisable options
(11) Includes 26,200 shares of Class B Common Stock owned by Midwest Telephone
Company, of which Mr. Revering is General Manager, and 14,394 shares of
Class A Common Stock and 12,338 shares of Class B Common Stock owned by
Peoples Telephone Company of Big Fork, of which Mr. Revering is President.
Mr. Revering disclaims beneficial ownership of these shares. Also includes
10,500 shares of Class A Common Stock that may be purchased upon exercise
of currently exercisable options.
(12) Includes 358,893 shares of Class A Common Stock and 121,664 shares of
Class B Common Stock owned by affiliates of Arvig Enterprises, Inc., of
which Mr. Swenson is a member of the Board of Directors. Mr. Swenson
disclaims beneficial ownership of these shares. Also includes 10,500
shares of Class A Common Stock that may be purchased upon exercise of
currently exercisable options.
(13) Includes 81,535 shares of Class A Common Stock and 34,944 shares of Class
B Common Stock owned by Wikstrom Telephone Company, Inc., of which Mr.
Wikstrom is a shareholder and Vice President. Mr. Wikstrom disclaims
beneficial ownership of these shares. Also includes 10,500 shares of Class
A Common Stock that may be purchased upon exercise of currently
exercisable options.
(14) Includes four shares of Class A Common Stock owned by or on behalf of Mr.
Donlea's wife and children and 29,020 shares of Class A Common Stock that
may be purchased upon exercise of currently exercisable options.
(15) Includes 45,500 shares of Class A Common Stock that may be purchased upon
exercise of currently exercisable options.
(16) See Notes 8 through 15 above.
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<PAGE>
DESCRIPTION OF OTHER INDEBTEDNESS
The following is a summary of certain indebtedness which the Company expects
to incur, as such indebtedness is reflected in its negotiations with its
prospective lenders, and certain existing indebtedness. This summary is
qualified in its entirety by reference to the various documents governing the
indebtedness.
NEW CREDIT FACILITY
Concurrent with the closing of the Atlantic Acquisition, the Company
replaced its Existing Credit Facility with the New Credit Facility in the amount
$300 million, which, together with the proceeds of the Notes Offering, will be
used to finance the Acquisitions and pay related fees and expenses.
Proceeds of the New Credit Facility will be used (i) to finance the
Acquisitions, (ii) to refinance the remaining outstanding amounts payable under
the Existing Credit Facility (described below), (iii) for additional
acquisitions in geographic areas where the Company owns cellular systems or in
contiguous areas and (iv) for capital expenditures and general corporate
purposes. As of the date of this Prospectus, the Company has no commitments or
understandings for any acquisitions other than the Acquisitions disclosed
herein.
The New Credit Facility consists of a $200 million Senior Secured 8 1/2 year
Reducing Revolving Credit Facility (the "Revolving Credit") and a $100 million
8 1/2 year Senior Secured Amortizing Term Loan (the "Term Loan").
The Company's obligations under the New Credit Facility are secured by a
first security interest in all of the assets of the Company, excluding its
ownership interest in certain of its subsidiaries. Repayment is unconditionally
guaranteed by the Company's wholly-owned subsidiaries, each of whom has executed
a security agreement in favor of the lender granting a first security interest
in all of its property and assets. The security interests granted by the Company
and its wholly owned subsidiaries include all property, whenever acquired,
including inventory, accounts, equipment, contracts and leases, general
intangibles, licenses, furniture and fixtures, deposit accounts, miscellaneous
items and proceeds of any of the foregoing.
Interest will be payable on borrowings under the New Credit Facility at
rates based on, at the option of the Company, either (i) the 1, 2, 3, 6 or, if
made available by the Lender, 9 or 12 months London Interbank Offered Rate for
U.S. dollar deposits (LIBOR) or (ii) the Base Rate, which is the higher of the
prime rate of The Toronto-Dominion Bank or the Federal Funds Rate, plus 0.5%. In
each case, an additional margin of interest will be payable by the Company above
the Base Rate or LIBOR rate. The margin will be based on the ratio of the
Company's indebtedness (including the indebtedness of its subsidiaries) to its
annualized operating cash flow as of the end of the most recently completed
fiscal quarter. The margin above the Base Rate fluctuates from zero if the ratio
is equal to or less than 4 to 1, to 1.25% if the ratio is more than 8 to 1. The
margin above the LIBOR rate fluctuates from .75% if the ratio is equal to or
less than 4 to 1, to 2.25% if the ratio is more than 8 to 1.
Under certain terms and conditions, subject to the approval of a majority of
the lender interests in the facility, the amount available under the New Credit
Facility may be increased from $300 million to an amount not to exceed $425
million. The $125 million incremental facility will have a maturity no earlier
than 12 months after the maturity of the $300 million indebtedness under the New
Credit Facility, with principal repayments commencing not earlier than and in
amounts not larger than, the repayments under the $300 million indebtedness
under the New Credit Facility.
Subsequent to an event of default under the agreements governing the New
Credit Facility which continues beyond the applicable cure period, interest on
all outstanding amounts shall be payable at 2% over the highest applicable
margin otherwise applicable under the Base Rate option.
Interest only will be payable for the first 2 1/2 years. Thereafter, the New
Credit Facility commitment will be reduced and outstanding borrowings shall be
repaid in installments increasing over its term. In the first year of principal
payments, the annual amount to be repaid is 7.5% of the total principal amount,
gradually increasing to an annual payment in the final year of 27.5%. Payment in
full of the Revolving Credit and Term Loan will be due 8 1/2 years following
closing of the loans.
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In addition to the scheduled reductions of outstanding principal described
above, the Company will be required to reduce the amount of commitment available
to it under the New Credit Facility on each March 31, beginning on March 31,
2001, by an amount equal to 50% of its excess cash flow for the immediately
preceding year or portion thereof. In addition, the Company must pay certain
costs if it prepays LIBOR advances.
The New Credit Facility contains covenants that, subject to certain
exceptions, restrict the Company's ability to (1) make capital expenditures; (2)
sell or dispose of its assets; (3) incur additional debt; (4) incur contingent
liabilities and liens; (5) merge or acquire other companies or be subject to a
change of control of more than 50% in ownership; (6) make loans or advances or
stock repurchases; (7) engage in transactions with affiliates; and (8) make
investments. In addition, the primary business activity of the Company must
remain within the wireless communications industry.
The New Credit Facility also requires that the Company satisfy certain
financial tests and maintain certain financial ratios. The Company is required
to enter into certain interest rate swap agreements which will rank PARI PASSU
with the New Credit Facility.
Upon the occurrence of an event of default under the New Credit Facility,
the lenders may cease making loans, terminate the New Credit Facility and
declare all amounts outstanding to be immediately due and payable. The New
Credit Facility specifies a number of "events of default" including, among
others, the failure to make timely principal and interest payments, to perform
the covenants, or to maintain the required financial performance ratios.
EXISTING CREDIT FACILITY
Prior to the closing of the Atlantic Acquisition, the Company was party to a
Loan Agreement dated as of May 1, 1997 with a consortium of banks (the "Banks"),
as amended by a First Amendment to Loan Agreement dated August 4, 1997, a Second
Amendment to Loan Agreement dated as of December 30, 1997, a Third Amendment to
Loan Agreement dated as of April 17, 1998, and a Fourth Amendment to Loan
Agreement dated as of April 24, 1998 (collectively, the "Existing Credit
Facility"). The Existing Credit Facility consisted of a revolving credit line in
the principal amount of $160 million. The Company used the $120.6 million net
proceeds from the Exchangeable Preferred Stock Offering to reduce the
outstanding borrowings under the Existing Credit Facility. The proceeds of the
Notes Offering, together with the proceeds of the New Credit Facility described
above, paid all remaining obligations under the Existing Credit Facility in
full.
The Company's obligations under the Existing Credit Facility were secured by
a first security interest in all of the assets of the Company, excluding its
ownership interests in Cellular 2000 and Switch 2000. Repayment was
unconditionally guaranteed by certain of the Company's subsidiaries, each of
whom executed a security agreement in favor of the Banks granting a first
perfected security interest in all of its property and assets. The security
interests granted by the Company and such subsidiaries pledged as collateral all
property, whenever acquired, including inventory, accounts, equipment, contracts
and leases, general intangibles, licenses, furniture and fixtures, deposit
accounts, miscellaneous items and proceeds of any of the foregoing.
Interest was payable quarterly on borrowings under the Existing Credit
Facility at rates based on, at the option of the Company, either (i) the 1, 2,
3, 6 or if made available by the Banks, 9 or 12 months LIBOR Rate or (ii) the
Base Rate, which is the higher of the prime rate of The Toronto-Dominion Bank or
the Federal Funds Rate plus 0.5%. In each case, an additional margin of interest
was payable by the Company above the Base Rate or LIBOR rate. The margin was
based on the ratio of the Company's total indebtedness (including indebtedness
of its subsidiaries) to the operating cash flow of the Company and its
subsidiaries for the twelve calendar month period ending as of the end of the
most recently completed fiscal quarter. The margin above the Base Rate
fluctuates from zero if the ratio is less than 3 to 1, to .875% if the ratio is
more than 6. The margin above the LIBOR rate fluctuates from 1.00% if the ratio
is less than 3 to 1, to 1.875% if the ratio is greater than 6. Subsequent to an
event of default under the Existing Credit Facility which continued beyond the
applicable cure period, interest on outstanding amounts was payable at the
highest applicable margin plus 2%.
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DESCRIPTION OF CAPITAL STOCK
The following summary description of the existing capital stock of the
Company is based, in part, on the provisions of the Company's Articles of
Incorporation, as amended (the "Articles of Incorporation"), and the Company's
Restated Bylaws (the "Bylaws") and is qualified in its entirety by reference to
the provisions of the Articles of Incorporation and Bylaws. The authorized
capital stock of the Company consists of 15,000,000 shares of Class A Common
Stock, par value $.0l per share (the "Class A Common Stock"), 5,000,000 shares
of Class B Common Stock, par value $.0l per share (the "Class B Common Stock"),
and 10,000,000 undesignated shares of capital stock, par value $.01 per share
(the "Undesignated Shares"). As of July 21, 1998, 7,635,754 shares of Class A
Common Stock, 1,260,668 shares of Class B Common Stock and 125,000 shares of
Exchangeable Preferred Stock were issued and outstanding.
COMMON STOCK
The Class A Common Stock and the Class B Common Stock (collectively, the
"Common Stock") are identical except as to voting rights. The Class A Common
Stock has one vote per share, and the Class B Common Stock has ten votes per
share. As of July 21, 1998 there were 82 holders of record of Class A Common
Stock and 32 holders of record of Class B Common Stock. The Class A Common Stock
is publicly held and is traded on the Nasdaq National Market under the symbol
"RCCC." The Class B Common Stock is privately held and is not traded on any
market. Directors and executive officers of the Company own in the aggregate
approximately 25% of the outstanding Class B Common Stock. See "Security
Ownership of Certain Beneficial Owners and Management."
Shares of Class B Common Stock are to be converted into Class A Common Stock
on a share-for-share basis: (i) at any time at the option of the holder, (ii)
immediately upon the transfer of shares of Class B Common Stock to any holder
other than an affiliate of the current holder, or (iii) at any time upon the
vote of the holders of at least two-thirds of the Class B Common Stock then
outstanding.
Holders of Common Stock have no cumulative voting rights or pre-emptive
rights. Subject to preferences that may be applicable to any then outstanding
shares of Exchangeable Preferred Stock or other shares of preferred stock (if
any), holders of Common Stock are entitled to receive ratably such dividends as
may be declared by the Company's Board of Directors out of funds legally
available therefor. Cash dividends, if any, must be paid equally to holders of
Class A Common Stock and Class B Common Stock. Dividends paid in shares of
Common Stock are to be in shares of Class A Common Stock to holders of Class A
Common Stock and in shares of Class B Common Stock to holders of Class B Common
Stock. In the event of a liquidation, dissolution or winding-up of the Company,
holders of Common Stock will be entitled to share ratably in all assets
remaining after payment of liabilities and the liquidation preference of any
then outstanding Exchangeable Preferred Stock or other shares of preferred stock
(if any).
UNDESIGNATED SHARES
The Articles of Incorporation authorize the Board of Directors to issue,
from time to time and without further shareholder action, one or more series of
capital stock from the Undesignated Shares, and to fix the relative rights and
preferences of such shares, including voting powers, dividend rights,
liquidation preferences, redemption rights and conversion privileges. The
issuance of Undesignated Shares may have the effect of delaying, deferring, or
preventing a change in control of the Company without further action by the
shareholders of the Company. Undesignated Shares issued with voting, conversion,
or redemption rights may adversely affect the voting power of the holders of the
Common Stock and could discourage any attempt to obtain control of the Company.
As of the date of this Prospectus, the Board of Directors has authorized the
issuance of 450,000 shares of Exchangeable Preferred Stock, including 125,000
shares of Old Exchangeable Preferred Stock, 125,000 shares of New Exchangeable
Preferred Stock to be issued in the Exchange Offer as well as the issuance of
Additional Shares and Dividend Shares, and currently has no plan or intention to
issue any additional series or class of capital stock. See "Description of
Exchangeable Preferred Stock and Exchange Debentures -- Exchangeable Preferred
Stock."
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LIMITATION ON FOREIGN OWNERSHIP AND TRANSFERS OF CONTROL
The Communications Act and the FCC's implementing regulations prohibit the
holding of a common carrier license by a corporation of which more than 20% of
the capital stock is owned directly or beneficially by aliens or of which more
than 25% of the capital stock of its controlling company is owned directly or
beneficially by aliens. For this purpose, "capital stock" of the Company
includes all equity interests in the Company, including its Class A and Class B
Common Stock, preferred stock (including the Exchangeable Preferred Stock) and
Undesignated Shares. Absent FCC approval of foreign ownership exceeding these
limits, failure to comply with these requirements may result in an FCC order
requiring divestiture of alien ownership to bring the Company into compliance
with the Communications Act. In addition, fines or denial of renewal or
revocation of such license is possible. The Articles of Incorporation permit the
redemption of the Company's Common Stock from shareholders where necessary to
protect the Company's licenses.
The Communications Act and the FCC's regulations also require prior approval
of changes in control of entities holding common carrier licenses.
LIMITATION OF LIABILITY AND INDEMNIFICATION
As permitted by Minnesota Business Corporation Act (the "MBCA"), the
Articles of Incorporation provide that no director of the Company will be liable
to the Company or its shareholders for monetary damages for breach of a
fiduciary duty as a director other than (i) any breach of the director's duty of
loyalty to the Company or its shareholders, (ii) acts or omissions not in good
faith or involving intentional misconduct or a knowing violation of law, (iii)
approval of certain unlawful dividends or stock repurchases or redemptions, and
(iv) any transaction from which the director derived an improper personal
benefit. In appropriate circumstances equitable remedies such as an injunction
or other forms of non-monetary relief would remain available under Minnesota
law.
Section 302A.521 of the MBCA and the Articles of Incorporation provide that
the Company shall indemnify any director, officer, employee or agent of the
Company made or threatened to be made a party to a proceeding, by reason of the
former or present official capacity of the person, against judgments, penalties,
fines, settlements and reasonable expenses incurred by the person in connection
with the proceeding if certain statutory standards are met. "Proceeding" means a
threatened, pending or completed civil, criminal, administrative, arbitration or
investigative proceeding, including one by or in the right of the Company.
Section 302A.521 and the Articles of Incorporation contain detailed terms
regarding such right of indemnification and reference is made thereto for a
complete statement of such indemnification rights.
CERTAIN ANTITAKEOVER EFFECTS
In addition to the Undesignated Shares, certain provisions of the MBCA, the
Articles of Incorporation and Bylaws could have the effect of discouraging
certain attempts to acquire the Company, including a hostile takeover, or remove
incumbent management even if some or a majority of the Company's shareholders
were to deem such an attempt to be in their best interest, including an attempt
that might result in the payment of a premium over the market price for the
shares of Common Stock held by the Company's shareholders.
CLASSIFIED BOARD OF DIRECTORS, REMOVAL, VACANCIES
The Articles of Incorporation and Bylaws provide that the Board of Directors
of the Company is divided into three classes of directors serving staggered
three-year terms. The classification of directors has the effect of making it
more difficult for shareholders to change the composition of the Board of
Directors in a relatively short period of time. The Articles of Incorporation
and Bylaws further provide that directors may be removed only by the affirmative
vote of the holders of at least two-thirds of the voting power of all of the
outstanding shares of Common Stock entitled to vote for the election of
directors. In addition, vacancies, whether created by resignation, death,
removal or an increase in the number of directors, may be filled by a vote of a
majority of directors then in office, even though less than a quorum. The
foregoing provisions could prevent shareholders from removing incumbent
directors and filling the resulting vacancies with their own nominees.
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ADVANCE NOTICE PROVISIONS FOR SHAREHOLDER PROPOSALS AND NOMINATIONS OF
DIRECTORS
The Bylaws establish procedures with regard to the nomination, other than by
the Company's Board of Directors, of candidates for election as directors (the
"Nomination Procedure") and with regard to certain matters to be brought before
an annual meeting of shareholders of the Company (the "Business Procedure"). The
Nomination Procedure requires that a shareholder give prior written notice, in
specified form, of a planned nomination to the Company's Board of Directors to
the Company's Secretary. Any person who is not so nominated will not be eligible
for election as a director under the Nomination Procedure. Under the Business
Procedure, a shareholder seeking to have any business conducted at an annual or
special meeting must give prior written notice, in specified form, to the
Secretary of the Company. If business is not properly brought before a meeting
in accordance with the Business Procedure, such business will not be transacted
at such meeting. Although the Bylaws do not give the Company's Board of
Directors any power to approve or disapprove shareholder nominations for the
election of directors or any other business desired by shareholders to be
conducted at an annual or any other meeting, the Nomination Procedure and the
Business Procedure (i) may have the effect of precluding a nomination for the
election of directors or precluding the conduct of business at a particular
annual meeting if the proper procedures are not followed and (ii) may discourage
or deter a third party from conducting a solicitation of proxies to elect its
own slate of directors or otherwise attempt to obtain control of the Company,
even if the conduct of such solicitation or such attempt might be beneficial to
the Company and its shareholders.
SUPERMAJORITY VOTE
The Articles of Incorporation require the affirmative vote of at least
two-thirds of the voting power of all outstanding Common Stock entitled to vote
to authorize any merger, consolidation, exchange, sale or other disposition of
all or substantially all of the Company's assets or voluntary dissolution of the
Company. Such supermajority shareholder approval is not required if two-thirds
of the directors of the Company approve the transaction. Such actions require
only majority shareholder approval if the proposed action has been approved by
the affirmative vote of two-thirds of the directors of the Company.
AMENDMENTS
The approval of the holders of at least two-thirds of the voting power of
all outstanding shares of Common Stock entitled to vote for the election of
directors is required to amend certain provisions of the Articles of
Incorporation and Bylaws. Provisions requiring such approval include those
described above.
CERTAIN STATUTORY PROVISIONS
Section 302A.671 of the MBCA applies, with certain exceptions, to any
acquisition of voting stock of the Company resulting in the acquisition of
beneficial ownership of 20% or more of the voting stock then outstanding.
Section 302A.671 requires approval of any such acquisition by a majority of the
shareholders of the Company prior to its consummation. In general, shares
acquired in the absence of such approval are denied voting rights and are
redeemable at their then fair market value by the Company within 30 days after
the acquiring person has failed to give a timely information statement to the
Company or the date the shareholders have voted not to grant voting rights to
the acquiring person's shares.
Section 302A.673 of the MBCA generally prohibits any shareholder that
purchases 10% or more of the Company's voting shares (an "interested
shareholder") to enter into any business combination with the Company, or any
subsidiary of the Company, within four years following such interested
shareholder's share acquisition date, unless the business combination is
approved by a committee of all of the disinterested members of the Board of
Directors of the Company before the interested shareholder's share acquisition.
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DESCRIPTION OF SENIOR SUBORDINATED NOTES
The Old Notes have been, and the New Notes will be, issued under an
Indenture, dated as of May 14, 1998 (the "Notes Indenture"), by and between the
Company and Norwest Bank Minnesota, National Association, as Trustee (the "Notes
Trustee"). The Notes will be subject to and governed by the Trust Indenture Act.
The following summary of the material terms and provisions of the Senior
Subordinated Notes and the Notes Indenture does not purport to be complete and
is subject to and qualified in its entirety by reference to the Notes Indenture
(including the terms made part of the Notes Indenture by reference to the Trust
Indenture Act), copies of which are available for inspection at the Corporate
Trust Office of the Notes Trustee in Minneapolis, Minnesota and which may also
be obtained from the Company. Definitions relating to certain capitalized terms
used in this section of this Prospectus are set forth under "-- Certain
Definitions" and throughout this description. Capitalized terms that are used in
this section but not otherwise defined herein have the meanings assigned to them
in the Notes Indenture and such definitions are incorporated herein by
reference. Unless otherwise indicated, references in this section to covenants
are to covenants set forth in the Notes Indenture. As used in this section, the
"Company" refers to Rural Cellular Corporation, unless the context otherwise
requires.
GENERAL
The Senior Subordinated Notes will be unsecured obligations of the Company
and will be limited in aggregate principal amount to $175 million, of which $125
million were issued in the Notes Offering (the additional $50 million of
aggregate principal amount of Senior Subordinated Notes being referred to as
"Additional Notes"). The Company will be permitted to offer and sell Additional
Notes under the Notes Indenture after the Issue Date (subject to the
restrictions on Indebtedness contained in the Notes Indenture), provided that
the Company must offer and sell Additional Notes in tranches which are in each
case no less than $25 million in principal amount in the aggregate. The Senior
Subordinated Notes will be senior subordinated obligations of the Company,
subordinated in right of payment to Senior Indebtedness of the Company,
including amounts outstanding under the New Credit Facility, PARI PASSU in right
of payment with all future senior subordinated indebtedness of the Company and
senior in right of payment to any future subordinated indebtedness of the
Company.
MATURITY, INTEREST AND PRINCIPAL
The Senior Subordinated Notes will mature on May 15, 2008. Interest on the
Senior Subordinated Notes will accrue at a rate of 9 5/8% per annum and will be
payable in cash semiannually on each May 15 and November 15, commencing on
November 15, 1998, to the Holders of record on the immediately preceding May 1
and Novem-
ber 1. Interest will be computed on the basis of a 360-day year of twelve 30-day
months. The Senior Subordinated Notes will be payable both as to principal and
interest at the office or agency of the Company maintained for such purpose
within the City and State of New York. Until otherwise designated by the
Company, the Company's office or agency in New York will be the office of the
Notes Trustee maintained for such purpose.
All moneys paid by the Company to a paying agent for the payment of
principal of (and premium, if any) and any interest on any Senior Subordinated
Notes which remain unclaimed for two years after such principal (or premium, if
any) or interest has become due and payable may be repaid to the Company and
thereafter the Holder of such Senior Subordinated Notes may look only to the
Company for payment thereof.
SUBORDINATION
The payment of the principal of and premium, if any, and interest on the
Senior Subordinated Notes will, to the extent set forth in the Notes Indenture,
be subordinated in right of payment to the prior payment in full of all Senior
Indebtedness. Upon any payment or distribution of assets of the Company to
creditors upon any liquidation, dissolution, winding-up, reorganization,
assignment for the benefit of creditors, marshalling of assets or any
bankruptcy, insolvency or similar proceedings of the Company, the holders of all
Senior Indebtedness will be entitled to receive payment in full of all amounts
due or to become due thereon before the Holders of the Senior Subordinated Notes
will be entitled to receive any Senior Subordinated Notes Payment.
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In the event that any Senior Payment Default shall have occurred and be
continuing, or the maturity of any Senior Indebtedness shall have been
accelerated, then no Senior Subordinated Notes Payment shall be made unless and
until such Senior Payment Default shall have been cured or waived and any
acceleration of Senior Indebtedness shall have been rescinded or annulled. In
the event that any Senior Nonmonetary Default shall have occurred and be
continuing, then, upon the receipt by the Company and the Notes Trustee of
written notice of such Senior Nonmonetary Default from a Person designated as a
representative for the Designated Senior Indebtedness or, if there is no
outstanding Designated Senior Indebtedness, any holder of Senior Indebtedness,
no Senior Subordinated Notes Payment shall be made during the period (the
"Payment Blockage Period") commencing on the date of such receipt of such
written notice and ending on the earlier of (i) the date on which such Senior
Nonmonetary Default shall have been cured or waived or shall have ceased to
exist and any acceleration of Senior Indebtedness shall have been rescinded or
annulled or the Senior Indebtedness to which such Senior Nonmonetary Default
relates shall have been discharged or (ii) the 179th day after the date of such
receipt of such written notice. No more than one Payment Blockage Period may be
commenced with respect to the Senior Subordinated Notes during any 360-day
period and there shall be a period of at least 181 consecutive days in each
360-day period in which no Payment Blockage Period is in effect. For all
purposes of this paragraph, no Senior Nonmonetary Default that was known to the
holders of Senior Indebtedness to exist or be continuing on the date of
commencement of any Payment Blockage Period shall be, or be made, the basis for
the commencement of a subsequent Payment Blockage Period by a representative for
the Designated Senior Indebtedness unless such Senior Nonmonetary Default shall
have been cured for a period of not less than 90 consecutive days.
The subordination provisions described above will cease to be applicable to
the Senior Subordinated Notes upon any defeasance or covenant defeasance of the
Senior Subordinated Notes as described under "Defeasance."
At March 31, 1998 on a pro forma basis after giving effect to the
Acquisitions and the Offerings, Senior Indebtedness aggregated approximately
$163.8 million. The Company expects from time to time to Incur additional
Indebtedness constituting Senior Indebtedness. See "Capitalization." In
addition, all existing and future Indebtedness and other liabilities of the
Company's Subsidiaries will be effectively senior in right of payment to the
Senior Subordinated Notes. At March 31, 1998 on a pro forma basis after giving
effect to the Acquisitions and the Offerings, the Company's Subsidiaries had no
material Indebtedness outstanding, other than Intercompany Indebtedness and
guarantees by such Subsidiaries of the Credit Facility.
OPTIONAL REDEMPTION
After May 15, 2003, the Senior Subordinated Notes may be redeemed at any
time at the option of the Company, in whole or from time to time in part, on not
less than 30 nor more than 60 days prior notice, at the following redemption
prices (expressed as percentages of principal amount thereof), together with
accrued and unpaid interest to but excluding the date fixed for redemption, if
redeemed during the 12-month period beginning on May 15 of each of the years
indicated below:
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
- --------------------------------------------------------------------------- -----------------
<S> <C>
2003....................................................................... 104.813%
2004....................................................................... 103.208%
2005....................................................................... 101.604%
2006 and thereafter........................................................ 100.000%
</TABLE>
Notwithstanding the foregoing, at any time prior to May 15, 2001, the
Company may redeem up to 25% of the aggregate principal amount of Senior
Subordinated Notes (including Additional Notes) actually issued under the
Indenture from the net cash proceeds of a Qualifying Event at a price equal to
109.625% of the aggregate principal amount thereof, together with accrued and
unpaid interest to but excluding the date fixed for redemption; PROVIDED, that
at least $90 million in aggregate principal amount of Senior Subordinated Notes
remains outstanding immediately following such redemption. Any such redemption
must be made within 30 days after the related Qualifying Event.
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Notice of any optional redemption of any Senior Subordinated Notes (or
portion thereof) will be given to Holders at their addresses appearing in the
Security Register, not less than 30 nor more than 60 days prior to the date
fixed for redemption. The notice of redemption shall state the redemption date,
the redemption price, if less than all the outstanding Senior Subordinated Notes
are to be redeemed, principal amounts of the particular Senior Subordinated
Notes to be redeemed, that on the redemption date the redemption price will
become due and payable upon each Senior Subordinated Note to be redeemed and the
place or places where such Senior Subordinated Notes are to be surrendered for
payment of the redemption price. If less than all of the Notes are to be
redeemed, the particular Notes to be redeemed will be selected not more than 60
days prior to the redemption date by the Notes Trustee by such method as the
Notes Trustee deems fair and appropriate.
NO SINKING FUND
No sinking fund is provided for the Senior Subordinated Notes.
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each Holder of a Senior
Subordinated Note shall have the right to have such Senior Subordinated Note
repurchased by the Company on the terms and conditions set forth in the Notes
Indenture. The Company shall, within 30 days following the date of the
consummation of a transaction resulting in a Change of Control, mail an Offer to
Purchase all outstanding Senior Subordinated Notes at a purchase price equal to
101% of the aggregate principal amount thereof plus accrued and unpaid interest
to but excluding the date of purchase. The occurrence of a Change of Control
constitutes an event of default under the Credit Facility, entitling the lenders
thereunder to accelerate all obligations owing thereunder, which would result in
a block on all payments under the Senior Subordinated Notes. There can be no
assurance that the Company will be able to make or satisfy the Offer to
Purchase.
"Change of Control" means (i) directly or indirectly a sale, transfer or
other conveyance of all or substantially all the assets of the Company, on a
consolidated basis, to any "person" or "group" (as such terms are used for
purposes of Sections 13(d) and 14(d) of the Exchange Act, whether or not
applicable), excluding transfers or conveyances to or among the Company's Wholly
Owned Restricted Subsidiaries, as an entirety or substantially as an entirety in
one transaction or series of related transactions, in each case with the effect
that any Person or group of Persons owns more than 50% of the total Voting Power
entitled to vote in the election of directors, managers or trustees of the
transferee entity immediately after such transaction, (ii) any "person" or
"group" (as such terms are used for purposes of Sections 13(d) and 14(d) of the
Exchange Act, whether or not applicable) is or becomes the "beneficial owner"
(as that term is used in Rules 13d-3 and 13d-5 under the Exchange Act, whether
or not applicable, except that a Person shall be deemed to have "beneficial
ownership" of all shares that any such Person has the right to acquire, whether
such right is exercisable immediately or only after the passage of time),
directly or indirectly, of more than 50% of the total Voting Power of the
Company or (iii) during any period of 24 consecutive months, individuals who at
the beginning of such period constituted the Board of Directors of the Company
(together with any new directors whose election by such Board or whose
nomination for election by the shareholders of the Company was approved by a
vote of a majority of the directors then still in office who were either
directors at the beginning of such period or whose election or nomination for
election was previously so approved), cease for any reason to constitute a
majority of the Board of Directors of the Company then in office.
The Company will comply with any tender offer rules under the Exchange Act
which may then be applicable, including Rule 14e-l thereunder, in connection
with any Offer to Purchase.
CERTAIN COVENANTS
LIMITATION ON CONSOLIDATED INDEBTEDNESS
The Notes Indenture prohibits the Company and its Restricted Subsidiaries
from Incurring any Indebtedness, except that the Company may Incur Indebtedness
if (x) there exists no Event of Default or an event which with notice or lapse
of time or both would become an Event of Default immediately prior and
subsequent thereto, and
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(y) after giving effect thereto, the Company's Annualized Operating Cash Flow
Ratio on a pro forma basis (calculated on the assumption that such Indebtedness
had been incurred on the first day of the applicable Reference Period), would
have been less than:
<TABLE>
<CAPTION>
FOR THE PERIOD RATIO
- ----------------------------------------------------------------------------------- ---------
<S> <C>
9.0 to
Prior to January 1, 2000........................................................... 1.0
8.0 to
Thereafter......................................................................... 1.0
</TABLE>
Notwithstanding the foregoing, if there exists no Event of Default or an
event which with notice or lapse of time or both would become an Event of
Default immediately prior and subsequent thereto, the Company and its Restricted
Subsidiaries may Incur the following Indebtedness (other than the Indebtedness
evidenced by the Exchange Debentures) without regard to the foregoing
limitations:
(i) Indebtedness evidenced by the Senior Subordinated Notes on the
Issue Date;
(ii) the Incurrence by the Company of (x) prior to the date of the
consummation of the Atlantic Acquisition, Indebtedness Incurred under the
Existing Credit Facility in an aggregate principal amount not to exceed $160
million at any time outstanding, reduced by repayments and permanent
reductions thereof due to application of Net Cash Proceeds pursuant to the
"Limitation on Asset Sales and Sales of Subsidiary Stock" covenant; and (y)
on and after the date of the consummation of the Atlantic Acquisition,
Indebtedness Incurred under the New Credit Facility in an aggregate
principal amount not to exceed $300 million at any time outstanding, reduced
by repayments and permanent reductions thereof due to the application of Net
Cash Proceeds as set forth in the "-- Limitation on Asset Sales and Sales of
Subsidiary Stock" covenant;
(iii) Indebtedness of the Company or any Restricted Subsidiary of the
Company owing to the Company or any Restricted Subsidiary of the Company
("Intercompany Indebtedness"); PROVIDED that (A) in the case of any such
Indebtedness of the Company, such obligations will be unsecured and
subordinated in all respects to the Holders' rights pursuant to the Senior
Subordinated Notes to the same extent as the Senior Subordinated Notes are
subordinated to Senior Indebtedness and (B) if any event occurs that causes
a Restricted Subsidiary to no longer be a Restricted Subsidiary, then this
clause (iii) will no longer be applicable to such Indebtedness of that
Restricted Subsidiary;
(iv) Indebtedness of the Company or any Restricted Subsidiary of the
Company to renew, extend, refinance or refund any Indebtedness of the
Company or such Restricted Subsidiary outstanding or committed on the date
of renewal, extension, refinancing or refunding other than Indebtedness
Incurred pursuant to clause (ii) or (iii); PROVIDED, HOWEVER, that such
Indebtedness does not exceed the principal amount of outstanding or
committed Indebtedness so renewed, extended, refinanced or refunded plus
financing fees and other expenses associated therewith; and PROVIDED
FURTHER, HOWEVER, that (a) such renewing, extending, refinancing or
refunding Indebtedness will not have a final maturity and will not have any
other mandatory repayments or redemptions prior to or in amounts greater
than those of the Indebtedness being renewed, extended, refinanced or
refunded, (b) in the case of any refinancing or refunding of Indebtedness
that ranks PARI PASSU in right of payment to the Senior Subordinated Notes,
the refinancing or refunding Indebtedness ranks PARI PASSU or is
subordinated in right of payment to the Senior Subordinated Notes and, in
the case of any refinancing or refunding of Indebtedness subordinated to the
Senior Subordinated Notes, the refinancing or refunding Indebtedness ranks
subordinate in right of payment to the Senior Subordinated Notes to
substantially the same extent as the Indebtedness refinanced or refunded and
(c) no Restricted Subsidiary of the Company will be permitted to refinance
any Indebtedness of the Company;
(v) Indebtedness Incurred by the Company or any Restricted Subsidiary of
the Company under Interest Hedge Agreements to hedge interest on permitted
Indebtedness, PROVIDED, that the notional principal amount of any such
Interest Hedge Agreements does not exceed the principal amount of
Indebtedness to which such Interest Hedge Agreements relate;
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(vi) Indebtedness of any Restricted Subsidiary of the Company which does
not exceed $30 million in the aggregate for all such Restricted Subsidiaries
at any time outstanding (excluding any Intercompany Indebtedness or Acquired
Indebtedness permitted to be Incurred under the Notes Indenture), PROVIDED,
that after giving effect thereto on a pro forma basis the Company's
Annualized Operating Cash Flow Ratio is less than 7.5 to 1.0 and the
Adjusted Annualized Operating Cash Flow Ratio of such Restricted Subsidiary
is less than 5.0 to 1.0;
(vii) any guarantee by any Restricted Subsidiary of any Indebtedness
Incurred under the Existing Credit Facility or New Credit Facility in
compliance with this covenant;
(viii) Acquired Indebtedness, PROVIDED that on a pro forma basis after
giving effect to the Incurrence of such Indebtedness, the Company shall be
able to Incur $1.00 of additional Indebtedness pursuant to the provisions
described under the first paragraph of this covenant "Limitation on
Consolidated Indebtedness";
(ix) Indebtedness in respect of performance, surety or appeal bonds
provided in the ordinary course of business;
(x) Indebtedness arising from agreements providing for indemnification,
adjustment of purchase price or similar obligations, or from guarantees or
letters of credit, surety bonds or performance bonds securing any
obligations of the Company or any of its Restricted Subsidiaries pursuant to
such agreements, in any case Incurred in connection with the disposition of
any business, assets or Restricted Subsidiary of the Company (other than
guarantees of Indebtedness Incurred by any Person acquiring all or any
portion of such business, assets or Restricted Subsidiary of the Company for
the purpose of financing such acquisition), in an amount not to exceed the
gross proceeds actually received by the Company or any Restricted Subsidiary
in connection with such disposition; and
(xi) Indebtedness of the Company or any Restricted Subsidiary, other
than Indebtedness permitted pursuant to clauses (i) through (x) above, which
does not exceed $10 million at any time outstanding or committed.
LIMITATION ON PREFERRED STOCK OF RESTRICTED SUBSIDIARIES
The Notes Indenture prohibits the Company from allowing any Restricted
Subsidiary of the Company to create or issue any Preferred Stock except:
(i) Preferred Stock outstanding on the Issue Date;
(ii) Preferred Stock issued to and held by the Company or any Wholly
Owned Restricted Subsidiary of the Company;
(iii) Preferred Stock issued by any Person prior to that Person's having
become a direct or indirect Restricted Subsidiary of the Company; and
(iv) Preferred Stock issued by a Restricted Subsidiary the proceeds of
which are used to refinance outstanding Preferred Stock of a Restricted
Subsidiary, provided that (a) the liquidation value of the refinancing
Preferred Stock does not exceed the liquidation value so refinanced plus
financing fees and other expenses associated with such refinancing and (b)
such refinancing Preferred Stock has no mandatory redemptions prior to (and
in no greater amounts than) the Preferred Stock being refinanced.
LIMITATION ON ASSET SALES AND SALES OF SUBSIDIARY STOCK
The Notes Indenture provides that after the Issue Date the Company will not,
and will not permit any of its Restricted Subsidiaries to, in one transaction or
a series of related transactions, convey, sell, transfer, assign or otherwise
dispose of, directly or indirectly, any of its property, business or assets,
including any sale or other transfer or issuance of any Capital Stock of any
Restricted Subsidiary of the Company, whether owned on the Issue Date or
thereafter acquired (an "Asset Sale") unless (a) such Asset Sale is for Fair
Market Value, (b) at least 80% of the value of the consideration for such Asset
Sale consists of (i) cash, (ii) the assumption by the transferee (and release
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of the Company or Subsidiary, as the case may be) of Senior Indebtedness or
Indebtedness of the Company that ranks PARI PASSU in right of payment to the
Senior Subordinated Notes or Indebtedness of such Restricted Subsidiary, or
(iii) notes, obligations or other marketable securities (collectively
"Marketable Securities") that are immediately converted into cash and (c) the
Net Cash Proceeds therefrom are applied on or prior to the date that is 360 days
after the date of such Asset Sale (i) to the repayment of Indebtedness under the
Credit Facility (which payment permanently reduces the commitment thereunder) or
(ii) to the repurchase of the Senior Subordinated Notes pursuant to an offer to
purchase (an "Asset Sale Offer") described below or (iii) to an investment in a
Wireless Communications Business.
Notwithstanding the foregoing provisions of the prior paragraph:
(i) any Restricted Subsidiary of the Company may convey, sell, lease,
transfer or otherwise dispose of any or all of its assets (upon voluntary
liquidation or otherwise) to the Company or a Wholly Owned Restricted
Subsidiary of the Company;
(ii) the Company and its Restricted Subsidiaries may, in the ordinary
course of business, (A) convey, sell, lease, transfer, assign or otherwise
dispose of assets in the ordinary course of business provided that the
consideration received reflects the Fair Market Value of such assets and (B)
exchange assets for either assets or equity interests in Wireless
Communications Businesses, provided that (I) the assets or equity interests
received have a Fair Market Value substantially equal to the assets
exchanged, (II) the assets received by the Company are controlled by the
Company with respect to voting rights and day-to-day operations, or the
equity interests received by the Company represent a controlling interest in
the total Voting Power and day-to-day operations of a Person that is the
issuer of such equity interests, (III) there exists no Event of Default or
event which with notice or lapse of time or both would become an Event of
Default immediately prior and subsequent thereto, and (IV) immediately after
giving effect to such transaction, the Company would be permitted to incur
at least $1.00 of additional Indebtedness pursuant to the provision of the
Notes Indenture described in the first paragraph under "-- Limitation on
Consolidated Indebtedness";
(iii) the Company and its Restricted Subsidiaries may convey, sell,
lease, transfer, assign or otherwise dispose of assets pursuant to and in
accordance with the covenants described in "Consolidation, Merger,
Conveyance, Transfer or Lease";
(iv) the Company and its Restricted Subsidiaries may (a) sell damaged,
worn out or other obsolete property in the ordinary course of business or
other property no longer necessary for the proper conduct of the business of
the Company or any of its Restricted Subsidiaries or (b) abandon such
property if it cannot, through reasonable efforts, be sold; and
(v) in addition to the Asset Sales permitted by the foregoing clauses
(i) through (iv), the Company and its Restricted Subsidiaries may consummate
Asset Sales (other than in the case of Capital Stock of any Restricted
Subsidiary of the Company) with respect to property, business or assets the
Fair Market Value of which does not exceed $5 million in the aggregate after
the Issue Date.
The Notes Indenture provides that an Asset Sale Offer may be deferred until
the accumulated Net Cash Proceeds not applied to the uses set forth in
subsections (c)(i) or (c)(iii) in the first paragraph of this Section
"Limitation on Asset Sales and Sales of Subsidiary Stock" exceed $5 million. An
Asset Sale Offer will remain open for a period of 20 Business Days following its
commencement and no longer, except to the extent that a longer period is
required by applicable law (the "Asset Sale Offer Period"). No later than five
Business Days after the termination of the Asset Sale Offer Period (the "Asset
Sale Purchase Date"), the Company will purchase the principal amount of Senior
Subordinated Notes required to be purchased pursuant to this covenant (the
"Asset Sale Offer Amount") at a purchase price equal to 100% of the principal
amount of the Senior Subordinated Notes plus accrued and unpaid interest to but
excluding the date of the purchase or, if less than the Asset Sale Offer Amount
has been tendered, all Senior Subordinated Notes tendered in response to the
Asset Sale Offer. Payment for any Senior Subordinated Notes so purchased will be
made in the same manner as interest payments are made.
If the Asset Sale Purchase Date is on or after an interest record date and
on or before the related interest payment date, any accrued and unpaid interest
will be paid to the Person in whose name a Senior Subordinated
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Note is registered at the close of business on such record date, and no
additional interest will be payable to Holders who tender Senior Subordinated
Notes pursuant to the Asset Sale Offer.
On or before the Asset Sale Purchase Date, the Company will, to the extent
lawful, accept for payment, on a pro rata basis to the extent necessary, the
Asset Sale Offer Amount of Senior Subordinated Notes or portions thereof
tendered pursuant to the Asset Sale Offer, or if less than the Asset Sale Offer
Amount has been tendered, all Senior Subordinated Notes tendered, and will
deliver to the Notes Trustee an Officers' Certificate stating that such Senior
Subordinated Notes or portions thereof were accepted for payment by the Company
in accordance with the terms of this covenant. The Company, the Depositary or
the Paying Agent, as the case may be, will promptly (but in any case not later
than five days after the Asset Sale Purchase Date) mail or deliver to each
tendering Holder an amount equal to the purchase price of the Senior
Subordinated Notes tendered by such Holder and accepted by the Company for
purchase, and the Company will promptly issue a new Senior Subordinated Note,
and the Notes Trustee, upon written request from the Company, will authenticate
and mail or deliver such new Senior Subordinated Note to such Holder, in a
principal amount equal to any unpurchased portion of the Senior Subordinated
Note surrendered. Any Senior Subordinated Note not so accepted will be promptly
mailed or delivered by the Company to the Holder thereof. The Company will
publicly announce the results of the Asset Sale Offer on the Asset Sale Purchase
Date.
LIMITATION ON RESTRICTED PAYMENTS
The Notes Indenture prohibits the Company or any Restricted Subsidiary from
making any Restricted Payment unless after giving effect thereto (a) no Event of
Default or event which with notice or lapse of time or both would become an
Event of Default has occurred and is continuing; (b) the Company would be
permitted to Incur an additional $1.00 of Indebtedness pursuant to the provision
of the Notes Indenture described in the first paragraph under "-- Limitation on
Consolidated Indebtedness"; and (c) the total of all Restricted Payments made on
or after the Issue Date does not exceed the sum of (i) Cumulative Operating Cash
Flow less 1.75 times Cumulative Interest Expense, (ii) 100% of the aggregate
Qualified Capital Stock Proceeds of the Company after the Issue Date, and (iii)
100% of the cash proceeds received from an Unrestricted Subsidiary to the extent
of Investments (other than Permitted Investments) made in such Unrestricted
Subsidiary since the Issue Date.
The foregoing provision shall not be violated, so long as no Event of
Default or event which with notice or lapse of time or both would become an
Event of Default has occurred and is continuing (other than in the case of
clause (ii)), by reason of (i) the payment of any dividend within 60 days after
declaration thereof if at the declaration date such payment would have complied
with the foregoing provision, (ii) any refinancing of any Indebtedness otherwise
permitted under the provision of the Notes Indenture described under clause (ii)
or (iv) of "-- Limitation on Consolidated Indebtedness," (iii) the issuance of
the Exchange Debentures in exchange for the Exchangeable Preferred Stock in
accordance with the terms of the Exchangeable Preferred Stock, PROVIDED, that
after giving effect thereto the Company's Annualized Operating Cash Flow Ratio
on a pro forma basis (calculated on the assumption that such Indebtedness had
been Incurred on the first day of the applicable Reference Period), would have
been less than 7.0 to 1.0, (iv) the purchase, redemption or other acquisition or
retirement for value of shares of Capital Stock of any Restricted Subsidiary
held by Persons other than the Company or any of its Restricted Subsidiaries,
(v) the redemption, defeasance, repurchase or other acquisition or retirement of
any Capital Stock of the Company or any Subordinated Indebtedness prior to its
scheduled maturity either in exchange for or out of the net cash proceeds of the
substantially concurrent sale (other than to a Subsidiary of the Company) of
Qualified Capital Stock of the Company and (vi) Restricted Payments, in addition
to Restricted Payments permitted pursuant to clauses (i) through (v) of this
paragraph, not in excess of $10 million in the aggregate after the Issue Date.
The payments described in clauses (i), (iii), (v) (provided the proceeds of the
sale of the Qualified Capital Stock referred to in such clause constitute
Qualified Capital Stock Proceeds) and (vi) of this paragraph will count as
Restricted Payments for the calculation under the first paragraph of this
section "Limitation on Restricted Payments."
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LIMITATIONS CONCERNING DISTRIBUTIONS AND TRANSFERS BY RESTRICTED
SUBSIDIARIES
The Notes Indenture provides that the Company shall not, and shall not
permit any Restricted Subsidiary to, create or otherwise cause or suffer to
exist or become effective any consensual restriction or prohibition on the
ability of any Restricted Subsidiary to (a) pay dividends on, or make other
distributions in respect of, its Capital Stock, or any other ownership interest
or participation in, or measured by, its profits, to the Company or any
Restricted Subsidiary or pay any Indebtedness or other obligation owed to the
Company or any Restricted Subsidiary, (b) make any loans or advances to the
Company or any Restricted Subsidiary or (c) transfer any of its property or
assets to the Company or any Restricted Subsidiary. Notwithstanding the
foregoing, the Company may, and may permit any Restricted Subsidiary to, suffer
to exist any such restriction or prohibition (i) pursuant to the Notes
Indenture, the Existing Credit Facility, any other agreement in effect on the
Issue Date or, if executed and delivered, the Exchange Indenture, PROVIDED that
any such restriction or prohibition in the Exchange Indenture is no more
restrictive than that contained in the Notes Indenture, (ii) pursuant to an
agreement relating to any Indebtedness of such Restricted Subsidiary which was
outstanding or committed prior to the date on which such Restricted Subsidiary
became a Restricted Subsidiary of the Company other than in anticipation of
becoming a Restricted Subsidiary; PROVIDED, that such restriction or prohibition
shall not apply to any property or assets of the Company or any Restricted
Subsidiary other than the property or assets of such Restricted Subsidiary and
its Subsidiaries, (iii) pursuant to an agreement effecting a renewal, extension,
refinancing or refunding of any agreement described in clauses (i) and (ii)
above, PROVIDED, HOWEVER, that the provisions contained in such renewal,
extension, refinancing or refunding agreement relating to such restriction or
prohibition are no more restrictive in any material respect than the provisions
contained in the agreement which is the subject thereof (it being understood
that for purposes of this clause (iii) the New Credit Facility is deemed to be a
refinancing of the Existing Credit Facility), (iv) existing under or by reason
of applicable law, (v) customary provisions restricting subletting or assignment
of any lease governing any leasehold interest of any Restricted Subsidiary, (vi)
purchase money obligations for property acquired in the ordinary course of
business that impose restrictions of the type referred to in clause (c) of this
covenant, (vii) restrictions of the type referred to in clause (c) of this
covenant contained in security agreements securing Indebtedness of a Restricted
Subsidiary to the extent that such Liens were otherwise incurred in accordance
with "-- Limitations on Liens" below and restrict the transfer of property
subject to such agreements, or (viii) customary provisions in joint venture
agreements and other similar agreements entered into in the ordinary course of
business.
LIMITATIONS ON TRANSACTIONS WITH AFFILIATES AND RELATED PERSONS
The Notes Indenture provides that the Company will not, and will not permit
any Restricted Subsidiary of the Company to, enter into any transaction
involving aggregate consideration in excess of (a) $1 million, including,
without limitation, any purchase, sale, lease or exchange of property or the
rendering of any service, with or to any Affiliate or Related Person of the
Company (other than a Restricted Subsidiary), unless a majority of the
disinterested members of the Board of Directors of the Company determines (which
determination will be evidenced by a Board Resolution) that (i) such transaction
is in the best interests of the Company or such Restricted Subsidiary and (ii)
such transaction is on terms that are no less favorable to the Company or such
Restricted Subsidiary than those which might be obtained in arm's-length
transactions with a third party at the time and (b) $5 million unless (in
addition to the provisions of the foregoing clause (a)) the Company receives a
written opinion from an investment banking firm of national reputation to the
effect that such transaction is fair to the Company or such Restricted
Subsidiary from a financial point of view; PROVIDED, that in the case of
transactions entered into in the ordinary course of business involving the
provision of telecommunications services by Affiliates or Related Persons of the
Company (who are regularly engaged in the provision of telecommunications
services) to the Company or any of its Restricted Subsidiaries (x) if the
aggregate consideration involved is not in excess of $5 million, then clause (a)
above shall be applicable but the good faith judgment of an officer of the
Company shall be substituted for the requirement of a resolution of the Board of
Directors and (y) if the aggregate consideration involved exceeds $5 million,
clause (b) above shall not be applicable but clause (a) above shall be
applicable.
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LIMITATIONS ON LIENS
The Notes Indenture provides that the Company will not, and will not permit
any Restricted Subsidiary of the Company to, Incur or suffer to exist any Lien
on or with respect to any property or assets now owned or hereafter acquired to
secure any Indebtedness that ranks in right of payment PARI PASSU with or
subordinate to the Senior Subordinated Notes without making, or causing such
Restricted Subsidiary to make, effective provision for securing the Senior
Subordinated Notes (i) equally and ratably with such Indebtedness as to such
property for so long as such Indebtedness will be so secured or (ii) in the
event such Indebtedness is Indebtedness of the Company or a Restricted
Subsidiary which is subordinate in right of payment to the Senior Subordinated
Notes, prior to such Indebtedness as to such property for so long as such
Indebtedness will be so secured.
The foregoing restrictions shall not apply to: (i) Liens existing in respect
of any Indebtedness that exists on the Issue Date; (ii) Liens in favor of the
Company or Liens in favor of a Wholly Owned Restricted Subsidiary of the Company
on the assets or Capital Stock of another Wholly Owned Restricted Subsidiary of
the Company; (iii) Liens to secure Indebtedness outstanding or committed for the
purpose of financing all or any part of the purchase price or the cost of
construction or improvement of the equipment or other property subject to such
Liens; PROVIDED, HOWEVER, that (a) the principal amount of any Indebtedness
secured by such a Lien does not exceed 100% of such purchase price or cost, (b)
such Lien does not extend to or cover any property other than such item of
property or any improvements on such item and (c) the Incurrence of such
Indebtedness is otherwise permitted by the Notes Indenture; (iv) Liens on
property existing immediately prior to the time of acquisition thereof (and not
Incurred in anticipation of the financing of such acquisition); (v) Liens to
secure Indebtedness to extend, renew, refinance or refund (or successive
extensions, renewals, refinancings or refundings), in whole or in part,
Indebtedness secured by any Lien referred to in the foregoing clauses (i), (iii)
and (iv) so long as such Lien does not extend to any other property and the
principal amount of Indebtedness so secured is not increased except as otherwise
permitted under the provision of the Notes Indenture described under clause (ii)
or (iv) of "-- Limitation on Consolidated Indebtedness"; (vi) Liens on any
Permitted Investment in Cooperative Bank Equity in favor of any Cooperative
Banks; or (vii) any other Liens in respect of any Indebtedness, which
Indebtedness does not exceed $500,000 in the aggregate.
LIMITATION ON CERTAIN DEBT
The Notes Indenture provides that the Company will not Incur any
Indebtedness that is subordinate in right of payment to any other Indebtedness
of the Company unless the Indebtedness so Incurred is either PARI PASSU or
subordinate in right of payment to the Senior Subordinated Notes.
CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE
The Notes Indenture provides that the Company will not consolidate with or
merge into any Person or permit any other Person to consolidate with or merge
into the Company, or transfer, sell, convey or lease or otherwise dispose of all
or substantially all of its assets to, any Person unless (i) (a) the Company is
the surviving entity or (b) if the Company is not the surviving entity then the
successor or transferee assumes all the obligations of the Company under the
Senior Subordinated Notes and the Notes Indenture and the surviving entity shall
be a corporation organized and validly existing under the laws of the United
States of America or any jurisdiction thereof, (ii) the Consolidated Net Worth
of the successor or transferee immediately after the transaction is not less
than 100% of the Company's Consolidated Net Worth immediately prior to the
transaction, (iii) immediately after giving effect to such transaction, the
Company (or its permitted successor or transferee) would be permitted to Incur
at least $1.00 of additional Indebtedness pursuant to the provision of the Notes
Indenture described in the first paragraph under "-- Limitation on Consolidated
Indebtedness," (iv) after giving effect to such transaction no Event of Default
or event which with notice or lapse of time would become an Event of Default has
occurred and is continuing and (v) an Officers' Certificate and an Opinion of
Counsel covering such conditions shall be delivered to the Notes Trustee.
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REPORTS
The Notes Indenture provides that whether or not the Company is subject to
the reporting requirements of Section 13 or 15(d) of the Exchange Act, the
Company shall deliver to the Notes Trustee and to each Holder, within 15 days
after it is or would have been required to file such with the Commission, annual
and quarterly financial statements substantially equivalent to financial
statements that would have been included in reports filed with the Commission,
if the Company were subject to the requirements of Section 13 or 15(d) of the
Exchange Act, including, with respect to annual information only, a report
thereon by the Company's certified independent public accountants as such would
be required in such reports to the Commission, and in each case, together with a
management's discussion and analysis of financial condition and results of
operations which would be so required.
EVENTS OF DEFAULT AND REMEDIES
The following are Events of Default under the Notes Indenture: (i) failure
to pay the principal of or premium, if any, on the Senior Subordinated Notes at
Maturity; (ii) failure to pay any interest on the Senior Subordinated Notes for
a period of 30 days or more after it becomes due and payable; (iii) failure to
offer to purchase or purchase in a timely fashion Senior Subordinated Notes
required to be purchased by the Company pursuant to any of the provisions of the
Notes Indenture described under "-- Change of Control" or "-- Covenants --
Limitation on Asset Sales and Sales of Subsidiary Stock"; (iv) failure to
perform or comply with the provisions of the Notes Indenture described under "--
Consolidation, Merger, Conveyance, Transfer or Lease"; (v) failure to perform
any other covenant or agreement of the Company under the Notes Indenture that
continues for 30 days after written notice to the Company by the Notes Trustee
or Holders of at least 25% in aggregate principal amount of outstanding Senior
Subordinated Notes; (vi) default by the Company or any Restricted Subsidiary
under the terms of any instrument evidencing or securing Indebtedness having an
outstanding principal amount in excess of $5 million in the aggregate, which
default results in the acceleration of the payment of such Indebtedness or
constitutes the failure to pay the principal of such Indebtedness at maturity;
(vii) the rendering of a final judgment or judgments against the Company or a
Restricted Subsidiary in an amount in excess of $5 million which remains
undischarged or unstayed for a period of 60 days after the date on which the
right of appeal has expired; and (viii) certain events of bankruptcy, insolvency
or reorganization affecting the Company or a Restricted Subsidiary.
If an Event of Default, other than an event described under (viii) above,
shall occur and be continuing, either the Notes Trustee or the Holders of at
least 25% in aggregate principal amount of the Senior Subordinated Notes by
notice as provided in the Notes Indenture may declare the principal amount of
the Senior Subordinated Notes to be due and payable immediately; PROVIDED,
HOWEVER, that after such acceleration, but before a judgment or decree based on
acceleration, the Holders of a majority in aggregate principal amount of
outstanding Senior Subordinated Notes may, under certain circumstances, rescind
and annul such acceleration if all Events of Default, other than the nonpayment
of accelerated principal of the Senior Subordinated Notes, have been cured or
waived as provided in the Notes Indenture. If an Event of Default described
under (viii) above shall occur, the Senior Subordinated Notes will become
immediately due and payable without any declaration or other act on the part of
the Notes Trustee or any Holder.
No Holder of any Senior Subordinated Note will have any right to institute
any proceeding with respect to the Notes Indenture or for any remedy thereunder,
unless such Holder shall have previously given to the Notes Trustee written
notice of an Event of Default and unless the Holders of at least 25% in
aggregate principal amount of the outstanding Senior Subordinated Notes shall
have made written request to the Notes Trustee and the Notes Trustee shall not
have received from the Holders of a majority in aggregate principal amount of
the outstanding Senior Subordinated Notes a direction inconsistent with such
request and shall have failed to institute such proceeding within 60 days.
However, such limitations do not apply to a suit instituted by a Holder of a
Senior Subordinated Note for enforcement of payment of the principal of and
premium, if any, or interest on such Senior Subordinated Note on or after the
respective due dates expressed in such Senior Subordinated Note. The Holders of
a majority in aggregate principal amount of the Senior Subordinated Notes
outstanding may waive any existing Event of Default except an Event of Default
in the payment of interest or principal (including premium) on the Senior
Subordinated Notes.
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MODIFICATION AND WAIVER
Modifications and amendments of the Notes Indenture may be made by the
Company and the Notes Trustee with the consent of the Holders of a majority in
aggregate principal amount of the outstanding Senior Subordinated Notes;
PROVIDED, HOWEVER, that no such modification or amendment may, without the
consent of the Holder of each Senior Subordinated Note affected thereby, (i)
change the Stated Maturity of the principal of, or any installment of interest
on, any Senior Subordinated Note, (ii) reduce the principal amount of, or
premium, if any, or interest on any Senior Subordinated Note, (iii) change the
place or currency of payment of principal of, or premium, if any, or interest on
any Senior Subordinated Note, (iv) impair the right to institute suit for the
enforcement of any payment on or with respect to any Senior Subordinated Note,
(v) reduce the percentage of aggregate principal amount of Senior Subordinated
Notes outstanding necessary to amend the Notes Indenture, (vi) reduce the
percentage of aggregate principal amount of Senior Subordinated Notes
outstanding necessary for waiver of compliance with certain provisions of the
Notes Indenture or for waiver of certain defaults, (vii) modify such provisions
with respect to modification and waiver, (viii) modify the subordination
provisions in a manner adverse to the Holders of the Senior Subordinated Notes
or (ix) following the mailing of an offer to purchase Senior Subordinated Notes,
modify the provisions of the Notes Indenture with respect to such offer to
purchase in a manner adverse to such Holder.
The Holders of a majority in aggregate principal amount of the outstanding
Senior Subordinated Notes may waive compliance by the Company with certain
restrictive provisions of the Notes Indenture. The Holders of a majority in
aggregate principal amount of the outstanding Senior Subordinated Notes may
waive any past default under the Notes Indenture, except a default in the
payment of principal, premium, if any, or interest and certain covenants and
provisions of the Notes Indenture which cannot be amended without the consent of
the Holder of each outstanding Senior Subordinated Note affected.
DEFEASANCE
The Notes Indenture provides that the Company, at its option, (i) will be
discharged from any and all obligations in respect of outstanding Senior
Subordinated Notes (except for certain obligations to register the transfer or
exchange of Senior Subordinated Notes, to replace mutilated, lost, destroyed or
stolen Senior Subordinated Notes and to maintain paying agents and hold moneys
for payment in trust), and the provisions of the Notes Indenture described under
"-- Subordination" shall cease to be effective, or (ii) need not comply with
certain restrictive covenants and that such omission shall not be deemed to be
an Event of Default under the Notes Indenture and the Senior Subordinated Notes,
and the provisions of the Notes Indenture described under "-- Subordination"
shall cease to be effective, in either case (i) or (ii) upon irrevocable deposit
with the Notes Trustee, in trust, of money, and/or U.S. government obligations
which will provide money without the need for reinvestment, in an amount
sufficient in the opinion of a nationally recognized firm of independent public
accountants to pay the principal of, and premium, if any, and each installment
of interest, if any, on the outstanding Senior Subordinated Notes in accordance
with the terms of the Notes Indenture and the Senior Subordinated Notes. Such
trust may only be established if, among other things, (1) with respect to clause
(i), the Company shall have delivered to the Notes Trustee an Opinion of Counsel
to the effect that the Company has received from, or there has been published
by, the Internal Revenue Service a ruling or there has been a change in law,
which provides that Holders of Senior Subordinated Notes will not recognize gain
or loss for federal income tax purposes as a result of such deposit, defeasance
and discharge and will be subject to federal income tax on the same amount, in
the same manner and at the same times as would have been the case if such
deposit, defeasance and discharge had not occurred; or, with respect to clause
(ii), the Company shall have delivered to the Notes Trustee an Opinion of
Counsel to the effect that the Holders of the Senior Subordinated Notes will not
recognize gain or loss for federal income tax purposes as a result or such
deposit and defeasance and will be subject to federal income tax on the same
amount, in the same manner and at the same times as would have been the case if
such deposit, defeasance and discharge had not occurred; (2) no Event of Default
or event that, with the passing of time or the giving of notice, or both, shall
constitute an Event of Default shall have occurred and be continuing on the date
of such deposit; (3) no Event of Default described under clause (viii) under
"Events of Default and Remedies" above or event that, with the passing of time
or the giving of notice, or both, shall constitute an Event of Default under
such clause (viii) shall have occurred and be continuing at any time during the
period ending on the 121st day following such date of
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deposit; (4) such deposit shall not cause the trust so created to be subject to
the Investment Company Act of 1940, as amended, or shall be qualified under such
act or exempt from regulation thereunder; and (5) certain other customary
conditions precedent.
NOTICES
Notices to Holders of Senior Subordinated Notes will be sent by mail to the
addresses of such Holders as they may appear in the Security Register.
TITLE
The Company, the Notes Trustee and any agent of the Notes Trustee may treat
the Holder of any Senior Subordinated Note as the absolute owner thereof
(whether or not such Senior Subordinated Note may be overdue) for the purpose of
making payment and for all other purposes.
GOVERNING LAW
The Notes Indenture and the Senior Subordinated Notes are governed by and
construed in accordance with the laws of the State of New York.
THE NOTES TRUSTEE
The Notes Indenture provides that, subject to the duty of the Notes Trustee
during an Event of Default to act with the required standard of care, the Notes
Trustee will be under no obligation to exercise any of its rights or powers
under the Notes Indenture at the request or direction of any of the Holders,
unless such Holders shall have offered to the Notes Trustee reasonable security
or indemnity. Subject to certain provisions, including those requiring security
or indemnification of the Notes Trustee, the Holders of a majority in principal
amount of the Senior Subordinated Notes will have the right to direct the time,
method and place of conducting any proceeding for any remedy available to the
Notes Trustee, or exercising any trust or power conferred on the Notes Trustee.
The Company will be required to furnish to the Notes Trustee annually a
statement as to the performance by the Company of its obligations under the
Notes Indenture and as to any default in such performance. The Notes Trustee
will also serve as the Debentures Trustee under the Exchange Indenture.
CERTAIN DEFINITIONS
"Acquired Indebtedness" means Indebtedness of a Person (including an
Unrestricted Subsidiary) (i) existing at the time such Person becomes a
Restricted Subsidiary or (ii) assumed in connection with the acquisition of
assets from such Person, in the case of both of the preceding clause (i) and
clause (ii), other than Indebtedness incurred in connection with, or in
contemplation of, such Person becoming a Restricted Subsidiary or such
acquisition. Acquired Indebtedness will be deemed to be Incurred on the date of
the related acquisition of assets from any Person or the date the acquired
Person becomes a Restricted Subsidiary.
"Adjusted Annualized Operating Cash Flow Ratio" of any Person means the
Annualized Operating Cash Flow Ratio of such Person as adjusted to treat all
Preferred Stock of such Person as Redeemable Stock.
"Affiliate" of any Person means any other Person directly or indirectly
controlling or controlled by or under direct or indirect common control with
such Person. For the purposes of this definition, "control" when used with
respect to any Person means the power to direct the management and policies of
such Person, directly or indirectly, whether through the ownership of voting
securities, by contract or otherwise; and the terms "controlling" and
"controlled" have meanings correlative to the foregoing.
"Annualized Operating Cash Flow" of any Person means the Operating Cash Flow
of such Person for the Reference Period multiplied by two.
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"Annualized Operating Cash Flow Ratio" of any Person on any date (the
"Transaction Date") means, with respect to any Person and its Restricted
Subsidiaries, the ratio of (i) Consolidated Indebtedness of such Person and its
Restricted Subsidiaries on the Transaction Date (after giving pro forma effect
to the Incurrence of any Indebtedness on such Transaction Date) divided by (ii)
the aggregate amount of Annualized Operating Cash Flow of such Person
(determined on a pro forma basis after giving effect to all dispositions of
businesses made by such Person and its Restricted Subsidiaries from the
beginning of the Reference Period through the Transaction Date as if such
dispositions had occurred at the beginning of such Reference Period); PROVIDED,
that for purposes of such computation, in calculating Annualized Operating Cash
Flow and Consolidated Indebtedness: (a) the transaction giving rise to the need
to calculate the Annualized Operating Cash Flow Ratio will be assumed to have
occurred (on a pro forma basis) on the first day of the Reference Period; (b)
the Incurrence of any Indebtedness during the Reference Period or subsequent
thereto and on or prior to the Transaction Date (and the application of the
proceeds therefrom to the extent used to retire Indebtedness) will be assumed to
have occurred (on a pro forma basis) on the first day of such Reference Period;
(c) Consolidated Interest Expense attributable to any Indebtedness (whether
existing or being incurred) bearing a floating interest rate shall be computed
as if the rate in effect on the Transaction Date had been the applicable rate
for the entire Reference Period; (d) all members of the consolidated group of
such Person on the Transaction Date that were acquired during the Reference
Period shall be deemed to be members of the consolidated group of such Person
for the entire Reference Period; and (e) the Indebtedness and Annualized
Operating Cash Flow of any Restricted Subsidiary that is not a Wholly Owned
Restricted Subsidiary shall be determined in accordance with the actual
percentage of the Person's common equity interest in such Restricted Subsidiary
on the date of determination of the Annualized Operating Cash Flow Ratio (thus,
for example, in the case of a Restricted Subsidiary in which such Person owns a
51% common equity interest, 51% of such Subsidiary's Indebtedness and of such
Subsidiary's Annualized Operating Cash Flow would be included in the calculation
of such Person's aggregate Indebtedness and Annualized Operating Cash Flow,
respectively). When the foregoing definition is used in connection with the
Company and its Restricted Subsidiaries, references to a Person and its
Restricted Subsidiaries in the foregoing definition shall be deemed to refer to
the Company and its Restricted Subsidiaries.
"Board Resolution" means a copy of a resolution certified by the Secretary
or an Assistant Secretary of the Company to have been duly adopted by the Board
of Directors, to be in full force and effect on the date of such certification
and delivered to the Notes Trustee.
"Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday
which is not a day on which banking institutions in New York City or the State
of Minnesota are authorized or obligated by law or executive order to close.
"Capital Lease Obligation" means that portion of any obligation of a Person
as lessee under a lease which is required to be capitalized on the balance sheet
of such lessee in accordance with generally accepted accounting principles.
"Capital Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, including
voting and non-voting) of equity of such Person.
"Cash Equivalents" means (i) securities issued or directly and fully
guaranteed or insured by the United States of America or any agency or
instrumentality thereof (provided that the full faith and credit of the United
States of America is pledged in support thereof), in each case maturing within
one year after the date of acquisition, (ii) time deposits and certificates of
deposit and commercial paper issued by the parent corporation of any domestic
commercial bank of recognized standing having capital and surplus in excess of
$500 million and commercial paper issued by others rated at least A-2 or the
equivalent thereof by Standard & Poor's Corporation or at least P-2 or the
equivalent thereof by Moody's Investors Service, Inc. and in each case maturing
within one year after the date of acquisition and (iii) investments in money
market funds substantially all of whose assets comprise securities of the types
described in clauses (i) and (ii) above.
"Commission" means the United States Securities and Exchange Commission.
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"Consolidated Income Tax Expense" of any Person means for any period the
provision for income taxes of such Person and its Restricted Subsidiaries for
such period.
"Consolidated Indebtedness" of any Person means at any date the Indebtedness
of such Person and its Restricted Subsidiaries at such date.
"Consolidated Interest Expense" of any Person means for any period the
interest expense included in an income statement (taking into account the effect
of any Interest Hedge Agreements but without deduction of interest income) of
such Person and its Restricted Subsidiaries for such period, including without
limitation or duplication (or, to the extent not so included, with the addition
of), (i) the portion of any rental obligation in respect of any Capital Lease
Obligation allocable to interest expense in accordance with generally accepted
accounting principles; (ii) the amortization of Indebtedness discounts; (iii)
any payments or fees with respect to letters of credit, bankers' acceptances or
similar facilities; (iv) fees with respect to Interest Hedge Agreements; (v) the
portion of any rental obligations in respect of any Sale and Leaseback
Transaction allocable to interest expense (determined as if such were treated as
a Capital Lease Obligation); and (vi) Preferred Stock dividends accrued or
payable other than dividends on Qualified Capital Stock of such Person.
"Consolidated Net Income" of any Person means for any period the net income
(or loss) of such Person and its Restricted Subsidiaries for such period
determined on a consolidated basis in accordance with generally accepted
accounting principles; PROVIDED that there shall be excluded therefrom (to the
extent included and without duplication) (i) the net income (or loss) of any
Person acquired by such Person or a Restricted Subsidiary of such Person after
the Issue Date in a pooling of interests transaction for any period prior to the
date of such transaction, (ii) the net income (or loss) of any Person that is
not a Restricted Subsidiary of such Person except to the extent of the amount of
dividends or other distributions actually paid to such Person by such other
Person during such period, (iii) gains or losses from sales of assets other than
sales of assets acquired and held for resale in the ordinary course of business,
(iv) for purposes of the "Limitation on Restricted Payments" covenant, the net
income, if positive, of any Restricted Subsidiary to the extent that the
declaration or payment of dividends or similar distributions by such Restricted
Subsidiary of such net income is not at that time permitted by the operation of
the terms of its charter or any agreement, instrument, judgment, decree, order,
statute, rule or governmental regulations applicable to such Restricted
Subsidiary, and (v) all extraordinary gains and extraordinary losses.
"Consolidated Net Worth" of any Person means the consolidated shareholders'
equity of such Person, determined on a consolidated basis in accordance with
generally accepted accounting principles; PROVIDED that, with respect to the
Company, adjustments following the Issue Date to the accounting books and
records of the Company in accordance with Accounting Principles Board Opinions
Nos. 16 and 17 (or successor opinions thereto) or otherwise resulting from the
acquisition of control of the Company by another Person and its Subsidiaries
shall not be given effect; PROVIDED FURTHER, that such computation shall exclude
(i) any amounts attributable to Redeemable Stock or any equity security
convertible into or exchangeable for Indebtedness, the cost of treasury stock
and the principal amount of any promissory notes receivable from the sale of the
Capital Stock of the Company or any of its Restricted Subsidiaries and (ii)
Unrestricted Subsidiaries.
"Cooperative Banks" means lenders under the Credit Facility which are
cooperative banks.
"Cooperative Bank Equity" means non-voting equity interests in Cooperative
Banks.
"Credit Facility" means the Existing Credit Facility or the New Credit
Facility.
"Cumulative Interest Expense" means the total amount of Consolidated
Interest Expense of the Company and its Restricted Subsidiaries for the period
beginning on the first day of the fiscal quarter immediately following the Issue
Date, through and including the end of the last fiscal quarter preceding the
date of any proposed Restricted Payment.
"Cumulative Operating Cash Flow" means Operating Cash Flow of the Company
and its Restricted Subsidiaries for the period beginning on the first day of the
fiscal quarter immediately following the Issue Date, through and including the
end of the last fiscal quarter preceding the date of any proposed Restricted
Payment.
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"Depositary" means a clearing agency registered under the Exchange Act that
is designated to act as Depositary for the Senior Subordinated Notes until a
successor Depositary shall have become such pursuant to the applicable
provisions of the Notes Indenture, and thereafter "Depositary" shall mean such
successor Depositary. The Depositary initially is DTC.
"Designated Senior Indebtedness" means the Indebtedness under the Credit
Facility.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Existing Credit Facility" means the Loan Agreement, dated as of May 1,
1997, among the Company, 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, as amended by a First Amendment to Loan Agreement dated as of August 4,
1997, a Second Amendment to Loan Agreement dated as of December 30, 1997, a
Third Amendment to Loan Agreement dated as of April 17, 1998 and a Fourth
Amendment to Loan Agreement dated as of April 24, 1998, and as such agreement
may be further amended, supplemented, restated or otherwise modified from time
to time.
"Fair Market Value" means, with respect to any assets or Person, the price
which could be negotiated in an arm's-length free market transaction, for cash,
between a willing seller and a willing buyer, neither of whom is under undue
pressure or compulsion to complete the transaction. Fair Market Value will be
determined (i) if such Person or assets have a Fair Market Value in excess of
$20,000 but not in excess of $5 million, by any officer of the Company and
evidenced by an Officers' Certificate, dated within 30 days of the relevant
transaction, or (ii) if such Person or assets have a Fair Market Value in excess
of $5 million, by a majority of the Board of Directors of the Company and
evidenced by a Board Resolution, dated within 30 days of the relevant
transaction, based on an appraisal of an independent appraiser of national
reputation.
"Holder" means a Person in whose name a Senior Subordinated Note is
registered in the Security Register.
"Incur" means, with respect to any Indebtedness or other obligation of any
Person, to create, issue, incur (by conversion, exchange or otherwise), assume,
guarantee or otherwise become liable in respect of such Indebtedness or other
obligation or the recording, as required pursuant to generally accepted
accounting principles or otherwise, of any such Indebtedness or other obligation
on the balance sheet of such Person (and "Incurrence," "Incurred," "Incurrable"
and "Incurring" shall have meanings correlative to the foregoing); PROVIDED,
HOWEVER, that a change in generally accepted accounting principles that results
in an obligation of such Person that exists at such time becoming Indebtedness
shall not be deemed an Incurrence of such indebtedness.
"Indebtedness" means (without duplication), with respect to any Person,
whether recourse is to all or a portion of the assets of such Person and whether
or not contingent, (i) every obligation of such Person for money borrowed, (ii)
every obligation of such Person evidenced by bonds, debentures, notes or similar
instruments, including obligations Incurred in connection with the acquisition
of property, assets or businesses, (iii) every reimbursement obligation of such
Person with respect to letters of credit, bankers' acceptances or similar
facilities issued for the account of such Person, (iv) every obligation of such
Person issued or assumed as the deferred purchase price of property or services
(but excluding trade accounts payable or accrued liabilities arising in the
ordinary course of business), (v) every Capital Lease Obligation of such Person,
(vi) the maximum fixed redemption or repurchase price of Redeemable Stock of
such Person at the time of determination, (vii) every obligation to pay rent or
other payment amounts of such Person with respect to any Sale and Leaseback
Transaction to which such Person is a party, (viii) all obligations under
Interest Hedge Agreements, (ix) every obligation of the type referred to in
clauses (i) through (viii) of another Person and all dividends of another Person
the payment of which, in either case, such Person has guaranteed or is
responsible or liable, directly or indirectly, as obligor, guarantor or
otherwise or which is secured by a Lien on any asset of such Person; and (x) the
liquidation value of Preferred Stock of a Subsidiary of such Person issued and
outstanding and held by other than such Person (or one of its Wholly Owned
Restricted Subsidiaries); PROVIDED, that for all purposes of the Notes
Indenture, (A) the amount outstanding at any time of any Indebtedness issued
with original issue discount is the face amount of such Indebtedness less the
unamortized portion of the original issue discount of such Indebtedness at the
time of its issuance as determined in conformity with generally accepted
accounting principles, (B) money borrowed at the time of the Incurrence of any
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Indebtedness in order to pre-fund the payment of interest on such Indebtedness
shall be deemed not to be "Indebtedness" and (C) Indebtedness shall not include
any liability for federal, state, local or other taxes. For purposes of the
Notes Indenture, the amount of any Indebtedness shall be the amount determined
in respect thereof as of the end of the then most recently ended fiscal quarter
of such Person, based on the assumption that such Indebtedness had terminated at
the end of such fiscal quarter, and in making such determination, if any
agreement relating to such obligation provides for the netting of amounts
payable by and to such Person thereunder or if any such agreement provides for
the simultaneous payment of amounts by and to such Person or in any event until
the counterparty thereunder defaults in its corresponding payment, then in each
such case, the amount of such obligations shall be the net amount so determined,
plus any premium due upon default by such Person.
"Interest Hedge Agreements" means any interest rate swap, cap, collar,
floor, caption or swaption agreements, or any similar arrangements designed to
hedge the risk of variable interest rate volatility or to reduce interest costs,
arising at any time between the Company or any Restricted Subsidiary, on the one
hand, and any Person (other than an Affiliate of the Company or any Restricted
Subsidiary), on the other hand, as such agreement or arrangement may be
modified, supplemented and in effect from time to time.
"Investment" by any Person in any other Person means (without duplication):
(a) the acquisition (whether by purchase, merger, consolidation or otherwise) by
such Person (whether for cash, property, services, securities or otherwise) of
capital stock, bonds, notes, debentures, partnership or other ownership
interests or other securities of such other Person or any agreement to make any
such acquisition; (b) the making by such Person of any deposit with, or advance,
loan or other extension of credit to, such other Person (including the purchase
of property from another Person subject to an understanding or agreement,
contingent or otherwise, to resell such property to such other Person) or any
commitment to make any such advance, loan or extension; (c) the entering into by
such Person of any guarantee of, or other contingent obligation with respect to,
Indebtedness or other liability of such other Person; (d) the making of any
capital contribution by such Person to such other Person; and (e) the
designation by the Board of Directors of the Company of any Person to be an
Unrestricted Subsidiary. For purposes of the covenant described in "--
Limitation on Restricted Payments," (i) "Investment" shall include and be valued
at the Fair Market Value of such Person's PRO RATA interest in the net assets of
any Restricted Subsidiary at the time that such Restricted Subsidiary is
designated an Unrestricted Subsidiary and shall exclude the lesser of (A) the
Fair Market Value of such Person's PRO RATA interest in the net assets of any
Unrestricted Subsidiary at the time that such Unrestricted Subsidiary is
designated a Restricted Subsidiary and (B) the Fair Market Value of the amount
of such Person's Investments (other than Permitted Investments) made in (net of
cash distributions received from) such Unrestricted Subsidiary since the Issue
Date, and (ii) the amount of any Investment shall be the Fair Market Value of
such Investment at the time any such Investment is made.
"Issue Date" means the time and date of the first issuance of the Senior
Subordinated Notes under the Notes Indenture.
"Lien" means, with respect to any property or assets, any mortgage or deed
of trust, pledge, hypothecation, assignment, deposit arrangement, security
interest, lien, charge, easement (other than an easement not materially
impairing usefulness or marketability), encumbrance, preference, priority or
other security agreement or preferential arrangement of any kind or nature
whatsoever on or with respect to such property or assets (including, without
limitation, any conditional sale or other title retention agreement having
substantially the same economic effect as any of the foregoing).
"Maturity" means, when used with respect to any Senior Subordinated Note,
the date on which the principal of such Senior Subordinated Note becomes due and
payable, whether at the Stated Maturity or by declaration of acceleration, call
for redemption or otherwise.
"Net Cash Proceeds" means the aggregate amount of cash and Cash Equivalents
received by the Company and its Restricted Subsidiaries in respect of an Asset
Sale (including upon the conversion to cash and Cash Equivalents of (a) any note
or installment receivable at any time or (b) any other property as and when any
cash and Cash Equivalents are received in respect of any property received in an
Asset Sale but only to the extent such cash and Cash Equivalents are received
within one year after such Asset Sale), less the sum of (i) all reasonable
out-of-pocket
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fees, commissions and other expenses incurred in connection with such Asset
Sale, including the amount (estimated in good faith by the Board of Directors of
the Company) of income, franchise, sales and other applicable taxes required to
be paid by the Company or any Restricted Subsidiary of the Company in connection
with such Asset Sale and (ii) the aggregate amount of cash so received which is
used to retire any existing Senior Indebtedness or Indebtedness of the Company
that ranks PARI PASSU in right of payment with the Senior Subordinated Notes or
existing Indebtedness of such Restricted Subsidiaries, as the case may be, which
is required to be repaid in connection with such Asset Sale or is secured by a
Lien on the property or assets of the Company or any of its Restricted
Subsidiaries, as the case may be.
"New Credit Facility" means the amendment and restatement or the refinancing
or replacement of the Existing Credit Facility with the same, a deletion of, or
additional lenders, including, without limitation, any successive renewals,
extensions, substitutions, refinancings, restructurings, replacements,
supplementations or other modifications of the foregoing that increase the
aggregate amount of borrowings outstanding or the aggregate commitments of the
lenders thereunder.
"Offer to Purchase" means a written offer (the "Offer") sent by the Company
to each Holder at his address appearing in the Security Register on the date of
the Offer offering to purchase up to the principal amount of Senior Subordinated
Notes specified in such Offer at the purchase price specified in such Offer.
Unless otherwise required by applicable law, the Offer shall specify an
expiration date (the "Expiration Date") of the Offer to Purchase which, subject
to any contrary requirements of applicable law, shall be not less than 30 days
nor more than 60 days after the date of such Offer to Purchase and a settlement
date (the "Purchase Date") for purchase of Senior Subordinated Notes within five
Business Days after the Expiration Date. The Offer shall also state the section
of the Notes Indenture pursuant to which the Offer to Purchase is being made,
the Expiration Date and the Purchase Date, the aggregate principal amount of the
outstanding Senior Subordinated Notes offered to be purchased by the Company,
the purchase price to be paid by the Company and the place or places where
Senior Subordinated Notes are to be surrendered for tender pursuant to the Offer
to Purchase.
"Officers' Certificate" means a certificate signed by two officers at least
one of whom shall be the principal executive officer, principal accounting
officer or principal financial officer of the Company and delivered to the Notes
Trustee.
"Operating Cash Flow" for any Person for any period means (a) the
Consolidated Net Income of such Person for such period, plus (b) the sum,
without duplication (and only to the extent such amounts are deducted from net
revenues in determining such Consolidated Net Income), of (i) the provisions for
income taxes for such period for such Person and its Subsidiaries, (ii)
depreciation, amortization and other non-cash charges of such Person and its
Subsidiaries and (iii) Consolidated Interest Expense of such Person for such
period, determined, in each case, on a consolidated basis for such Person and
its Subsidiaries in accordance with generally accepted accounting principles,
less (c) the sum, without duplication (and only to the extent such amounts are
included in such Consolidated Net Income), of (i) all extraordinary gains of
such Person and its Subsidiaries during such period and (ii) the amount of all
cash payments made during such period by such Person and its Subsidiaries to the
extent such payments relate to non-cash charges that were added back in
determining Operating Cash Flow for such period or for any prior period; and in
the case of a Restricted Subsidiary that is not a Wholly Owned Restricted
Subsidiary, the determination of the percentage of the Operating Cash Flow of
such Restricted Subsidiary that is to be included in the calculation of the
Company's Annualized Operating Cash Flow Ratio shall be made on a pro forma
basis on the assumption that the percentage of the Company's common equity
interest in such Restricted Subsidiary throughout the applicable Reference
Period was equivalent to its common equity interest on the date of the
determination. When the foregoing definition is used in connection with the
Company, references to a Person and its Subsidiaries in the foregoing definition
shall be deemed to refer to the Company and its Restricted Subsidiaries.
"Opinion of Counsel" means a written opinion of counsel, who may be counsel
for the Company, and who shall be reasonably acceptable to the Notes Trustee,
delivered to the Notes Trustee.
"Permitted Investments" means: (i) Investments in Cash Equivalents; (ii)
Investments in the Company or a Restricted Subsidiary (other than payments
described in clause (iv) of the second paragraph under "Limitation on
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Restricted Payments"); (iii) Investments in a Person substantially all of whose
assets are of a type generally used in a Wireless Communications Business (an
"Acquired Person") if, as a result of such Investments, (A) the Acquired Person
immediately thereupon becomes a Restricted Subsidiary or (B) the Acquired Person
immediately thereupon either (1) is merged or consolidated with or into the
Company or any Restricted Subsidiary or (2) transfers or conveys all or
substantially all of its assets to, or is liquidated into, the Company or any of
its Restricted Subsidiaries; (iv) Investments in accounts and notes receivable
acquired in the ordinary course of business; (v) any securities received in
connection with an Asset Sale and any investment with the Net Cash Proceeds from
any Asset Sale in Capital Stock of a Person, all or substantially all of whose
assets are of a type used in a Wireless Communications Business, that complies
with the "Limitation on Asset Sales and Sales of Subsidiary Stock" covenant;
(vi) advances and prepayments for asset purchases in the ordinary course of
business in a Wireless Communications Business of the Company or a Restricted
Subsidiary; (vii) customary loans or advances made in the ordinary course of
business to officers, directors or employees of the Company or any of its
Restricted Subsidiaries for travel, entertainment, and moving and other
relocation expenses; (viii) the purchase of Cooperative Bank Equity in
Cooperative Banks to the extent required by the charter documents of such
Cooperative Banks in connection with the Incurrence of any Indebtedness which is
provided by such Cooperative Banks under the Credit Facility, provided that such
Incurrence is permitted under the terms of the Notes Indenture; and (ix)
Investments in Wireless Alliance not exceeding $25 million in the aggregate made
after the Issue Date; PROVIDED, that the matters referenced in clauses (iii) and
(ix) above shall not be Permitted Investments if made at any time that an Event
of Default or event which with notice or lapse of time or both would become an
Event of Default has occurred and is continuing.
"Person" means any individual, corporation, partnership, joint venture,
trust, unincorporated organization or government or any agency or political
subdivision thereof.
"Preferred Stock" means, with respect to any Person, any and all shares of
Capital Stock of such Person that have preferential rights to any other Capital
Stock of such Person with respect to dividends or redemptions or upon
liquidation.
"Public Equity Offering" means an underwritten public offering of common
stock of the Company pursuant to an effective registration statement filed with
the Commission in accordance with the Securities Act.
"Qualified Capital Stock" means, with respect to any Person, any and all
shares of Capital Stock other than Redeemable Stock issued by such Person after
the date of the Notes Indenture.
"Qualified Capital Stock Proceeds" means, with respect to any Person, (a) in
the case of any sale of Qualified Capital Stock, the aggregate net cash proceeds
received by such Person, after payment of expenses, commissions and the like
Incurred by such Person in connection therewith, and net of Indebtedness that
such Person Incurred, guaranteed or otherwise became liable for in connection
with the issuance or acquisition of such Capital Stock; and (b) in the case of
any exchange, exercise, conversion or surrender of any Redeemable Stock or
Indebtedness of such Person issued (other than to any Subsidiary) for cash after
the Issue Date for or into shares of Qualified Capital Stock of such Person, the
liquidation value of the Redeemable Stock or the net book value of such
Indebtedness as adjusted on the books of such Person to the date of such
exchange, exercise, conversion or surrender, plus any additional amount paid by
the securityholders to such Person upon such exchange, exercise, conversion or
surrender and less any and all payments made to the securityholders, and all
other expenses, commissions and the like Incurred by such Person or any
Subsidiary in connection therewith.
"Qualifying Event" means a Public Equity Offering or one or more Strategic
Equity Investments which in either case results in aggregate net proceeds of not
less than $50 million.
"Redeemable Stock" of any Person means any equity security of such Person
that by its terms or otherwise is required to be redeemed prior to the final
Stated Maturity of the Senior Subordinated Notes or is redeemable at the option
of the holder thereof at any time prior to the final Stated Maturity of the
Senior Subordinated Notes; PROVIDED that any Capital Stock that would not
constitute Redeemable Stock but for provisions thereof giving holders thereof
the right to require such Person to repurchase or redeem such Capital Stock upon
the occurrence of a "change of control" occurring prior to the final Stated
Maturity of the Senior Subordinated Notes shall not constitute Redeemable Stock
if the "change of control" provisions applicable to such Capital Stock are no
more
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favorable to the holders of such Capital Stock than the provisions contained in
the "--Change of Control" covenant and such Capital Stock specifically provides
that such Person will not repurchase or redeem any such stock pursuant to such
provision prior to the Company's repurchase of the Senior Subordinated Notes as
required pursuant to such "Change of Control" covenant.
"Reference Period" with regard to any Person means the last two full fiscal
quarters of such Person immediately preceding any date upon which any
determination is to be made pursuant to the terms of the Senior Subordinated
Notes or the Notes Indenture.
"Related Person" of any Person means any other Person owning (a) 5% or more
of the outstanding Common Stock of such Person or (b) 5% or more of the Voting
Power of such Person.
"Restricted Payment" means, with respect to any Person, (i) any declaration
or payment of a dividend or other distribution on any shares of Capital Stock of
such Person or any Subsidiary of such Person (other than a dividend payable
solely in shares of its Capital Stock or options, warrants or other rights to
acquire its Capital Stock and other than any declaration or payment of a
dividend or other distribution by a Restricted Subsidiary to the Company or
another Restricted Subsidiary), (ii) any payment on account of the purchase,
redemption, retirement or acquisition (including by way of issuing any
Indebtedness or Redeemable Stock in exchange for Qualified Capital Stock) of (A)
any shares of Capital Stock of such Person or any Subsidiary of such Person held
by other than such Person or any of its Restricted Subsidiaries or (B) any
option, warrant or other right to acquire shares of Capital Stock of such Person
or any Subsidiary of such Person or any of its Restricted Subsidiaries, in each
case other than pursuant to the cashless exercise of options, (iii) any
Investment (other than a Permitted Investment) made by such Person and (iv) any
redemption, defeasance, repurchase or other acquisition or retirement for value
prior to any scheduled maturity, repayment or sinking fund payment, of any
Subordinated Indebtedness of such Person; PROVIDED, that the term "Restricted
Payment" does not include the payment of a dividend or other distribution by any
Restricted Subsidiary on shares of its Capital Stock that is paid pro rata to
all holders of such Capital Stock.
"Restricted Subsidiary" of any Person means any Subsidiary of such Person
other than an Unrestricted Subsidiary.
"Sale and Leaseback Transaction" of any Person means an arrangement with any
lender or investor or to which such lender or investor is a party providing for
the leasing by such Person of any property or asset of such Person which has
been or is being sold or transferred by such Person more than 270 days after the
acquisition thereof or the completion of construction or commencement of
operation thereof to such lender or investor or to any Person to whom funds have
been or are to be advanced by such lender or investor on the security of such
property or asset. The stated maturity of such arrangement shall be the date of
the last payment of rent or any other amount due under such arrangement prior to
the first date on which such arrangement may be terminated by the lessee without
payment of a penalty.
"Securities Act" means the Securities Act of 1933, as amended.
"Security Register" has the meaning set forth in the Notes Indenture.
"Senior Indebtedness" means the principal of (and premium, if any) and
interest (including interest accruing on or after the filing of any petition in
bankruptcy or for reorganization relating to the Company, whether or not a claim
for post-petition interest is allowed in such proceeding) on (i) Indebtedness of
the Company created pursuant to the Credit Facility and all other obligations
thereunder or under the notes, security documents, pledge agreements, Interest
Hedge Agreements or other agreements or instruments executed in connection
therewith, (ii) Indebtedness of the Company created pursuant to any vendor
financing Incurred for the acquisition, construction or improvement by the
Company or any Restricted Subsidiary of assets in the Wireless Communications
Business, (iii) all other Indebtedness of the Company referred to in the
definition of Indebtedness other than clauses (iv), (vi) and (ix) thereof (and
clause (viii) thereof to the extent applicable to Indebtedness Incurred under
clauses (iv) and (vi) thereof), whether Incurred on or prior to the Issue Date,
other than the Senior Subordinated Notes, and (iv) amendments, renewals,
extensions, modifications, refinancings and refundings of any such Indebtedness;
PROVIDED, HOWEVER, the following shall not constitute Senior Indebtedness: (A)
any Indebtedness owed to a
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Person when such Person is a Restricted Subsidiary of the Company, (B) any
Indebtedness which by the terms of the instrument creating or evidencing the
same is not superior in right of payment to the Senior Subordinated Notes, (C)
any Indebtedness Incurred in violation of the Notes Indenture (but, as to any
such Indebtedness, no such violation shall be deemed to exist for purposes of
this clause (c) if the holder(s) of such Indebtedness or their representative
and the Notes Trustee shall have received an Officers' Certificate of the
Company to the effect that the Incurrence of such Indebtedness does not (or in
the case of revolving credit Indebtedness, that the Incurrence of the entire
committed amount thereof at the date on which the initial borrowing thereunder
is made would not) violate the Notes Indenture) or (D) any Indebtedness which is
subordinated in right of payment to any other Indebtedness of the Company.
"Senior Nonmonetary Default" means the occurrence or existence and
continuance of any event of default, or of any event which, after notice or
lapse of time (or both), would become an event of default, under the terms of
any instrument pursuant to which any Senior Indebtedness is outstanding,
permitting (after notice or lapse of time or both) one or more holders of such
Senior Indebtedness (or an administrative agent on behalf of the holders
thereof) to declare such Senior Indebtedness due and payable prior to the date
on which it would otherwise become due and payable, other than a Senior Payment
Default.
"Senior Payment Default" means any default in the payment of principal of
(or premium, if any) or interest on any Senior Indebtedness when due, whether at
the stated maturity of any such payment or by declaration of acceleration, call
for redemption or otherwise.
"Senior Subordinated Notes Payment" means any payment or distribution of any
kind or character, whether in cash, property or securities, on account of
principal of (or premium, if any) or interest on or other obligations in respect
of the Senior Subordinated Notes or other Indebtedness of the Company that is
PARI PASSU or subordinate in right of payment to the Senior Subordinated Notes
or on account of any purchase or other acquisition of Senior Subordinated Notes
or such other Indebtedness by the Company or any Subsidiary of the Company.
"Stated Maturity," when used with respect to any Senior Subordinated Note or
any installment of interest thereon, means the date specified in such Senior
Subordinated Note as the date on which the principal of such Senior Subordinated
Note or such installment of interest is due and payable.
"Strategic Equity Investment" means an investment in Qualified Stock made by
a Strategic Investor in an aggregate amount of not less than $50 million.
"Strategic Investor" means a Person (other than an Affiliate of the Company
or a Person who by virtue of such Investment becomes such an Affiliate) engaged
in one or more Telecommunications Businesses with an equity market
capitalization at the time such Person makes a Strategic Equity Investment in
the Company in excess of $1 billion.
"Subordinated Indebtedness" means Indebtedness of the Company that is
subordinated in right of payment to the Senior Subordinated Notes.
"Subsidiary" means, as applied to any Person, (a) any corporation of which
more than fifty percent (50%) of the outstanding Capital Stock (other than
directors' qualifying shares) having ordinary Voting Power to elect its board of
directors, regardless of the existence at the time of a right of the holders of
any class or classes of securities of such corporation to exercise such Voting
Power by reason of the happening of any contingency, or any entity other than a
corporation of which more than fifty percent (50%) of the outstanding ownership
interests, is at the time owned directly or indirectly by such Person, or by one
or more Subsidiaries of such Person, or by such Person and one or more
Subsidiaries of such Person, or (b) any other entity which is directly or
indirectly controlled or capable of being controlled by such Person, or by one
or more Subsidiaries of such Person, or by such Person and one or more
Subsidiaries of such Person.
"Telecommunications Business" means the business of (i) transmitting, or
providing services relating to the transmission of, voice, video or data through
owned or leased wireline or wireless transmission facilities, (ii) creating,
developing, constructing, installing, repairing, maintaining or marketing
communications-related systems, network equipment and facilities, software and
other products, or (iii) evaluating, owning, operating,
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participating in or pursuing any other business that is primarily related to
those identified in clause (i) or (ii) above (in the case of this clause (iii),
however, in a manner consistent with the Company's manner of business on the
Issue Date), and shall, in any event, include all businesses in which the
Company or any of its Subsidiaries is engaged on the Issue Date or has entered
into agreements to engage in or to acquire a company to engage in or contemplate
engaging in, as expressly set forth in this Prospectus; PROVIDED that the
determination of what constitutes a Telecommunications Business shall be made in
good faith by the Company's Board of Directors.
"Unrestricted Subsidiary" of any Person means (i) any Subsidiary of such
Person that at the time of determination shall be designated an Unrestricted
Subsidiary by the Board of Directors of such Person in the manner provided below
and (ii) any Subsidiary of an Unrestricted Subsidiary. The Board of Directors of
any Person may designate any Restricted Subsidiary to be an Unrestricted
Subsidiary unless such Subsidiary owns any Capital Stock of, or owns or holds
any Lien on any property of, such Person or any Restricted Subsidiary; PROVIDED,
that either (A) the Subsidiary to be so designated has total assets of $1,000 or
less or (B) if such Subsidiary has assets greater than $1,000, such Person's PRO
RATA interest in the Fair Market Value of the net assets of such Subsidiary at
the time of such designation would be permitted as an Investment under the
provision of the Notes Indenture described under "-- Limitation on Restricted
Payments." The Board of Directors of any Person may designate any Unrestricted
Subsidiary to be a Restricted Subsidiary of such Person; PROVIDED, that
immediately after giving effect to such designation (x) such Person would be
permitted to Incur $1.00 of additional Indebtedness pursuant to the provision of
the Notes Indenture described in the first paragraph under "-- Limitation on
Consolidated Indebtedness" and (y) no Event of Default or event which with
notice or lapse of time or both would become an Event of Default has occurred
and is continuing. Any such designation by the Board of Directors shall be
evidenced by a Board Resolution submitted to the Notes Trustee. Wireless
Alliance shall be deemed an Unrestricted Subsidiary as of the Issue Date and
shall thereafter remain an Unrestricted Subsidiary unless and until designated
by the Board of Directors as a Restricted Subsidiary in accordance with the
terms of the Notes Indenture.
"Voting Power" of any Person means the aggregate number of votes of all
classes of Capital Stock of such Person which ordinarily have voting power for
the election of directors of such Person.
"Wholly Owned Restricted Subsidiary" of any Person means a Restricted
Subsidiary of such Person all of the outstanding Capital Stock or other
ownership interests of which (other than directors' qualifying shares) shall at
the time be owned by such Person or by one or more Wholly Owned Restricted
Subsidiaries of such Person or by such Person and one or more Wholly Owned
Restricted Subsidiaries of such Person.
"Wireless Communications Business" means any business substantially related
to the ownership, development, operation or acquisition of wireless
communications services permitted under the Federal Communications Commission's
("FCC") Commercial Mobile Radio Services rules (and the related provisions of
the FCC's Public Mobile Services and Personal Communications Services rules),
and other related telecommunications business services.
FORM, DENOMINATION, BOOK-ENTRY PROCEDURES AND TRANSFER
Senior Subordinated Notes will be issued only in fully registered form,
without interest coupons, in denominations of $1,000 and integral multiples
thereof. Senior Subordinated Notes will not be issued in bearer form. New Senior
Subordinated Notes will be issued only in accordance of the Exchange Offer.
If the Senior Subordinated Notes are to be redeemed in part, the Company
will not be required to (i) issue, register the transfer of or exchange any
Senior Subordinated Note during a period beginning at the opening of business 15
days before the day of mailing of notice of redemption of any such Senior
Subordinated Note that may be selected for redemption and ending at the close of
business on the day of such mailing or (ii) register the transfer of or exchange
any Senior Subordinated Note so selected for redemption, in whole or in part,
except the unredeemed portion of any such Senior Subordinated Note being
redeemed in part.
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DESCRIPTION OF EXCHANGEABLE PREFERRED STOCK
AND EXCHANGE DEBENTURES
EXCHANGEABLE PREFERRED STOCK
The following summary of the material provisions of the Exchangeable
Preferred Stock does not purport to be complete and is subject to and qualified
in its entirety by reference to the provisions of the Certificate of Designation
relating thereto, a copy of which may be obtained from the Company. Definitions
relating to certain capitalized terms that are used in this section of this
Prospectus are set forth under "-- Certain Definitions" and throughout this
description. Capitalized terms that are used in this section but not otherwise
defined herein have the meanings assigned to them in the Certificate of
Designation and such definitions are incorporated herein by reference. Unless
otherwise indicated, references in this section to convenants are to convenants
set forth in the Certificate of Designation. As used in this section, the
"Company" refers to Rural Cellular Corporation, unless the context otherwise
requires.
GENERAL
The Company is authorized to issue 450,000 shares of Exchangeable Preferred
Stock, par value $.01 per share, with a liquidation preference of $1,000 per
share pursuant to the Certification of Designation. Such shares include 125,000
shares of Old Exchangeable Preferred Stock, 125,000 shares of New Exchangeable
Preferred Stock, an additional 25,000 shares (the "Additional Shares") reserved
for possible future issuance, and additional shares of Exchangeable Preferred
Stock that may be used to pay dividends on the Exchangeable Preferred Stock if
the Company elects to pay dividends in additional shares of such stock (the
"Dividend Shares") (all such Exchangeable Preferred Stock, including Additional
Shares and Dividend Shares, as the context requires, being referred to herein as
the "Exchangeable Preferred Stock"). To the extent the Company issues any
Additional Shares, such issuance shall include all such Additional Shares.
Subject to certain conditions, the Exchangeable Preferred Stock will be
exchangeable for the Exchange Debentures at the option of the Company on any
dividend payment date. The New Exchangeable Preferred Stock to be issued by the
Company in the Exchange Offer, when issued by the Company in accordance with the
terms of the Exchange Offer, will be fully paid and non-assessable and the
holders thereof will not have any subscription or preemptive rights in
connection therewith. Norwest Bank Minnesota, National Association, is the
Exchange Agent and transfer agent and registrar (the "Transfer Agent") for the
Exchangeable Preferred Stock.
RANKING
The Exchangeable Preferred Stock will, with respect to dividend rights and
rights on liquidation, winding-up and dissolution of the Company, rank: (i)
senior to all classes of common stock and to each other class of Capital Stock
established after May 14, 1998 by the Board of Directors of the Company the
terms of which expressly provide that it ranks junior to the Exchangeable
Preferred Stock as to dividend rights and rights on liquidation, winding-up and
dissolution of the Company (collectively referred to, together with all classes
of common stock of the Company, as "Junior Stock"); (ii) subject to certain
conditions, described below, on a parity with each other class of Capital Stock
established after May 14, 1998 by the Board of Directors of the Company the
terms of which expressly provide that such class or series will rank on a parity
with the Exchangeable Preferred Stock as to dividend rights and rights on
liquidation, winding-up and dissolution of the Company (collectively referred to
as "Parity Stock"); and (iii) subject to certain conditions, described below,
junior to each class of Capital Stock established after May 14, 1998 by the
Board of Directors of the Company the terms of which do not expressly provide
that such class or series of Capital Stock will rank junior to, or on a parity
with, the Exchangeable Preferred Stock as to dividend rights and rights upon
liquidation, winding-up and dissolution of the Company (collectively referred to
as "Senior Stock").
The Company may not authorize or issue any new class of Senior Stock or
Parity Stock without the affirmative vote or consent (voting or consenting as
one class) of the holders of at least (i) 66 2/3% of the shares of Exchangeable
Preferred Stock then outstanding with respect to Senior Stock and (ii) a
majority of the shares of Exchangeable
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Preferred Stock then outstanding with respect to Parity Stock; PROVIDED, that
any shares of Exchangeable Preferred Stock may be issued by the Company without
the approval of the holders of the Exchangeable Preferred Stock; PROVIDED
FURTHER, that, without the approval of holders of the Exchangeable Preferred
Stock, the Company may issue shares of Senior Stock in exchange for, or the
proceeds of which are used to redeem or purchase, all (but not less than all)
shares of the Exchangeable Preferred Stock then outstanding in accordance with
the Certificate of Designation.
DIVIDENDS
Holders of the outstanding shares of Exchangeable Preferred Stock will be
entitled to receive, when, as and if declared by the Board of Directors of the
Company out of funds legally available therefor, dividends on the Exchangeable
Preferred Stock, which shall accrue at a rate per annum equal to 11 3/8%. If at
any time dividends on the Exchangeable Preferred Stock are in arrears and unpaid
for six or more quarterly dividend periods (whether or not consecutive), holders
of Exchangeable Preferred Stock will be entitled to certain voting rights. All
dividends will be cumulative, whether or not earned or declared, from May 14,
1998, and will be payable quarterly in arrears on February 15, May 15, August
15, and November 15, of each year, commencing on August 15, 1998, to holders of
record on the February 1, May 1, August 1 or November 1 immediately preceding
the relevant dividend payment date. On or before May 15, 2003 the Company may,
at its option, pay dividends in cash or in Dividend Shares having an aggregate
liquidation preference equal to the amount of such dividends. After May 15,
2003, dividends may be paid only in cash. If any dividend (or portion thereof)
payable on any dividend payment date on or before May 15, 2003, is not declared
or paid in full in cash or in Dividend Shares as described above on such
dividend payment date, the amount of the accumulated and unpaid dividends will
bear interest at the dividend rate on the Exchangeable Preferred Stock,
compounding quarterly from such dividend payment date until paid in full. If any
dividend (or portion thereof) payable on any dividend payment date after May 15,
2003, is not declared or paid in full in cash on such dividend payment date, the
amount of the accumulated and unpaid dividend will bear interest at the dividend
rate on the Exchangeable Preferred Stock, compounding quarterly from such
dividend payment date until paid in full. The Credit Facility, the Notes
Indenture and Minnesota corporate law limit the Company's ability under certain
circumstances to pay cash dividends on its capital stock, and future agreements
may contain similar or more restrictive limitations. See "Description of Other
Indebtedness" and "Description of Senior Subordinated Notes."
No full dividends may be declared or paid or funds set apart for the payment
of dividends on any Parity Stock for any period unless full cumulative dividends
shall have been or contemporaneously are declared and paid (or are deemed
declared and paid) in full or declared and, if payable in cash, a sum in cash
sufficient for such payment set apart for such payment on the Exchangeable
Preferred Stock. If full dividends are not so paid, the Exchangeable Preferred
Stock will share dividends PRO RATA with the Parity Stock. No dividends may be
paid or set apart for such payment on Junior Stock (except dividends on Junior
Stock payable in additional shares of Junior Stock) and no Junior Stock or
Parity Stock may be repurchased, redeemed or otherwise retired nor may funds be
set apart for payment with respect thereto, if full cumulative dividends have
not been paid in full (or deemed paid) on the Exchangeable Preferred Stock.
Dividends on account of arrears for any past dividend period and dividends in
connection with any optional redemption may be declared and paid at any time,
without reference to any regular dividend payment date, to holders of record of
the Exchangeable Preferred Stock on such date, not more than 45 days prior to
the payment thereof, as may be fixed by the Board of Directors of the Company.
OPTIONAL REDEMPTION
After May 15, 2003, the Exchangeable Preferred Stock may be redeemed
(subject to contractual and other restrictions with respect thereto and to
certain conditions under Minnesota corporate law) at any time at the option of
the Company, in whole or from time to time in part, on not less than 30 nor more
than 60 days prior notice, at the redemption prices (expressed as percentages of
the then effective liquidation preference thereof) set forth below, plus,
without duplication, all accumulated and unpaid dividends, if any, to but
excluding the redemption date (including an amount in cash equal to a prorated
dividend for the period from the dividend payment date
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immediately prior to the redemption date to but excluding the redemption date),
if redeemed during the 12-month period beginning on May 15 of the years
indicated below:
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
- --------------------------------------------------------------------------- -----------------
<S> <C>
2003....................................................................... 105.688%
2004....................................................................... 104.266%
2005....................................................................... 102.844%
2006....................................................................... 101.422%
2007 and thereafter........................................................ 100.000%
</TABLE>
In addition, at any time prior to May 15, 2001, the Company may redeem
shares of Exchangeable Preferred Stock having an aggregate liquidation
preference of up to 25% of the aggregate liquidation preference of all shares of
Exchangeable Preferred Stock (including Additional Shares and Dividend Shares
but excluding any New Exchangeable Preferred Stock to the extent the Old
Exchangeable Preferred Stock in exchange for which it was issued is included in
the amount of all such shares of Exchangeable Preferred Stock issued) issued,
from the net cash proceeds of a Qualifying Event at a price equal to 111.375% of
the aggregate liquidation preference thereof, plus, without duplication,
accumulated and unpaid dividends, if any, to but excluding the date fixed for
redemption (including an amount in cash equal to a prorated dividend for the
period from the dividend payment date immediately prior to the redemption date),
subject to the right of holders of record on the relevant record date to receive
dividends due on a dividend payment date; PROVIDED, that at least $75 million in
aggregate liquidation preference of the Exchangeable Preferred Stock remains
outstanding immediately following such redemption. Any such redemption must be
made within 30 days after the related Qualifying Event.
Notice of any optional redemption of any Exchangeable Preferred Stock (or
portion thereof) will be given to Holders at their addresses as given to the
Transfer Agent, not less than 30 nor more than 60 days prior to the date fixed
for redemption. The notice of redemption shall state the redemption date, the
redemption price, if less than all the outstanding shares of Exchangeable
Preferred Stock are to be redeemed, the liquidation preference of, and accrued
and unpaid dividends on, the particular Exchangeable Preferred Stock to be
redeemed, that on the redemption date the redemption price will become due and
payable upon each share of Exchangeable Preferred Stock to be redeemed and the
place or places where such Exchangeable Preferred Stock is to be surrendered for
payment of the redemption price.
No optional redemption may be authorized or made unless on or prior to such
redemption full unpaid cumulative dividends shall have been paid or a sum set
apart for such payment on the Exchangeable Preferred Stock.
The Credit Facility, the Notes Indenture and Minnesota corporate law limit
the Company's ability to redeem the Exchangeable Preferred Stock, and future
agreements may contain similar or more restrictive limitations.
MANDATORY REDEMPTION
The Exchangeable Preferred Stock will also be subject to mandatory
redemption (subject to certain conditions under Minnesota corporate law) in
whole on May 15, 2010 (the "Mandatory Redemption Date"), at a redemption price
equal to 100% of the aggregate liquidation preference thereof, plus, without
duplication, all accumulated and unpaid dividends, if any, to but excluding the
date fixed for redemption (including an amount in cash equal to a prorated
dividend for the period from the dividend payment date immediately prior to the
redemption date). The Credit Facility, the Notes Indenture and Minnesota
corporate law limit the Company's ability to redeem the Exchangeable Preferred
Stock, and future agreements of the Company may contain similar or more
restrictive limitations.
PROCEDURE FOR REDEMPTION
Notice of any redemption of any shares of Exchangeable Preferred Stock will
be given to the Holders at their registered address not less than 30 nor more
than 60 days prior to the date fixed for redemption. The notice of
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redemption shall state the redemption date, the redemption price, if less than
all of the outstanding shares of Exchangeable Preferred Stock are to be
redeemed, the liquidation preference of, and accrued and unpaid dividends on,
the shares of Exchangeable Preferred Stock to be redeemed, that on the
redemption date the redemption price will become due and payable upon each share
of Exchangeable Preferred Stock to be redeemed and the place or places where
such shares are to be surrendered for payment of the redemption price. If less
than all of the Exchangeable Preferred Stock is to be redeemed, the particular
shares to be redeemed will be determined PRO RATA, except that the Company may
redeem such shares held by a Holder of fewer than 100 shares without regard to
such PRO RATA redemption requirement.
On and after the redemption date, unless the Company defaults in the payment
of the applicable redemption price, dividends will cease to accumulate on shares
of Exchangeable Preferred Stock called for redemption and all rights of Holders
of such shares will terminate except for the right to receive the redemption
price, without interest; PROVIDED, HOWEVER, that if a notice of redemption has
been given and the funds necessary for redemption (including an amount in
respect of all dividends that will accrue to the redemption date) will have been
segregated and irrevocably set apart by the Company, in trust for the benefit of
the Holders of the shares called for redemption, then dividends will cease to
accumulate on the redemption date on the shares to be redeemed and, at the close
of business on the day on which such funds are segregated and set apart, the
Holders of the shares to be redeemed shall cease to be stockholders of the
Company and shall be entitled only to receive the redemption price for such
shares. New certificates of Exchangeable Preferred Stock having an aggregate
liquidation preference equal to the unredeemed portion of Exchangeable Preferred
Stock will be issued in the name of the Holder thereof upon cancellation of the
original shares of Exchangeable Preferred Stock. Shares of Exchangeable
Preferred Stock issued and reacquired by the Company will, upon compliance with
the applicable requirements of Minnesota law, have the status of authorized but
unissued Undesignated Shares of the Company and may, with any and all other
authorized but unissued Undesignated Shares of the Company, be designated or
redesignated, and issued or reissued, as the case may be, as part of any series
of capital stock of the Company, except that any issuance or reissuance of
shares of Exchangeable Preferred Stock must be in compliance with the
Certificate of Designation.
EXCHANGE
The Company may, at its option, on any scheduled dividend payment date,
exchange, in whole but not in part, the Exchangeable Preferred Stock for the
Exchange Debentures; PROVIDED that (i) on the date of such exchange there are no
accumulated and unpaid dividends on the Exchangeable Preferred Stock (including
the dividend payable on such date) or other contractual impediments to such
exchange; (ii) there shall be legally available funds sufficient therefor
(including, without limitation, funds sufficient under Minnesota law to repay
Indebtedness when due); (iii) either (A) a registration statement relating to
the Exchange Debentures shall have been declared effective under the Securities
Act prior to or on the Exchange Date and shall continue to be in effect on the
date of such exchange or (B) the Company shall have obtained a written Opinion
of Counsel that an exemption from the registration requirements of the
Securities Act is available for such exchange and that upon receipt of such
Exchange Debentures pursuant to such exchange made in accordance with such
exemption, each Holder of an Exchange Debenture that is not an Affiliate of the
Company will not be subject to any restrictions imposed by the Securities Act
upon the resale of such Exchange Debenture, and such exemption is relied upon by
the Company for such exchange; (iv) if required by applicable law, the Exchange
Indenture and the Debentures Trustee thereunder shall have been qualified under
the Trust Indenture Act of 1939, as amended, and (v) immediately prior and
subsequent to such exchange, no Event of Default (as defined in the Exchange
Indenture) or event which with notice or lapse of time or both would become an
Event of Default has occurred and is continuing; and no material breach or
default would exist under the Credit Facility or the Notes Indenture, and (vi)
the Company shall have delivered to the Debentures Trustee a written Opinion of
Counsel, dated the date of exchange, regarding the satisfaction of all the
conditions to be satisfied prior to such exchange including, without limitation,
those conditions set forth in clauses (i), (ii), (iii) and (iv) and the due
authorization, execution, delivery and enforceability of both the Exchange
Debentures and the Exchange Indenture. Currently, the exchange of the
Exchangeable Preferred Stock into Exchange Debentures is restricted by covenants
contained in the Credit Facility and the Notes Indenture, and future agreements
may contain similar or more restrictive limitations. There can be no assurance
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that the conditions in such covenants for the exchange of Exchangeable Preferred
Stock for Exchange Debentures will be satisfied or that the exchange will occur
or that future Indebtedness of the Company would not also restrict an exchange.
See "Description of Senior Subordinated Notes" and "Description of Other
Indebtedness."
Notice of any exchange of any shares of Exchangeable Preferred Stock will be
given to each Holder at its registered address not less than 30 nor more than 60
days prior to the date fixed for such exchange (the "Exchange Date"). On the
Exchange Date, if the conditions set forth in clauses (i) through (vi) above are
satisfied and the exchange is permitted under the Company's then outstanding
Indebtedness, the Company shall issue Exchange Debentures in exchange for the
Exchangeable Preferred Stock as provided in the next paragraph. In the event
that (i) the issuance of the Exchange Debentures is not permitted on the
Exchange Date or (ii) any of the conditions set forth in clauses (i) through
(vi) of the preceding paragraph is not satisfied on the Exchange Date, the
Company shall use its best efforts to satisfy such conditions and effect such
exchange as soon as practicable.
The Company will comply with the provisions of Rule 13e-4 promulgated
pursuant to the Exchange Act in connection with any exchange, to the extent
applicable.
Upon any exchange of Exchangeable Preferred Stock for Exchange Debentures on
the Exchange Date pursuant to the preceding paragraph, Holders of outstanding
shares of Exchangeable Preferred Stock will be entitled to receive, subject to
the second succeeding sentence, $1.00 of principal amount of Exchange Debentures
for each $1.00 of the then effective liquidation preference of Exchangeable
Preferred Stock held by them. The Exchange Debentures will be issued in
registered form, without coupons. Exchange Debentures issued in exchange for
Exchangeable Preferred Stock will be issued in principal amounts of $1,000 and
integral multiples thereof, and the Company will pay cash in lieu of issuing an
Exchange Debenture in any other principal amount. On and after the Exchange
Date, dividends will cease to accumulate on the outstanding shares of
Exchangeable Preferred Stock, and all rights of the holders of Exchangeable
Preferred Stock (except the right to receive the Exchange Debentures, an amount
in cash, to the extent applicable, equal to the accumulated and unpaid dividends
to the Exchange Date and cash in lieu of any Exchange Debenture that is in a
principal amount less than $1,000) will terminate. The person entitled to
receive Exchange Debentures issuable upon such exchange will be treated for all
purposes as the registered holder of such Exchange Debentures.
LIQUIDATION PREFERENCE
Upon any voluntary or involuntary liquidation, dissolution or winding-up of
the Company, Holders of Exchangeable Preferred Stock will be entitled to be
paid, out of the assets of the Company available for distribution to
stockholders, the then effective liquidation preference per share of
Exchangeable Preferred Stock ($1,000 per share), plus, without duplication, an
amount in cash equal to all accumulated and unpaid dividends thereon to but
excluding the date fixed for liquidation, dissolution or winding-up (including
an amount equal to a prorated dividend for the period from the last dividend
payment date to the date fixed for liquidation, dissolution or winding-up),
before any distribution is made on any Junior Stock, including, without
limitation, common stock of the Company. If, upon any voluntary or involuntary
liquidation, dissolution or winding-up of the Company, the amounts payable with
respect to the Exchangeable Preferred Stock and all other Parity Stock are not
paid in full, the Holders of the Exchangeable Preferred Stock and the Parity
Stock will share equally and ratably in any distribution of assets of the
Company in proportion to the full liquidation preference to which each is
entitled. After payment of the full amount of the liquidation preference and
accumulated and unpaid dividends to which they are entitled, the Holders of
shares of Exchangeable Preferred Stock will not be entitled to any further
participation in any distribution of assets of the Company. However, neither the
sale, conveyance, exchange or transfer (for cash, shares of stock, securities or
other consideration) of all or substantially all of the property or assets of
the Company nor the consolidation or merger of the Company with one or more
entities shall be deemed to be a liquidation, dissolution or winding-up of the
Company.
NO SINKING FUND
The Certificate of Designation for the Exchangeable Preferred Stock will not
contain any provision requiring funds to be set aside to protect the liquidation
preference of the Exchangeable Preferred Stock.
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VOTING RIGHTS
The holders of Exchangeable Preferred Stock, except as otherwise required
under Minnesota law or as set forth below, shall not be entitled or permitted to
vote on any matter required or permitted to be voted upon by the stockholders of
the Company.
The Certificate of Designation provides that if (i) at any time, dividends
on the Exchangeable Preferred Stock are in arrears and unpaid for six or more
quarterly dividend periods (whether or not consecutive); (ii) the Company fails
to redeem the Exchangeable Preferred Stock on May 15, 2010, or fails to
otherwise discharge any redemption or repurchase obligation with respect to the
Exchangeable Preferred Stock; (iii) the Company fails to make a Change of
Control Offer if such offer is required by the provisions set forth under the
"Change of Control" covenant below or fails to purchase shares of Exchangeable
Preferred Stock from Holders who elect to have such shares purchased pursuant to
the Change of Control Offer; (iv) a breach or violation of any other provisions
described under the caption "-- Certain Covenants" occurs and the breach or
violation continues for a period of 30 days or more after the Company receives
notice thereof specifying the default from the Holders of at least 25% of the
shares of Exchangeable Preferred Stock then outstanding; or (v) default by the
Company or any Restricted Subsidiary under the terms of any instrument
evidencing or securing Indebtedness having an outstanding principal amount in
excess of $5 million in the aggregate, which default results in the acceleration
of the payment of such Indebtedness or constitutes the failure to pay the
principal of such Indebtedness at maturity, then the Holders of a majority of
the then outstanding shares of Exchangeable Preferred Stock, voting as a class
(together with the holders of any Parity Stock having similar voting rights),
shall be entitled to elect the lesser of (a) two directors of the Board of
Directors of the Company and (b) 25% of the members of the Board of Directors of
the Company. If applicable, the voting rights will continue until such time as,
in the case of a dividend default, all dividends in arrears on the Exchangeable
Preferred Stock are paid in full (and in the case of dividends payable after May
15, 2003, paid in cash) and, in all other cases, any failure, breach or default
giving rise to such voting rights is remedied or waived by the holders of at
least a majority of the shares of Exchangeable Preferred Stock then outstanding,
at which time the term of any directors elected pursuant to the provisions of
this paragraph shall terminate. Each such event described in clauses (i) through
(v) above is referred to herein as a "Voting Rights Triggering Event." If the
voting rights provided herein is applicable, then they shall represent each
Holder's exclusive remedy at law or in equity.
The Certificate of Designation also provides that the Company will not
authorize or issue any new class of Senior Stock or Parity Stock except as
described above under "-- Ranking."
Under Minnesota law, holders of preferred stock are entitled to vote as a
class upon a proposed amendment to the articles of incorporation, whether or not
entitled to vote thereon by the terms of the articles of incorporation, if the
amendment would: (i) increase or decrease the aggregate number of authorized
shares of preferred stock; (ii) effect an exchange, reclassification, or
cancellation of all or part of the shares of preferred stock; (iii) effect an
exchange, or create a right of exchange, of all or any part of the shares of
another class or series for the shares of preferred stock; (iv) change the
rights or preferences of the preferred stock; (v) change the shares of preferred
stock into the same or a different number of shares, either with or without par
value, of another class or series of stock; (vi) create a new class or series of
shares having rights and preferences prior and superior to the shares of
preferred stock, or increase the rights and preferences or the number of
authorized shares of a class or series having rights and preferences prior or
superior to the shares of preferred stock; (vii) divide the shares of preferred
stock into series and determine the designation of each series and the
variations in the relative rights and preferences between the shares of each
series, or authorize the board of directors to do so; (viii) limit or deny any
existing preemptive rights of the shares of preferred stock; or (ix) cancel or
otherwise affect distributions on the shares of preferred stock that have
accrued but have not been declared.
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each Holder of Exchangeable
Preferred Stock shall have the right to have such Exchangeable Preferred Stock
repurchased by the Company on the terms and conditions set forth in the
Certificate of Designation. The Company shall, within 30 days following the date
of the consummation
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of a transaction resulting in a Change of Control, mail an Offer to Purchase all
outstanding shares of Exchangeable Preferred Stock at a purchase price equal to
101% of the aggregate liquidation preference thereof plus, without duplication,
accumulated and unpaid dividends, if any, to but excluding the date of purchase
(including an amount in cash equal to a prorated dividend for the period from
the dividend payment date immediately prior to the date of purchase). The
occurrence of a Change of Control constitutes an event of default under the
Credit Facility, entitling the lenders thereunder to accelerate all obligations
owing thereunder. Moreover, the Senior Subordinated Note holders have the right
to require the Company to repurchase all the Senior Subordinated Notes upon the
occurrence of a Change of Control, which would have to be satisfied prior to the
satisfaction of the Offer to Purchase the Exchangeable Preferred Stock. In
addition, Minnesota corporate law imposes certain conditions on the ability of
the Company to purchase shares of Exchangeable Preferred Stock. There can be no
assurance that the Company would be able to make or satisfy such Offer to
Purchase.
"Change of Control" means (i) directly or indirectly, a sale, transfer or
other conveyance of all or substantially all the assets of the Company, on a
consolidated basis, to any "person" or "group" (as such terms are used for
purposes of Sections 13(d) and 14(d) of the Exchange Act, whether or not
applicable), excluding transfers or conveyances to or among the Company's Wholly
Owned Restricted Subsidiaries, as an entirety or substantially as an entirety in
one transaction or series of related transactions, in each case with the effect
that any Person or group of Persons owns more than 50% of the total Voting Power
entitled to vote in the election of directors, managers or trustees of the
transferee entity immediately after such transaction, (ii) any "person" or
"group" (as such terms are used for purposes of Sections 13(d) and 14(d) of the
Exchange Act, whether or not applicable) is or becomes the "beneficial owner"
(as that term is used in Rules 13d-3 and 13d-5 under the Exchange Act, whether
or not applicable, except that a Person shall be deemed to have "beneficial
ownership" of all shares that any such Person has the right to acquire, whether
such right is exercisable immediately or only after the passage of time),
directly or indirectly, of more than 50% of the total Voting Power of the
Company, or (iii) during any period of 24 consecutive months, individuals who at
the beginning of such period constituted the Board of Directors of the Company
(together with any new directors whose election by such Board or whose
nomination for election by the shareholders of the Company was approved by a
vote of a majority of the directors then still in office who were either
directors at the beginning of such period or whose election or nomination for
election was previously so approved), cease for any reason to constitute a
majority of the Board of Directors of the Company then in office.
The Company will comply with any tender offer rules under the Exchange Act
which may then be applicable, including Rule 14e-l thereunder, in connection
with any Offer to Purchase.
CERTAIN COVENANTS
LIMITATION ON CONSOLIDATED INDEBTEDNESS
The Certificate of Designation prohibits the Company and its Restricted
Subsidiaries from Incurring any Indebtedness, except that the Company may Incur
Indebtedness if (x) there exists no Voting Rights Triggering Event or event
which with notice or lapse of time or both would become a Voting Rights
Triggering Event immediately prior and subsequent thereto and (y) after giving
effect thereto, the Company's Annualized Operating Cash Flow Ratio on a pro
forma basis (calculated on the assumption that such Indebtedness had been
incurred on the first day of the applicable Reference Period), would have been
less than:
<TABLE>
<CAPTION>
FOR THE PERIOD RATIO
- ------------------------------------------------------------------------------ ----------
<S> <C>
Prior to January 1, 2000...................................................... 9.0 to 1.0
Thereafter.................................................................... 8.0 to 1.0
</TABLE>
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Notwithstanding the foregoing, if there exists no Voting Rights Triggering
Event or event which with notice or lapse of time or both would become a Voting
Rights Triggering Event immediately prior and subsequent thereto, the Company
and its Restricted Subsidiaries may Incur the following Indebtedness without
regard to the foregoing limitations:
(i) Indebtedness evidenced by the Senior Subordinated Notes on the
Issue Date;
(ii) the Incurrence by the Company of (x) prior to the date of the
consummation of the Atlantic Acquisition, Indebtedness Incurred under the
Existing Credit Facility in an aggregate principal amount not to exceed $160
million at any time outstanding, reduced by repayments and permanent
reductions thereof due to application of Net Cash Proceeds (as defined in
the Notes Indenture) pursuant to the "Limitation on Asset Sales and Sales of
Subsidiary Stock" covenant set forth in the Notes Indenture; and (y) on and
after the date of the consummation of the Atlantic Acquisition, Indebtedness
Incurred under the New Credit Facility in an aggregate principal amount not
to exceed $300 million at any time outstanding, reduced by such repayments
and permanent reductions thereof due to application of Net Cash Proceeds (as
defined in the Notes Indenture) as set forth in the "-- Limitation on Asset
Sales and Sales of Subsidiary Stock" covenant set forth in the Notes
Indenture;
(iii) Indebtedness of the Company or any Restricted Subsidiary of the
Company owing to the Company or any Restricted Subsidiary of the Company
("Intercompany Indebtedness"); PROVIDED that (A) in the case of any such
Indebtedness of the Company, such obligations will be unsecured and
subordinated in all respects to the rights of the holders of the Exchange
Debentures, if and when issued, to the same extent as the Exchange
Debentures will be subordinated to Senior Indebtedness and (B) if any event
occurs that causes a Restricted Subsidiary to no longer be a Restricted
Subsidiary, then this clause (iii) will no longer be applicable to such
Indebtedness of that Restricted Subsidiary;
(iv) Indebtedness of the Company or any Restricted Subsidiary of the
Company to renew, extend, refinance or refund any Indebtedness of the
Company or any Restricted Subsidiary outstanding or committed on the date of
renewal, extension, refinancing or refunding other than Indebtedness
Incurred pursuant to clause (ii) or (iii); PROVIDED, HOWEVER, that such
Indebtedness does not exceed the principal amount of outstanding or
committed Indebtedness so renewed, extended, refinanced or refunded plus
financing fees and other expenses associated therewith; and PROVIDED
FURTHER, HOWEVER, that (a) such renewing, extending, refinancing or
refunding Indebtedness will not have a final maturity and will not have any
other mandatory repayments or redemptions prior to those of the Indebtedness
being renewed, extended, refinanced or refunded; (b) in the case of any
refinancing or refunding of Indebtedness that would rank PARI PASSU in right
of payment to the Exchange Debentures (if and when issued), the refinancing
or refunding Indebtedness would rank PARI PASSU or subordinate in right of
payment to the Exchange Debentures (if and when issued), and, in the case of
any refinancing or refunding of Indebtedness that would rank subordinate to
the Exchange Debentures (if and when issued), the refinancing or refunding
Indebtedness ranks subordinate in right of payment to the Exchange
Debentures (if and when issued) to substantially the same extent as the
Indebtedness refinanced or refunded; and (c) no Restricted Subsidiary of the
Company will be permitted to refinance any Indebtedness of the Company;
(v) Indebtedness Incurred by the Company or any Restricted Subsidiary of
the Company under Interest Hedge Agreements to hedge interest on permitted
Indebtedness; PROVIDED, that the notional principal amount of any such
Interest Hedge Agreements does not exceed the principal amount of
Indebtedness to which such Interest Hedge Agreements relate;
(vi) Indebtedness of any Restricted Subsidiary of the Company which does
not exceed $30 million in the aggregate for all such Restricted Subsidiaries
at any time outstanding (excluding any Intercompany Indebtedness or Acquired
Indebtedness permitted to be Incurred under the Certificate of Designation),
PROVIDED that after giving effect thereto on a pro forma basis the Company's
Annualized Operating Cash Flow Ratio is less than 7.5 to 1.0 and the
Adjusted Annualized Operating Cash Flow Ratio of such Subsidiary is less
than 5.0 to 1.0.
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(vii) any guarantee by any Restricted Subsidiary of any Indebtedness
Incurred under the Existing Credit Facility or New Credit Facility in
compliance with this covenant;
(viii) Acquired Indebtedness, PROVIDED that on a pro forma basis after
giving effect to the Incurrence of such Indebtedness, the Company shall be
able to Incur $1.00 of additional Indebtedness pursuant to the provisions
described under the first paragraph of this covenant "Limitation on
Consolidated Indebtedness";
(ix) Indebtedness in respect of performance, surety or appeal bonds
provided in the ordinary course of business;
(x) Indebtedness arising from agreements providing for indemnification,
adjustment of purchase price or similar obligations, or from guarantees or
letters of credit, surety bonds or performance bonds securing any
obligations of the Company or any of its Restricted Subsidiaries pursuant to
such agreements, in any case Incurred in connection with the disposition of
any business, assets or Restricted Subsidiary of the Company (other than
guarantees of Indebtedness Incurred by any Person acquiring all or any
portion of such business, assets or Restricted Subsidiary of the Company for
the purpose of financing such acquisition), in an amount not to exceed the
gross proceeds actually received by the Company or any Restricted Subsidiary
in connection with such disposition; and
(xi) Indebtedness of the Company or any Restricted Subsidiary, other
than Indebtedness permitted pursuant to clauses (i) through (x) above, which
does not exceed $10 million at any time outstanding or committed.
LIMITATION ON PREFERRED STOCK OF RESTRICTED SUBSIDIARIES
The Certificate of Designation prohibits the Company from allowing any
Restricted Subsidiary of the Company to create or issue any Preferred Stock
except:
(i) Preferred Stock outstanding on the Issue Date;
(ii) Preferred Stock issued to and held by the Company or any Wholly
Owned Restricted Subsidiary of the Company;
(iii) Preferred Stock issued by any Person prior to that Person's having
become a direct or indirect Restricted Subsidiary of the Company; and
(iv) Preferred Stock issued by a Restricted Subsidiary the proceeds of
which are used to refinance certain outstanding Preferred Stock of a
Restricted Subsidiary, PROVIDED that (a) the liquidation value of the
refinancing Preferred Stock does not exceed the liquidation value so
refinanced plus financing fees and other expenses associated with such
refinancing and (b) such refinancing Preferred Stock has no mandatory
redemptions prior to (and in no greater amounts than) the Preferred Stock
being refinanced.
LIMITATION ON RESTRICTED PAYMENTS
The Certificate of Designation prohibits the Company or any Restricted
Subsidiary from making any Restricted Payment unless after giving effect thereto
(a) no Voting Rights Triggering Event or event which, with notice or lapse of
time or both, would become a Voting Rights Triggering Event has occurred and is
continuing; (b) the Company would be permitted to Incur an additional $1.00 of
Indebtedness pursuant to the provision of the Certificate of Designation
described in the first paragraph under "-- Limitation on Consolidated
Indebtedness"; (c) the total of all Restricted Payments made on or after the
Issue Date does not exceed the sum of (i) Cumulative Operating Cash Flow less
1.75 times Cumulative Interest Expense, (ii) 100% of the aggregate Qualified
Capital Stock Proceeds of the Company after the Issue Date and (iii) 100% of the
cash proceeds received from an Unrestricted Subsidiary to the extent of
Investments (other than Permitted Investments) made in such Unrestricted
Subsidiary since the Issue Date; and (d) all accumulated and unpaid dividends on
the Exchangeable Preferred Stock shall have been paid in full as provided in the
Certificate of Designation.
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The foregoing provision shall not be violated, so long as no Voting Rights
Triggering Event or event which with notice or lapse of time or both would
become a Voting Rights Triggering Event has occurred and is continuing or shall
occur as a consequence of the actions or payments set forth below, by reason of
(i) the payment of any dividend within 60 days after declaration thereof if at
the declaration date such payment would have complied with the foregoing
provision, (ii) the purchase, acquisition, redemption or other acquisition or
retirement for value of shares of Capital Stock of any Restricted Subsidiary
held by Persons other than the Company or any of its Restricted Subsidiaries,
(iii) the redemption, defeasance, repurchase or other acquisition or retirement
of any Junior Stock of the Company or its Restricted Subsidiaries either in
exchange for or out of the net cash proceeds of the substantially concurrent
sale (other than to a Subsidiary of the Company) of Qualified Junior Stock and
(iv) Restricted Payments, in addition to Restricted Payments permitted pursuant
to clauses (i) through (iii) of this paragraph, not in excess of $10 million in
the aggregate after the Issue Date. The payments described in clauses (i), (iii)
(provided the proceeds of the sale of the Qualified Junior Stock constitute
Qualified Capital Stock Proceeds) and (iv) of this paragraph will count as
Restricted Payments for the calculation under the first paragraph of this
section "Limitation on Restricted Payments."
LIMITATIONS CONCERNING DISTRIBUTIONS AND TRANSFERS BY RESTRICTED
SUBSIDIARIES
The Certificate of Designation provides that the Company will not, and will
not permit any Restricted Subsidiary to, create or otherwise cause or suffer to
exist or become effective any consensual restriction or prohibition on the
ability of any Restricted Subsidiary to (a) pay dividends on, or make other
distributions in respect of, its Capital Stock, or any other ownership interest
or participation in, or measured by, its profits, to the Company or any
Restricted Subsidiary or pay any Indebtedness or other obligation owed to the
Company or any Restricted Subsidiary, (b) make any loans or advances to the
Company or any Restricted Subsidiary, or (c) transfer any of its property or
assets to the Company or any Restricted Subsidiary. Notwithstanding the
foregoing, the Company may, and may permit any Restricted Subsidiary to, suffer
to exist any such restriction or prohibition (i) pursuant to the Certificate of
Designation, the Notes Indenture, the Existing Credit Facility or any other
agreement in effect on the Issue Date, (ii) pursuant to an agreement relating to
any Indebtedness of such Restricted Subsidiary which was outstanding or
committed prior to the date on which such Restricted Subsidiary was acquired by
the Company other than in anticipation of becoming a Restricted Subsidiary;
PROVIDED that such restriction or prohibition shall not apply to any property or
assets of the Company or any Restricted Subsidiary other than the property or
assets of such Restricted Subsidiary and its Subsidiaries, (iii) pursuant to an
agreement effecting a renewal, extension, refinancing or refunding of any
agreement described in clauses (i) and (ii) above, PROVIDED, HOWEVER, that the
provisions contained in such renewal, extension, refinancing or refunding
agreement relating to such restriction or prohibition are no more restrictive in
any material respect than the provisions contained in the agreement the subject
thereof (it being understood that for purposes of this clause (iii) the New
Credit Facility is deemed to be a refinancing of the Existing Credit Facility),
(iv) existing under or by reason of applicable law, (v) customary provisions
restricting subletting or assignment of any lease governing any leasehold
interest of any Restricted Subsidiary, (vi) purchase money obligations for
property acquired in the ordinary course of business that impose restrictions of
the type referred to in clause (c) of this covenant, (vii) restrictions of the
type referred to in clause (c) of this covenant contained in security agreements
securing Indebtedness of a Restricted Subsidiary to the extent that such Liens
were otherwise incurred in accordance with "-- Limitations on Liens" below and
restrict the transfer of property subject to such agreements, or (viii)
customary provisions in joint venture agreements and other similar agreements
entered into in the ordinary course of business.
LIMITATIONS ON TRANSACTIONS WITH AFFILIATES AND RELATED PERSONS
The Certificate of Designation provides that the Company will not, and will
not permit any Restricted Subsidiary of the Company to, enter into any
transaction involving aggregate consideration in excess of (a) $1 million,
including, without limitation, any purchase, sale, lease or exchange of property
or the rendering of any service, with or to any Affiliate or Related Person of
the Company (other than a Restricted Subsidiary), unless a majority of the
disinterested members of the Board of Directors of the Company determines (which
determination will be evidenced by a Board Resolution) that (i) such transaction
is in the best interests of the Company or such
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Restricted Subsidiary and (ii) such transaction is on terms that are no less
favorable to the Company or such Restricted Subsidiary than those which might be
obtained in arm's-length transactions with a third party at the time and (b) $5
million unless (in addition to the provisions of the foregoing clause (a)) the
Company receives a written opinion from an investment banking firm of national
reputation to the effect that such transaction is fair to the Company or such
Restricted Subsidiary, from a financial point of view; PROVIDED, that in the
case of transactions entered into in the ordinary course of business principally
involving the provision of telecommunications services by Affiliates or Related
Persons of the Company (who are regularly engaged in the provision of
telecommunications services) to the Company or any of its Restricted
Subsidiaries (x) if the aggregate consideration involved is not in excess of $5
million, then clause (a) above will be applicable but the good faith judgment of
an officer of the Company will be substituted for the requirement of a
resolution of the Board of Directors and (y) if the aggregate consideration
involved exceeds $5 million, clause (b) above will not be applicable but clause
(a) above will be applicable.
LIMITATIONS ON LIENS
The Certificate of Designation provides that the Company will not, and will
not permit any Restricted Subsidiary of the Company to, Incur or suffer to exist
any Lien on or with respect to any property or assets now owned or hereafter
acquired to secure any Indebtedness that ranks in right of payment PARI PASSU
with or subordinate to the Exchange Debentures, if and when issued, without
making, or causing such Restricted Subsidiary to make, effective provision for
securing the Exchange Debentures, if and when issued, (i) equally and ratably
with such Indebtedness as to such property for so long as such Indebtedness will
be so secured or (ii) in the event such Indebtedness is Indebtedness of the
Company or a Restricted Subsidiary which is subordinate in right of payment to
the Exchange Debentures, if and when issued, prior to such Indebtedness as to
such property for so long as such Indebtedness will be so secured.
The foregoing restrictions shall not apply to: (i) Liens existing in respect
of any Indebtedness that exists on the Issue Date; (ii) Liens in favor of the
Company or Liens in favor of a Wholly Owned Restricted Subsidiary of the Company
on the assets or Capital Stock of another Wholly Owned Restricted Subsidiary of
the Company; (iii) Liens to secure Indebtedness outstanding or committed for the
purpose of financing all or any part of the purchase price or the cost of
construction or improvement of the equipment or other property subject to such
Liens; PROVIDED, HOWEVER, that (a) the principal amount of any Indebtedness
secured by such a Lien does not exceed 100% of such purchase price or cost, (b)
such Lien does not extend to or cover any property other than such item of
property or any improvements on such item and (c) the Incurrence of such
Indebtedness is otherwise permitted by the Certificate of Designation; (iv)
Liens on property existing immediately prior to the time of acquisition thereof
(and not Incurred in anticipation of the financing of such acquisition); (v)
Liens to secure Indebtedness to extend, renew, refinance or refund (or
successive extensions, renewals, refinancings or refundings), in whole or in
part, Indebtedness secured by any Lien referred to in the foregoing clauses (i),
(iii) and (iv) so long as such Lien does not extend to any other property and
the principal amount of Indebtedness so secured is not increased except as
otherwise permitted under the provision of the Certificate of Designation
described under clause (ii) or (iv) of "-- Limitation on Consolidated
Indebtedness"; (vi) Liens on any Permitted Investment in Cooperative Bank Equity
in favor of any Cooperative Banks; or (vii) any other Liens in respect of any
Indebtedness which Indebtedness does not exceed $500,000 in the aggregate.
LIMITATION ON CERTAIN DEBT
The Certificate of Designation provides that the Company will not Incur any
Indebtedness that is subordinate in right of payment to any other Indebtedness
of the Company unless the Indebtedness so Incurred is either PARI PASSU or
subordinate in right of payment to the Exchange Debentures (if and when issued).
CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE
The Certificate of Designation provides that the Company will not
consolidate with or merge into any Person or permit any other Person to
consolidate with or merge into the Company, or transfer, sell, convey or lease
or
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otherwise dispose of all or substantially all of its assets to, any Person
unless (i) (a) the Company is the surviving entity or (b) if the Company is not
the surviving entity, then the successor or transferee will be a corporation
organized and validly existing under the laws of the United States of America or
any jurisdiction thereof and the Exchangeable Preferred Stock shall be converted
into or exchanged for and shall become shares of such successor or transferee
company, having in respect of such successor or transferee company substantially
the same powers, preferences and relative participating, optional or other
special rights and the qualifications, limitations or restrictions thereon that
the Exchangeable Preferred Stock had immediately prior to such transaction, (ii)
the Consolidated Net Worth of the successor or transferee immediately after the
transaction is not less than 100% of the Company's Consolidated Net Worth
immediately prior to the transaction, (iii) immediately after giving effect to
such transaction, the Company (or its permitted successor or transferee) would
be permitted to Incur at least $1.00 of additional Indebtedness pursuant to the
provision of the Certificate of Designation described in the first paragraph
under "-- Limitation on Consolidated Indebtedness," (iv) after giving effect to
such transaction no Voting Rights Triggering Event or event which with notice or
lapse of time would become a Voting Rights Triggering Event has occurred and is
continuing, and (v) an Officers' Certificate and an Opinion of Counsel covering
such conditions shall be delivered to the Transfer Agent.
REPORTS
The Certificate of Designation provides that whether or not the Company is
subject to the reporting requirements of Section 13 or 15(d) of the Exchange
Act, the Company shall deliver to the Transfer Agent and to each Holder, within
15 days after it is or would have been required to file such with the
Commission, annual and quarterly financial statements substantially equivalent
to financial statements that would have been included in reports filed with the
Commission, if the Company were subject to the requirements of Section 13 or
15(d) of the Exchange Act, including, with respect to annual information only, a
report thereon by the Company's certified independent public accountants as such
would be required in such reports to the Commission, and, in each case, together
with a management's discussion and analysis of financial condition and results
of operations which would be so required.
CERTAIN DEFINITIONS
"Acquired Indebtedness" means Indebtedness of a Person (including an
Unrestricted Subsidiary) (i) existing at the time such Person becomes a
Restricted Subsidiary or (ii) assumed in connection with the acquisition of
assets from such Person, in the case of both of the preceding clause (i) and
clause (ii), other than Indebtedness incurred in connection with, or in
contemplation of, such Person becoming a Restricted Subsidiary or such
acquisition. Acquired Indebtedness will be deemed to be Incurred on the date of
the related acquisition of assets from any Person or the date the acquired
Person becomes a Restricted Subsidiary.
"Adjusted Annualized Operating Cash Flow Ratio" of any Person means the
Annualized Operating Cash Flow Ratio of such Person as adjusted to treat all
Preferred Stock of such Person as Redeemable Stock.
"Affiliate" of any Person means any other Person directly or indirectly
controlling or controlled by or under direct or indirect common control with
such Person. For the purposes of this definition, "control" when used with
respect to any Person means the power to direct the management and policies of
such Person, directly or indirectly, whether through the ownership of voting
securities, by contract or otherwise; and the terms "controlling" and
"controlled" have meanings correlative to the foregoing.
"Annualized Operating Cash Flow" of any Person means the Operating Cash Flow
of such Person for the Reference Period multiplied by two.
"Annualized Operating Cash Flow Ratio" of any Person on any date (the
"Transaction Date") means, with respect to any Person and its Restricted
Subsidiaries, the ratio of (i) Consolidated Indebtedness of such Person and its
Restricted Subsidiaries on the Transaction Date (after giving pro forma effect
to the Incurrence of any Indebtedness on such Transaction Date) divided by (ii)
the aggregate amount of Annualized Operating Cash Flow of such Person
(determined on a pro forma basis after giving effect to all dispositions of
businesses made by such
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Person and its Restricted Subsidiaries from the beginning of the Reference
Period through the Transaction Date as if such dispositions had occurred at the
beginning of such Reference Period); PROVIDED, that for purposes of such
computation, in calculating Annualized Operating Cash Flow and Consolidated
Indebtedness: (a) the transaction giving rise to the need to calculate the
Annualized Operating Cash Flow Ratio will be assumed to have occurred (on a pro
forma basis) on the first day of the Reference Period; (b) the incurrence of any
Indebtedness during the Reference Period or subsequent thereto and on or prior
to the Transaction Date (and the application of the proceeds therefrom to the
extent used to retire Indebtedness) will be assumed to have occurred (on a pro
forma basis) on the first day of such Reference Period; (c) Consolidated
Interest Expense attributable to any Indebtedness (whether existing or being
incurred) bearing a floating interest rate shall be computed as if the rate in
effect on the Transaction Date had been the applicable rate for the entire
period; (d) all members of the consolidated group of such Person on the
Transaction Date that were acquired during the Reference Period shall be deemed
to be members of the consolidated group of such Person for the entire Reference
Period and (e) the Indebtedness and Annualized Operating Cash Flow of any
Restricted Subsidiary that is not a Wholly Owned Restricted Subsidiary shall be
determined in accordance with the actual percentage of the Person's common
equity interest in such Restricted Subsidiary on the date of determination of
the Annualized Operating Cash Flow Ratio (thus, for example, in the case of a
Restricted Subsidiary in which such Person owns a 51% common equity interest,
51% of such Subsidiary's Indebtedness and of such Subsidiary's Annualized
Operating Cash Flow would be included in the calculation of such Person's
aggregate Indebtedness and Annualized Operating Cash Flow, respectively. When
the foregoing definition is used in connection with the Company and its
Restricted Subsidiaries, references to a Person and its Restricted Subsidiaries
in the foregoing definition shall be deemed to refer to the Company and its
Restricted Subsidiaries.
"Board Resolution" means a copy of a resolution certified by the Secretary
or an Assistant Secretary of the Company to have been duly adopted by the Board
of Directors, to be in full force and effect on the date of such certification
and delivered to the Transfer Agent.
"Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday
which is not a day on which banking institutions in New York City or the State
of Minnesota are authorized or obligated by law or executive order to close.
"Capital Lease Obligation" means that portion of any obligation of a Person
as lessee under a lease which is required to be capitalized on the balance sheet
of such lessee in accordance with generally accepted accounting principles.
"Capital Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or non-voting) of equity of such Person.
"Cash Equivalents" means (i) securities issued or directly and fully
guaranteed or insured by the United States of America or any agency or
instrumentality thereof (provided that the full faith and credit of the United
States of America is pledged in support thereof), in each case maturing within
one year after the date of acquisition, (ii) time deposits and certificates of
deposit and commercial paper issued by the parent corporation of any domestic
commercial bank of recognized standing having capital and surplus in excess of
$500 million and commercial paper issued by others rated at least A-2 or the
equivalent thereof by Standard & Poor's Corporation or at least P-2 or the
equivalent thereof by Moody's Investors Service, Inc. and in each case maturing
within one year after the date of acquisition, and (iii) investments in money
market funds substantially all of whose assets comprise securities of the types
described in clauses (i) and (ii) above.
"Commission" means the Securities and Exchange Commission.
"Consolidated Income Tax Expense" of any Person means for any period the
provision for income taxes of such Person and its Restricted Subsidiaries for
such period.
"Consolidated Indebtedness" of any Person means at any date the Indebtedness
of such Person and its Restricted Subsidiaries at such date.
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"Consolidated Interest Expense" of any Person means for any period the
interest expense included in an income statement (taking into account the effect
of any Interest Hedge Agreements but without deduction of interest income) of
such Person and its Restricted Subsidiaries for such period, including without
limitation or duplication (or, to the extent not so included, with the addition
of), (i) the portion of any rental obligation in respect of any Capital Lease
Obligation allocable to interest expense in accordance with generally accepted
accounting principles; (ii) the amortization of Indebtedness discounts; (iii)
any payments or fees with respect to letters of credit, bankers' acceptances or
similar facilities; (iv) fees with respect to Interest Hedge Agreements; (v) the
portion of any rental obligations in respect of any Sale and Leaseback
Transaction allocable to interest expense (determined as if such were treated as
a Capital Lease Obligation); and (vi) Preferred Stock dividends accrued or
payable other than dividends on Qualified Capital Stock of the Company.
"Consolidated Net Income" of any Person means for any period the net income
(or loss) of such Person and its Restricted Subsidiaries for such period
determined on a consolidated basis in accordance with generally accepted
accounting principles; PROVIDED that there shall be excluded therefrom (to the
extent included and without duplication) (i) the net income (or loss) of any
Person acquired by such Person or a Restricted Subsidiary of such Person after
the Issue Date in a pooling of interests transaction for any period prior to the
date of such transaction; (ii) the net income (or loss) of any Person that is
not a Restricted Subsidiary of such Person except to the extent of the amount of
dividends or other distributions actually paid to such Person by such other
Person during such period; (iii) gains or losses from sales of assets other than
sales of assets acquired and held for resale in the ordinary course of business;
(iv) for the purposes of the "Limitation on Restricted Payments" covenant, the
net income, if positive, of any Restricted Subsidiary to the extent that the
declaration or payment of dividends or similar distributions by such Restricted
Subsidiary of such net income is not at that time permitted by the operation of
the terms of its charter or any agreement, instrument, judgment, decree, order,
statute, rule or governmental regulations applicable to such Restricted
Subsidiary and (v) all extraordinary gains and extraordinary losses.
"Consolidated Net Worth" of any Person means the consolidated shareholders'
equity of such Person, determined on a consolidated basis in accordance with
generally accepted accounting principles; PROVIDED, that with respect to the
Company, adjustments following the Issue Date to the accounting books and
records of the Company in accordance with Accounting Principles Board Opinions
Nos. 16 and 17 (or successor opinions thereto) or otherwise resulting from the
acquisition of control of the Company by another Person and its Subsidiaries
shall not be given effect; PROVIDED FURTHER, that such computation shall exclude
(i) any amounts attributable to Redeemable Stock or any equity security
convertible into or exchangeable for Indebtedness, the cost of treasury stock
and the principal amount of any promissory notes receivable from the sale of the
Capital Stock of the Company or any of its Restricted Subsidiaries and (ii)
Unrestricted Subsidiaries.
"Cooperative Banks" means lenders under the Credit Facility which are
cooperative banks.
"Cooperative Bank Equity" means non-voting equity interests in Cooperative
Banks.
"Credit Facility" means the Existing Credit Facility or the New Credit
Facility.
"Cumulative Interest Expense" means the total amount of Consolidated
Interest Expense of the Company and its Restricted Subsidiaries for the period
beginning on the first day of the fiscal quarter immediately following the Issue
Date through and including the end of the last fiscal quarter preceding the date
of any proposed Restricted Payment.
"Cumulative Operating Cash Flow" means Operating Cash Flow of the Company
and its Restricted Subsidiaries for the period beginning on the first day of the
fiscal quarter immediately following the Issue Date, through and including the
end of the last fiscal quarter preceding the date of any proposed Restricted
Payment.
"Depositary" means a clearing agency registered under the Exchange Act that
is designated to act as Depositary for the Exchangeable Preferred Stock until a
successor Depositary shall have become such pursuant to the applicable
provisions of the Certificate of Designation, and thereafter "Depositary" shall
mean such successor Depositary. The Depositary initially is DTC.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
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"Existing Credit Facility" means the Loan Agreement, dated as of May 1,
1997, among the Company, 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, as amended by a First Amendment to Loan Agreement dated as of August 4,
1997, a Second Amendment to Loan Agreement dated as of December 30, 1997, a
Third Amendment to Loan Agreement dated as of April 17, 1998 and a Fourth
Amendment to Loan Agreement dated as of April 24, 1998, and as such agreement
may be further amended, supplemented, restated or otherwise modified from time
to time.
"Fair Market Value" means, with respect to any assets or Person, the price
which could be negotiated in an arm's-length free market transaction, for cash,
between a willing seller and a willing buyer, neither of whom is under undue
pressure or compulsion to complete the transaction. Fair Market Value will be
determined (i) if such Person or assets have a Fair Market Value in excess of
$20,000 but not in excess of $5 million, by any officer of the Company and
evidenced by an Officers' Certificate dated within 30 days of the relevant
transaction, or (ii) if such Person or assets have a Fair Market Value in excess
of $5 million, by a majority of the Board of Directors of the Company and
evidenced by a Board Resolution, dated within 30 days of the relevant
transaction, based on an appraisal of an independent appraiser of national
reputation.
"Holder" means a Person in whose name a share of Exchangeable Preferred
Stock is registered.
"Incur" means, with respect to any Indebtedness or other obligation of any
Person, to create, issue, incur (by conversion, exchange or otherwise), assume,
guarantee or otherwise become liable in respect of such Indebtedness or other
obligation or the recording, as required pursuant to generally accepted
accounting principles or otherwise, of any such Indebtedness or other obligation
on the balance sheet of such Person (and "Incurrence," "Incurred," "Incurrable"
and "Incurring" shall have meanings correlative to the foregoing); PROVIDED,
HOWEVER, that a change in generally accepted accounting principles that results
in an obligation of such Person that exists at such time becoming Indebtedness
shall not be deemed an Incurrence of such Indebtedness.
"Indebtedness" means (without duplication), with respect to any Person,
whether recourse is to all or a portion of the assets of such Person and whether
or not contingent, (i) every obligation of such Person for money borrowed, (ii)
every obligation of such Person evidenced by bonds, debentures, notes or similar
instruments, including obligations Incurred in connection with the acquisition
of property, assets or businesses, (iii) every reimbursement obligation of such
Person with respect to letters of credit, bankers' acceptances or similar
facilities issued for the account of such Person, (iv) every obligation of such
Person issued or assumed as the deferred purchase price of property or services
(but excluding trade accounts payable or accrued liabilities arising in the
ordinary course of business), (v) every Capital Lease Obligation of such Person,
(vi) the maximum fixed redemption or repurchase price of Redeemable Stock of
such Person at the time of determination, (vii) every obligation to pay rent or
other payment amounts of such Person with respect to any Sale and Leaseback
Transaction to which such Person is a party, (viii) all obligations under
Interest Rate Agreements, (ix) every obligation of the type referred to in
clauses (i) through (viii) of another Person and all dividends of another Person
the payment of which, in either case, such Person has guaranteed or is
responsible or liable, directly or indirectly, as obligor, guarantor or
otherwise, or which is secured by a lien on any asset of such Person; and (x)
the liquidation value of Preferred Stock of a Subsidiary of such Person issued
and outstanding and held by other than such Person (or one of its Wholly Owned
Restricted Subsidiaries); PROVIDED, that for all purposes of the Certificate of
Designation, (A) the amount outstanding at any time of any Indebtedness issued
with original issue discount is the face amount of such Indebtedness less the
unamortized portion of the original issue discount of such Indebtedness at the
time of its issuance as determined in conformity with generally accepted
accounting principles, (B) money borrowed at the time of the Incurrence of any
Indebtedness in order to pre-fund the payment of interest on such Indebtedness
shall be deemed not to be "Indebtedness" and (C) Indebtedness shall not include
any liability for federal, state, local or other taxes. For purposes of the
Certificate of Designation, the amount of any Indebtedness shall be the amount
determined in respect thereof as of the end of the then most recently ended
fiscal quarter of such Person, based on the assumption that such Indebtedness
had terminated at the end of such fiscal quarter, and in making such
determination, if any agreement relating to such obligation provides for the
netting of amounts payable by and to such Person thereunder or if any such
agreement provides for the simultaneous payment of amounts by and to such Person
or in any event
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until the counterparty thereunder defaults in its corresponding payment, then in
each such case, the amount of such obligations shall be the net amount so
determined, plus any premium due upon default by such Person.
"Interest Hedge Agreements" means any interest rate swap, cap, collar,
floor, caption or swaption agreements, or any similar arrangements designed to
hedge the risk of variable interest rate volatility or to reduce interest costs,
arising at any time between the Company or any Restricted Subsidiary, on the one
hand, and any Person (other than an Affiliate of the Company or any Restricted
Subsidiary), on the other hand, as such agreement or arrangement may be
modified, supplemented and in effect from time to time.
"Investment" by any Person in any other Person means (without duplication):
(a) the acquisition (whether by purchase, merger, consolidation or otherwise) by
such Person (whether for cash, property, services, securities or otherwise) of
Capital Stock, bonds, notes, debentures, partnership or other ownership
interests or other securities of such other Person or any agreement to make any
such acquisition; (b) the making by such Person of any deposit with, or advance,
loan or other extension of credit to, such other Person (including the purchase
of property from another Person subject to an understanding or agreement,
contingent or otherwise, to resell such property to such other Person) or any
commitment to make any such advance, loan or extension; (c) the entering into by
such Person of any guarantee of, or other contingent obligation with respect to,
Indebtedness or other liability of such other Person; (d) the making of any
capital contribution by such Person to such other Person; and (e) the
designation by the Board of Directors of the Company of any Person to be an
Unrestricted Subsidiary. For purposes of the covenant described in "--
Limitation on Restricted Payments," (i) "Investment" shall include and be valued
at the Fair Market Value of such Person's PRO RATA interest in the net assets of
any Restricted Subsidiary at the time that such Restricted Subsidiary is
designated an Unrestricted Subsidiary and shall exclude the lesser of (A) Fair
Market Value of such Person's pro rata interest in the net assets of any
Unrestricted Subsidiary at the time that such Unrestricted Subsidiary is
designated a Restricted Subsidiary and (B) the Fair Market Value of the amount
of such Person's Investments (other than Permitted Investments) made in (net of
cash distributions received from) such Unrestricted Subsidiary since the Issue
Date, and (ii) the amount of any Investment shall be the Fair Market Value of
such Investment at the time any such Investment is made.
"Issue Date" means the time and date of the first issuance of the
Exchangeable Preferred Stock.
"Lien" means, with respect to any property or assets, any mortgage or deed
of trust, pledge, hypothecation, assignment, deposit arrangement, security
interest, lien, charge, easement (other than an easement not materially
impairing usefulness or marketability), encumbrance, preference, priority or
other security agreement or preferential arrangement of any kind or nature
whatsoever on or with respect to such property or assets (including, without
limitation, any conditional sale or other title retention agreement having
substantially the same economic effect as any of the foregoing).
"New Credit Facility" means the amendment and restatement or the refinancing
or replacement of the Existing Credit Facility with the same, a deletion of, or
additional lenders, including, without limitation, any successive renewals,
extensions, substitutions, refinancings, restructurings, replacements,
supplementations or other modifications of the foregoing that increase the
aggregate amount of borrowings outstanding or the aggregate commitments of the
lenders thereunder.
"Offer to Purchase" means a written offer (the "Offer") sent by the Company
to each Holder at its registered address on the date of the Offer offering to
purchase Exchangeable Preferred Stock having a liquidation preference up to the
amount specified in such Offer at the purchase price specified in such Offer.
Unless otherwise required by applicable law, the Offer shall specify an
expiration date (the "Expiration Date") of the Offer to Purchase which, subject
to any contrary requirements of applicable law, shall be not less than 30 days
nor more than 60 days after the date of such Offer to Purchase and a settlement
date (the "Purchase Date") for purchase of Exchangeable Preferred Stock within
five Business Days after the Expiration Date. The Offer shall also state the
section of the Certificate of Designation pursuant to which the Offer to
Purchase is being made, the Expiration Date and the Purchase Date, the aggregate
liquidation preference of the outstanding Exchangeable Preferred Stock offered
to be purchased by the Company, the purchase price to be paid by the Company and
the place or places where shares of Exchangeable Preferred Stock are to be
surrendered for tender pursuant to the Offer to Purchase.
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"Officers' Certificate" means a certificate signed by two officers at least
one of whom shall be the principal executive officer, principal accounting
officer or principal financial officer of the Company and delivered to the
Transfer Agent.
"Operating Cash Flow" for any Person for any period means (a) the
Consolidated Net Income of such Person for such period, plus (b) the sum,
without duplication (and only to the extent such amounts are deducted from net
revenues in determining such Consolidated Net Income), of (i) the provisions for
income taxes for such period for such Person and its Subsidiaries, (ii)
depreciation, amortization and other non-cash charges of such Person and its
Subsidiaries and (iii) Consolidated Interest Expense of such Person for such
period, determined, in each case, on a consolidated basis for such Person and
its Subsidiaries in accordance with generally accepted accounting principles,
less (c) the sum, without duplication (and only to the extent such amounts are
included in such Consolidated Net Income), of (i) all extraordinary gains of
such Person and its Subsidiaries during such period and (ii) the amount of all
cash payments made during such period by such Person and its Subsidiaries to the
extent such payments relate to non-cash charges that were added back in
determining Operating Cash Flow for such period or for any prior period; and in
the case of a Restricted Subsidiary that is not a Wholly Owned Restricted
Subsidiary, the determination of the percentage of the Operating Cash Flow of
such Restricted Subsidiary that is to be included in the calculation of the
Company's Annualized Operating Cash Flow Ratio shall be made on a pro forma
basis on the assumption that the percentage of the Company's common equity
interest in such Restricted Subsidiary throughout the applicable Reference
Period was equivalent to its common equity interest on the date of the
determination. When the foregoing definition is used in connection with the
Company and its Restricted Subsidiaries, references to a Person and its
Subsidiaries in the foregoing definition shall be deemed to refer to the Company
and its Restricted Subsidiaries.
"Opinion of Counsel" means a written opinion of counsel, who may be counsel
for the Company, and who shall be reasonably acceptable to the Transfer Agent,
delivered to the Transfer Agent.
"Permitted Investments" means: (i) Investments in Cash Equivalents; (ii)
Investments in the Company or a Restricted Subsidiary (other than payments
described in clause (ii) of the second paragraph under "Limitation on Restricted
Payments"), (iii) Investments in a Person substantially all of whose assets are
of a type generally used in a Wireless Communications Business (an "Acquired
Person") if, as a result of such Investments, (A) the Acquired Person
immediately thereupon becomes a Restricted Subsidiary or (B) the Acquired Person
immediately thereupon either (1) is merged or consolidated with or into the
Company or any Restricted Subsidiary or (2) transfers or conveys all or
substantially all of its assets to, or is liquidated into, the Company or any of
its Restricted Subsidiaries; (iv) Investments in accounts and notes receivable
acquired in the ordinary course of business; (v) any securities received in
connection with an Asset Sale and any investment with the Net Cash Proceeds from
any Asset Sale in Capital Stock of a Person, all or substantially all of whose
assets are of a type used in a Wireless Communications Business, that complies
with the "Limitation on Asset Sales and Sales of Subsidiary Stock" covenant;
(vi) advances and prepayments for asset purchases in the ordinary course of
business in a Wireless Communications Business of the Company or a Restricted
Subsidiary; (vii) customary loans or advances made in the ordinary course of
business to officers, directors or employees of the Company or any of its
Restricted Subsidiaries for travel, entertainment, and moving and other
relocation expenses; (viii) the purchase of Cooperative Bank Equity in
Cooperative Banks to the extent required by the charter documents of such
Cooperative Banks in connection with the Incurrence of any Indebtedness which is
provided by such Cooperative Banks under the Credit Facility, provided that such
Incurrence is permitted under the terms of the Certificate of Designation; and
(ix) Investments in Wireless Alliance not exceeding $25 million in the aggregate
made after the Issue Date; PROVIDED, that the matters referenced in clauses
(iii) and (ix) above shall not be Permitted Investments if made at any time that
a Voting Rights Triggering Event or event which with notice or lapse of time or
both would become a Voting Rights Triggering Event has occurred and is
continuing.
"Person" means any individual, corporation, partnership, joint venture,
trust, unincorporated organization or government or any agency or political
subdivision thereof.
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"Preferred Stock" means, with respect to any Person, and any and all shares
of Capital Stock of such Person that have preferential rights to any other
Capital Stock of such Person with respect to dividends or redemptions or upon
liquidation.
"Public Equity Offering" means an underwritten public offering of common
stock of the Company pursuant to an effective registration statement filed with
the Commission in accordance with the Securities Act.
"Qualified Capital Stock" means, with respect to any Person, any and all
shares of Capital Stock other than Redeemable Stock issued by such Person after
the date of the Certificate of Designation.
"Qualified Capital Stock Proceeds" means, with respect to any Person, (a) in
the case of any sale of Qualified Capital Stock, the aggregate net cash proceeds
received by such Person, after payment of expenses, commissions and the like,
Incurred by such Person in connection therewith, and net of Indebtedness that
such Person Incurred, guaranteed, or otherwise became liable for in connection
with the issuance or acquisition of such Capital Stock; and (b) in the case of
any exchange, exercise, conversion or surrender of any Redeemable Stock or
Indebtedness of such Person issued (other than to any Subsidiary) for cash after
the Issue Date for or into shares of Qualified Capital Stock of such Person, the
aggregate net cash proceeds received from the issuance of such Qualified Capital
Stock, plus the aggregate net cash proceeds, if any, received by such Person
upon such exchange, exercise, conversion or surrender, and less any and all
payments made to the securityholders, and all other expenses, commissions and
the like Incurred by such Person or any Subsidiary in connection therewith.
"Qualified Junior Stock" means Junior Stock that does not constitute
Redeemable Stock.
"Qualifying Event" means a Public Equity Offering or one or more Strategic
Equity Investments which in either case results in aggregate net proceeds of not
less than $50 million.
"Redeemable Stock" of any Person means any equity security of such Person
that by its terms or otherwise is required to be redeemed prior to the Mandatory
Redemption Date or is redeemable at the option of the holder thereof at any time
prior to the Mandatory Redemption Date, provided that any Capital Stock that
would not constitute Redeemable Stock but for provisions thereof giving holders
thereof the right to require such Person to repurchase or redeem such Capital
Stock upon the occurrence of a "change of control" occurring prior to the
Mandatory Redemption Date shall not constitute Redeemable Stock if the "change
of control" provisions applicable to such Capital Stock are no more favorable to
the holders of such Capital Stock than the provisions contained in the "Change
of Control" covenant and such Capital Stock specifically provides that such
Person will not repurchase or redeem any such stock pursuant to such provision
prior to the Company's repurchase of the Exchangeable Preferred Stock as
required pursuant to the "Change of Control" covenant.
"Reference Period" with regard to any Person means the last two full fiscal
quarters of such Person immediately preceding any date upon which any
determination is to be made pursuant to the terms of the Senior Subordinated
Notes or the Certificate of Designation.
"Related Person" of any Person means any other Person owning (a) 5% or more
of the outstanding Common Stock of such Person or (b) 5% or more of the Voting
Power of such Person.
"Restricted Payment" means, with respect to any Person, (i) any declaration
or payment of a dividend or other distribution on any shares of the Junior Stock
of such Person or any Subsidiary of such Person (other than a dividend payable
solely in shares of its Junior Stock or options, warrants or other rights to
acquire its Junior Stock and other than any declaration or payment of a dividend
or other distribution by a Restricted Subsidiary to the Company or another
Restricted Subsidiary), (ii) any payment on account of the purchase, redemption,
retirement or acquisition of (A) any shares of Junior Stock of such Person or
any Subsidiary of such Person held by other than such Person or any of its
Restricted Subsidiaries or (B) any option, warrant or other right to acquire
shares of Junior Stock of such Person or any Subsidiary of such Person or any of
its Restricted Subsidiaries, in each case other than pursuant to the cashless
exercise of options, (iii) any Investment (other than a Permitted Investment)
made by such Person; PROVIDED, that the term "Restricted Payment" does not
include the payment of a dividend or other distribution by any Restricted
Subsidiary on shares of its Capital Stock that is paid PRO RATA to all holders
of such Capital Stock.
"Restricted Subsidiary" of any Person means any Subsidiary of such Person
other than an Unrestricted Subsidiary.
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"Sale and Leaseback Transaction" of any Person means an arrangement with any
lender or investor or to which such lender or investor is a party providing for
the leasing by such Person of any property or asset of such Person which has
been or is being sold or transferred by such Person more than 270 days after the
acquisition thereof or the completion of construction or commencement of
operation thereof to such lender or investor or to any Person to whom funds have
been or are to be advanced by such lender or investor on the security of such
property or asset. The stated maturity of such arrangement shall be the date of
the last payment of rent or any other amount due under such arrangement prior to
the first date on which such arrangement may be terminated by the lessee without
payment of a penalty.
"Securities Act" means the Securities Act of 1933, as amended.
"Senior Indebtedness" means the principal of (and premium, if any) and
interest (including interest accruing on or after the filing of any petition in
bankruptcy or for reorganization relating to the Company whether or not a claim
for post-petition interest is allowed in such proceeding) on (i) Indebtedness of
the Company created pursuant to the Credit Facility and all other obligations
thereunder or under the notes, security documents, pledge agreements, Interest
Hedge Agreements or other agreements or instruments executed in connection
therewith, (ii) Indebtedness of the Company created pursuant to any vendor
financing Incurred for the acquisition, construction or improvement by the
Company or any Restricted Subsidiary of assets in the Wireless Communications
Business, (iii) all other Indebtedness of the Company referred to in the
definition of Indebtedness other than clauses (iv), (vi) and (ix) thereof (and
clause (viii) thereof to the extent applicable to Indebtedness Incurred under
clauses (iv) and (vi) thereof), whether Incurred on or prior to the Issue Date,
other than the Senior Subordinated Notes, and (iv) amendments, renewals,
extensions, modifications, refinancings and refundings of any such Indebtedness;
PROVIDED, HOWEVER, the following shall not constitute Senior Indebtedness: (A)
any Indebtedness owed to a Person when such Person is a Restricted Subsidiary of
the Company, (B) any Indebtedness which by the terms of the instrument creating
or evidencing the same is not superior in right of payment to the Exchange
Debentures, if and when issued, (C) any Indebtedness Incurred in violation of
the Certificate of Designation (but, as to any such Indebtedness, no such
violation shall be deemed to exist for purposes of this clause (c) if the
holder(s) of such Indebtedness or their representative shall have received an
Officers' Certificate of the Company to the effect that the Incurrence of such
Indebtedness does not (or in the case of revolving credit Indebtedness, that the
Incurrence of the entire committed amount thereof at the date on which the
initial borrowing thereunder is made would not) violate the Certificate of
Designation or (D) any Indebtedness which is subordinated in right of payment to
any other Indebtedness of the Company.
"Strategic Equity Investment" means an investment in Qualified Junior Stock
made by a Strategic Investor in an aggregate amount of not less than $50
million.
"Strategic Investor" means a Person (other than an Affiliate of the Company
or a Person who by virtue of such Investment becomes such an Affiliate) engaged
in one or more Telecommunications Businesses with an equity market
capitalization at the time such Person makes a Strategic Equity Investment in
the Company in excess of $1.0 billion.
"Subordinated Indebtedness" mean Indebtedness of the Company that is
subordinated in right of payment to the Exchange Debentures, if and when issued.
"Subsidiary" means, as applied to any Person, (a) any corporation of which
more than fifty percent (50%) of the outstanding Capital Stock (other than
directors' qualifying shares) having ordinary Voting Power to elect its board of
directors, regardless of the existence at the time of a right of the holders of
any class or classes of securities of such corporation to exercise such Voting
Power by reason of the happening of any contingency, or any entity other than a
corporation of which more than fifty percent (50%) of the outstanding ownership
interests, is at the time owned directly or indirectly by such Person, or by one
or more Subsidiaries of such Person, or by such Person and one or more
Subsidiaries of such Person, or (b) any other entity which is directly or
indirectly controlled or capable of being controlled by such Person, or by one
or more Subsidiaries of such Person, or by such Person and one or more
Subsidiaries of such Person.
"Telecommunications Business" means the business of (i) transmitting, or
providing services relating to the transmission of, voice, video or data through
owned or leased wireline or wireless transmission facilities,
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(ii) creating, developing, constructing, installing, repairing, maintaining or
marketing communications-related systems, network equipment and facilities,
software and other products, or (iii) evaluating, owning, operating,
participating in or pursuing any other business that is primarily related to
those identified in clause (i) or (ii) above (in the case of this clause (iii),
however, in a manner consistent with the Company's manner of business on the
Issue Date), and shall, in any event, include all businesses in which the
Company or any of its Subsidiaries is engaged on the Issue Date or has entered
into agreements to engage in or to acquire a company to engage in or contemplate
engaging in, as expressly set forth in this Prospectus; PROVIDED that the
determination of what constitutes a Telecommunications Business shall be made in
good faith by the Company's Board of Directors.
"Unrestricted Subsidiary" of any Person means (i) any Subsidiary of such
Person that at the time of determination shall be designated an Unrestricted
Subsidiary by the Board of Directors of such Person in the manner provided below
and (ii) any Subsidiary of an Unrestricted Subsidiary. The Board of Directors of
any Person may designate any Restricted Subsidiary to be an Unrestricted
Subsidiary unless such Subsidiary owns any Capital Stock of, or owns or holds
any Lien on any property of, such Person or any Restricted Subsidiary; PROVIDED
THAT either (A) the Subsidiary to be so designated has total assets of $1,000 or
less or (B) if such Subsidiary has assets greater than $1,000, such Person's PRO
RATA interest in the Fair Market Value of the net assets of such Subsidiary at
the time of such designation would be permitted as an Investment under the
provision of the Certificate of Designation described under "-- Limitation on
Restricted Payments." The Board of Directors of any Person may designate any
Unrestricted Subsidiary to be a Restricted Subsidiary of such Person; PROVIDED
that immediately after giving effect to such designation (x) such Person would
be permitted to Incur $1.00 of additional Indebtedness pursuant to the provision
of the Certificate of Designation described in the first paragraph under "--
Limitation on Consolidated Indebtedness" and (y) no Voting Rights Triggering
Event or event which with notice or lapse of time or both would become a Voting
Rights Triggering Event has occurred and is continuing. Any such designation by
the Board of Directors shall be evidenced by a Board Resolution submitted to the
Transfer Agent. Wireless Alliance shall be deemed an Unrestricted Subsidiary as
of the Issue Date and shall thereafter remain an Unrestricted Subsidiary unless
and until designated by the Board of Directors as a Restricted Subsidiary in
accordance with the terms of the Certificate of Designation.
"Voting Power" of any Person means the aggregate number of votes of all
classes of Capital Stock of such Person which ordinarily have voting power for
the election of directors of such Person.
"Wholly Owned Restricted Subsidiary" of any Person means a Restricted
Subsidiary of such Person all of the outstanding Capital Stock or other
ownership interests of which (other than directors' qualifying shares) shall at
the time be owned by such Person or by one or more Wholly Owned Restricted
Subsidiaries of such Person or by such Person and one or more Wholly Owned
Restricted Subsidiaries of such Person.
"Wireless Communications Business" means any business substantially related
to the ownership, development, operation or acquisition of mobile wireless
communications services permitted under the Federal Communications Commission's
("FCC") Commercial Mobile Radio Service rules (and the related provisions of the
FCC's Public Mobile Services and Personal Communications Services rules), and
other related telecommunications business services.
FORM, DENOMINATION, BOOK-ENTRY PROCEDURES AND TRANSFER
Exchangeable Preferred Stock will be issued only in fully registered form in
denominations of $1,000 and integral multiples thereof. Exchangeable Preferred
Stock will not be issued in bearer form. New Exchangeable Preferred Stock will
be issued only in accordance with the terms of the Exchange Offer.
If the Exchangeable Preferred Stock is to be redeemed in part, the Company
will not be required to (i) issue, register the transfer of or exchange any
Exchangeable Preferred Stock during a period beginning at the opening of
business 15 days before the day of mailing of notice of redemption of any such
Exchangeable Preferred Stock that may be selected for redemption and ending at
the close of business on the day of such mailing or (ii) register the transfer
of or exchange any Exchangeable Preferred Stock so selected for redemption, in
whole or in part, except the unredeemed portion of any such Exchangeable
Preferred Stock being redeemed in part.
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EXCHANGE DEBENTURES
The Exchange Debentures will be issued under an Indenture, to be dated as of
the Exchange Date (the "Exchange Indenture"), by and between the Company and
Norwest Bank Minnesota, National Association, as Trustee (the "Debentures
Trustee"). If the Exchange Debentures are issued, the Exchange Debentures will
be subject to and governed by the Trust Indenture Act. The following summary of
the material terms and provisions of the Exchange Debentures and the Exchange
Indenture does not purport to be complete and is subject to and qualified in its
entirety by reference to the Exchange Indenture (including the terms made part
of the Exchange Indenture by reference to the Trust Indenture Act), copies of
which are available for inspection at the Corporate Trust Office of the
Debentures Trustee in Minneapolis, Minnesota and which may also be obtained from
the Company. Definitions relating to certain capitalized terms used in this
section of this Prospectus are set forth under "-- Certain Definitions" and
throughout this description. Capitalized terms that are used in this section but
not otherwise defined herein have the meanings assigned to them in the Exchange
Indenture and such definitions are incorporated herein by reference. Unless
otherwise indicated, references in this section to covenants are to covenants
set forth in the Exchange Indenture. As used in this section, the "Company"
refers to Rural Cellular Corporation, unless the context otherwise requires.
GENERAL
The Exchange Debentures will be unsecured obligations of the Company and
will be limited in aggregate principal amount to the liquidation preference of
the Exchangeable Preferred Stock exchanged for Exchange Debentures on the
Exchange Date plus any additional Exchange Debentures thereafter issued in lieu
of cash interest as described herein. The Exchange Debentures will be senior
subordinated obligations of the Company, subordinated in right of payment to
Senior Indebtedness of the Company, including amounts outstanding under the New
Credit Facility, PARI PASSU in right of payment with all future senior
subordinated indebtedness of the Company and senior in right of payment to any
future subordinated indebtedness of the Company.
MATURITY, INTEREST AND PRINCIPAL
The Exchange Debentures will mature on May 15, 2010. Interest on the
Exchange Debentures will accrue at a rate of 11 3/8% per annum and will be
payable in cash (or, on or prior to May 15, 2003, in additional Exchange
Debentures having an aggregate principal amount equal to the amount of such
interest, at the option of the Company) semiannually on each May 15 and November
15, commencing on the first such date following the Exchange Date to the Holders
of record on the immediately preceding May 1 and November 1. Interest will be
computed on the basis of a 360-day year of twelve 30-day months. The Exchange
Debentures will be payable both as to principal and interest at the office or
agency of the Company maintained for such purpose within the City and State of
New York. Until otherwise designated by the Company, the Company's office or
agency in New York will be the office of the Debentures Trustee maintained for
such purpose.
All moneys paid by the Company to a paying agent for the payment of
principal of (and premium, if any) and any interest on any Exchange Debentures
which remain unclaimed for two years after such principal (and premium, if any)
or interest has become due and payable may be repaid to the Company and
thereafter the Holder of such Exchange Debentures may look only to the Company
for payment thereof.
SUBORDINATION
The payment of the principal of and premium, if any, and interest on the
Exchange Debentures will, to the extent set forth in the Exchange Indenture, be
subordinated in right of payment to the prior payment in full of all Senior
Indebtedness. Upon any payment or distribution of assets of the Company to
creditors upon any liquidation, dissolution, winding-up, reorganization,
assignment for the benefit of creditors, marshalling of assets or any
bankruptcy, insolvency or similar proceedings of the Company, the holders of all
Senior Indebtedness will be entitled to receive payment in full of all amounts
due or to become due thereon before the Holders of the Exchange Debentures will
be entitled to receive any Exchange Debentures Payment.
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In the event that any Senior Payment Default shall have occurred and be
continuing, or the maturity of any Senior Indebtedness shall have been
accelerated, then no Exchange Debentures Payment shall be made unless and until
such Senior Payment Default shall have been cured or waived and any acceleration
of Senior Indebtedness shall have been rescinded or annulled. In the event that
any Senior Nonmonetary Default shall have occurred and be continuing, then, upon
the receipt by the Company and the Debentures Trustee of written notice of such
Senior Nonmonetary Default from a Person designated as a representative for the
Designated Senior Indebtedness or, if there is no outstanding Designated Senior
Indebtedness, any holder of Senior Indebtedness, no Exchange Debentures Payment
shall be made during the period (the "Payment Blockage Period") commencing on
the date of such receipt of such written notice and ending on the earlier of (i)
the date on which such Senior Nonmonetary Default shall have been cured or
waived or shall have ceased to exist and any acceleration of Senior Indebtedness
shall have been rescinded or annulled or the Senior Indebtedness to which such
Senior Nonmonetary Default relates shall have been discharged or (ii) the 179th
day after the date of such receipt of such written notice. No more than one
Payment Blockage Period may be commenced with respect to the Exchange Debentures
during any 360-day period and there shall be a period of at least 181
consecutive days in each 360-day period in which no Payment Blockage Period is
in effect. For all purposes of this paragraph, no Senior Nonmonetary Default
that was known to the holders of Senior Indebtedness to exist or be continuing
on the date of commencement of any Payment Blockage Period shall be, or be made,
the basis for the commencement of a subsequent Payment Blockage Period by a
representative for the Designated Senior Indebtedness unless such Senior
Nonmonetary Default shall have been cured for a period of not less than 90
consecutive days.
The subordination provisions described above will cease to be applicable to
the Exchange Debentures upon any defeasance or covenant defeasance of the
Exchange Debentures as described under "Defeasance."
At March 31, 1998 on a pro forma basis after giving effect to the
Acquisitions and the Offerings, Senior Indebtedness aggregated approximately
$163.8 million. The Company expects from time to time to Incur additional
Indebtedness constituting Senior Indebtedness. See "Capitalization." In
addition, all existing and future indebtedness and other liabilities of the
Company's Subsidiaries will be effectively senior in right of payment to the
Exchange Debentures. At March 31, 1998 on a pro forma basis after giving effect
to the Acquisitions and the Offerings, the Company's Subsidiaries had no
material Indebtedness, other than Intercompany Indebtedness and guarantees by
such Subsidiaries of the Credit Facility.
OPTIONAL REDEMPTION
After May 15, 2003, the Exchange Debentures may be redeemed at any time at
the option of the Company, in whole or from time to time in part, on not less
than 30 nor more than 60 days prior notice, at the following redemption prices
(expressed as percentages of principal amount thereof), together with accrued
and unpaid interest to but excluding the date fixed for redemption, if redeemed
during the 12-month period beginning on May 15 of each of the years indicated
below:
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
- --------------------------------------------------------------------------- -----------------
<S> <C>
2003....................................................................... 105.688%
2004....................................................................... 104.266%
2005....................................................................... 102.844%
2006....................................................................... 101.422%
2007 and thereafter........................................................ 100.000%
</TABLE>
Notwithstanding the foregoing, at any time prior to May 15, 2001, the
Company may redeem up to 25% of the aggregate principal amount of Exchange
Debentures actually issued under the Indenture from the net cash proceeds of a
Qualifying Event at a price equal to 111.375% of the aggregate principal amount
thereof, together with accrued and unpaid interest to but excluding the date
fixed for redemption; PROVIDED, that at least $75 million in aggregate principal
amount of Exchange Debentures remains outstanding immediately following such
redemption; and PROVIDED FURTHER, HOWEVER, that the aggregate liquidation
preference of any shares of Exchangeable Preferred Stock previously redeemed out
of the net cash proceeds of a Qualifying Event shall be counted as aggregate
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principal amount of Exchange Debentures issued and redeemed for purposes of the
foregoing 25% calculation. Any such redemption must be made within 30 days after
the related Qualifying Event.
Notice of any optional redemption of any Exchange Debentures (or portion
thereof) will be given to Holders at their addresses appearing in the Security
Register, not less than 30 nor more than 60 days prior to the date fixed for
redemption. The notice of redemption shall state the redemption date, the
redemption price, if less than all the outstanding Exchange Debentures are to be
redeemed, principal amounts of the particular Exchange Debentures to be
redeemed, that on the redemption date the redemption price will become due and
payable upon each Exchange Debenture to be redeemed and the place or places
where such Exchange Debentures are to be surrendered for payment of the
redemption price. If less than all of the Exchange Debentures are to be
redeemed, the particular Exchange Debentures to be redeemed will be selected not
more than 60 days prior to the redemption date by the Debentures Trustee by such
method as the Debentures Trustee deems fair and appropriate.
NO SINKING FUND
No sinking fund is provided for the Exchange Debentures.
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each Holder of an Exchange
Debenture shall have the right to have such Exchange Debenture repurchased by
the Company on the terms and conditions set forth in the Exchange Indenture. The
Company shall, within 30 days following the date of the consummation of a
transaction resulting in a Change of Control, mail an Offer to Purchase all
outstanding Exchange Debentures at a purchase price equal to 101% of the
aggregate principal amount thereof plus accrued and unpaid interest to but
excluding the date of purchase. The occurrence of a Change of Control
constitutes an event of default under the Credit Facility, entitling the lenders
thereunder to accelerate all obligations owing thereunder, which would result in
a block on all payments under the Exchange Debentures. There can be no assurance
that the Company will be able to make or satisfy the Offer to Purchase.
"Change of Control" means (i) directly or indirectly a sale, transfer or
other conveyance of all or substantially all the assets of the Company, on a
consolidated basis, to any "person" or "group" (as such terms are used for
purposes of Sections 13(d) and 14(d) of the Exchange Act, whether or not
applicable), excluding transfers or conveyances to or among the Company's Wholly
Owned Restricted Subsidiaries, as an entirety or substantially as an entirety in
one transaction or series of related transactions, in each case with the effect
that any Person or group of Persons owns more than 50% of the total Voting Power
entitled to vote in the election of directors, managers or trustees of the
transferee entity immediately after such transaction, (ii) any "person" or
"group" (as such terms are used for purposes of Sections 13(d) and 14(d) of the
Exchange Act, whether or not applicable) is or becomes the "beneficial owner"
(as that term is used in Rules 13d-3 and 13d-5 under the Exchange Act, whether
or not applicable, except that a Person shall be deemed to have "beneficial
ownership" of all shares that any such Person has the right to acquire, whether
such right is exercisable immediately or only after the passage of time),
directly or indirectly, of more than 50% of the total Voting Power of the
Company or (iii) during any period of 24 consecutive months, individuals who at
the beginning of such period constituted the Board of Directors of the Company
(together with any new directors whose election by such Board or whose
nomination for election by the shareholders of the Company was approved by a
vote of a majority of the directors then still in office who were either
directors at the beginning of such period or whose election or nomination for
election was previously so approved), cease for any reason to constitute a
majority of the Board of Directors of the Company then in office.
The Company will comply with any tender offer rules under the Exchange Act
which may then be applicable, including Rule 14e-l thereunder, in connection
with any Offer to Purchase.
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CERTAIN COVENANTS
LIMITATION ON CONSOLIDATED INDEBTEDNESS
The Exchange Indenture will prohibit the Company and its Restricted
Subsidiaries from Incurring any Indebtedness, except that the Company may Incur
Indebtedness if (x) there exists no Event of Default or an event which with
notice or lapse of time or both would become an Event of Default immediately
prior and subsequent thereto, and (y) after giving effect thereto, the Company's
Annualized Operating Cash Flow Ratio on a pro forma basis (calculated on the
assumption that such Indebtedness had been incurred on the first day of the
applicable Reference Period), would have been less than:
<TABLE>
<CAPTION>
FOR THE PERIOD RATIO
- ----------------------------------------------------------------------------------- ---------
<S> <C>
9.0 to
Prior to January 1, 2000........................................................... 1.0
8.0 to
Thereafter......................................................................... 1.0
</TABLE>
Notwithstanding the foregoing, if there exists no Event of Default or an
event which with notice or lapse of time or both would become an Event of
Default immediately prior and subsequent thereto, the Company and its Restricted
Subsidiaries may Incur the following Indebtedness without regard to the
foregoing limitations:
(i) Indebtedness evidenced by the Exchange Debentures on the Exchange
Date, and Exchange Debentures issued after the Exchange Date in lieu of cash
interest as described herein;
(ii) the Incurrence by the Company of (x) prior to the date of the
consummation of the Atlantic Acquisition, Indebtedness Incurred under the
Existing Credit Facility in an aggregate principal amount not to exceed $160
million at any time outstanding, reduced by repayments and permanent
reductions thereof due to application of Net Cash Proceeds pursuant to the
"Limitation on Asset Sales and Sales of Subsidiary Stock" covenant; and (y)
on and after the date of the consummation of the Atlantic Acquisition,
Indebtedness Incurred under the New Credit Facility in an aggregate
principal amount not to exceed $300 million at any time outstanding, reduced
by repayments and permanent reductions thereof due to the application of Net
Cash Proceeds set forth in the "-- Limitation on Asset Sales and Sales of
Subsidiary Stock" covenant;
(iii) Indebtedness of the Company or any Restricted Subsidiary of the
Company owing to the Company or any Restricted Subsidiary of the Company
("Intercompany Indebtedness"); PROVIDED, that (A) in the case of any such
Indebtedness of the Company, such obligations will be unsecured and
subordinated in all respects to the Holders' rights pursuant to the Exchange
Debentures to the same extent as the Exchange Debentures are subordinated to
Senior Indebtedness and (B) if any event occurs that causes a Restricted
Subsidiary to no longer be a Restricted Subsidiary, then this clause (iii)
will no longer be applicable to such Indebtedness of that Restricted
Subsidiary;
(iv) Indebtedness of the Company or any Restricted Subsidiary of the
Company to renew, extend, refinance or refund any Indebtedness of the
Company or such Restricted Subsidiary outstanding or committed on the date
of renewal, extension, refinancing or refunding other than Indebtedness
Incurred pursuant to clause (ii) or (iii); PROVIDED, HOWEVER, that such
Indebtedness does not exceed the principal amount of outstanding or
committed Indebtedness so renewed, extended, refinanced or refunded plus
financing fees and other expenses associated therewith; and PROVIDED
FURTHER, HOWEVER, that (a) such renewing, extending, refinancing or
refunding Indebtedness will not have a final maturity and shall not have any
other mandatory repayments or redemptions prior to or in amounts greater
than those of the Indebtedness being renewed, extended, refinanced or
refunded, (b) in the case of any refinancing or refunding of Indebtedness
that ranks PARI PASSU in right of payment to the Exchange Debentures, the
refinancing or refunding Indebtedness ranks PARI PASSU or is subordinated in
right of payment to the Exchange Debentures and, in the case of any
refinancing or refunding of Indebtedness subordinated to the Exchange
Debentures, the refinancing or refunding Indebtedness ranks subordinate in
right of payment to the Exchange Debentures to substantially the same extent
as the Indebtedness refinanced or refunded and (c) no Restricted Subsidiary
of the Company will be permitted to refinance any Indebtedness of the
Company;
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(v) Indebtedness Incurred by the Company or any Restricted Subsidiary,
of the Company under Interest Hedge Agreements to hedge interest on
permitted Indebtedness, PROVIDED, that the notional principal amount of any
such Interest Hedge Agreements does not exceed the principal amount of
Indebtedness to which such Interest Hedge Agreements relate;
(vi) Indebtedness of any Restricted Subsidiary of the Company which does
not exceed $30 million in the aggregate for all such Restricted Subsidiaries
at any time outstanding (excluding any Intercompany Indebtedness or Acquired
Indebtedness permitted to be Incurred under the Exchange Indenture),
PROVIDED, that after giving effect thereto on a pro forma basis the
Company's Annualized Operating Cash Flow Ratio is less than 7.5 to 1.0 and
the Adjusted Annualized Operating Cash Flow Ratio of such Restricted
Subsidiary is less than 5.0 to 1.0;
(vii) any guarantee by any Restricted Subsidiary of any Indebtedness
Incurred under the Existing Credit Facility or New Credit Facility in
compliance with this covenant;
(viii) Acquired Indebtedness; PROVIDED that on a pro forma basis after
giving effect to the Incurrence of such Indebtedness, the Company shall be
able to Incur $1.00 of additional Indebtedness pursuant to the provisions
described under the first paragraph of this covenant "Limitation on
Consolidated Indebtedness";
(ix) Indebtedness in respect of performance, surety or appeal bonds
provided in the ordinary course of business;
(x) Indebtedness arising from agreements providing for indemnification,
adjustment of purchase price or similar obligations, or from guarantees or
letters of credit, surety bonds or performance bonds securing any
obligations of the Company or any of its Restricted Subsidiaries pursuant to
such agreements, in any case Incurred in connection with the disposition of
any business, assets or Restricted Subsidiary of the Company (other than
guarantees of Indebtedness Incurred by any Person acquiring all or any
portion of such business, assets or Restricted Subsidiary of the Company for
the purpose of financing such acquisition), in an amount not to exceed the
gross proceeds actually received by the Company or any Restricted Subsidiary
in connection with such disposition; and
(xi) Indebtedness of the Company or any Restricted Subsidiary, other
than Indebtedness permitted pursuant to clauses (i) through (x) above, which
does not exceed $10 million at any time outstanding or committed.
LIMITATION ON PREFERRED STOCK OF RESTRICTED SUBSIDIARIES
The Exchange Indenture will prohibit the Company from allowing any
Restricted Subsidiary of the Company to create or issue any Preferred Stock
except:
(i) Preferred Stock outstanding on the Exchange Date;
(ii) Preferred Stock issued to and held by the Company or any Wholly
Owned Restricted Subsidiary of the Company;
(iii) Preferred Stock issued by any Person prior to that Person's having
become a direct or indirect Restricted Subsidiary of the Company; and
(iv) Preferred Stock issued by a Restricted Subsidiary the proceeds of
which are used to refinance outstanding Preferred Stock of a Restricted
Subsidiary, provided that (a) the liquidation value of the refinancing
Preferred Stock does not exceed the liquidation value so refinanced plus
financing fees and other expenses associated with such refinancing and (b)
such refinancing Preferred Stock has no mandatory redemptions prior to (and
in no greater amounts than) the Preferred Stock being refinanced.
LIMITATION ON ASSET SALES AND SALES OF SUBSIDIARY STOCK
The Exchange Indenture will provide that after the Exchange Date the Company
will not, and will not permit any of its Restricted Subsidiaries to, in one
transaction or a series of related transactions, convey, sell, transfer, assign
or otherwise dispose of, directly or indirectly, any of its property, business
or assets, including any sale or other
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transfer or issuance of any Capital Stock of any Restricted Subsidiary of the
Company, whether owned on the Exchange Date or thereafter acquired (an "Asset
Sale") unless (a) such Asset Sale is for Fair Market Value, (b) at least 80% of
the value of the consideration for such Asset Sale consists of (i) cash, (ii)
the assumption by the transferee (and release of the Company or Subsidiary, as
the case may be) of Senior Indebtedness or Indebtedness of the Company that
ranks PARI PASSU in right of payment to the Exchange Debentures or Indebtedness
of such Restricted Subsidiary, or (iii) notes, obligations or other marketable
securities (collectively "Marketable Securities") that are immediately converted
into cash and (c) the Net Cash Proceeds therefrom are applied on or prior to the
date that is 360 days after the date of such Asset Sale (i) to the repayment of
Indebtedness under the Credit Facility (which payment permanently reduces the
commitment thereunder) or (ii) to the repurchase of the Exchange Debentures
pursuant to an offer to purchase (an "Asset Sale Offer") described below or
(iii) to an investment in a Wireless Communications Business.
Notwithstanding the foregoing provisions of the prior paragraph:
(i) any Restricted Subsidiary of the Company may convey, sell, lease,
transfer or otherwise dispose of any or all of its assets (upon voluntary
liquidation or otherwise) to the Company or a Wholly Owned Restricted
Subsidiary of the Company;
(ii) the Company and its Restricted Subsidiaries may, in the ordinary
course of business, (A) convey, sell, lease, transfer, assign or otherwise
dispose of assets in the ordinary course of business provided that the
consideration received reflects the Fair Market Value of such assets and (B)
exchange assets for either assets or equity interests in Wireless
Communications Businesses, provided that (I) the assets or equity interests
received have a Fair Market Value substantially equal to the assets
exchanged, (II) the assets received by the Company are controlled by the
Company with respect to voting rights and day-to-day operations, or the
equity interests received by the Company represent a controlling interest in
the total Voting Power and day-to-day operations of a Person that is the
issuer of such equity interests, (III) there exists no Event of Default or
event which with notice or lapse of time or both would become an Event of
Default immediately prior and subsequent thereto, and (IV) immediately after
giving effect to such transaction, the Company would be permitted to incur
at least $1.00 of additional Indebtedness pursuant to the provision of the
Exchange Indenture described in the first paragraph under "-- Limitation on
Consolidated Indebtedness";
(iii) the Company and its Restricted Subsidiaries may convey, sell,
lease, transfer, assign or otherwise dispose of assets pursuant to and in
accordance with the covenants described in "Consolidation, Merger,
Conveyance, Transfer or Lease";
(iv) the Company and its Restricted Subsidiaries may (a) sell damaged,
worn out or other obsolete property in the ordinary course of business or
other property no longer necessary for the proper conduct of the business of
the Company or any of its Restricted Subsidiaries or (b) abandon such
property if it cannot, through reasonable efforts, be sold; and
(v) in addition to the Asset Sales permitted by the foregoing clauses
(i) through (iv), the Company and its Restricted Subsidiaries may consummate
Asset Sales (other than in the case of Capital Stock of any Restricted
Subsidiary of the Company) with respect to property, business or assets the
Fair Market Value of which does not exceed $5 million in the aggregate after
the Exchange Date.
The Exchange Indenture will provide that an Asset Sale Offer may be deferred
until the accumulated Net Cash Proceeds not applied to the uses set forth in
subsections (c)(i) or (c)(iii) in the first paragraph of this Section
"Limitation on Asset Sales and Sales of Subsidiary Stock" exceed $5 million. An
Asset Sale Offer will remain open for a period of 20 Business Days following its
commencement and no longer, except to the extent that a longer period is
required by applicable law (the "Asset Sale Offer Period"). No later than five
Business Days after the termination of the Asset Sale Offer Period (the "Asset
Sale Purchase Date"), the Company will purchase the principal amount of Exchange
Debentures required to be purchased pursuant to this covenant (the "Asset Sale
Offer Amount") at a purchase price equal to 100% of the principal amount of the
Exchange Debentures plus accrued and unpaid interest to but excluding the date
of the purchase or, if less than the Asset Sale Offer Amount has been tendered,
all Exchange Debentures tendered in response to the Asset Sale Offer. Payment
for any Exchange Debentures so purchased will be made in the same manner as
interest payments are made.
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If the Asset Sale Purchase Date is on or after an interest record date and
on or before the related interest payment date, any accrued and unpaid interest
will be paid to the Person in whose name an Exchange Debenture is registered at
the close of business on such record date, and no additional interest will be
payable to Holders who tender Exchange Debentures pursuant to the Asset Sale
Offer.
On or before the Asset Sale Purchase Date, the Company will, to the extent
lawful, accept for payment, on a pro rata basis to the extent necessary, the
Asset Sale Offer Amount of Exchange Debentures or portions thereof tendered
pursuant to the Asset Sale Offer, or if less than the Asset Sale Offer Amount
has been tendered, all Exchange Debentures tendered, and will deliver to the
Debentures Trustee an Officers' Certificate stating that such Exchange
Debentures or portions thereof were accepted for payment by the Company in
accordance with the terms of this covenant. The Company, the Depositary or the
Paying Agent, as the case may be, will promptly (but in any case not later than
five days after the Asset Sale Purchase Date) mail or deliver to each tendering
Holder an amount equal to the purchase price of the Exchange Debentures tendered
by such Holder and accepted by the Company for purchase, and the Company will
promptly issue a new Exchange Debenture, and the Debentures Trustee, upon
written request from the Company, will authenticate and mail or deliver such new
Exchange Debenture to such Holder, in a principal amount equal to any
unpurchased portion of the Exchange Debenture surrendered. Any Exchange
Debenture not so accepted will be promptly mailed or delivered by the Company to
the Holder thereof. The Company will publicly announce the results of the Asset
Sale Offer on the Asset Sale Purchase Date.
LIMITATION ON RESTRICTED PAYMENTS
The Exchange Indenture will prohibit the Company or any Restricted
Subsidiary from making any Restricted Payment unless after giving effect thereto
(a) no Event of Default or event which with notice or lapse of time or both
would become an Event of Default has occurred and is continuing; (b) the Company
would be permitted to Incur an additional $1.00 of Indebtedness pursuant to the
provision of the Exchange Indenture described in the first paragraph under "--
Limitation on Consolidated Indebtedness"; and (c) the total of all Restricted
Payments made on or after the Issue Date does not exceed the sum of (i)
Cumulative Operating Cash Flow less 1.75 times Cumulative Interest Expense, (ii)
100% of the aggregate Qualified Capital Stock Proceeds of the Company after the
Issue Date, and (iii) 100% of the cash proceeds received from an Unrestricted
Subsidiary to the extent of Investments (other than Permitted Investments) made
in such Unrestricted Subsidiary since the Issue Date.
The foregoing provision shall not be violated, so long as no Event of
Default or event which with notice or lapse of time or both would become an
Event of Default has occurred and is continuing (other than in the case of
clause (ii)), by reason of (i) the payment of any dividend within 60 days after
declaration thereof if at the declaration date such payment would have complied
with the foregoing provision, (ii) any refinancing of any Indebtedness otherwise
permitted under the provision of the Exchange Indenture described under clause
(ii) or (iv) of "-- Limitation on Consolidated Indebtedness," (iii) the
purchase, redemption or other acquisition or retirement for value of shares of
Capital Stock of any Restricted Subsidiary held by Persons other than the
Company or any of its Restricted Subsidiaries, (iv) the redemption, defeasance,
repurchase or other acquisition or retirement of any Capital Stock of the
Company or any Subordinated Indebtedness prior to its scheduled maturity either
in exchange for or out of the net cash proceeds of the substantially concurrent
sale (other than to a Subsidiary of the Company) of Qualified Capital Stock of
the Company and (v) Restricted Payments, in addition to Restricted Payments
permitted pursuant to clauses (i) through (iv) above, not in excess of $10
million in the aggregate after the Issue Date. The payments described in clauses
(i), (iv) (provided the proceeds of the sale of the Qualified Capital Stock
referred to in such clause constitute Qualified Capital Stock Proceeds) and (vi)
of this paragraph will count as Restricted Payments for the calculation under
the first paragraph of this section "Limitation on Restricted Payments."
LIMITATIONS CONCERNING DISTRIBUTIONS AND TRANSFERS BY RESTRICTED
SUBSIDIARIES
The Exchange Indenture will provide that the Company shall not, and shall
not permit any Restricted Subsidiary to, create or otherwise cause or suffer to
exist or become effective any consensual restriction or prohibition on the
ability of any Restricted Subsidiary to (a) pay dividends on, or make other
distributions in respect of, its Capital Stock, or any other ownership interest
or participation in, or measured by, its profits, to the Company
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or any Restricted Subsidiary or pay any Indebtedness or other obligation owed to
the Company or any Restricted Subsidiary, (b) make any loans or advances to the
Company or any Restricted Subsidiary or (c) transfer any of its property or
assets to the Company or any Restricted Subsidiary. Notwithstanding the
foregoing, the Company may, and may permit any Restricted Subsidiary to, suffer
to exist any such restriction or prohibition (i) pursuant to the Exchange
Indenture, the Credit Facility or any other agreement in effect on the Exchange
Date, (ii) pursuant to an agreement relating to any Indebtedness of such
Restricted Subsidiary which was outstanding or committed prior to the date on
which such Restricted Subsidiary became a Restricted Subsidiary of the Company
other than in anticipation of becoming a Restricted Subsidiary; PROVIDED, that
such restriction or prohibition shall not apply to any property or assets of the
Company or any Restricted Subsidiary other than the property or assets of such
Restricted Subsidiary and its Subsidiaries, (iii) pursuant to an agreement
effecting a renewal, extension, refinancing or refunding of any agreement
described in clauses (i) and (ii) above, PROVIDED, HOWEVER, that the provisions
contained in such renewal, extension, refinancing or refunding agreement
relating to such restriction or prohibition are no more restrictive in any
material respect than the provisions contained in the agreement which is the
subject thereof (it being understood that for purposes of this clause (iii) the
New Credit Facility is deemed to be a refinancing of the Existing Credit
Facility), (iv) existing under or by reason of applicable law, (v) customary
provisions restricting subletting or assignment of any lease governing any
leasehold interest of any Restricted Subsidiary, (vi) purchase money obligations
for property acquired in the ordinary course of business that impose
restrictions of the type referred to in clause (c) of this covenant, (vii)
restrictions of the type referred to in clause (c) of this covenant contained in
security agreements securing Indebtedness of a Restricted Subsidiary to the
extent that such Liens were otherwise incurred in accordance with "--
Limitations on Liens" below and restrict the transfer of property subject to
such agreements, or (viii) customary provisions in joint venture agreements and
other similar agreements entered into in the ordinary course of business.
LIMITATIONS ON TRANSACTIONS WITH AFFILIATES AND RELATED PERSONS
The Exchange Indenture will provide that the Company will not, and will not
permit any Restricted Subsidiary of the Company to, enter into any transaction
involving aggregate consideration in excess of (a) $1 million, including,
without limitation, any purchase, sale, lease or exchange of property or the
rendering of any service, with or to any Affiliate or Related Person of the
Company (other than a Restricted Subsidiary), unless a majority of the
disinterested members of the Board of Directors of the Company determines (which
determination will be evidenced by a Board Resolution) that (i) such transaction
is in the best interests of the Company or such Restricted Subsidiary and (ii)
such transaction is on terms that are no less favorable to the Company or such
Restricted Subsidiary than those which might be obtained in arm's-length
transactions with a third party at the time and (b) $5 million unless (in
addition to the provisions of the foregoing clause (a)) the Company receives a
written opinion from an investment banking firm of national reputation to the
effect that such transaction is fair to the Company or such Restricted
Subsidiary, from a financial point of view; PROVIDED, that in the case of
transactions entered into in the ordinary course of business involving the
provision of telecommunications services by Affiliates or Related Persons of the
Company (who are regularly engaged in the provision of telecommunications
services) to the Company or any of its Restricted Subsidiaries (x) if the
aggregate consideration involved is not in excess of $5 million, then clause (a)
above shall be applicable but the good faith judgment of an officer of the
Company shall be substituted for the requirement of a resolution of the Board of
Directors and (y) if the aggregate consideration involved exceeds $5 million,
clause (b) above shall not be applicable but clause (a) above shall be
applicable.
LIMITATIONS ON LIENS
The Exchange Indenture will provide that the Company will not, and will not
permit any Restricted Subsidiary of the Company to, Incur or suffer to exist any
Lien on or with respect to any property or assets now owned or hereafter
acquired to secure any Indebtedness that ranks in right of payment PARI PASSU
with or subordinate to the Exchange Debentures without making, or causing such
Restricted Subsidiary to make, effective provision for securing the Exchange
Debentures (i) equally and ratably with such Indebtedness as to such property
for so long as such Indebtedness will be so secured or (ii) in the event such
Indebtedness is Indebtedness of the Company or a Restricted Subsidiary which is
subordinate in right of payment to the Exchange Debentures, prior to such
Indebtedness as to such property for so long as such Indebtedness will be so
secured.
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The foregoing restrictions shall not apply to: (i) Liens existing in respect
of any Indebtedness that exists on the Exchange Date; (ii) Liens in favor of the
Company or Liens in favor of a Wholly Owned Restricted Subsidiary of the Company
on the assets or Capital Stock of another Wholly Owned Restricted Subsidiary of
the Company; (iii) Liens to secure Indebtedness outstanding or committed for the
purpose of financing all or any part of the purchase price or the cost of
construction or improvement of the equipment or other property subject to such
Liens; PROVIDED, HOWEVER, that (a) the principal amount of any Indebtedness
secured by such a Lien does not exceed 100% of such purchase price or cost, (b)
such Lien does not extend to or cover any property other than such item of
property or any improvements on such item and (c) the Incurrence of such
Indebtedness is otherwise permitted by the Exchange Indenture; (iv) Liens on
property existing immediately prior to the time of acquisition thereof (and not
Incurred in anticipation of the financing of such acquisition); (v) Liens to
secure Indebtedness to extend, renew, refinance or refund (or successive
extensions, renewals, refinancings or refundings), in whole or in part,
Indebtedness secured by any Lien referred to in the foregoing clauses (i), (iii)
and (iv) so long as such Lien does not extend to any other property and the
principal amount of Indebtedness so secured is not increased except as otherwise
permitted under the provision of the Exchange Indenture described under clause
(ii) or (iv) of "-- Limitation on Consolidated Indebtedness"; (vi) Liens on any
Permitted Investment in Cooperative Bank Equity in favor of any Cooperative
Banks; or (vii) any other Liens in respect of any Indebtedness, which
Indebtedness does not exceed $500,000 in the aggregate.
LIMITATION ON CERTAIN DEBT
The Exchange Indenture will provide that the Company will not Incur any
Indebtedness that is subordinate in right of payment to any other Indebtedness
of the Company unless the Indebtedness so Incurred is either PARI PASSU or
subordinate in right of payment to the Exchange Debentures.
CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE
The Exchange Indenture will provide that the Company will not consolidate
with or merge into any Person or permit any other Person to consolidate with or
merge into the Company, or transfer, sell, convey or lease or otherwise dispose
of all or substantially all of its assets to, any Person unless (i) (a) the
Company is the surviving entity or (b) if the Company is not the surviving
entity then the successor or transferee assumes all the obligations of the
Company under the Exchange Debentures and the Exchange Indenture and the
surviving entity shall be a corporation organized and validly existing under the
laws of the United States of America or any jurisdiction thereof, (ii) the
Consolidated Net Worth of the successor or transferee immediately after the
transaction is not less than 100% of the Company's Consolidated Net Worth
immediately prior to the transaction, (iii) immediately after giving effect to
such transaction, the Company (or its permitted successor or transferee) would
be permitted to Incur at least $1.00 of additional Indebtedness pursuant to the
provision of the Exchange Indenture described in the first paragraph under "--
Limitation on Consolidated Indebtedness," (iv) after giving effect to such
transaction no Event of Default or event which with notice or lapse of time
would become an Event of Default has occurred and is continuing and (v) an
Officers' Certificate and an Opinion of Counsel covering such conditions shall
be delivered to the Debentures Trustee.
REPORTS
The Exchange Indenture will provide that whether or not the Company is
subject to the reporting requirements of Section 13 or 15(d) of the Exchange
Act, the Company shall deliver to the Debentures Trustee and to each Holder,
within 15 days after it is or would have been required to file such with the
Commission, annual and quarterly financial statements substantially equivalent
to financial statements that would have been included in reports filed with the
Commission, if the Company were subject to the requirements of Section 13 or
15(d) of the Exchange Act, including, with respect to annual information only, a
report thereon by the Company's certified independent public accountants as such
would be required in such reports to the Commission, and, in each case, together
with a management's discussion and analysis of financial condition and results
of operations which would be so required.
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EVENTS OF DEFAULT AND REMEDIES
The following are Events of Default under the Exchange Indenture: (i)
failure to pay the principal of or premium, if any, on the Exchange Debentures
at Maturity; (ii) failure to pay any interest on the Exchange Debentures for a
period of 30 days or more after it becomes due and payable; (iii) failure to
purchase in a timely fashion Exchange Debentures required to be purchased by the
Company pursuant to either of the provisions of the Exchange Indenture described
under "-- Change of Control" or "-- Covenants -- Limitation on Asset Sales and
Sales of Subsidiary Stock"; (iv) failure to perform or comply with the
provisions of the Exchange Indenture described under "-- Consolidation, Merger,
Conveyance, Transfer or Lease"; (v) failure to perform any other covenant or
agreement of the Company under the Exchange Indenture that continues for 30 days
after written notice to the Company by the Debentures Trustee or Holders of at
least 25% in aggregate principal amount of outstanding Exchange Debentures; (vi)
default by the Company or any Restricted Subsidiary under the terms of any
instrument evidencing or securing Indebtedness having an outstanding principal
amount in excess of $5 million in the aggregate, which default results in the
acceleration of the payment of such Indebtedness or constitutes the failure to
pay the principal of such Indebtedness at maturity; (vii) the rendering of a
final judgment or judgments against the Company or a Restricted Subsidiary in an
amount in excess of $5 million which remains undischarged or unstayed for a
period of 60 days after the date on which the right of appeal has expired; and
(viii) certain events of bankruptcy, insolvency or reorganization affecting the
Company or a Restricted Subsidiary.
If an Event of Default, other than an event described under (viii) above,
shall occur and be continuing, either the Debentures Trustee or the Holders of
at least 25% in aggregate principal amount of the Exchange Debentures by notice
as provided in the Exchange Indenture may declare the principal amount of the
Exchange Debentures to be due and payable immediately; PROVIDED, HOWEVER, that
after such acceleration, but before a judgment or decree based on acceleration,
the Holders of a majority in aggregate principal amount of outstanding Exchange
Debentures may, under certain circumstances, rescind and annul such acceleration
if all Events of Default, other than the nonpayment of accelerated principal of
the Exchange Debentures, have been cured or waived as provided in the Exchange
Indenture. If an Event of Default described under (viii) above shall occur, the
Exchange Debentures will become immediately due and payable without any
declaration or other act on the part of the Debentures Trustee or any Holder.
No Holder of any Exchange Debenture will have any right to institute any
proceeding with respect to the Exchange Indenture or for any remedy thereunder,
unless such Holder shall have previously given to the Debentures Trustee written
notice of an Event of Default and unless the Holders of at least 25% in
aggregate principal amount of the outstanding Exchange Debentures shall have
made written request to the Debentures Trustee and the Debentures Trustee shall
not have received from the Holders of a majority in aggregate principal amount
of the outstanding Exchange Debentures a direction inconsistent with such
request and shall have failed to institute such proceeding within 60 days.
However, such limitations do not apply to a suit instituted by a Holder of an
Exchange Debenture for enforcement of payment of the principal of and premium,
if any, or interest on such Exchange Debenture on or after the respective due
dates expressed in such Exchange Debenture. The Holders of a majority in
aggregate principal amount of the Exchange Debentures outstanding may waive any
existing Event of Default except an Event of Default in the payment of interest
or principal (including premium) on the Exchange Debentures.
MODIFICATION AND WAIVER
Modifications and amendments of the Exchange Indenture may be made by the
Company and the Debentures Trustee with the consent of the Holders of a majority
in aggregate principal amount of the outstanding Exchange Debentures; PROVIDED,
HOWEVER, that no such modification or amendment may, without the consent of the
Holder of each Exchange Debenture affected thereby, (i) change the Stated
Maturity of the principal of, or any installment of interest on, any Exchange
Debenture, (ii) reduce the principal amount of, or premium, if any, or interest
on any Exchange Debenture, (iii) change the place or currency of payment of
principal of, or premium, if any, or interest on any Exchange Debenture, (iv)
impair the right to institute suit for the enforcement of any payment on or with
respect to any Exchange Debenture, (v) reduce the percentage of aggregate
principal amount of Exchange
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Debentures outstanding necessary to amend the Exchange Indenture, (vi) reduce
the percentage of aggregate principal amount of Exchange Debentures outstanding
necessary for waiver of compliance with certain provisions of the Exchange
Indenture or for waiver of certain defaults, (vii) modify such provisions with
respect to modification and waiver, (viii) modify the subordination provisions
in a manner adverse to the Holders of the Exchange Debentures or (ix) following
the mailing of an offer to purchase Exchange Debentures, modify the provisions
of the Exchange Indenture with respect to such offer to purchase in a manner
adverse to such Holder.
The Holders of a majority in aggregate principal amount of the outstanding
Exchange Debentures may waive compliance by the Company with certain restrictive
provisions of the Exchange Indenture. The Holders of a majority in aggregate
principal amount of the outstanding Exchange Debentures may waive any past
default under the Exchange Indenture, except a default in the payment of
principal, premium, if any, or interest and certain covenants and provisions of
the Exchange Indenture which cannot be amended without the consent of the Holder
of each outstanding Exchange Debenture affected.
DEFEASANCE
The Exchange Indenture will provide that the Company, at its option, (i)
will be discharged from any and all obligations in respect of outstanding
Exchange Debentures (except for certain obligations to register the transfer or
exchange of Exchange Debentures, to replace mutilated, lost, destroyed or stolen
Exchange Debentures and to maintain paying agents and hold moneys for payment in
trust), and the provisions of the Exchange Indenture described under "--
Subordination" shall cease to be effective, or (ii) need not comply with certain
restrictive covenants and that such omission shall not be deemed to be an Event
of Default under the Exchange Indenture and the Exchange Debentures, and the
provisions of the Exchange Indenture described under "-- Subordination" shall
cease to be effective, in either case (i) or (ii) upon irrevocable deposit with
the Debentures Trustee, in trust, of money, and/or U.S. government obligations
which will provide money without the need for reinvestment, in an amount
sufficient in the opinion of a nationally recognized firm of independent public
accountants to pay the principal of, and premium, if any, and each installment
of interest, if any, on the outstanding Exchange Debentures in accordance with
the terms of the Exchange Indenture and the Exchange Debentures. Such trust may
only be established if, among other things, (1) with respect to clause (i), the
Company shall have delivered to the Debentures Trustee an Opinion of Counsel to
the effect that the Company has received from, or there has been published by,
the Internal Revenue Service a ruling or there has been a change in law, which
provides that Holders of Exchange Debentures will not recognize gain or loss for
federal income tax purposes as a result of such deposit, defeasance and
discharge and will be subject to federal income tax on the same amount, in the
same manner and at the same times as would have been the case if such deposit,
defeasance and discharge had not occurred; or, with respect to clause (ii), the
Company shall have delivered to the Debentures Trustee an Opinion of Counsel to
the effect that the Holders of the Exchange Debentures will not recognize gain
or loss for federal income tax purposes as a result or such deposit and
defeasance and will be subject to federal income tax on the same amount, in the
same manner and at the same times as would have been the case if such deposit,
defeasance and discharge had not occurred; (2) no Event of Default or event
that, with the passing of time or the giving of notice, or both, shall
constitute an Event of Default shall have occurred and be continuing on the date
of such deposit; (3) no Event of Default described under clause (viii) under
"Events of Default and Remedies" above or event that, with the passing of time
or the giving of notice, or both, shall constitute an Event of Default under
such clause (viii) shall have occurred and be continuing at any time during the
period ending on the 121st day following such date of deposit; (4) such deposit
shall not cause the trust so created to be subject to the Investment Company Act
of 1940, as amended, or shall be qualified under such act or exempt from
regulation thereunder; and (5) certain other customary conditions precedent.
NOTICES
Notices to Holders of Exchange Debentures will be sent by mail to the
addresses of such Holders as they may appear in the Security Register.
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TITLE
The Company, the Debentures Trustee and any agent of the Debentures Trustee
may treat each Holder of an Exchange Debenture as the absolute owner thereof
(whether or not such Exchange Debenture may be overdue) for the purpose of
making payment and for all other purposes.
GOVERNING LAW
The Exchange Indenture and the Exchange Debentures will be governed by and
construed in accordance with the laws of the State of New York.
THE DEBENTURES TRUSTEE
The Exchange Indenture will provide that, subject to the duty of the
Debentures Trustee during an Event of Default to act with the required standard
of care, the Debentures Trustee will be under no obligation to exercise any of
its rights or powers under the Exchange Indenture at the request or direction of
any of the Holders, unless such Holders shall have offered to the Debentures
Trustee reasonable security or indemnity. Subject to certain provisions,
including those requiring security or indemnification of the Debentures Trustee,
the Holders of a majority in principal amount of the Exchange Debentures will
have the right to direct the time, method and place of conducting any proceeding
for any remedy available to the Debentures Trustee, or exercising any trust or
power conferred on the Debentures Trustee.
The Company will be required to furnish to the Debentures Trustee annually a
statement as to the performance by the Company of its obligations under the
Exchange Indenture and as to any default in such performance. The Debentures
Trustee will also serve as the Notes Trustee under the Notes Indenture.
CERTAIN DEFINITIONS
"Acquired Indebtedness" means Indebtedness of a Person (including an
Unrestricted Subsidiary) (i) existing at the time such Person becomes a
Restricted Subsidiary or (ii) assumed in connection with the acquisition of
assets from such Person, in the case of both of the preceding clause (i) and
clause (ii), other than Indebtedness incurred in connection with, or in
contemplation of, such Person becoming a Restricted Subsidiary or such
acquisition. Acquired Indebtedness will be deemed to be Incurred on the date of
the related acquisition of assets from any Person or the date the acquired
Person becomes a Restricted Subsidiary.
"Adjusted Annualized Operating Cash Flow Ratio" of any Person means the
Annualized Operating Cash Flow Ratio of such Person as adjusted to treat all
Preferred Stock of such Person as Redeemable Stock.
"Affiliate" of any Person means any other Person directly or indirectly
controlling or controlled by or under direct or indirect common control with
such Person. For the purposes of this definition, "control" when used with
respect to any Person means the power to direct the management and policies of
such Person, directly or indirectly, whether through the ownership of voting
securities, by contract or otherwise; and the terms "controlling" and
"controlled" have meanings correlative to the foregoing.
"Annualized Operating Cash Flow" of any Person means the Operating Cash Flow
of such Person for the Reference Period multiplied by two.
"Annualized Operating Cash Flow Ratio" of any Person on any date (the
"Transaction Date") means, with respect to any Person and its Restricted
Subsidiaries, the ratio of (i) Consolidated Indebtedness of such Person and its
Restricted Subsidiaries on the Transaction Date (after giving pro forma effect
to the Incurrence of any Indebtedness on such Transaction Date) divided by (ii)
the aggregate amount of Annualized Operating Cash Flow of such Person
(determined on a pro forma basis after giving effect to all dispositions of
businesses made by such Person and its Restricted Subsidiaries from the
beginning of the Reference Period through the Transaction Date as if such
dispositions had occurred at the beginning of such Reference Period); PROVIDED,
that for purposes of such computation, in calculating Annualized Operating Cash
Flow and Consolidated Indebtedness: (a) the transaction giving rise to the need
to calculate the Annualized Operating Cash Flow Ratio will be assumed to have
occurred (on
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a pro forma basis) on the first day of the Reference Period; (b) the Incurrence
of any Indebtedness during the Reference Period or subsequent thereto and on or
prior to the Transaction Date (and the application of the proceeds therefrom to
the extent used to retire Indebtedness) will be assumed to have occurred (on a
pro forma basis) on the first day of such Reference Period; (c) Consolidated
Interest Expense attributable to any Indebtedness (whether existing or being
incurred) bearing a floating interest rate shall be computed as if the rate in
effect on the Transaction Date had been the applicable rate for the entire
Reference Period; (d) all members of the consolidated group of such Person on
the Transaction Date that were acquired during the Reference Period shall be
deemed to be members of the consolidated group of such Person for the entire
Reference Period; and (e) the Indebtedness and Annualized Operating Cash Flow of
any Restricted Subsidiary that is not a Wholly Owned Restricted Subsidiary shall
be determined in accordance with the actual percentage of the Person's common
equity interest in such Restricted Subsidiary on the date of determination of
the Annualized Operating Cash Flow Ratio (thus, for example, in the case of a
Restricted Subsidiary in which such Person owns a 51% common equity interest,
51% of such Subsidiary's Indebtedness and of such Subsidiary's Annualized
Operating Cash Flow would be included in the calculation of such Person's
aggregate Indebtedness and Annualized Operating Cash Flow, respectively). When
the foregoing definition is used in connection with the Company and its
Restricted Subsidiaries, references to a Person and its Restricted Subsidiaries
in the foregoing definition shall be deemed to refer to the Company and its
Restricted Subsidiaries.
"Board Resolution" means a copy of a resolution certified by the Secretary
or an Assistant Secretary of the Company to have been duly adopted by the Board
of Directors, to be in full force and effect on the date of such certification
and delivered to the Debentures Trustee.
"Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday
which is not a day on which banking institutions in New York City or the State
of Minnesota are authorized or obligated by law or executive order to close.
"Capital Lease Obligation" means that portion of any obligation of a Person
as lessee under a lease which is required to be capitalized on the balance sheet
of such lessee in accordance with generally accepted accounting principles.
"Capital Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, including
voting and non-voting) of equity of such Person.
"Cash Equivalents" means (i) securities issued or directly and fully
guaranteed or insured by the United States of America or any agency or
instrumentality thereof (provided that the full faith and credit of the United
States of America is pledged in support thereof), in each case maturing within
one year after the date of acquisition, (ii) time deposits and certificates of
deposit and commercial paper issued by the parent corporation of any domestic
commercial bank of recognized standing having capital and surplus in excess of
$500 million and commercial paper issued by others rated at least A-2 or the
equivalent thereof by Standard & Poor's Corporation or at least P-2 or the
equivalent thereof by Moody's Investors Service, Inc. and in each case maturing
within one year after the date of acquisition and (iii) investments in money
market funds substantially all of whose assets comprise securities of the types
described in clauses (i) and (ii) above.
"Commission" means the United States Securities and Exchange Commission.
"Consolidated Income Tax Expense" of any Person means for any period the
provision for income taxes of such Person and its Restricted Subsidiaries for
such period.
"Consolidated Indebtedness" of any Person means at any date the Indebtedness
of such Person and its Restricted Subsidiaries at such date.
"Consolidated Interest Expense" of any Person means for any period the
interest expense included in an income statement (taking into account the effect
of any Interest Hedge Agreements but without deduction of interest income) of
such Person and its Restricted Subsidiaries for such period, including without
limitation or duplication (or, to the extent not so included, with the addition
of), (i) the portion of any rental obligation in respect of any Capital Lease
Obligation allocable to interest expense in accordance with generally accepted
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accounting principles; (ii) the amortization of Indebtedness discounts; (iii)
any payments or fees with respect to letters of credit, bankers' acceptances or
similar facilities; (iv) fees with respect to Interest Hedge Agreements; (v) the
portion of any rental obligations in respect of any Sale and Leaseback
Transaction allocable to interest expense (determined as if such were treated as
a Capital Lease Obligation); and (vi) Preferred Stock dividends accrued or
payable other than dividends on Qualified Capital Stock of such Person.
"Consolidated Net Income" of any Person means for any period the net income
(or loss) of such Person and its Restricted Subsidiaries for such period
determined on a consolidated basis in accordance with generally accepted
accounting principles; PROVIDED that there shall be excluded therefrom (to the
extent included and without duplication) (i) the net income (or loss) of any
Person acquired by such Person or a Restricted Subsidiary of such Person after
the Issue Date in a pooling of interests transaction for any period prior to the
date of such transaction, (ii) the net income (or loss) of any Person that is
not a Restricted Subsidiary of such Person except to the extent of the amount of
dividends or other distributions actually paid to such Person by such other
Person during such period, (iii) gains or losses from sales of assets other than
sales of assets acquired and held for resale in the ordinary course of business,
(iv) for purposes of the "Limitation on Restricted Payments" covenant, the net
income, if positive, of any Restricted Subsidiary to the extent that the
declaration or payment of dividends or similar distributions by such Restricted
Subsidiary of such net income is not at that time permitted by the operation of
the terms of its charter or any agreement, instrument, judgment, decree, order,
statute, rule or governmental regulations applicable to such Restricted
Subsidiary, and (v) all extraordinary gains and extraordinary losses.
"Consolidated Net Worth" of any Person means the consolidated shareholders'
equity of such Person, determined on a consolidated basis in accordance with
generally accepted accounting principles; PROVIDED that, with respect to the
Company, adjustments following the Issue Date to the accounting books and
records of the Company in accordance with Accounting Principles Board Opinions
Nos. 16 and 17 (or successor opinions thereto) or otherwise resulting from the
acquisition of control of the Company by another Person and its Subsidiaries
shall not be given effect; PROVIDED FURTHER that, such computation shall exclude
(i) any amounts attributable to Redeemable Stock or any equity security
convertible into or exchangeable for Indebtedness, the cost of treasury stock
and the principal amount of any promissory notes receivable from the sale of the
Capital Stock of the Company or any of its Restricted Subsidiaries and (ii)
Unrestricted Subsidiaries.
"Cooperative Banks" means lenders under the Credit Facility which are
cooperative banks.
"Cooperative Bank Equity" means non-voting equity interests in Cooperative
Banks.
"Credit Facility" means the Existing Credit Facility or the New Credit
Facility.
"Cumulative Interest Expense" means the total amount of Consolidated
Interest Expense of the Company and its Restricted Subsidiaries for the period
beginning on the first day of the fiscal quarter immediately following the Issue
Date, through and including the end of the last fiscal quarter preceding the
date of any proposed Restricted Payment.
"Cumulative Operating Cash Flow" means Operating Cash Flow of the Company
and its Restricted Subsidiaries for the period beginning on the first day of the
fiscal quarter immediately following the Issue Date, through and including the
end of the last fiscal quarter preceding the date of any proposed Restricted
Payment.
"Depositary" means a clearing agency registered under the Exchange Act that
is designated to act as Depositary for the Exchange Debentures until a successor
Depositary shall have become such pursuant to the applicable provisions of the
Exchange Indenture, and thereafter "Depositary" shall mean such successor
Depositary. The Depositary initially is DTC.
"Designated Senior Indebtedness" means the Indebtedness under the Credit
Facility.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exchange Date" means the time and date the Exchange Debentures are first
issued under the Exchange Indenture in exchange for the Exchangeable Preferred
Stock.
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"Exchange Debentures Payment" means any payment or distribution of any kind
or character, whether in cash, property or securities, on account of principal
of (or premium, if any) or interest on or other obligations in respect of the
Exchange Debentures or other Indebtedness of the Company that is PARI PASSU or
subordinate in right of payment to the Exchange Debentures or on account of any
purchase or other acquisition of Exchange Debentures or such other Indebtedness
by the Company or any Subsidiary of the Company.
"Existing Credit Facility" means the Loan Agreement, dated as of May 1,
1997, among the Company, The Toronto-Dominion Bank, BankBoston, 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,
as amended by a First Amendment to Loan Agreement dated as of August 4, 1997, a
Second Amendment to Loan Agreement dated as of December 30, 1997, a Third
Amendment to Loan Agreement dated as of April 17, 1998 and a Fourth Amendment to
Loan Agreement dated as of April 24, 1998, and as such agreement may be further
amended, supplemented, restated or otherwise modified from time to time.
"Fair Market Value" means, with respect to any assets or Person, the price
which could be negotiated in an arm's-length free market transaction, for cash,
between a willing seller and a willing buyer, neither of whom is under undue
pressure or compulsion to complete the transaction. Fair Market Value will be
determined (i) if such Person or assets have a Fair Market Value in excess of
$20,000 but not in excess of $5 million, by any officer of the Company and
evidenced by an Officers' Certificate, dated within 30 days of the relevant
transaction, or (ii) if such Person or assets have a Fair Market Value in excess
of $5 million, by a majority of the Board of Directors of the Company and
evidenced by a Board Resolution, dated within 30 days of the relevant
transaction, based on an appraisal of an independent appraiser of national
reputation.
"Holder" means a Person in whose name an Exchange Debenture is registered in
the Security Register.
"Incur" means, with respect to any Indebtedness or other obligation of any
Person, to create, issue, incur (by conversion, exchange or otherwise), assume,
guarantee or otherwise become liable in respect of such Indebtedness or other
obligation or the recording, as required pursuant to generally accepted
accounting principles or otherwise, of any such Indebtedness or other obligation
on the balance sheet of such Person (and "Incurrence," "Incurred," "Incurrable"
and "Incurring" shall have meanings correlative to the foregoing); PROVIDED,
HOWEVER, that a change in generally accepted accounting principles that results
in an obligation of such Person that exists at such time becoming Indebtedness
shall not be deemed an Incurrence of such indebtedness.
"Indebtedness" means (without duplication), with respect to any Person,
whether recourse is to all or a portion of the assets of such Person and whether
or not contingent, (i) every obligation of such Person for money borrowed, (ii)
every obligation of such Person evidenced by bonds, debentures, notes or similar
instruments, including obligations Incurred in connection with the acquisition
of property, assets or businesses, (iii) every reimbursement obligation of such
Person with respect to letters of credit, bankers' acceptances or similar
facilities issued for the account of such Person, (iv) every obligation of such
Person issued or assumed as the deferred purchase price of property or services
(but excluding trade accounts payable or accrued liabilities arising in the
ordinary course of business), (v) every Capital Lease Obligation of such Person,
(vi) the maximum fixed redemption or repurchase price of Redeemable Stock of
such Person at the time of determination, (vii) every obligation to pay rent or
other payment amounts of such Person with respect to any Sale and Leaseback
Transaction to which such Person is a party, (viii) all obligations under
Interest Hedge Agreements, (ix) every obligation of the type referred to in
clauses (i) through (viii) of another Person and all dividends of another Person
the payment of which, in either case, such Person has guaranteed or is
responsible or liable, directly or indirectly, as obligor, guarantor or
otherwise or which is secured by a lien on any asset of such Person and (x) the
liquidation value of Preferred Stock of a Subsidiary of such Person issued and
outstanding and held by other than such Person (or one of its Wholly Owned
Restricted Subsidiaries); PROVIDED, that for all purposes of the Exchange
Indenture, (A) the amount outstanding at any time of any Indebtedness issued
with original issue discount is the face amount of such Indebtedness less the
unamortized portion of the original issue discount of such Indebtedness at the
time of its issuance as determined in conformity with generally accepted
accounting principles, (B) money borrowed at the time of the Incurrence of any
Indebtedness in order to pre-fund the payment of interest on such Indebtedness
shall be deemed not to be "Indebtedness" and (C) Indebtedness shall not include
any liability for federal, state, local or other taxes. For purposes of the
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Exchange Indenture, the amount of any Indebtedness shall be the amount
determined in respect thereof as of the end of the then most recently ended
fiscal quarter of such Person, based on the assumption that such Indebtedness
had terminated at the end of such fiscal quarter, and in making such
determination, if any agreement relating to such obligation provides for the
netting of amounts payable by and to such Person thereunder or if any such
agreement provides for the simultaneous payment of amounts by and to such Person
or in any event until the counterparty thereunder defaults in its corresponding
payment, then in each such case, the amount of such obligations shall be the net
amount so determined, plus any premium due upon default by such Person.
"Interest Hedge Agreements" means any interest rate swap, cap, collar,
floor, caption or swaption agreements, or any similar arrangements designed to
hedge the risk of variable interest rate volatility or to reduce interest costs,
arising at any time between the Company or any Restricted Subsidiary, on the one
hand, and any Person (other than an Affiliate of the Company or any Restricted
Subsidiary), on the other hand, as such agreement or arrangement may be
modified, supplemented and in effect from time to time.
"Investment" by any Person in any other Person means (without duplication):
(a) the acquisition (whether by purchase, merger, consolidation or otherwise) by
such Person (whether for cash, property, services, securities or otherwise) of
capital stock, bonds, notes, debentures, partnership or other ownership
interests or other securities of such other Person or any agreement to make any
such acquisition; (b) the making by such Person of any deposit with, or advance,
loan or other extension of credit to, such other Person (including the purchase
of property from another Person subject to an understanding or agreement,
contingent or otherwise, to resell such property to such other Person) or any
commitment to make any such advance, loan or extension; (c) the entering into by
such Person of any guarantee of, or other contingent obligation with respect to,
Indebtedness or other liability of such other Person; (d) the making of any
capital contribution by such Person to such other Person; and (e) the
designation by the Board of Directors of the Company of any Person to be an
Unrestricted Subsidiary. For purposes of the covenant described in "--
Limitation on Restricted Payments," (i) "Investment" shall include and be valued
at the Fair Market Value of such Person's PRO RATA interest in the net assets of
any Restricted Subsidiary at the time that such Restricted Subsidiary is
designated an Unrestricted Subsidiary and shall exclude the lesser of (A) the
Fair Market Value of such Person's PRO RATA interest in the net assets of any
Unrestricted Subsidiary at the time that such Unrestricted Subsidiary is
designated a Restricted Subsidiary and (B) the Fair Market Value of the amount
of such Person's Investments (other than Permitted Investments) made in (net of
cash distributions received from) such Unrestricted Subsidiary since the Issue
Date, and (ii) the amount of any Investment shall be the Fair Market Value of
such Investment at the time any such Investment is made.
"Issue Date" means the time and date of the first issuance of the
Exchangeable Preferred Stock.
"Lien" means, with respect to any property or assets, any mortgage or deed
of trust, pledge, hypothecation, assignment, deposit arrangement, security
interest, lien, charge, easement (other than an easement not materially
impairing usefulness or marketability), encumbrance, preference, priority or
other security agreement or preferential arrangement of any kind or nature
whatsoever on or with respect to such property or assets (including, without
limitation, any conditional sale or other title retention agreement having
substantially the same economic effect as any of the foregoing).
"Maturity" means, when used with respect to any Exchange Debenture, the date
on which the principal of such Exchange Debenture becomes due and payable,
whether at the Stated Maturity or by declaration of acceleration, call for
redemption or otherwise.
"Net Cash Proceeds" means the aggregate amount of cash and Cash Equivalents
received by the Company and its Restricted Subsidiaries in respect of an Asset
Sale (including upon the conversion to cash and Cash Equivalents of (a) any note
or installment receivable at any time, or (b) any other property as and when any
cash and Cash Equivalents are received in respect of any property received in an
Asset Sale but only to the extent such cash and Cash Equivalents are received
within one year after such Asset Sale), less the sum of (i) all reasonable
out-of-pocket fees, commissions and other expenses incurred in connection with
such Asset Sale, including the amount (estimated in good faith by the Board of
Directors of the Company) of income, franchise, sales and other applicable taxes
required to be paid by the Company or any Restricted Subsidiary of the Company
in connection with such
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Asset Sale and (ii) the aggregate amount of cash so received which is used to
retire any existing Senior Indebtedness or Indebtedness of the Company that
ranks PARI PARSU in right of payment with the Exchange Debentures or any
existing Indebtedness of such Restricted Subsidiaries, as the case may be, which
is required to be repaid in connection with such Asset Sale or is secured by a
Lien on the property or assets of the Company or any of its Restricted
Subsidiaries, as the case may be.
"New Credit Facility" means the amendment and restatement or the refinancing
or replacement of the Existing Credit Facility with the same, a deletion of, or
additional lenders, including, without limitation, any successive renewals,
extensions, substitutions, refinancings, restructurings, replacements,
supplementations or other modifications of the foregoing that increase the
aggregate amount of borrowings outstanding or the aggregate commitments of the
lenders thereunder.
"Offer to Purchase" means a written offer (the "Offer") sent by the Company
to each Holder at his address appearing in the Security Register on the date of
the Offer offering to purchase up to the principal amount of Exchange Debentures
specified in such Offer at the purchase price specified in such Offer. Unless
otherwise required by applicable law, the Offer shall specify an expiration date
(the "Expiration Date") of the Offer to Purchase which, subject to any contrary
requirements of applicable law, shall be not less than 30 days nor more than 60
days after the date of such Offer to Purchase and a settlement date (the
"Purchase Date") for purchase of Exchange Debentures within five Business Days
after the Expiration Date. The Offer shall also state the section of the
Exchange Indenture pursuant to which the Offer to Purchase is being made, the
Expiration Date and the Purchase Date, the aggregate principal amount of the
outstanding Exchange Debentures offered to be purchased by the Company, the
purchase price to be paid by the Company and the place or places where Exchange
Debentures are to be surrendered for tender pursuant to the Offer to Purchase.
"Officers' Certificate" means a certificate signed by two officers at least
one of whom shall be the principal executive officer, principal accounting
officer or principal financial officer of the Company and delivered to the
Debentures Trustee.
"Operating Cash Flow" for any Person for any period means (a) the
Consolidated Net Income of such Person for such period, plus (b) the sum,
without duplication (and only to the extent such amounts are deducted from net
revenues in determining such Consolidated Net Income), of (i) the provisions for
income taxes for such period for such Person and its Subsidiaries, (ii)
depreciation, amortization and other non-cash charges of such Person and its
Subsidiaries and (iii) Consolidated Interest Expense of such Person for such
period, determined, in each case, on a consolidated basis for such Person and
its Subsidiaries in accordance with generally accepted accounting principles,
less (c) the sum, without duplication (and only to the extent such amounts are
included in such Consolidated Net Income), of (i) all extraordinary gains of
such Person and its Subsidiaries during such period and (ii) the amount of all
cash payments made during such period by such Person and its Restricted
Subsidiaries to the extent such payments relate to non-cash charges that were
added back in determining Operating Cash Flow for such period or for any prior
period; and in the case of a Restricted Subsidiary that is not a Wholly Owned
Restricted Subsidiary, the determination of the percentage of the Operating Cash
Flow of such Restricted Subsidiary that is to be included in the calculation of
the Company's Annualized Operating Cash Flow Ratio shall be made on a pro forma
basis on the assumption that the percentage of the Company's common equity
interest in such Restricted Subsidiary throughout the applicable Reference
Period was equivalent to its common equity interest on the date of the
determination. When the foregoing definition is used in connection with the
Company and its Restricted Subsidiaries, references to a Person and its
Subsidiaries in the foregoing definition shall be deemed to refer to the Company
and its Restricted Subsidiaries.
"Opinion of Counsel" means a written opinion of counsel, who may be counsel
for the Company, and who shall be reasonably acceptable to the Debentures
Trustee, delivered to the Debentures Trustee.
"Permitted Investments" means: (i) Investments in Cash Equivalents; (ii)
Investments in the Company or a Restricted Subsidiary (other than payments
described in clause (iv) of the second paragraph under "Limitation on Restricted
Payments"); (iii) Investments in a Person substantially all of whose assets are
of a type generally used in a Wireless Communications Business (an "Acquired
Person") if, as a result of such Investments, (A) the Acquired
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Person immediately thereupon becomes a Restricted Subsidiary or (B) the Acquired
Person immediately thereupon either (1) is merged or consolidated with or into
the Company or any Restricted Subsidiary or (2) transfers or conveys all or
substantially all of its assets to, or is liquidated into, the Company or any of
its Restricted Subsidiaries; (iv) Investments in accounts and notes receivable
acquired in the ordinary course of business; (v) any securities received in
connection with an Asset Sale and any investment with the Net Cash Proceeds from
any Asset Sale in Capital Stock of a Person, all or substantially all of whose
assets are of a type used in a Wireless Communications Business, that complies
with the "Limitation on Asset Sales and Sales of Subsidiary Stock" covenant;
(vi) advances and prepayments for asset purchases in the ordinary course of
business in a Wireless Communications Business of the Company or a Restricted
Subsidiary; (vii) customary loans or advances made in the ordinary course of
business to officers, directors or employees of the Company or any of its
Restricted Subsidiaries for travel, entertainment, and moving and other
relocation expenses; (viii) the purchase of Cooperative Bank Equity in
Cooperative Banks to the extent required by the charter documents of such
Cooperative Banks in connection with the Incurrence of any Indebtedness which is
provided by such Cooperative Banks under the Credit Facility, provided that such
Incurrence is permitted under the terms of the Exchange Indenture; and (ix)
Investments in Wireless Alliance not exceeding $25 million in the aggregate made
after the Issue Date; PROVIDED, that the matters referenced in clauses (iii) and
(ix) above shall not be Permitted Investments if made at any time that an Event
of Default or event which with notice or lapse of time or both would become an
Event of Default has occurred and is continuing.
"Person" means any individual, corporation, partnership, joint venture,
trust, unincorporated organization or government or any agency or political
subdivision thereof.
"Preferred Stock" means, with respect to any Person, any and all shares of
Capital Stock of such Person that have preferential rights to any other Capital
Stock of such Person with respect to dividends or redemptions or upon
liquidation.
"Public Equity Offering" means an underwritten public offering of common
stock of the Company pursuant to an effective registration statement filed with
the Commission in accordance with the Securities Act.
"Qualified Capital Stock" means, with respect to any Person, any and all
shares of Capital Stock other than Redeemable Stock issued by such Person after
the date of the Exchange Indenture.
"Qualified Capital Stock Proceeds" means, with respect to any Person, (a) in
the case of any sale of Qualified Capital Stock, the aggregate net cash proceeds
received by such Person, after payment of expenses, commissions and the like
Incurred by such Person in connection therewith, and net of Indebtedness that
such Person Incurred, guaranteed or otherwise became liable for in connection
with the issuance or acquisition of such Capital Stock; and (b) in the case of
any exchange, exercise, conversion or surrender of any Redeemable Stock or
Indebtedness of such Person issued (other than to any Subsidiary) for cash after
the Issue Date for or into shares of Qualified Capital Stock of such Person, the
liquidation value of the Redeemable Stock or the net book value of such
Indebtedness as adjusted on the books of such Person to the date of such
exchange, exercise, conversion or surrender, plus any additional amount paid by
the securityholders to such Person upon such exchange, exercise, conversion or
surrender and less any and all payments made to the securityholders, and all
other expenses, commissions and the like Incurred by such Person or any
Subsidiary in connection therewith.
"Qualifying Event" means a Public Equity Offering or one or more Strategic
Equity Investments which in either case results in aggregate net proceeds of not
less than $50 million.
"Redeemable Stock" of any Person means any equity security of such Person
that by its terms or otherwise is required to be redeemed prior to the final
Stated Maturity of the Exchange Debentures or is redeemable at the option of the
holder thereof at any time prior to the final Stated Maturity of the Exchange
Debentures; PROVIDED that any Capital Stock that would not constitute Redeemable
Stock but for provisions thereof giving holders thereof the right to require
such Person to repurchase or redeem such Capital Stock upon the occurrence of a
"change of control" occurring prior to the final Stated Maturity of the Exchange
Debentures shall not constitute Redeemable Stock if the "change of control"
provisions applicable to such Capital Stock are no more favorable to the holders
of such Capital Stock than the provisions contained in the "Change of Control"
covenant of the Exchange Indenture and such Capital Stock specifically provides
that such Person will not repurchase or redeem any such stock pursuant
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to such provision prior to the Company's repurchase of the Exchange Debentures
as required pursuant to such "Change of Control" covenant.
"Reference Period" with regard to any Person means the last two full fiscal
quarters of such Person immediately preceding any date upon which any
determination is to be made pursuant to the terms of the Exchange Debentures or
the Exchange Indenture.
"Related Person" of any Person means any other Person owning (a) 5% or more
of the outstanding Common Stock of such Person or (b) 5% or more of the Voting
Power of such Person.
"Restricted Payment" means, with respect to any Person, (i) any declaration
or payment of a dividend or other distribution on any shares of Capital Stock of
such Person or any Subsidiary of such Person (other than a dividend payable
solely in shares of its Capital Stock or options, warrants or other rights to
acquire its Capital Stock and other than any declaration or payment of a
dividend or other distribution by a Restricted Subsidiary to the Company or
another Restricted Subsidiary), (ii) any payment on account of the purchase,
redemption, retirement or acquisition (including by way of issuing any
Indebtedness or Redeemable Stock in exchange for Qualified Capital Stock) of (A)
any shares of Capital Stock of such Person or any Subsidiary of such Person held
by other than such Person or any of its Restricted Subsidiaries or (B) any
option, warrant or other right to acquire shares of Capital Stock of such Person
or any Subsidiary of such Person or any of its Restricted Subsidiaries, in each
case other than pursuant to the cashless exercise of options, (iii) any
Investment (other than a Permitted Investment) made by such Person and (iv) any
redemption, defeasance, repurchase or other acquisition or retirement for value
prior to any scheduled maturity, repayment or sinking fund payment of any
Subordinated Indebtedness of such Person; PROVIDED, that the term "Restricted
Payment" does not include the payment of a dividend or other distribution by any
Restricted Subsidiary on shares of its Capital Stock that is paid pro rata to
all holders of such Capital Stock.
"Restricted Subsidiary" of any Person means any Subsidiary of such Person
other than an Unrestricted Subsidiary.
"Sale and Leaseback Transaction" of any Person means an arrangement with any
lender or investor or to which such lender or investor is a party providing for
the leasing by such Person of any property or asset of such Person which has
been or is being sold or transferred by such Person more than 270 days after the
acquisition thereof or the completion of construction or commencement of
operation thereof to such lender or investor or to any Person to whom funds have
been or are to be advanced by such lender or investor on the security of such
property or asset. The stated maturity of such arrangement shall be the date of
the last payment of rent or any other amount due under such arrangement prior to
the first date on which such arrangement may be terminated by the lessee without
payment of a penalty.
"Securities Act" means the Securities Act of 1933, as amended.
"Security Register" has the meaning set forth in the Exchange Indenture.
"Senior Indebtedness" means the principal of (and premium, if any) and
interest (including interest accruing on or after the filing of any petition in
bankruptcy or for reorganization relating to the Company whether or not a claim
for post-petition interest is allowed in such proceeding) on (i) Indebtedness of
the Company created pursuant to the Credit Facility and all other obligations
thereunder or under the notes, security documents, pledge agreements, Interest
Hedge Agreements or other agreements or instruments executed in connection
therewith, (ii) Indebtedness of the Company created pursuant to any vendor
financing Incurred for the acquisition, construction or improvement by the
Company or any Restricted Subsidiary of assets in the Wireless Communications
Business, (iii) all other Indebtedness of the Company referred to in the
definition of Indebtedness other than clauses (iv), (vi) and (ix) thereof (and
clause (viii) thereof to the extent applicable to Indebtedness Incurred under
clauses (iv) and (vi) thereof), whether Incurred on or prior to the Exchange
Date, other than the Senior Subordinated Notes, and (iv) amendments, renewals,
extensions, modifications, refinancings and refundings of any such Indebtedness;
PROVIDED, HOWEVER, the following shall not constitute Senior Indebtedness: (A)
any Indebtedness owed to a Person when such Person is a Restricted Subsidiary of
the Company, (B) any Indebtedness which by the terms of the instrument creating
or evidencing the same is not superior in right of payment to the Exchange
Debentures, (C) any
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Indebtedness Incurred in violation of the Exchange Indenture (but, as to any
such Indebtedness, no such violation shall be deemed to exist for purposes of
this clause (c) if the holder(s) of such Indebtedness or their representative
and the Debentures Trustee shall have received an Officers' Certificate of the
Company to the effect that the Incurrence of such Indebtedness does not (or in
the case of revolving credit Indebtedness, that the Incurrence of the entire
committed amount thereof at the date on which the initial borrowing thereunder
is made would not) violate the Exchange Indenture) or (D) any Indebtedness which
is subordinated in right of payment to any other Indebtedness of the Company.
"Senior Nonmonetary Default" means the occurrence or existence and
continuance of any event of default, or of any event which after notice or lapse
of time or both would become an event of default, under the terms of any
instrument pursuant to which any Senior Indebtedness is outstanding, permitting
(after notice or lapse of time or both) one or more holders of such Senior
Indebtedness (or an administrative agent on behalf of the holders thereof) to
declare such Senior Indebtedness due and payable prior to the date on which it
would otherwise become due and payable, other than a Senior Payment Default.
"Senior Payment Default" means any default in the payment of principal of
(or premium, if any) or interest on any Senior Indebtedness when due, whether at
the stated maturity of any such payment or by declaration of acceleration, call
for redemption or otherwise.
"Stated Maturity," when used with respect to any Exchange Debenture or any
installment of interest thereon, means the date specified in such Exchange
Debenture as the date on which the principal of such Exchange Debenture or such
installment of interest is due and payable.
"Strategic Equity Investment" means an investment in Qualified Stock made by
a Strategic Investor in an aggregate amount of not less than $50 million.
"Strategic Investor" means a Person (other than an Affiliate of the Company
or a Person who by virtue of such Investment becomes such an Affiliate) engaged
in one or more Telecommunications Businesses with an equity market
capitalization at the time such Person makes a Strategic Equity Investment in
the Company in excess of $1.0 billion.
"Subordinated Indebtedness" mean Indebtedness of the Company that is
subordinated in right of payment to the Exchange Debentures.
"Subsidiary" means, as applied to any Person, (a) any corporation of which
more than fifty percent (50%) of the outstanding Capital Stock (other than
directors' qualifying shares) having ordinary Voting Power to elect its board of
directors, regardless of the existence at the time of a right of the holders of
any class or classes of securities of such corporation to exercise such Voting
Power by reason of the happening of any contingency, or any entity other than a
corporation of which more than fifty percent (50%) of the outstanding ownership
interests, is at the time owned directly or indirectly by such Person, or by one
or more Subsidiaries of such Person, or by such Person and one or more
Subsidiaries of such Person, or (b) any other entity which is directly or
indirectly controlled or capable of being controlled by such Person, or by one
or more Subsidiaries of such Person, or by such Person and one or more
Subsidiaries of such Person.
"Telecommunications Business" means the business of (i) transmitting, or
providing services relating to the transmission of, voice, video or data through
owned or leased wireline or wireless transmission facilities, (ii) creating,
developing, constructing, installing, repairing, maintaining or marketing
communications-related systems, network equipment and facilities, software and
other products, or (iii) evaluating, owning, operating, participating in or
pursuing any other business that is primarily related to those identified in
clause (i) or (ii) above (in the case of this clause (iii), however, in a manner
consistent with the Company's manner of business on the Issue Date), and shall,
in any event, include all businesses in which the Company or any of its
Subsidiaries is engaged on the Issue Date or has entered into agreements to
engage in or to acquire a company to engage in or contemplate engaging in, as
expressly set forth in this Prospectus; PROVIDED that the determination of what
constitutes a Telecommunications Business shall be made in good faith by the
Company's Board of Directors.
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"Unrestricted Subsidiary" of any Person means (i) any Subsidiary of such
Person that at the time of determination shall be designated an Unrestricted
Subsidiary by the Board of Directors of such Person in the manner provided below
and (ii) any Subsidiary of an Unrestricted Subsidiary. The Board of Directors of
any Person may designate any Restricted Subsidiary to be an Unrestricted
Subsidiary unless such Subsidiary owns any Capital Stock of, or owns or holds
any Lien on any property of, such Person or any Restricted Subsidiary; PROVIDED,
that either (A) the Subsidiary to be so designated has total assets of $1,000 or
less or (B) if such Subsidiary has assets greater than $1,000, such Person's PRO
RATA interest in the Fair Market Value of the net assets of such Subsidiary at
the time of such designation would be permitted as an Investment under the
provision of the Exchange Indenture described under "-- Limitation on Restricted
Payments." The Board of Directors of any Person may designate any Unrestricted
Subsidiary to be a Restricted Subsidiary of such Person; PROVIDED, that
immediately after giving effect to such designation (x) such Person would be
permitted to Incur $1.00 of additional Indebtedness pursuant to the provision of
the Exchange Indenture described in the first paragraph under "-- Limitation on
Consolidated Indebtedness" and (y) no Event of Default or event which with
notice or lapse of time or both would become an Event of Default has occurred
and is continuing. Any such designation by the Board of Directors shall be
evidenced by a Board Resolution submitted to the Debentures Trustee. Wireless
Alliance shall be deemed an Unrestricted Subsidiary as of the Issue Date and
shall thereafter remain an Unrestricted Subsidiary unless and until designated
by the Board of Directors as a Restricted Subsidiary in accordance with the
terms of the Exchange Indenture.
"Voting Power" of any Person means the aggregate number of votes of all
classes of Capital Stock of such Person which ordinarily have voting power for
the election of directors of such Person.
"Wholly Owned Restricted Subsidiary" of any Person means a Restricted
Subsidiary of such Person all of the outstanding Capital Stock or other
ownership interests of which (other than directors' qualifying shares) shall at
the time be owned by such Person or by one or more Wholly Owned Restricted
Subsidiaries of such Person or by such Person and one or more Wholly Owned
Restricted Subsidiaries of such Person.
"Wireless Communications Business" means any business substantially related
to the ownership, development, operation or acquisition of wireless
communications services permitted under the Federal Communications Commission's
("FCC") Commercial Mobile Radio Services rules (and the related provisions of
the FCC's Public Mobile Services and Personal Communications Services rules),
and other related telecommunications business services.
FORM, DENOMINATION, BOOK-ENTRY PROCEDURES AND TRANSFER
Exchange Debentures will be issued only in fully registered form in
denominations of $1,000 and integral multiples thereof. Exchange Debentures will
not be issued in bearer form.
If the Exchange Debentures are to be redeemed in part, the Company will not
be required to (i) issue, register the transfer of or exchange any Exchange
Debentures during a period beginning at the opening of business 15 days before
the day of mailing of notice of redemption of any such Exchange Debentures that
may be selected for redemption and ending at the close of business on the day of
such mailing or (ii) register the transfer of or exchange any Exchange
Debentures so selected for redemption, in whole or in part, except the
unredeemed portion of any such Exchange Debentures being redeemed in part.
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CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The discussion set forth below summarizes certain material United States
federal income tax consequences that may be relevant to initial holders, that
is, persons who acquire the Securities pursuant to the Offerings, who are
"United States persons" (as defined below) and who hold the Securities as
capital assets ("Holders"). The discussion is intended only as a summary and
does not purport to be a complete analysis or listing of all potential tax
considerations that may be relevant to such Holders. The discussion does not
include special rules that may apply to certain Holders (including insurance
companies, tax-exempt organizations, financial institutions or broker-dealers,
and persons holding Senior Subordinated Notes, Exchangeable Preferred Stock or
Exchange Debentures as part of a "straddle," "hedge" or "conversion
transaction," and, except as otherwise discussed below, investors who are not
"United States persons"), and does not address the tax consequences of the law
of any state, locality or foreign jurisdiction. The discussion is based upon
currently existing provisions of the Internal Revenue Code of 1986, as amended
(the "Code"), existing and proposed United States Treasury Regulations
promulgated thereunder, and current administrative rulings and court decisions.
All of the foregoing are subject to change (possibly with retroactive effect),
and any such change could affect the continuing validity of this discussion.
As used herein, "United States person" means a beneficial owner of Senior
Subordinated Notes, Exchangeable Preferred Stock or Exchange Debentures who or
that (i) is a citizen or resident of the United States, (ii) is a corporation,
partnership or other entity created or organized in or under the laws of the
United States or a political subdivision thereof, (iii) is an estate the income
of which is subject to United States federal income taxation regardless of its
source, (iv) is a trust if (A) a United States court is able to exercise primary
supervision over the administration of the trust and (B) one or more United
States fiduciaries have authority to control all substantial decisions of the
trust, (v) is a certain type of trust in existence on August 20, 1996 which was
treated as a United States person under the Code in effect immediately prior to
such date and which has made a valid election to be treated as a "United States
person" under the Code, or (vi) is otherwise subject to United States federal
income tax on a net income basis in respect of its worldwide taxable income. A
"United States Holder" is a Holder that is a "United States person." A
"Non-United States Holder" is a Holder that is not a United States Holder. The
Company does not intend to treat the Senior Subordinated Notes and the
Exchangeable Preferred Stock, which are being offered concurrently, as an
investment unit for United States federal income tax purposes.
SENIOR SUBORDINATED NOTES
EXCHANGE OFFER
The exchange of Old Notes for New Notes pursuant to the Exchange Offer will
not result in any United States federal income tax consequences to the United
States Holders. When a United States Holder exchanges an Old Note for a New Note
pursuant to the Exchange Offer, the Holder will have the same adjusted tax basis
and holding period in the New Note as in the Old Note immediately before the
Exchange.
PAYMENTS OF INTEREST ON THE SENIOR SUBORDINATED NOTES
Interest on a Senior Subordinated Note will generally be taxable to a United
States Holder as ordinary income from domestic sources at the time it is paid or
accrued in accordance with the United States Holder's method of accounting for
tax purposes. It is expected that the Senior Subordinated Notes will be issued
without original issue discount and the following discussion so assumes.
MARKET DISCOUNT
If a United States Holder purchases a Senior Subordinated Note for an amount
that is less than its principal amount, the amount of the difference will be
treated as "market discount" for United States federal income tax purposes,
unless such difference is less than a specified DE MINIMIS amount. Under the
market discount rules, a United States Holder will be required to treat any
partial principal payment on, or any gain on the sale, exchange, retirement or
other disposition of, a Senior Subordinated Note as ordinary income to the
extent of the market
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discount which has not previously been included in income and is treated as
having accrued on such Senior Subordinated Note at the time of such payment or
disposition. In addition, the United States Holder may be required to defer,
until the maturity of the Senior Subordinated Note or its earlier disposition in
a taxable transaction, the deduction of all or a portion of the interest expense
on any indebtedness incurred or continued to purchase or carry such Senior
Subordinated Notes.
Any market discount will be considered to accrue ratably during the period
from the date of acquisition to the maturity date of the Senior Subordinated
Note, unless the United States Holder elects to accrue on a constant interest
method. A United States Holder may elect to include market discount in income
currently as it accrues (on either a ratable or constant interest method), in
which case the rule described above regarding deferral of interest deductions
will not apply. This election to include market discount in income currently,
once made, applies to all market discount obligations acquired on or after the
first taxable year to which the election applies and may not be revoked without
the consent of the Internal Revenue Service (the "IRS").
AMORTIZABLE BOND PREMIUM
A United States Holder that purchases a Senior Subordinated Note for an
amount in excess of the principal amount will be considered to have purchased
the Senior Subordinated Note at a "premium." A United States Holder generally
may elect to amortize the premium over the remaining term of the Senior
Subordinated Note on a constant yield method. However, if the Senior
Subordinated Note is purchased at a time when the Senior Subordinated Note may
be optionally redeemed for an amount that is in excess of its principal amount,
special rules would apply that could result in a deferral of the amortization of
bond premium until later in the term of the Senior Subordinated Note. The amount
amortized in any year will be treated as a reduction of the United States
Holder's interest income from the Senior Subordinated Note. Bond premium on a
Senior Subordinated Note held by a United States Holder that does not make such
an election will decrease the gain or increase the loss otherwise recognized on
disposition of the Senior Subordinated Note. The election to amortize premium on
a constant yield method, once made, applies to all debt obligations held or
subsequently acquired by the electing United States Holder on or after the first
day of the first taxable year to which the election applies and may not be
revoked without the consent of the IRS.
DISPOSITION OF SENIOR SUBORDINATED NOTES
Unless a nonrecognition provision applies, a United States Holder of Senior
Subordinated Notes will recognize gain or loss upon the sale, redemption
(including pursuant to an offer by the Company), retirement or other disposition
of Senior Subordinated Notes, and such gain or loss will generally be equal to
the difference between (i) the amount of cash and the fair market value of
property received and (ii) the United States Holder's adjusted tax basis
(increased by any accrued market discount previously included in income by the
United States Holder and reduced by any amortized bond premium previously
deducted from income by such United States Holder and any previous payments with
respect to the Senior Subordinated Notes) in such Senior Subordinated Notes.
Gain or loss recognized will be capital gain or loss, and will be long-term
capital gain or loss if the United States Holder has held such Senior
Subordinated Notes (or is treated as having held such Senior Subordinated Notes)
for longer than one year. Under current law, net capital gains recognized by
corporations are currently taxed at a maximum rate of 35% and the maximum rate
on net capital gains (i.e., the excess of net long-term capital gains over net
short-term capital losses) in the case of individuals is currently 20% for
Senior Subordinated Notes held for more than 18 months (28% if held more than 12
months, but not more than 18 months). Special rules (and generally lower maximum
rates) apply for individuals whose taxable income is below certain levels. Under
the Code, an individual United States Holder's net capital losses are currently
deductible only to the extent of $3,000 per year.
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NON-UNITED STATES HOLDERS
Under present United States federal income and estate tax law, and subject
to the discussion below concerning backup withholding:
(a) no United States federal withholding tax will be imposed with
respect to the payment by the Company or its paying agent of principal,
premium, if any, or interest on a Senior Subordinated Note owned by a
Non-United States Holder (the "Portfolio Interest Exception"), provided:
(i) that such Non-United States Holder does not actually or
constructively own 10% or more of the total combined voting power of all
classes of stock of the Company entitled to vote within the meaning of
Section 871(h)(3) of the Code and the regulations thereunder;
(ii) such Non-United States Holder is not a controlled foreign
corporation that is related, directly or indirectly, to the Company
through stock ownership;
(iii) such Non-United States Holder is not a bank whose receipt of
interest on a Senior Subordinated Note is described in Section
881(c)(3)(A) of the Code, and
(iv) such Non-United States Holder satisfies the statement
requirement (described generally below) set forth in Section 871(h) and
Section 881(c) of the Code and the regulations thereunder;
(b) no United States federal withholding tax will be imposed generally
with respect to any gain or income realized by a Non-United States Holder
upon the sale, exchange, redemption, retirement or other disposition of a
Senior Subordinated Note; and
(c) a Senior Subordinated Note beneficially owned by an individual who
at the time of death is a Non-United States Holder will not be subject to
United States federal estate tax as a result of such individual's death,
PROVIDED that such individual does not actually or constructively own 10% or
more of the total combined voting power of all classes of stock of the
Company entitled to vote within the meaning of Section 871(h)(3) of the Code
and PROVIDED that the interest payments with respect to such Senior
Subordinated Note would not have been, if received at the time of such
individual's death, effectively connected with the conduct of a United
States trade or business by such individual.
To satisfy the requirement referred to in (a)(iv) above, the beneficial
owner of such Senior Subordinated Note, or a financial institution holding the
Senior Subordinated Note on behalf of such owner, must provide, in accordance
with specified procedures, a paying agent of the Company with a statement to the
effect that the beneficial owner is not a United States person. Pursuant to
current temporary United States Treasury Regulations, these requirements will be
met if (1) the beneficial owner provides his name and address and certifies,
under penalties of perjury, that he is not a United States person (which
certification may be made on an IRS Form W-8 (or substitute form)) or (2) a
financial institution holding the Senior Subordinated Note on behalf of the
beneficial owner certifies, under penalties of perjury, that such statement has
been received by it and furnishes a paying agent with a copy thereof.
United States Treasury regulations recently issued by the IRS, which will be
effective for payments made after December 31, 1999 (subject to certain
transition rules), made modifications to the certification procedure applicable
to Non-United States Holders. In general, these regulations unify certain
certification procedures and forms and clarify and modify reliance standards. A
Non-United States Holder should consult its own tax adviser regarding the effect
of the new United States Treasury Regulations.
If a Non-United States Holder cannot satisfy the requirements of the
Portfolio Interest Exception described in (a) above, payment of interest on a
Senior Subordinated Note made to such Non-United States Holder will be subject
to a 30% withholding tax unless the beneficial owner of the Senior Subordinated
Note provides the Company or its paying agent, as the case may be, with a
properly executed (1) IRS Form 1001 (or substitute form) claiming an exemption
from or reduction of withholding under the benefit of a tax treaty or (2) IRS
Form 4224 (or substitute form) stating that interest paid on the Senior
Subordinated Note is not subject to withholding tax because it is effectively
connected with the beneficial owner's conduct of a trade or business in the
United States.
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Under recently finalized United States Treasury Regulations, for payments made
after December 31, 1999, Non-United States Holders will generally be required to
provide an IRS Form W-8 in lieu of IRS Form 1001 and IRS Form 4224 although
alternative documentation may be applicable in certain situations.
If a Non-United States Holder is engaged in a trade or business in the
United States and interest on a Senior Subordinated Note is effectively
connected with the conduct of such trade or business, the Non-United States
Holder, although exempt from United States federal withholding tax as described
above (provided the Non-United States Holder files the appropriate certification
with the Company or its U.S. agent), will generally be subject to United States
federal income tax on such interest on a net income basis in the same manner as
if it were a United States Holder. In addition, if such Non-United States Holder
is a foreign corporation, it may be subject to a branch profits tax equal to 30%
of its effectively connected earnings and profits for the taxable year, or such
lower rate as may be specified by an applicable income tax treaty, subject to
adjustments.
Any gain or income realized upon the sale, exchange, retirement or other
disposition of a Senior Subordinated Note generally will not be subject to
United States federal income tax unless (i) such gain or income is effectively
connected with a trade or business in the United States of the Non-United States
Holder or (ii) in the case of a Non-United States Holder who is an individual,
such individual is present in the United States for 183 days or more in the
taxable year of such sale, exchange, retirement or other disposition, and
certain other conditions are met.
INFORMATION REPORTING AND BACKUP WITHHOLDING
In general, information reporting requirements will apply to payments on a
Senior Subordinated Note and to the proceeds of the sale of a Senior
Subordinated Note made to United States Holders other than certain exempt
recipients (such as corporations). A 31% backup withholding tax will apply to
such payments if the United States Holder fails to provide a taxpayer
identification number or certification of foreign or other exempt status or
fails to report in full dividend and interest income.
Under current United States Treasury Regulations, no information reporting
or backup withholding will be required with respect to payments made by the
Company or any paying agent to Non-United States Holder if a statement described
in (a)(iv) under "-- Non-United States Holders" has been received or such
Non-United States Holder has otherwise established an exemption, PROVIDED that
neither the Company nor its agent has actual knowledge that the beneficial owner
is a United States person.
In addition, backup withholding and information reporting will not apply if
payments on a Senior Subordinated Note are paid or collected by a foreign office
of a custodian, nominee or other foreign agent on behalf of the beneficial owner
of such Senior Subordinated Note, or if a foreign office of a broker (as defined
in applicable United States Treasury Regulations) pays the proceeds of the sale
of a Senior Subordinated Note to the owner thereof. If, however, such nominee,
custodian, agent or broker is, for United States federal income tax purposes, a
United States person, a controlled foreign corporation or a foreign person that
derives 50% or more of its gross income for certain periods from the conduct of
a trade or business in the United States, such payments will be subject to
information reporting (but not backup withholding), unless (1) such custodian,
nominee, agent or broker has documentary evidence in its records that the
beneficial owner is not a United States person and certain other conditions are
met or (2) the beneficial owner otherwise establishes an exemption. Temporary
United States Treasury Regulations provide that the United States Treasury is
considering whether backup withholding will apply with respect to payments of
principal, premium, if any, interest or the proceeds of a sale that are subject
to backup withholding under the current regulations.
Payments on a Senior Subordinated Note paid to the beneficial owner of a
Senior Subordinated Note by a United States office of a custodian, nominee or
agent, or the payment by the United States office of a broker of the proceeds of
sale of a Senior Subordinated Note, will be subject to both backup withholding
and information reporting unless the beneficial owner provides the statement
referred to in (a)(iv) above and the payor does not have actual knowledge that
the beneficial owner is a United States person or otherwise establishes an
exemption.
In October 1997, Treasury regulations were issued which alter the foregoing
rules in certain respects and which generally will apply to any payments in
respect of a Senior Subordinated Note or proceeds from the sale of a Senior
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Subordinated Note that are made after December 31, 1999. Among other things,
such regulations expand the number of foreign intermediaries that are
potentially subject to information reporting and address certain documentary
evidence requirements relating to exemption from the general backup withholding
requirements. Holders of the Senior Subordinated Notes should consult their tax
advisers concerning the possible application of such regulations to any payments
made on or with respect to the Senior Subordinated Notes.
Any amounts withheld under the backup withholding rules will be credited
toward such Holder's United States federal income tax liability, if any. To the
extent that the amounts withheld exceed the Holder's tax liability, the excess
may be refunded to the Holder provided the required information is furnished to
the IRS. In addition to providing the necessary information, the Holder must
file a United States tax return in order to obtain a refund of the excess
withholding.
EXCHANGEABLE PREFERRED STOCK
EXCHANGE OFFER
The exchange of Old Exchangeable Preferred Stock for New Exchangeable
Preferred Stock pursuant to the Exchange Offer will not result in any United
States federal income tax consequences to the United States Holders. When a
United States Holder exchanges shares of Old Exchangeable Preferred Stock for
New Exchangeable Preferred Stock pursuant to the Exchange Offer, the Holder will
have the same adjusted tax basis and holding period in the New Exchangeable
Preferred Stock as in the Old Exchangeable Preferred Stock immediately before
the exchange.
DISTRIBUTIONS ON THE EXCHANGEABLE PREFERRED STOCK
Distributions on the Exchangeable Preferred Stock paid in cash will be
taxable to a United States Holder as dividends, taxable as ordinary income to
the extent of the Company's current and accumulated earnings and profits (as
determined for United States federal income tax purposes). A distribution on the
Exchangeable Preferred Stock made in the form of Dividend Shares will be treated
as being made in an amount equal to the fair market value of the Dividend Shares
and will be treated as a dividend taxable as ordinary income, to the extent of
the Company's current and accumulated earnings and profits. The holding period
of any such Dividend Shares will commence on the date of their distribution. The
Company believes that it currently has no accumulated earnings and profits. It
is not anticipated that the Company will have any earnings and profits in the
near future.
To the extent that the amount of any distribution paid on the Exchangeable
Preferred Stock (including distributions made in the form of Dividend Shares)
exceeds the Company's current and accumulated earnings and profits allocable to
such distributions, such distribution will be treated as a return of capital,
thus reducing the United States Holder's adjusted tax basis in such Exchangeable
Preferred Stock. Any such excess distribution that is greater than the United
States Holder's adjusted basis in the Exchangeable Preferred Stock will be taxed
as capital gain from the sale or exchange of the Exchangeable Preferred Stock
and will be long-term capital gain if the United States Holder's holding period
for such Exchangeable Preferred Stock exceeds one year. For purposes of the
remainder of this discussion, the term "dividend" refers to a distribution on
the Exchangeable Preferred Stock paid out of the Company's accumulated or
current earnings and profits, unless the context indicates otherwise.
Constructive distributions (including those arising from a redemption
premium) are taxable to the United States Holder as dividends to the extent of
the Company's current or accumulated earnings and profits. If the size of the
constructive dividend is greater than the Company's current or accumulated
earnings and profits, the excess is treated as a tax-free recovery of basis in
the Exchangeable Preferred Stock until such United States Holder's basis is
equal to zero, and then as capital gain from the sale or exchange of the
Exchangeable Preferred Stock.
If the fair market value of any Dividend Shares at the time of distribution
is less than the redemption price of such Dividend Shares by more than a DE
MINIMIS amount, the resulting redemption premium will be required, pursuant to
section 305 of the Code, to be accrued by the United States Holder as a
constructive distribution of additional Dividend Shares as described below under
"Preferred Stock Discount."
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DIVIDENDS RECEIVED DEDUCTION
Dividends paid to a corporate United States Holder who owns less than 20% of
the Company (by vote or value) will be eligible for the 70% dividends-received
deduction under section 243 of the Code, subject to the limitations contained in
sections 246 and 246A of the Code. In general, the dividends-received deduction
is available only if the stock in respect of which the dividend is paid is held
for at least 46 days during the 90-day period that begins 45 days before the
stock becomes ex-dividend with respect to the dividend (91 days during the
180-day period that begins 90 days before the stock becomes ex-dividend with
respect to a dividend in the case of a dividend attributable to a period or
periods aggregating more than 366 days). Under section 246(c) of the Code, a
taxpayer's holding period for these purposes is reduced by periods during which
the taxpayer's risk of loss with respect to the stock is considered diminished
by reason of the existence of options, contracts to sell and similar
transactions. The dividends-received deduction will also not be available if the
taxpayer is under an obligation to make related payments with respect to
positions in substantially similar or related property. The dividends-received
deduction is limited to specified percentages of a corporate United States
Holder's taxable income and may be reduced or eliminated if the corporate United
States Holder has indebtedness "directly attributable" to its investment in the
stock. Prospective corporate purchasers of the Exchangeable Preferred Stock
should consult their own tax advisers to determine whether these limitations
might apply to them.
For purposes of computing its alternative minimum tax, dividends eligible
for the 70% dividends-received deduction are included in a corporate United
States Holder's "adjusted current earnings." If such adjusted current earnings
exceed the corporate United States Holder's alternative minimum taxable income
(determined without regard to the adjustments for adjusted current earnings or
the alternative tax net operating loss deduction), 75% of the excess is added to
the corporate United States Holder's alternative minimum taxable income.
EXTRAORDINARY DIVIDENDS
Under section 1059 of the Code, if a corporate United States Holder receives
an "extraordinary dividend" from the Company with respect to the Exchangeable
Preferred Stock which has not been held for more than two years on the dividend
announcement date, the basis of the Exchangeable Preferred Stock will be reduced
(but not below zero) by the non-taxed portion of the dividend. The reduction in
basis is treated as occurring at the beginning of the ex-dividend date of the
extraordinary dividend to which the reduction relates. If, because of the
limitation on reducing basis below zero, any amount of the non-taxed portion of
an extraordinary dividend is not applied to reduce basis, such amount will be
treated as gain from the sale or exchange of the Exchangeable Preferred Stock in
the year in which the extraordinary dividend is received. Generally, the
non-taxed portion of an extraordinary dividend is the amount excluded from
income under section 243 of the Code (relating to the dividends-received
deduction). An extraordinary dividend on the Exchangeable Preferred Stock
generally would include any dividend that (i) equals or exceeds five percent of
the United States Holder's adjusted tax basis in the Exchangeable Preferred
Stock, treating all dividends having ex-dividend dates within an 85-day period
as one dividend or (ii) exceeds 20% of the United States Holder's adjusted tax
basis in the Exchangeable Preferred Stock, treating all dividends having
ex-dividend dates within a 365-day period as one dividend. In determining
whether a dividend paid on the Exchangeable Preferred Stock is an extraordinary
dividend, a United States Holder may elect to use the fair market value of such
stock rather than its adjusted tax basis for purposes of determining the
applicable percentage limitation if the United States Holder is able to
establish to the satisfaction of the IRS the fair market value of the
Exchangeable Preferred Stock as of the day before the ex-dividend date. An
extraordinary dividend would also include any amount treated as a dividend in
the case of a redemption of the Exchangeable Preferred Stock that is either
non-pro rata as to all corporate United States Holders of Exchangeable Preferred
Stock or part of a partial liquidation, without regard to the period the United
States Holder held the stock. Corporate United States Holders should see
"Redemption and Exchange of Exchangeable Preferred Stock" for a discussion of
when a redemption of the Exchangeable Preferred Stock will constitute an
extraordinary dividend.
Certain "qualified preferred dividends," however, are not considered
extraordinary dividends. A qualified preferred dividend is any fixed dividend
payable with respect to preferred stock which (i) provides for fixed preferred
dividends payable not less frequently than annually and (ii) is not in arrears
as to dividends when acquired, PROVIDED,
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HOWEVER, that the actual rate of return (as determined under section 1059(e)(3)
of the Code) on such stock does not exceed 15%. If a qualified preferred
dividend announced within two years of the date of acquisition of the preferred
stock exceeds the five percent (or 20%) threshold for extraordinary dividend
status described above, (i) section 1059(a) will not apply (and no reduction in
basis will be required) if the United States Holder holds the stock for more
than five years and (ii) the aggregate reduction in basis under section 1059(a)
will not exceed the excess of the qualified preferred stock dividends paid on
such stock during the period held by the United States Holder over the qualified
preferred dividends that would have been paid during such period on the basis of
the stated rate of return, as determined under section 1059(e)(3) of the Code.
The length of time that a United States Holder is deemed to have held stock for
purposes of section 1059 of the Code is determined under principles similar to
those contained in section 246(c) of the Code discussed above.
The Company does not now have any current or accumulated earnings and
profits and is unable to predict whether or when it will have sufficient
earnings and profits for distributions with respect to the Exchangeable
Preferred Stock to be treated as dividends. Until such time, if any, as such
distributions are treated as dividends, corporate United States Holders of the
Exchangeable Preferred Stock will not be eligible for the dividends-received
deduction described above.
PREFERRED STOCK DISCOUNT
The Exchangeable Preferred Stock is subject to mandatory redemption on May
15, 2010 (the "Mandatory Redemption"). In addition, on or after May 15, 2003 and
subject to certain restrictions, the Exchangeable Preferred Stock is redeemable
at any time at the option of the Company at specified redemption prices (the
"Optional Redemption"). Pursuant to section 305(c) of the Code, United States
Holders of Exchangeable Preferred Stock generally may be required to treat a
portion of the difference between the issue price of the Exchangeable Preferred
Stock and its redemption price as constructive distributions of property
includable in income on a periodic basis. For purposes of determining whether
such constructive distribution treatment applies, the Mandatory Redemption and
the Optional Redemption are tested separately. Constructive distribution
treatment is required if either (or both) of these tests is satisfied.
Section 305(c) of the Code provides that the entire amount of a redemption
premium with respect to preferred stock that is subject to mandatory redemption
is treated as being distributed to the holders of such preferred stock on an
economic accrual basis. Preferred stock generally is considered to have a
redemption premium for this purpose if the price at which it must be redeemed
(the "Redemption Price") exceeds its issue price by more than a DE MINIMIS
amount. For this purpose, such excess (the "Preferred Stock Discount") will be
treated as zero if it is less than 1/4 of 1% of the Redemption Price multiplied
by the number of complete years from the date of issuance until the stock must
be redeemed. Preferred Stock Discount is taxable as a constructive distribution
to the United States Holder (treated as a dividend to the extent of the
Company's current and accumulated earnings and profits and otherwise subject to
the treatment described above for distributions) over the term of the
Exchangeable Preferred Stock using a constant interest rate method similar to
that employed for accruing original issue discount pursuant to the Code.
Preferred Stock Discount will arise due to the Optional Redemption feature
only if, based on all of the facts and circumstances as of the Issue Date, the
Exchangeable Preferred Stock redemption pursuant to the Optional Redemption is
more likely than not to occur. Even if redemption were more likely than not to
occur, however, constructive distribution treatment would not result if the
redemption premium were solely in the nature of a penalty for premature
redemption. For this purpose, a penalty for premature redemption is a premium
paid as a result of changes in economic or market conditions over which neither
the issuer nor the holder has legal or practical control, such as changes in
prevailing dividend rates. The United States Treasury Regulations provide a safe
harbor pursuant to which constructive distribution treatment will not result
from an issuer call right if (i) the issuer and the holder are unrelated, (ii)
there are no arrangements that effectively require the issuer to redeem the
stock and (iii) exercise of the option to redeem would not reduce the yield of
the stock. Although the issue is not free from doubt, the Company believes that
the Exchangeable Preferred Stock should not be considered to have been issued
with Preferred Stock Discount by reason of the Optional Redemption feature.
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Any Dividend Shares distributed by the Company in lieu of cash dividend
payments on the Exchangeable Preferred Stock to United States Holders of the
Exchangeable Preferred Stock may bear Preferred Stock Discount depending upon
the issue price of such shares (i.e., the fair market value of the Dividend
Shares on the date of their issuance). A United States Holder's initial tax
basis in Dividend Shares will equal the fair market value of such Dividend
Shares on their date of distribution. Depending on the fair market value of the
Exchangeable Preferred Stock on that date, United States Holders may be required
to include additional Preferred Stock Discount in income based on the difference
between (x) the fair market value of such shares on the date of their issuance
and (y) the amount payable on redemption of such shares, unless the difference
is DE MINIMIS, as described above. If shares of Exchangeable Preferred Stock
(including Dividend Shares) bear Preferred Stock Discount, such shares generally
will have different tax characteristics from other shares of Exchangeable
Preferred Stock (including other Dividend Shares) and might trade separately,
which might adversely affect the liquidity of such shares.
REDEMPTION AND EXCHANGE OF EXCHANGEABLE PREFERRED STOCK
A redemption of shares of Exchangeable Preferred Stock for cash or in
exchange for Exchange Debentures would be a taxable event.
A redemption of shares of Exchangeable Preferred Stock for cash will
generally be treated as a sale or exchange if the United States Holder does not
own, actually or constructively within the meaning of section 318 of the Code,
any stock of the Company other than the Exchangeable Preferred Stock. Under
section 318 of the Code, a person generally will be treated as the owner of
stock of the Company owned by certain related parties or certain entities in
which the person owns an interest. If a United States Holder does own, actually
or constructively, other stock of the Company, a redemption of Exchangeable
Preferred Stock may be treated as a dividend to the extent of the Company's
current and accumulated earnings and profits. Dividend treatment would not
apply, however, if the redemption is "not essentially equivalent to a dividend"
with respect to the United States Holder under section 302(b)(1) of the Code. A
distribution to a United States Holder will be "not essentially equivalent to a
dividend" if it results in a "meaningful reduction" in the United States
Holder's stock interest in the Company. For this purpose, a redemption of
Exchangeable Preferred Stock that results in a reduction in the proportionate
interest in the Company (taking into account any actual ownership of Common
Stock of the Company and any stock constructively owned) of a United States
Holder whose relative stock interest in the Company is minimal should be
regarded as a meaningful reduction in the United States Holder's stock interest
in the Company.
If a redemption of the Exchangeable Preferred Stock for cash is not treated
as a distribution taxable as a dividend, the redemption would result in capital
gain or loss equal to the difference between the amount of cash received and the
United States Holder's adjusted tax basis in the Exchangeable Preferred Stock
redeemed, except to the extent that the redemption price includes dividends
which have been declared by the Board of Directors of the Company prior to the
redemption. Similarly, upon the sale of the Exchangeable Preferred Stock (other
than in a redemption or in exchange for the Exchange Debentures), the difference
between the sum of the amount of cash and the fair market value of other
property received and the United States Holder's adjusted basis in the
Exchangeable Preferred Stock would result in capital gain or loss. This gain or
loss would be long-term capital gain or loss if the United States Holder's
holding period for the Exchangeable Preferred Stock exceeds one year. Under
current law, net capital gains recognized by corporations are currently taxed at
a maximum rate of 35% and the maximum rate on net capital gains in the case of
individuals is currently 20% for property held for more than 18 months (28% if
held more than 12 months but not more than 18 months). A redemption of
Exchangeable Preferred Stock in exchange for Exchange Debentures will be subject
to the same general rules as a redemption for cash, except that any gain or loss
generally will be determined based upon the issue price of the Exchange
Debentures (as determined for purposes of computing the original issue discount
on such Exchange Debentures). See the discussion below under "Issue Price of
Exchange Debentures."
If a redemption of the Exchangeable Preferred Stock is treated as a
distribution that is taxable as a dividend, the amount of the distribution will
be measured by the amount of cash or the issue price of the Exchange Debentures,
as the case may be, received by the United States Holder. It is possible,
however, that the fair market value of the Exchange Debentures (if different
from their issue price) may constitute the amount of the distribution. The
United States Holder's adjusted tax basis in the redeemed Exchangeable Preferred
Stock will be transferred to
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any remaining stock holdings in the Company, subject to reduction or possible
gain recognition under section 1059 of the Code in respect of the non-taxed
portion of such dividend. If the United States Holder does not retain any actual
stock ownership in the Company (i.e., such United States Holder is treated as
having received a dividend because such United States Holder constructively owns
stock in the Company, but such United States Holder does not actually own any
Company Stock), such United States Holder may lose the benefit of its basis in
the Exchangeable Preferred Stock. However, such basis may be transferred to the
person or entity whose ownership of stock is attributed to the United States
Holder.
EXCHANGE DEBENTURES
ISSUE PRICE OF EXCHANGE DEBENTURES
If the Exchange Debentures are traded on an established securities market
within the 60-day period ending thirty days after the Exchange Date, the issue
price of the Exchange Debentures will be their fair market value as of their
issue date. Subject to certain limitations described in the United States
Treasury regulations, the Exchange Debentures will be deemed to be traded on an
established securities market if, at a minimum, price quotations will be readily
available from dealers, brokers or traders. If the Exchangeable Preferred Stock,
but not the Exchange Debentures issued in exchange therefor, is traded on an
established securities market within the 60-day period ending thirty days after
the Exchange Date, then the issue price of each Exchange Debenture should be the
fair market value of the Exchangeable Preferred Stock exchanged therefor at the
time of the exchange. The Exchangeable Preferred Stock generally will be deemed
to be traded on an established securities market if, at a minimum, it appears on
a system of general circulation that provides a reasonable basis to determine
fair market value based either on recent price quotations or recent sales
transactions. In the event that neither the Exchangeable Preferred Stock nor the
Exchange Debentures are traded on an established securities market within the
applicable period, the issue price of the Exchange Debentures will be their
stated principal amount (i.e., their face value) unless either (i) the Exchange
Debentures do not bear "adequate stated interest" within the meaning of section
1274 of the Code, or (ii) the Exchange Debentures are issued in a so-called
"potentially abusive situation" as defined in the United States Treasury
Regulations under section 1274 of the Code (including a situation involving a
recent sales transaction), in which case the issue price of such Exchange
Debentures generally will be the fair market value of the Exchangeable Preferred
Stock surrendered in exchange therefor. It cannot be determined at the present
time whether the Exchangeable Preferred Stock or the Exchange Debentures will,
at the relevant time, be traded on an established securities market within the
meaning of the United States Treasury regulations or whether the Exchange
Debentures will bear "adequate stated interest."
INTEREST ON THE EXCHANGE DEBENTURES
Except as set forth below, interest on the Exchange Debentures will be
taxable to a United States Holder as ordinary interest income at the time such
amounts are accrued or received, in accordance with the United States Holder's
method of accounting for United States federal income tax purposes.
ORIGINAL ISSUE DISCOUNT. The Exchange Debentures may be issued with
original issue discount ("OID") equal to the excess of their "stated redemption
price at maturity" over their "issue price" if such excess is greater than a DE
MINIMIS amount. United States Holders of Exchange Debentures will be subject to
special tax accounting rules, as described in greater detail below. United
States Holders of Exchange Debentures should be aware that they generally must
include OID in gross income for United States federal income tax purposes on an
annual basis under a constant yield accrual method. As a result, such United
States Holders will include OID in income in advance of the receipt of cash
attributable to that income. However, United States Holders of Exchange
Debentures generally will not be required to include separately in income cash
payments received on such Exchange Debentures, even if denominated as interest,
to the extent such payments do not constitute qualified stated interest (as
defined below). The Company will report to United States Holders of Exchange
Debentures on a timely basis the reportable amount of OID and interest income
based on its understanding of applicable law.
The "stated redemption price at maturity" of a debt instrument is the sum of
its principal amount plus all other payments required thereunder, other than
payments of "qualified stated interest." For this purpose, "qualified stated
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interest" means stated interest that is unconditionally payable in cash or in
property (other than the debt instruments of the issuer), at least annually at a
single fixed rate, during the entire term of the debt instrument that
appropriately takes into account the length of the intervals between payments.
If the Exchange Debentures are issued at a time when the Company has the right
to make interest payments with additional Exchange Debentures in lieu of cash,
none of the stated interest on such Exchange Debentures will be treated as
qualified stated interest. The "issue price" of an Exchange Debenture will be
determined as described above under "-- Issue Price of Exchange Debentures."
The amount of OID includible in income by the initial United States Holder
of an Exchange Debenture is the sum of the "daily portions" of OID with respect
to the Exchange Debenture for each day during the taxable year or portion of the
taxable year in which such United States Holder held such Exchange Debenture
("accrued OID"). The daily portion is determined by allocating to each day in
any "accrual period" a pro rata portion of the OID allocable to that accrual
period. The "accrual period" for an Exchange Debenture may be of any length and
may vary in length over the term of the Exchange Debenture, PROVIDED that each
accrual period is no longer than one year and each scheduled payment of
principal or interest occurs on the first day or the final day of an accrual
period. The amount of OID allocable to any accrual period is an amount equal to
the excess, if any, of (a) the product of the Exchange Debenture "adjusted issue
price" at the beginning of such accrual period and its yield to maturity
(determined on the basis of compounding at the closing of each accrual period
and properly adjusted for the length of the accrual period) over (b) the sum of
any qualified stated interest allocable to the accrual period. OID allocable to
a final accrual period is the difference between the amount payable at maturity
(other than a payment of qualified stated interest) and the adjusted issue price
at the beginning of the final accrual period. Special rules will apply for
calculating OID for an initial short accrual period. The "adjusted issue price"
of an Exchange Debenture at the beginning of any accrual period is equal to its
issue price increased by the accrued OID for each prior accrual period
(determined without regard to the amortization of any amortizable bond premium,
as described below) and reduced by any payments made on such Exchange Debenture
(other than qualified stated interest) on or before the first day of the accrual
period. Under these rules, a United States Holder will have to include in income
increasingly greater amounts of OID in successive accrual periods.
PROSPECTIVE INVESTORS ARE URGED TO CONSULT THEIR OWN TAX ADVISERS AS TO THE
TAX CONSEQUENCES OF OWNING EXCHANGE DEBENTURES.
ELECTION
A United States Holder of Exchange Debentures, subject to certain
limitations, may elect to include all interest and discount on the Exchange
Debentures in gross income under the constant yield method. For this purpose,
interest includes stated and unstated interest, and OID and DE MINIMIS OID, as
adjusted by any amortizable bond premium.
AMORTIZABLE BOND PREMIUM
If the Exchangeable Preferred Stock is exchanged for Exchange Debentures at
a time when the "issue price" of the Exchange Debentures exceeds the amount
payable at maturity of the Exchange Debentures, such excess will constitute
amortizable bond premium that the United States Holder may elect to amortize
under the constant yield method over the term of the Exchange Debentures. A
United States Holder who elects to amortize bond premium must reduce its tax
basis in the Exchange Debentures by the amount of the aggregate amortization
allowable for amortizable bond premium. Amortizable bond premium will be treated
under the Code as an offset to interest income on the related debt instrument
for federal income tax purposes.
SALE OR OTHER DISPOSITION OF EXCHANGE DEBENTURES
Generally, any sale, exchange, redemption (including pursuant to an offer by
the Company) or other disposition of Exchange Debentures by a United States
Holder would result in taxable gain or loss equal to the difference between the
sum of the amount of cash and the fair market value of other property received
(except to the extent that cash received is attributable to accrued but
previously untaxed interest, which portion of the consideration
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would be taxed as ordinary income) and the United States Holder's adjusted tax
basis in the Exchange Debentures. The adjusted tax basis of a United States
Holder who receives an Exchange Debenture in exchange for Exchangeable Preferred
Stock will generally be equal to the issue price of the Exchange Debenture,
increased by any OID previously included in the United States Holder's income
and reduced by any amortizable bond premium, if any, deducted over the term of
the Exchange Debentures and by payments on the Exchange Debentures. Any such
gain or loss generally would be long-term capital gain or loss if the United
States Holder's holding period for the Exchange Debentures exceeds one year.
Under current law, net capital gains recognizable by corporations are currently
taxed at a maximum rate of 35% and the maximum rate on net capital gains in the
case of individuals is currently 20% for property held for more than 18 months
(28% if held for more than 12 months but not more than 18 months). At the time
of sale, exchange, disposition, retirement or redemption, a United States Holder
of the Exchange Debenture must also include in income any previously accrued but
unrecognized OID.
APPLICABLE HIGH YIELD DISCOUNT OBLIGATIONS
It is possible that the Exchange Debentures will be treated as "applicable
high yield discount obligations" ("AHYDOs") for United States federal income tax
purposes. The Exchange Debentures will constitute AHYDOs if they (i) have a term
of more than five years, (ii) have a yield to maturity equal to or greater than
the sum of the applicable federal rate ( "AFR") at the time of issuance of the
Exchange Debentures plus 500 basis points and (iii) have significant OID. The
AFR is an interest rate, announced monthly by the IRS, that is based on the
yield of debt obligations issued by the United States Treasury. A debt
instrument is treated as having "significant OID" if the aggregate amount that
would be includable in gross income with respect to such debt instrument for
periods before the close of any accrual period ending after the date five years
after the date of issue exceeds the sum of (i) the aggregate amount of interest
to be paid in cash under the debt instrument before the close of such accrual
period and (ii) the product of the initial issue price of such debt instrument
and its yield to maturity. For purposes of determining whether an Exchange
Debenture is an AHYDO, United States Holders are bound by the Company's
determination of the appropriate accrual period. Because the amount of OID, if
any, attributable to the Exchange Debentures will be determined at the time such
Exchange Debentures are issued and the AFR at that time is not predictable, it
is currently impossible to determine whether the Exchange Debentures will be
treated as AHYDOS.
If the Exchange Debentures are treated as AHYDOS, (i) a portion of the OID
that accrues on the Exchange Debentures may be treated as a dividend generally
eligible for the dividends received deduction in the case of corporate United
States Holders, (ii) the Company would not be entitled to deduct the
"disqualified portion" of the OID that accrues on the Exchange Debentures and
(iii) the Company would be allowed to deduct the remainder of the OID only when
it pays amounts attributable to such OID in cash. The "disqualified portion" of
the OID is equal to the lesser of (x) the amount of OID or (y) the portion of
the "total return" (i.e., the excess of all payments to be made with respect to
an Exchange Debenture over its issue price) with respect to the Exchange
Debentures in excess of the AFR plus 600 basis points per annum.
BACKUP WITHHOLDING AND INFORMATION REPORTING
A United States Holder may be subject to backup withholding at the rate of
31% with respect to distributions (actual or constructive) on the Exchangeable
Preferred Stock, interest (including OID) on the Exchange Debentures or sales
proceeds of any of the foregoing, unless such United States Holder (i) is a
corporation or comes within certain other exempt categories and, when required,
demonstrates its exempt status or (ii) provides a correct taxpayer
identification number, certifies as to no loss of exemption from backup
withholding and otherwise complies with applicable requirements of the backup
withholding rules. A United States Holder who does not provide the Company with
the United States Holder's correct taxpayer identification number may be subject
to penalties imposed by the IRS. Any amount paid as backup withholding would be
creditable against the United States Holder's federal income tax liability.
The Company will furnish annually to the IRS and to record United States
Holders of the Exchangeable Preferred Stock (other than with respect to certain
exempt holders) information relating to dividends paid during the calendar year.
In the case of Exchangeable Preferred Stock or Dividend Shares subject to
section 305 of the
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Code, such information may be based upon dividends accruing to the record United
States Holder of such Exchangeable Preferred Stock or Dividend Shares at the
time of issuance.
The Company will furnish annually to the IRS and to record United States
Holders of the Exchange Debentures (other than with respect to certain exempt
holders) information relating to the stated interest and the OID, if any,
accruing during the calendar year. Such information will be based on the amount
of OID that would have accrued to a United States Holder who acquired the
Exchange Debenture in exchange for its Exchangeable Preferred Stock.
Accordingly, other United States Holders will be required to determine for
themselves whether they are eligible to report a reduced amount of OID for
federal income tax purposes.
THE FOREGOING SUMMARY DOES NOT DISCUSS ALL ASPECTS OF FEDERAL INCOME
TAXATION THAT MAY BE RELEVANT TO A PARTICULAR HOLDER OF SENIOR SUBORDINATED
NOTES, EXCHANGEABLE PREFERRED STOCK OR EXCHANGE DEBENTURES IN LIGHT OF SUCH
HOLDER'S PARTICULAR CIRCUMSTANCES AND INCOME TAX SITUATION. EACH HOLDER OF
SENIOR SUBORDINATED NOTES, EXCHANGEABLE PREFERRED STOCK OR EXCHANGE DEBENTURES
SHOULD CONSULT SUCH HOLDER'S TAX ADVISER AS TO THE SPECIFIC TAX CONSEQUENCES TO
SUCH HOLDER OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE SENIOR
SUBORDINATED NOTES, EXCHANGEABLE PREFERRED STOCK OR EXCHANGE DEBENTURES,
INCLUDING THE APPLICATION AND EFFECT OF STATE, LOCAL, FOREIGN AND OTHER TAX
LAWS, OR SUBSEQUENT REVISIONS THEREOF.
PLAN OF DISTRIBUTION
Each broker-dealer that receives New Notes or shares of New Exchangeable
Preferred Stock for its own account pursuant to the Exchange Offer must
acknowledge that it will deliver a prospectus in connection with any resale of
such New Notes or shares of Exchangeable Preferred Stock. This Prospectus, as it
may be amended or supplemented from time to time, may be used by a broker-dealer
in connection with the resale of New Notes or shares of New Exchangeable
Preferred Stock received in exchange for Old Notes or shares of Old Exchangeable
Preferred Stock where such Old Notes or shares of Old Exchangeable Preferred
Stock were acquired as a result of market-making activities or other trading
activities. The Company has agreed that, starting on the Expiration Date and
ending on the close of business 90 days after the Expiration Date, it will make
this Prospectus, as amended or supplemented, available to any broker-dealer for
use in connection with any such resale. In addition, until October 22, 1998, all
dealers effecting transactions in the New Notes or shares of New Exchangeable
Preferred Stock may be required to deliver a prospectus.
The Company will not receive any proceeds from any sale of New Notes or
shares of New Exchangeable Preferred Stock by broker-dealers. New Notes and
shares of New Exchangeable Preferred Stock received by broker-dealers for their
own account pursuant to the Exchange Offer may be sold from time to time in one
or more transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the New Notes or New Exchangeable Preferred
Stock or a combination of such methods of resale, at market prices prevailing at
the time of resale, at prices related to such prevailing market prices or
negotiated prices. Any such resale may be made directly to purchasers or to or
through brokers or dealers who may receive compensation in the form of
commissions or concessions from any such broker-dealer or the purchasers of any
such New Notes or shares of New Exchangeable Preferred Stock. Any broker-dealer
that resells New Notes or shares of New Exchangeable Preferred Stock that were
received by it for its own account pursuant to the Exchange Offer and any broker
or dealer that participates in a distribution of such New Notes or shares of New
Exchangeable Preferred Stock may be deemed to be an "underwriter" within the
meaning of the Securities Act and any profit from any such resale of New Notes
or shares of New Exchangeable Preferred Stock and any commissions or concessions
received by any such persons may be deemed to be underwriting compensation under
the Securities Act. The Letters of Transmittal state that, by acknowledging that
it will deliver and by delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the Securities
Act.
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For a period of 90 days after the Expiration Date, the Company will promptly
send additional copies of this Prospectus and any amendment or supplement to
this Prospectus to any broker-dealer that requests such documents in a Letter of
Transmittal. The Company has agreed to pay all expenses incident to the Exchange
Offer (including the reasonable fees and expenses, if any, of one counsel for
the Initial Purchasers of the Old Notes and the Old Exchangeable Preferred
Stock) other than commissions or concessions of any brokers or dealers and will
indemnify the holders of the Senior Subordinated Notes and the Exchangeable
Preferred Stock (including any broker-dealers) against certain liabilities,
including liabilities under the Securities Act.
LEGAL MATTERS
Certain legal matters in connection with the Securities offered hereby are
being passed upon for the Company by Moss & Barnett, A Professional Association,
Minneapolis, Minnesota, counsel to the Company.
EXPERTS
The audited consolidated financial statements of the Company as of December
31, 1996 and 1997 and for each of the three years in the period ended December
31, 1997, included in this Prospectus and elsewhere in the Registration
Statement, have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their report with respect thereto, and are included
herein in reliance upon the authority of said firm as experts in giving said
report.
The audited consolidated financial statements of Atlantic Cellular Company,
L.P. and Subsidiaries as of December 31, 1996 and 1997 and for each of the years
in the three-year period ended December 31, 1997 included in this Prospectus and
elsewhere in the Registration Statement have been audited by KPMG Peat Marwick
LLP, independent certified public accountants, as indicated in their report with
respect thereto, and are included herein in reliance upon the authority of said
firm as experts in accounting and auditing. Such financial statements have been
included in reliance upon the report of KPMG Peat Marwick LLP, which included an
explanatory paragraph stating that the Partnership entered into two separate
purchase and sale agreements in February 1998 which will result in the sale of
substantially all of the Partnership's assets.
The audited consolidated financial statements of Unity Cellular System, Inc.
and Subsidiaries as of and for the years ended December 31, 1995 and 1996
included in this Prospectus and elsewhere in the Registration Statement have
been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their report with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in giving said report.
ADDITIONAL INFORMATION
The Company has filed with the Commission, Washington, D.C. 20549, a
Registration Statement on Form S-4 (including all amendments thereto, the
"Registration Statement") under the Securities Act, with respect to the New
Notes and New Exchangeable Preferred Stock offered in connection with the
Exchange Offer. As permitted by the rules and regulations of the Commission,
this Prospectus omits certain information contained in the Registration
Statement. For further information with respect to the Company and the New Notes
and New Exchangeable Preferred Stock offered in connection with the Exchange
Offer, reference is made to the Registration Statement and the exhibits and
schedules filed therewith. Statements contained in this Prospectus concerning
the contents of any contract or any other document referred to are not
necessarily complete; reference is made in each instance to the copy of such
contract or document filed as an exhibit to the Registration Statement. Each
such statement is qualified in all respects by such reference to such exhibits.
The Registration Statement, including exhibits and schedules thereto, may be
inspected without charge at the Commission's principal office in Washington,
D.C., and copies of all or any part thereof may be obtained from such office
after payment of fees prescribed by the Commission. The Commission also
maintains a Web site that contains reports, proxy statements and other
information regarding registrants, including the Company, that file such
information electronically with the Commission. The address of the Commission's
website is HTTP://WWW.SEC.GOV.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
RURAL CELLULAR CORPORATION AND SUBSIDIARIES
Report of Independent Public Accountants................................................................... F-2
Consolidated Balance Sheets as of December 31, 1996 and 1997 and March 31, 1998 (unaudited)................ F-3
Consolidated Statements of Operations for the years ended December 31, 1995, 1996 and 1997 and the three
months ended March 31, 1997 and 1998 (unaudited)......................................................... F-4
Consolidated Statements of Shareholders' Equity for the years ended December 31, 1995, 1996 and 1997 and
the three months ended March 31, 1998 (unaudited)........................................................ F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1996 and 1997 and the three
months ended March 31, 1997 and 1998 (unaudited)......................................................... F-6
Notes to Consolidated Financial Statements................................................................. F-7
Schedule II -- Valuation and Qualifying Accounts........................................................... F-20
ATLANTIC CELLULAR COMPANY, L.P. AND SUBSIDIARIES
Independent Auditors' Report............................................................................... F-21
Consolidated Balance Sheets as of December 31, 1996 and 1997 and March 31, 1998 (unaudited)................ F-22
Consolidated Statements of Operations for the years ended December 31, 1995, 1996 and 1997 and the three
months ended March 31, 1997 and 1998 (unaudited)......................................................... F-23
Consolidated Statements of Partners' Capital for the years ended December 31, 1995, 1996 and 1997 and the
three months ended March 31, 1998 (unaudited)............................................................ F-24
Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1996 and 1997 and the three
months ended March 31, 1997 and 1998 (unaudited)......................................................... F-25
Notes to Consolidated Financial Statements................................................................. F-26
UNITY CELLULAR SYSTEM, INC., AND SUBSIDIARY
Report of Independent Public Accountants................................................................... F-34
Consolidated Balance Sheets as of December 31, 1995 and 1996............................................... F-35
Consolidated Statements of Operations for the years ended December 31, 1995 and 1996....................... F-36
Consolidated Statements of Changes in Stockholder's Equity for the years ended December 31, 1995 and
1996..................................................................................................... F-37
Consolidated Statements of Cash Flows for the years ended December 31, 1995 and 1996....................... F-38
Notes to Consolidated Financial Statements................................................................. F-39
</TABLE>
F-1
<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, 1996 and 1997, 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 and the schedule referred to
below are the responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Rural Cellular Corporation
and subsidiaries as of December 31, 1996 and 1997, 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.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index of
financial statements is presented for purposes of complying with the Securities
and Exchange Commission rules and is not part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in the audit
of the basic 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 financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
February 6, 1998 (except
for Note 12, as for which
the date is July 1, 1998)
F-2
<PAGE>
RURAL CELLULAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------- MARCH 31,
1996 1997 1998
------------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash............................................................. $ 237,499 $ 1,994,628 $ 3,304,614
Accounts receivable, less allowance of $308,000, $1,146,000 and
$1,210,000..................................................... 6,240,137 9,621,032 8,504,416
Inventories...................................................... 1,309,862 1,774,222 1,503,733
Other current assets............................................. 341,964 765,939 617,009
------------- -------------- --------------
Total current assets........................................... 8,129,462 14,155,821 13,929,772
------------- -------------- --------------
PROPERTY AND EQUIPMENT, less accumulated depreciation of
$13,496,000, $23,874,000 and $27,441,000......................... 41,935,497 77,920,283 83,236,504
INVESTMENTS AND OTHER ASSETS:
Licenses and other intangible assets, less accumulated
amortization of $18,000, $1,490,000 and $2,041,000............. 6,710,419 81,348,237 80,797,233
Investments in unconsolidated affiliates......................... 1,442,569 1,094,531 937,741
Restricted investments........................................... 884,844 910,063 1,013,430
Other assets, less accumulated amortization of $35,000, $178,000
and $234,000................................................... 1,404,068 6,159,133 6,495,005
------------- -------------- --------------
Total investments and other assets............................. 10,441,900 89,511,964 89,243,409
------------- -------------- --------------
$ 60,506,859 $ 181,588,068 $ 186,409,685
------------- -------------- --------------
------------- -------------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt............................. $ 8,447,920 $ -- $ --
Accounts payable................................................. 8,913,734 7,959,778 8,082,118
Advance billings and customer deposits........................... 1,399,965 2,541,015 2,589,276
Accrued interest................................................. 88,892 1,595,212 1,701,893
Other accrued expenses........................................... 493,527 1,546,347 1,701,013
------------- -------------- --------------
Total current liabilities...................................... 19,344,038 13,642,352 14,074,300
LONG-TERM DEBT..................................................... 43,886 128,000,000 135,000,000
------------- -------------- --------------
Total liabilities.............................................. 19,387,924 141,642,352 149,074,300
------------- -------------- --------------
MINORITY INTEREST.................................................. 6,122,583 6,215,480 5,477,636
------------- -------------- --------------
COMMITMENTS AND CONTINGENCIES (Note 7)
SHAREHOLDERS' EQUITY:
Class A common stock, $.01 par value, 15,000,000 shares
authorized; 7,502,552, 7,592,628 and 7,612,504 shares issued
and outstanding................................................ 75,025 75,926 76,125
Class B common stock, $.01 par value, 5,000,000 shares
authorized; 1,350,744, 1,260,668 and 1,260,668 shares issued
and outstanding................................................ 13,508 12,607 12,607
Additional paid-in capital....................................... 34,445,849 34,445,849 34,639,014
Retained earnings (accumulated deficit).......................... 461,970 (804,146) (2,869,997)
------------- -------------- --------------
Total shareholders' equity..................................... 34,996,352 33,730,236 31,857,749
------------- -------------- --------------
$ 60,506,859 $ 181,588,068 $ 186,409,685
------------- -------------- --------------
------------- -------------- --------------
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
<PAGE>
RURAL CELLULAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31 MARCH 31
---------------------------------- ---------------------
1995 1996 1997 1997 1998
---------- ---------- ---------- --------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Service............................ $14,289,434 $23,119,691 $43,407,782 $6,908,242 $12,718,825
Roamer............................. 4,561,760 6,413,524 9,474,907 1,317,481 1,757,978
Equipment.......................... 1,475,716 927,128 1,020,014 96,714 320,373
---------- ---------- ---------- --------- ----------
Total revenues................... 20,326,910 30,460,343 53,902,703 8,322,437 14,797,176
---------- ---------- ---------- --------- ----------
OPERATING EXPENSES:
Network costs...................... 4,973,598 6,731,130 11,577,886 2,000,215 3,627,733
Cost of equipment sales............ 1,913,664 1,374,980 2,807,206 287,376 884,042
Selling, general and
administrative................... 7,699,964 13,575,347 25,224,683 4,426,573 6,589,884
Depreciation and amortization...... 3,249,313 5,539,067 12,458,286 1,962,781 4,219,140
---------- ---------- ---------- --------- ----------
Total operating expenses......... 17,836,539 27,220,524 52,068,061 8,676,945 15,320,799
---------- ---------- ---------- --------- ----------
OPERATING INCOME (LOSS).............. 2,490,371 3,239,819 1,834,642 (354,508) (523,623)
---------- ---------- ---------- --------- ----------
OTHER INCOME (EXPENSE):
Interest expense................... (1,365,852) (280,146) (6,064,468) (215,209) (2,410,159)
Interest and dividend income....... 277,352 334,850 231,809 62,347 278,538
Equity in earnings (losses) of
unconsolidated affiliates........ (37,021) 51,519 (350,539) 18,809 (148,451)
Minority interest.................. -- 330,892 3,082,440 448,554 737,844
---------- ---------- ---------- --------- ----------
Other income (expense), net...... (1,125,521) 437,115 (3,100,758) 314,501 (1,542,228)
---------- ---------- ---------- --------- ----------
INCOME (LOSS) BEFORE INCOME TAX...... 1,364,850 3,676,934 (1,266,116) (40,007) (2,065,851)
INCOME TAX PROVISION................. 575,003 200,000 -- -- --
---------- ---------- ---------- --------- ----------
NET INCOME (LOSS).................... $ 789,847 $3,476,934 $(1,266,116) $ (40,007) $(2,065,851)
---------- ---------- ---------- --------- ----------
---------- ---------- ---------- --------- ----------
BASIC AND DILUTED NET INCOME (LOSS)
PER SHARE.......................... $ 0.13 $ 0.41 $ (0.14) $ (0.00) $ (0.23)
---------- ---------- ---------- --------- ----------
---------- ---------- ---------- --------- ----------
BASIC AND DILUTED WEIGHTED AVERAGE
SHARES OUTSTANDING................. 5,983,420 8,508,908 8,853,296 8,853,296 8,868,313
---------- ---------- ---------- --------- ----------
---------- ---------- ---------- --------- ----------
</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 THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
CLASS A CLASS B RETAINED
COMMON STOCK COMMON STOCK ADDITIONAL EARNINGS TOTAL
-------------------- -------------------- PAID-IN (ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT) EQUITY
--------- --------- --------- --------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1994................. 4,302,671 $ 43,027 1,680,762 $ 16,808 $ 8,412,634 $(3,804,811) $4,667,658
Net income............................... -- -- -- -- -- 789,847 789,847
--------- --------- --------- --------- ------------ ------------- ------------
BALANCE, December 31, 1995................. 4,302,671 43,027 1,680,762 16,808 8,412,634 (3,014,964) 5,457,505
Issuance of common stock, net of offering
expenses............................... 2,869,863 28,698 -- -- 26,033,215 -- 26,061,913
Conversion of Class B common stock to
Class A common stock................... 330,018 3,300 (330,018) (3,300) -- -- --
Net income............................... -- -- -- -- -- 3,476,934 3,476,934
--------- --------- --------- --------- ------------ ------------- ------------
BALANCE, December 31, 1996................. 7,502,552 75,025 1,350,744 13,508 34,445,849 461,970 34,996,352
Conversion of Class B common stock to
Class A common stock................... 90,076 901 (90,076) (901) -- -- --
Net loss................................. -- -- -- -- -- (1,266,116) (1,266,116)
--------- --------- --------- --------- ------------ ------------- ------------
BALANCE, December 31, 1997................. 7,592,628 75,926 1,260,668 12,607 34,445,849 (804,146) 33,730,236
Common stock options exercised and
employee stock purchase plan
purchases (unaudited).................. 19,876 199 -- -- 193,165 -- 193,364
Net loss (unaudited)..................... -- -- -- -- -- (2,065,851) (2,065,851)
--------- --------- --------- --------- ------------ ------------- ------------
BALANCE, March 31, 1998 (unaudited)........ 7,612,504 $ 76,125 1,260,668 $ 12,607 $ 34,639,014 $(2,869,997) $31,857,749
--------- --------- --------- --------- ------------ ------------- ------------
--------- --------- --------- --------- ------------ ------------- ------------
</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>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31 MARCH 31
------------------------------------- ----------------------
1995 1996 1997 1997 1998
---------- ----------- ------------ ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss).................. $ 789,847 $ 3,476,934 $ (1,266,116) $ (40,007) $(2,065,851)
Adjustments to reconcile to net
cash provided by operating
activities --
Depreciation and amortization.... 3,249,313 5,539,067 12,458,286 1,962,781 4,219,140
Deferred income taxes............ 500,000 -- -- -- --
Equity in earnings (losses) of
unconsolidated affiliates...... 37,021 (51,519) 350,539 (18,809) 156,790
Change in minority interest...... -- (330,892) (3,082,440) (448,554) (737,844)
Other............................ (186,332) (184,036) (41,662) (28,177) (105,075)
Change in other operating
elements:
Accounts receivable............ (640,326) (3,220,417) (1,008,231) 299,237 1,116,616
Inventories.................... 294,973 (681,846) (27,448) 405,843 270,488
Other current assets........... (7,283) (246,271) (262,193) 186,427 148,931
Accounts payable............... 3,059,394 4,871,828 (2,524,360) (5,303,173) 122,340
Advance billings and customer
deposits..................... 145,204 435,502 796,791 -- --
Other accrued expenses......... (300,600) 30,517 2,649,214 331,129 309,608
---------- ----------- ------------ ---------- ----------
Net cash provided by (used
in) operating activities... 6,941,211 9,638,867 8,042,380 (2,653,303) 3,435,143
---------- ----------- ------------ ---------- ----------
INVESTING ACTIVITIES:
Purchases of property and
equipment, net................... (9,312,820) (24,213,803) (34,927,880) (3,607,271) (8,969,735)
Contributions to unconsolidated
affiliates....................... (368,964) (225,156) (2,500) -- --
Purchases of restricted
investments...................... (101,178) -- -- -- --
Purchases of Unity and Northern
Maine............................ -- -- (85,705,736) -- --
Payments made for other assets..... -- -- (4,064,126) -- --
Other, net......................... (121,777) (996,713) 80,845 (477,892) (298,786)
---------- ----------- ------------ ---------- ----------
Net cash used in investing
activities................. (9,904,739) (25,435,672) (124,619,397) (4,085,163) (9,268,521)
---------- ----------- ------------ ---------- ----------
FINANCING ACTIVITIES:
Proceeds from issuance of common
stock, net of offering
expenses......................... (478,153) 26,540,066 -- -- 193,364
Proceeds from issuance of long-term
debt............................. 4,251,648 14,740,927 137,695,000 7,100,000 7,000,000
Repayments of long-term debt....... (920,952) (25,371,826) (18,161,371) (523,882) --
Payments of debt issuance costs.... -- -- (1,199,483) -- (50,000)
---------- ----------- ------------ ---------- ----------
Net cash provided by
financing activities....... 2,852,543 15,909,167 118,334,146 6,576,118 7,143,364
---------- ----------- ------------ ---------- ----------
NET INCREASE (DECREASE) IN CASH...... (110,985) 112,362 1,757,129 (162,348) 1,309,986
CASH, at beginning of period......... 236,122 125,137 237,499 237,499 1,994,628
---------- ----------- ------------ ---------- ----------
CASH, at end of period............... $ 125,137 $ 237,499 $ 1,994,628 $ 75,151 $3,304,614
---------- ----------- ------------ ---------- ----------
---------- ----------- ------------ ---------- ----------
</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, 1996 AND 1997
(INCLUDING DATA APPLICABLE TO THE UNAUDITED PERIODS)
1. ORGANIZATION AND NATURE OF BUSINESS:
Rural Cellular Corporation and its subsidiaries ("the 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 ("the
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 an agreement with 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 SYSTEM, INC.
Effective May 1, 1997, the Company completed the acquisition of the Maine
wireless telephone operations and related assets of Unity Cellular System, Inc.
("Unity") and related cellular and microwave licenses from InterCel Licenses,
Inc., both wholly owned subsidiaries of InterCel, Inc. In addition, the Company
acquired Unity'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 in cash. The acquisitions were funded with the proceeds
of borrowings under a revolving credit facility with a group of banks headed by
TD Securities (USA), Inc., formerly known as Toronto-Dominion Bank. The
acquisitions have been accounted for under the purchase method of accounting.
See Note 3 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 would have 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>
THREE MONTHS
YEARS ENDED DECEMBER 31 ENDED
---------------------------- MARCH 31,
1996 1997 1997
------------- ------------- -------------
<S> <C> <C> <C>
Total revenues...................................................... $ 46,544,493 $ 58,720,638 $ 11,819,278
Operating income (loss)............................................. 4,061,485 1,767,256 (405,711)
Loss before cumulative effect of accounting change, net of tax...... (3,096,254) (3,860,945) (1,844,751)
Net loss............................................................ (4,349,435) (3,860,945) (1,844,751)
Basic net loss per share............................................ (.51) (.44) (.21)
</TABLE>
F-7
<PAGE>
RURAL CELLULAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997
(INCLUDING DATA APPLICABLE TO THE UNAUDITED PERIODS)
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 Licenses, Inc., 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, 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.
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
F-8
<PAGE>
RURAL CELLULAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997
(INCLUDING DATA APPLICABLE TO THE UNAUDITED PERIODS)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
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:
<TABLE>
<CAPTION>
DECEMBER 31
------------------------------ MARCH 31,
1996 1997 1998 USEFUL LIVES
-------------- -------------- -------------- ------------
<S> <C> <C> <C> <C>
Property and equipment:
Land............................................ $ 1,233,007 $ 1,965,323 $ 2,041,745 N/A
Building and towers............................. 13,680,928 23,835,317 25,310,854 15-39 Years
Equipment....................................... 35,650,325 62,164,386 68,794,819 2-10 Years
Furniture and fixtures.......................... 3,626,247 6,603,957 6,928,668 3-10 Years
Assets under construction....................... 1,241,124 7,225,192 7,601,564 N/A
-------------- -------------- --------------
Property and equipment............................ 55,431,631 101,794,175 110,677,650
Less--Accumulated depreciation.................... (13,496,134) (23,873,892) (27,441,146)
-------------- -------------- --------------
Property and equipment, net....................... $ 41,935,497 $ 77,920,283 $ 83,236,504
-------------- -------------- --------------
-------------- -------------- --------------
</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 the 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 Unity and Northern Maine.
Paging licenses are being amortized on a straight-line basis over 40 years,
while the Unity 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 Unity 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 (CONTINUED)
DECEMBER 31, 1996 AND 1997
(INCLUDING DATA APPLICABLE TO THE UNAUDITED PERIODS)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
The components of licenses and other intangible assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------- MARCH 31,
1996 1997 1998
------------ ------------- -------------
<S> <C> <C> <C>
Licenses:
Cellular............................................................ $ -- $ 31,891,000 $ 31,891,000
PCS................................................................. 6,453,475 9,628,812 9,628,812
Paging.............................................................. 275,000 275,000 275,000
Other intangible assets............................................. -- 41,043,881 41,043,881
------------ ------------- -------------
6,728,475 82,838,693 82,838,693
Less--Accumulated amortization...................................... (18,056) (1,490,456) (2,041,460)
------------ ------------- -------------
Licenses and other intangible assets................................ $ 6,710,419 $ 81,348,237 $ 80,797,233
------------ ------------- -------------
------------ ------------- -------------
</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 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, 1996, December 31, 1997 and March 31, 1998.
F-10
<PAGE>
RURAL CELLULAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997
(INCLUDING DATA APPLICABLE TO THE UNAUDITED PERIODS)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
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.
INTERIM FINANCIAL INFORMATION
The accompanying balance sheet as of March 31, 1998, the statements of
operations and cash flows for the three months ended March 31, 1997 and 1998 and
the statement of shareholders' equity for the three months ended March 31, 1998
are unaudited, but, in the opinion of management, include all adjustments,
consisting solely of normal recurring adjustments necessary for a fair
presentation of results for these interim periods. The results of operations for
the three months ended March 31, 1998 are not necessarily indicative of results
to be expected for the entire year.
RECLASSIFICATIONS
Certain 1995 and 1996 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.
4. LONG-TERM DEBT:
On May 1, 1997, the Company entered into an agreement with TD Securities
(USA), Inc. for a $140 million Senior Secured Reducing Revolving Credit Facility
("the Existing Credit Facility"). On December 30, 1997, the Company completed an
amendment to this agreement increasing the Existing Credit Facility to $160
million. Under the Existing Credit Facility, amounts may be borrowed or repaid
at any time through maturity provided that, at no time, the aggregate
outstanding borrowings exceed the total of the Existing Credit Facility. During
the second quarter of 1997, proceeds from the Existing Credit 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 Existing Credit Facility
bear interest at London Interbank Offering Rate (7.6% as of December 31, 1997)
or base rate plus an applicable margin (9.1% as of December 31, 1997) 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 Existing Credit Facility is payable quarterly.
The Existing Credit Facility security has been provided by a pledge of all the
assets of the Company excluding its ownership interest in Switch 2000 and its
stock in Cellular 2000. Mandatory commitment reductions will be required upon
any material sale of assets. The Existing Credit Facility is subject to various
covenants including the ratio of indebtedness to annualized operating cash flow
and the ratio of annualized operating cash flow to interest expense. As of
December 31, 1997, the Company was in compliance with all covenants under the
Existing Credit Facility.
F-11
<PAGE>
RURAL CELLULAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997
(INCLUDING DATA APPLICABLE TO THE UNAUDITED PERIODS)
4. LONG-TERM DEBT: (CONTINUED)
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 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>
<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 and March 31, 1998.
INITIAL PUBLIC OFFERING
During 1996, the Company completed an initial public offering (the
"Offering") of 3,450,000 shares of Class A common stock, of which 2,869,863
shares were sold by the Company and 580,137 previously issued shares were sold
by certain shareholders. The net proceeds to the Company of approximately $26.0
million were used to repay long-term debt and to provide capital for future
expansion. In connection with the Offering, the exercise price of 150,600
employee stock options was fixed at $10.00 per share, the price at which the
stock was sold to the public in the Offering.
COMMON STOCK RIGHTS
Class A common shareholders are entitled to one vote for each share owned,
while Class B common shareholders are entitled to ten votes for each share
owned. Each share of Class B common stock may at any time be converted into one
share of Class A common stock at the option of the holder. Additionally, all
issued Class B common shares will 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.
F-12
<PAGE>
RURAL CELLULAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997
(INCLUDING DATA APPLICABLE TO THE UNAUDITED PERIODS)
5. SHAREHOLDERS' EQUITY: (CONTINUED)
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 March 31, 1998 have exercise prices ranging
between $8.75 and $16.81 and a weighted average remaining contractual life of
ten years. Information related to stock options is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
----------------------------------------------
THREE MONTHS ENDED
1996 1997 MARCH 31, 1998
---------------------- ---------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- ----------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding beginning of period:.......................... -- $ -- 459,700 $ 9.99 735,200 $ 9.47
Granted................................................. 549,700 10.32 319,750 9.09 92,500 13.50
Exercised............................................... -- -- -- -- (13,600) 10.00
Canceled................................................ (90,000) 12.00 (44,250) 8.75 (5,000) 8.75
--------- --------- ---------
Outstanding, end of period................................ 459,700 $ 9.99 735,200 $ 9.47 809,100 $ 9.93
--------- --------- ---------
--------- --------- ---------
Exercisable, end of period................................ 55,200 $ 9.92 161,895 $ 9.92 158,670 $ 10.12
--------- --------- ---------
--------- --------- ---------
Weighted average fair value of options granted............ $ 5.60 $ 6.40 $ 9.25
</TABLE>
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
F-13
<PAGE>
RURAL CELLULAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997
(INCLUDING DATA APPLICABLE TO THE UNAUDITED PERIODS)
5. SHAREHOLDERS' EQUITY: (CONTINUED)
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 THREE MONTHS ENDED
31 MARCH 31
--------------------- ---------------------
1996 1997 1997 1998
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Net income (loss):
As reported.................. $3,476,934 $(1,266,116) $ (40,007) $(2,065,851)
Pro forma.................... 3,215,468 (1,890,506) (40,007) (2,921,435)
Net income (loss) per share:
As reported.................. 0.41 (0.14) (0.00) (0.23)
Pro forma.................... 0.38 (0.21) (0.00) (0.23)
</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 1996, 1997 and for the three months ended March
31, 1997 and 1998: expected volatility of 48.5%, 51.6%, 54.7% and 48.6%,
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, 1997 and
for the three months ended March 31, 1998 was $5.75, $6.40 and $9.25 per share,
respectively. There were no options granted for the three months ended March 31,
1997.
6. INCOME TAXES:
The components of the Company's income tax provision are as follows for the
years ended December 31:
<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Current:
Federal................................................. $ 40,003 $ 106,000 $ --
State................................................... 35,000 94,000 --
---------- ---------- ----------
75,003 200,000 --
Deferred.................................................. 500,000 -- --
---------- ---------- ----------
$ 575,003 $ 200,000 $ --
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
F-14
<PAGE>
RURAL CELLULAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997
(INCLUDING DATA APPLICABLE TO THE UNAUDITED PERIODS)
6. INCOME TAXES: (CONTINUED)
Reconciliation between the federal income tax rate and the effective income
tax rate is as follows for the years ended December 31:
<TABLE>
<CAPTION>
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Federal income tax rate................................................ 34.0% 34.0% 34.0%
Tax benefit of loss carryforwards...................................... -- (29.8) (34.0)
Penalties and fines.................................................... (2.1) -- --
State income taxes, net of federal tax benefit......................... 6.5 1.2 --
Other, net............................................................. 3.7 -- --
--- --------- ---------
42.1% 5.4% --%
--- --------- ---------
--- --------- ---------
</TABLE>
The income tax effect of the items that create deferred income tax assets
and liabilities for the years ended December 31 are as follows:
<TABLE>
<CAPTION>
1996 1997
------------- -------------
<S> <C> <C>
Deferred income tax assets:
Operating loss carryforwards.................................. $ 1,795,000 $ 4,488,000
Temporary differences:
Allowance for doubtful accounts............................. 123,000 450,000
Other....................................................... 202,000 302,000
Valuation allowance........................................... -- (400,000)
------------- -------------
Total deferred income tax assets.......................... 2,120,000 4,840,000
Deferred income tax liabilities:
Depreciation.................................................. (1,948,000) (3,971,000)
Intangible assets............................................. -- (724,000)
Other......................................................... (172,000) (145,000)
------------- -------------
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 and $3.2 million as of December 31, 1997 and March
31, 1998, respectively.
F-15
<PAGE>
RURAL CELLULAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997
(INCLUDING DATA APPLICABLE TO THE UNAUDITED PERIODS)
7. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
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 and March
31, 1998.
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.
LEASES
The Company leases office space and real estate under noncancelable
operating leases. Future minimum payments under these leases as of March 31,
1998 are as follows:
<TABLE>
<CAPTION>
YEAR
- ----------------------------------------------------------------------------
<S> <C>
1998 (nine months ended December 31, 1998).................................. $ 378,000
1999........................................................................ 434,000
2000........................................................................ 347,000
2001........................................................................ 247,000
2002........................................................................ 147,000
Thereafter.................................................................. 619,000
------------
Total................................................................... $ 2,172,000
------------
------------
</TABLE>
Under the terms of the lease agreements, the Company also is responsible for
certain operating expenses and taxes. Total rent expense of $347,000, $379,000,
$839,000 , $70,000 and $317,000 was charged to operations for the years ended
December 31, 1995, 1996, 1997 and the three months ended March 31, 1997 and
1998, respectively.
F-16
<PAGE>
RURAL CELLULAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997
(INCLUDING DATA APPLICABLE TO THE UNAUDITED PERIODS)
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 March 31, 1998, the investment in unconsolidated
affiliates represents $1,687,000 of stock and capital contributions less
$741,000 of cumulative losses. Combined condensed results of operations and net
assets of these entities are as follows:
<TABLE>
<CAPTION>
THREE
MONTHS
YEARS ENDED DECEMBER 31 ENDED
------------------------------- MARCH 31,
1995 1996 1997 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Results of operations:
Revenues.................................... $7,074,877 $9,201,380 $6,655,665 $1,009,495
Operating expenses.......................... (7,035,889) (9,044,303) (7,541,533) (1,371,855)
Other income (expense), net................. (129,791) (11,811) 5,181 572
--------- --------- --------- ---------
Net income (loss)......................... $ (90,803) $ 145,266 $(880,687) $(361,788)
--------- --------- --------- ---------
--------- --------- --------- ---------
Company's share of net income (loss).......... $ (37,021) $ 51,519 $(350,539) $(148,451)
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS
DECEMBER 31 ENDED
-------------------------- MARCH 31,
1996 1997 1998
------------ ------------ -------------
<S> <C> <C> <C>
Net assets and liabilities:
Current assets....................................................... $ 455,292 $ 549,541 $ 737,769
Noncurrent assets.................................................... 4,064,677 2,827,325 2,467,147
Current liabilities.................................................. (743,309) (708,893) (898,726)
Noncurrent liabilities............................................... (228,000) -- --
------------ ------------ -------------
Equity............................................................. $ 3,548,660 $ 2,667,973 $ 2,306,190
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
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 $3,753,000,
$4,824,000, $3,230,000, $892,000 and $404,000 for the years ended December 31,
1995, 1996, 1997 and the three months ended March 31, 1997 and 1998,
respectively.
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 was
$336,000 for the year ended December 31, 1995 and net
F-17
<PAGE>
RURAL CELLULAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997
(INCLUDING DATA APPLICABLE TO THE UNAUDITED PERIODS)
9. RELATED-PARTY TRANSACTIONS: (CONTINUED)
payments to the Company from the partnership were $331,000, $156,000, $106,000
and $108,000 for the years ended December 31, 1996 and 1997 and the three months
ended March 31, 1997 and 1998, respectively.
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, 1995, 1996, 1997 and the three
months ended March 31, 1997 and 1998 were $66,000, $74,000, $162,000, $51,000
and $63,000, respectively. 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>
THREE MONTHS
YEARS ENDED DECEMBER 31 ENDED MARCH 31
------------------------------- --------------------
1995 1996 1997 1997 1998
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Cash paid for:
Interest............................. $1,400,722 $ 563,948 $4,630,281 $ 91,468 $2,371,657
Income taxes......................... 98,136 805,000 64,032 -- --
Cash received for:
Income taxes......................... -- -- -- -- 250,000
Noncash investing and financing
activity:
Contribution by Aerial
Communications, Inc. of PCS
licenses........................... -- 6,453,475 3,175,337 -- --
</TABLE>
12. SUBSEQUENT EVENTS:
ATLANTIC ACQUISITION
Effective July 1, 1998, the Company completed the acquisition of the net
assets of Atlantic Cellular, L.P. ("Atlantic") for approximately $256 million.
The cellular properties 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).
WMC ACQUISITION
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).
F-18
<PAGE>
RURAL CELLULAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997
(INCLUDING DATA APPLICABLE TO THE UNAUDITED PERIODS)
12. SUBSEQUENT EVENTS: (CONTINUED)
OFFERINGS
On May 14, 1998, the Company completed an offering of 9 5/8% Senior
Subordinated Notes of $125,000,000 due 2008 (the "Note Offering") and 125,000
shares of 11 3/8% Senior Exchangeable Preferred Stock with a liquidation
preference of $1,000 per share (collectively, "the Offerings"). The net proceeds
received by the Company from the Offerings are approximately $240.9 million (net
of estimated fees and expenses of approximately $9.1 million). On July 1, 1998,
the Company replaced its Existing Credit Facility with a $300.0 million credit
facility ("New Credit Facility"). The Company used the net proceeds of the
Senior Exchangeable Preferred Stock to repay indebtedness under the Existing
Credit Facility. The net proceeds from the Notes Offering and the New Credit
Facility were used to finance the Atlantic acquisition, pay related fees and
expenses of the Offerings and the Atlantic and WMC acquisitions and to finance
the pending WMC acquisition.
F-19
<PAGE>
RURAL CELLULAR CORPORATION AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31 THREE MONTHS
-------------------------------------- ENDED
1995 1996 1997 MARCH 31, 1998
----------- ----------- ------------ --------------
<S> <C> <C> <C> <C>
Balance, at beginning of period.......................... $ 144,000 $ 163,000 $ 308,000 $ 1,146,000
Additions charged to income............................ 246,000 603,000 1,511,000 488,000
Write-offs, net of recoveries.......................... (227,000) (458,000) (673,000) (424,000)
----------- ----------- ------------ --------------
Balance, at end of period................................ $ 163,000 $ 308,000 $ 1,146,000 $ 1,210,000
----------- ----------- ------------ --------------
----------- ----------- ------------ --------------
</TABLE>
F-20
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Partners of Atlantic Cellular Company, L.P. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Atlantic
Cellular Company, L.P. and Subsidiaries as of December 31, 1996 and 1997 and the
related consolidated statements of operations, partners' capital and cash flows
for each of the years in the three year period ended December 31, 1997. These
consolidated financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these consolidated
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 audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Atlantic
Cellular Company, L.P. and Subsidiaries at December 31, 1996 and 1997 and the
results of their operations and cash flows for each of the years in the three
year period ended December 31, 1997, in conformity with generally accepted
accounting principles.
As discussed in note 9, the Partnership entered into two separate purchase
and sale agreements in February 1998 which will result in the sale of
substantially all of the Partnership's assets.
KPMG Peat Marwick LLP
Providence, Rhode Island
February 17, 1998
F-21
<PAGE>
ATLANTIC CELLULAR COMPANY, L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------------------------ 1998
1996 1997 (UNAUDITED)
-------------- -------------- --------------
<S> <C> <C> <C>
ASSETS
Current assets (notes 7 and 9):
Cash and cash equivalents...................................... $ 124,789 $ 1,014,060 $ 1,009,632
Due from Hawaiian Wireless, Inc. (notes 2(a) and 3(e))......... 405,235 659,568 324,968
Due from Michiana Partnership, L.P............................. 15,622 4,620 8,497
Accounts receivable, net of allowance for doubtful accounts of
$277,000 in 1996, $447,000 in 1997 and $488,000 (unaudited)
in 1998...................................................... 3,890,862 3,676,212 3,623,633
Inventories of cellular telephones and equipment............... 1,083,699 602,882 476,238
-------------- -------------- --------------
Total current assets......................................... 5,520,207 5,957,342 5,442,968
-------------- -------------- --------------
Property and equipment (notes 4, 5, 7, 8 and 9):
Cellular telephone systems..................................... 179,053,629 162,555,149 163,167,854
PCS Licenses................................................... -- 9,996,948 9,997,032
Other property and equipment................................... 5,490,066 4,913,454 4,935,764
-------------- -------------- --------------
184,543,695 177,465,551 178,100,650
Less accumulated depreciation and amortization................. 38,439,343 41,064,781 43,546,600
-------------- -------------- --------------
Net property and equipment................................... 146,104,352 136,400,770 134,554,050
-------------- -------------- --------------
Other assets (note 7 and 9):
Deposit (note 5)............................................... 3,000,000 -- --
Investment in equity securities................................ 292,491 -- --
Investments in other wireless entities (note 6)................ 355,551 297,835 300,094
Other assets................................................... 11,900 -- --
Deferred financing costs, net of accumulated amortization...... 1,965,366 1,637,805 1,555,915
-------------- -------------- --------------
Total other assets........................................... 5,625,308 1,935,640 1,856,009
-------------- -------------- --------------
Total assets................................................. $ 157,249,867 $ 144,293,752 $ 141,853,027
-------------- -------------- --------------
-------------- -------------- --------------
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable............................................... $ 17,608 $ 19,321 $ 21,412
Due to Atlantic Cellular Management Company (note 2(a))........ 2,890,849 911,689 988,582
Accrued consulting fees (note 2(c))............................ 75,000 75,000 112,500
Accrued interest (note 7)...................................... 546,638 458,089 130,019
Deposits on sales of other wireless entities................... -- 123,345 123,345
Current portion of capital lease obligations (note 8).......... 73,635 49,316 49,316
-------------- -------------- --------------
Total current liabilities.................................... 3,603,730 1,636,760 1,425,174
Notes payable -- bank (note 7)................................... 81,500,000 40,000,000 38,000,000
Capital lease obligations, net of current portion (note 8)....... 83,595 32,059 11,059
-------------- -------------- --------------
Total liabilities............................................ 85,187,325 41,668,819 39,436,233
-------------- -------------- --------------
Minority interests in partnerships (note 3)...................... 7,689,420 7,536,804 7,519,065
Partners' capital................................................ 64,708,945 95,088,129 94,897,729
Valuation allowance for unrealized loss on equity securities..... (335,823) -- --
-------------- -------------- --------------
Partners' capital, net........................................... 64,373,122 95,088,129 94,897,729
-------------- -------------- --------------
Commitments (note 8)
-------------- -------------- --------------
Total liabilities and partners' capital...................... $ 157,249,867 $ 144,293,752 $ 141,853,027
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-22
<PAGE>
ATLANTIC CELLULAR COMPANY, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED THREE MONTHS ENDED
------------------------------------------- MARCH 31, 1997 MARCH 31, 1998
1995 1996 1997 (UNAUDITED) (UNAUDITED)
------------- ------------- ------------- ------------------ ------------------
<S> <C> <C> <C> <C> <C>
Revenues from cellular operations.. $ 34,350,693 $ 43,283,440 $ 45,087,272 $ 11,522,341 $ 11,773,444
------------- ------------- ------------- ------------------ ------------------
Operating costs:
Costs of cellular operations..... 22,605,996 25,870,905 25,604,407 6,793,866 5,613,933
Corporate overhead expenses
(notes 2(a) and 3)............. 2,595,020 3,034,394 4,078,365 727,931 897,734
Depreciation and amortization.... 9,264,938 10,204,142 9,885,345 2,782,836 2,481,818
------------- ------------- ------------- ------------------ ------------------
Total operating costs.......... 34,465,954 39,109,441 39,568,117 10,304,633 8,993,485
------------- ------------- ------------- ------------------ ------------------
Income (loss) from
operations................... (115,261) 4,173,999 5,519,155 1,217,708 2,779,959
Other income (expenses):
Gain on sale of Mountain Cellular
assets (note 3(b))............. -- -- 28,076,875 -- --
Management fee income (note
2(a)).......................... -- 1,200,000 1,200,000 300,000 300,000
Interest expense................. (6,958,712) (6,502,602) (4,170,338) (1,429,600) (717,535)
Interest income.................. 142,010 145,552 201,073 28,257 48,827
Amortization of deferred
financing fees................. (629,637) (590,802) (327,561) (81,890) (81,890)
Consulting fees (note 2(c))...... (150,000) (150,000) (150,000) (37,500) (37,500)
Loss on sale of equity
securities..................... (206,540) -- (50,799) -- --
Loss on sale of equipment........ -- -- (79,723) -- --
Gain from sale of SMR
Channels....................... -- 50,625 -- -- --
Equity in net income (loss) of
Michiana Partnership, L.P...... (466) 4,545 7,886 -- --
------------- ------------- ------------- ------------------ ------------------
Total other income (expenses),
net.......................... (7,803,345) (5,842,682) 24,707,413 (1,220,733) (488,098)
------------- ------------- ------------- ------------------ ------------------
Income (loss) before minority
partners' share of loss...... (7,918,606) (1,668,683) 30,226,568 (3,025) 2,291,861
Minority partners' share of loss... (694,557) (221,687) (152,616) (8,404) (17,739)
------------- ------------- ------------- ------------------ ------------------
Net income (loss).............. $ (7,224,049) $ (1,446,996) $ 30,379,184 $ 5,379 $ 2,309,600
------------- ------------- ------------- ------------------ ------------------
------------- ------------- ------------- ------------------ ------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-23
<PAGE>
ATLANTIC CELLULAR COMPANY, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<S> <C>
Balance at December 31, 1994...................... $77,160,416
Net loss........................................ (7,224,049)
-----------
Balance at December 31, 1995...................... 69,936,367
Stock distribution (note 3(e)).................. (3,780,426)
Net loss........................................ (1,446,996)
-----------
Balance at December 31, 1996...................... 64,708,945
Net income...................................... 30,379,184
-----------
Balance at December 31, 1997...................... 95,088,129
Distributions (unaudited)....................... (2,500,000)
Net income (unaudited).......................... 2,309,600
-----------
Balance at March 31, 1998 (unaudited)............. $94,897,729
-----------
-----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-24
<PAGE>
ATLANTIC CELLULAR COMPANY, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31 MARCH 31,
------------------------------------------- 1997
1995 1996 1997 (UNAUDITED)
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)............................................ $ (7,224,049) $ (1,446,996) $ 30,379,184 $ 5,379
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Gain on sale of Mountain Cellular assets................... -- -- (28,076,875) --
Loss on sale of equipment.................................. -- -- 79,723 --
Depreciation and amortization.............................. 9,849,573 10,794,944 10,212,906 2,864,729
Gain on sale of SMR Channels............................... -- (50,625) -- --
Loss on sale of equity securities.......................... 206,540 -- 50,799 --
Equity in income of investment............................. -- 4,545 7,886 --
Minority partners' share of loss........................... (694,557) (221,687) (152,616) (8,404)
Provision for doubtful accounts............................ 446,793 276,610 521,517 105,982
Changes in assets and liabilities:
(Increase) decrease in due from Hawaiian Wireless,
Inc.................................................... -- (405,235) (254,333) 199,156
Decrease (increase) in due from Michiana Partnership,
L.P.................................................... 25,108 4,587 11,002 (118,408)
Increase in accounts receivable.......................... (1,638,288) (385,860) (791,330) (434,029)
Decrease (increase) in inventories....................... 581,562 (223,907) 480,817 354,005
(Decrease) increase in accounts payable.................. 52,982 (315,977) 1,713 (50,153)
Increase (decrease) in advances from Atlantic Cellular
Management Company..................................... 1,107,686 622,369 (1,979,160) (3,176,139)
Decrease in accrued interest............................. (138,406) (78,568) (88,549) (237,075)
Increase in deposit...................................... -- -- 123,345 --
------------- ------------- ------------- -------------
Net cash provided by operating activities.............. 2,574,944 8,574,200 10,526,029 (494,957)
------------- ------------- ------------- -------------
Cash flows from investing activities:
Net proceeds from sale of Mountain Cellular assets........... -- -- 41,314,294 --
Purchase and/or build-out of cellular telephone systems...... (9,541,700) (6,053,502) (2,745,947) (577,277)
Purchase of PCS licenses..................................... -- -- (9,996,948) --
Other capital expenditures................................... (1,187,873) (967,700) (374,039) (45,454)
Investment in specialized mobile radio systems............... (1,509,511) -- -- --
(Increase) decrease in other investments..................... 8,716 (42,680) 50,000 (789)
Proceeds from sale of equity securities...................... 373,460 -- 577,514 --
Proceeds from sale of equipment.............................. -- -- 88,018 --
(Increase) decrease in deposits.............................. -- (3,000,000) 3,000,000 --
------------- ------------- ------------- -------------
Net cash provided by (used in) investing activities.... (11,856,908) (10,063,882) 31,912,892 (623,520)
------------- ------------- ------------- -------------
Cash flows from financing activities:
(Payments) borrowings under senior secured revolver, net..... 7,000,000 -- (41,500,000) 1,000,000
Decrease (increase) in note receivable....................... (1,500,000) 1,500,000 -- 809,500
Repayment of note payable other, net......................... (500,000) -- -- --
Payments on capital lease obligations........................ (27,120) (62,500) (49,650) --
Proceeds from minority partners' capital contributions....... 160,800 -- -- --
Increase in deferred financing costs......................... (193,811) (115,878) -- --
Distribution to Partners..................................... -- -- -- --
------------- ------------- ------------- -------------
Net cash provided by (used in) financing activities.... 4,939,869 1,321,622 (41,549,650) 1,809,500
------------- ------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents........... (4,342,095) (168,060) 889,271 691,023
Cash and cash equivalents at beginning of period............... 4,634,944 292,849 124,789 124,789
------------- ------------- ------------- -------------
Cash and cash equivalents at end of period..................... $ 292,849 $ 124,789 $ 1,014,060 $ 815,812
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Supplemental cash flow information:
Non cash investing and financing activities:
- Contribution of net assets to an affiliated entity........ $ -- $ 3,928,000 $ -- $ --
- Interest payments......................................... $ 6,947,000 $ 6,581,000 $ 4,082,000 $ 1,733,000
- Acquisition of property and equipment through capital
lease..................................................... $ 141,000 $ -- $ -- $ --
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
<CAPTION>
THREE MONTHS
ENDED
MARCH 31,
1998
(UNAUDITED)
-------------
<S> <C>
Cash flows from operating activities:
Net income (loss)............................................ $ 2,309,600
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Gain on sale of Mountain Cellular assets................... --
Loss on sale of equipment.................................. --
Depreciation and amortization.............................. 2,563,708
Gain on sale of SMR Channels............................... --
Loss on sale of equity securities.......................... --
Equity in income of investment............................. --
Minority partners' share of loss........................... (17,739)
Provision for doubtful accounts............................ 102,314
Changes in assets and liabilities:
(Increase) decrease in due from Hawaiian Wireless,
Inc.................................................... 334,600
Decrease (increase) in due from Michiana Partnership,
L.P.................................................... (3,877)
Increase in accounts receivable.......................... (49,735)
Decrease (increase) in inventories....................... 126,644
(Decrease) increase in accounts payable.................. 39,592
Increase (decrease) in advances from Atlantic Cellular
Management Company..................................... 76,893
Decrease in accrued interest............................. (328,070)
Increase in deposit...................................... --
-------------
Net cash provided by operating activities.............. 5,153,930
-------------
Cash flows from investing activities:
Net proceeds from sale of Mountain Cellular assets........... --
Purchase and/or build-out of cellular telephone systems...... (612,705)
Purchase of PCS licenses..................................... (84)
Other capital expenditures................................... (22,310)
Investment in specialized mobile radio systems............... --
(Increase) decrease in other investments..................... (2,259)
Proceeds from sale of equity securities...................... --
Proceeds from sale of equipment.............................. --
(Increase) decrease in deposits.............................. --
-------------
Net cash provided by (used in) investing activities.... (637,358)
-------------
Cash flows from financing activities:
(Payments) borrowings under senior secured revolver, net..... (2,000,000)
Decrease (increase) in note receivable....................... --
Repayment of note payable other, net......................... --
Payments on capital lease obligations........................ (21,000)
Proceeds from minority partners' capital contributions....... --
Increase in deferred financing costs......................... --
Distribution to Partners..................................... (2,500,000)
-------------
Net cash provided by (used in) financing activities.... (4,521,000)
-------------
Net increase (decrease) in cash and cash equivalents........... (4,428)
Cash and cash equivalents at beginning of period............... 1,014,060
-------------
Cash and cash equivalents at end of period..................... $ 1,009,632
-------------
-------------
Supplemental cash flow information:
Non cash investing and financing activities:
- Contribution of net assets to an affiliated entity........ $ --
- Interest payments......................................... $ 1,046,000
- Acquisition of property and equipment through capital
lease..................................................... $ --
-------------
-------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-25
<PAGE>
ATLANTIC CELLULAR COMPANY, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996, AND 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) ORGANIZATION
Atlantic Cellular Company, L.P. (the Partnership) is a Delaware limited
partnership created on May 5, 1989 to acquire, own and operate cellular
telephone systems throughout the United States. The term of the partnership will
continue until December 31, 2009, unless terminated earlier under the provisions
of the Partnership Agreement. On August 28, 1990 the original partnership
agreement was amended to allow additional partners to join the partnership under
terms and conditions set forth in the amended partnership agreement. In July
1996, the Partnership Agreement was again amended to allow for the distribution
of shares of HW Holding, Inc. to individual partners under the terms and
conditions set forth in the Amendment Agreement (see note 3(e)).
The partners and their respective capital account balances at December 31,
1995, 1996, and 1997 are reflected in the accompanying Statements of Partners'
Capital. Profits, losses and distributable cash are allocated to the individual
partners based upon their adjusted capital contributions and subject to certain
special allocations as defined in the amended partnership agreement.
(B) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Atlantic
Cellular Company, L.P. and the following subsidiaries:
Atlantic Cellular/New Hampshire RSA Number One Limited Partnership (NH
#1)
ACC Cellular Holdings, L.P. (ACCCH)
Mountain Cellular, L.P. (MC)
ACC Wireless L.P. (ACCW)
ACC Wireless Holdings, L.P. (ACCWH)
Hawaiian Wireless Partners, L.P. (HWP)
The Partnership owns a direct interest in NH #1 of 50.01% and owned a direct
interest in HWP of 83.7% in 1995. In 1996, HWP was dissolved as discussed in
note 3(e). The remaining partnerships are owned 100% by the Partnership and its
existing partners (see note 3). All significant intercompany balances and
transactions have been eliminated in consolidation.
At December 31, 1995, 1996, and 1997 ACCW owned a 17.2%, 17.2% and 6.7%
interest, respectively, in Michiana Partnership, L.P. (Michiana), an
unconsolidated equity investment, which was formed to acquire Specialized Mobile
Radio (SMR) channels. ACCW is also the General Partner. On March 21, 1997 the
partnership agreement was amended to admit additional partners and to approve
the transactions contemplated by an Assignment and Assumption Agreement with an
unrelated third party. Under the terms of the Assignment and Assumption
Agreement essentially all assets of Michiana are to be sold during 1998. ACCW
has recorded its investment in Michiana in accordance with the equity method of
accounting. In addition to its investment, the Partnership was owed $20,209,
$15,622 and $4,620 from Michiana at December 31, 1995, 1996, and 1997,
respectively.
F-26
<PAGE>
ATLANTIC CELLULAR COMPANY, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, AND 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(C) CASH AND CASH EQUIVALENTS
Cash equivalents represent overnight repurchase agreements whose underlying
security consists of U.S. Treasury securities. At December 31, 1996 and 1997,
approximately $108,000 and $997,000, respectively is held by ACCW for investment
in wireless telephone systems other than cellular.
(D) INVENTORIES OF CELLULAR TELEPHONES AND EQUIPMENT
Inventories of cellular telephones and equipment are stated at cost
determined on a specific identification basis.
(E) PROPERTY AND EQUIPMENT
Costs incurred for the purchase of various personal communication service
("PCS") licenses are stated at cost. Costs incurred for the purchase of cellular
telephone construction permits and licenses are capitalized and amortized using
the straight-line method over twenty-five years. Costs incurred for the
construction of the cellular telephone systems are stated at cost and
depreciated over ten years using the straight-line method. Property and
equipment are stated at cost and depreciated or amortized using the
straight-line method with estimated useful lives ranging from five to ten years.
(F) INVESTMENT IN EQUITY SECURITIES
Investment in equity securities consisted of shares of a publicly traded,
unconsolidated company that owns and operates various wireless communication
systems. This investment was classified as available for sale and carried at its
market value. The equity securities were sold during 1997.
(G) INVESTMENTS IN OTHER WIRELESS ENTITIES
Investment in other wireless entities includes investments made in
unconsolidated partnerships, including Michiana, formed to carry on business in
other wireless communication systems and/or licenses. Investments in
unconsolidated partnerships are accounted for under the equity method of
accounting and investments in licenses are carried at the lower of their cost or
net realizable value.
(H) DEFERRED FINANCING COSTS
Costs incurred in obtaining a revolving loan agreement from a consortium of
banks in October, 1994 are being amortized on a straight line basis over eight
years, the life of the debt. Costs incurred to provide interest rate protection,
such as interest rate caps, required by the revolving loan agreement, are being
amortized as a rate adjustment over the respective lives of the cap or swap
agreements.
(I) DERIVATIVES
Premiums paid for purchased interest rate cap agreements and options to
enter into interest swap agreements are amortized to interest expense over the
terms of the agreement. Unamortized premiums are included in deferred financing
cost in the consolidated balance sheet.
F-27
<PAGE>
ATLANTIC CELLULAR COMPANY, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, AND 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(J) REVENUE AND EXPENSE RECOGNITION
Cellular airtime revenue and access charges are recognized as service is
provided. Cellular airtime is billed in arrears and a majority of access charges
are billed in advance. Subscriber acquisition costs are expensed when incurred.
Accounts receivable consist mainly of amounts due from subscribers and other
cellular companies whose subscribers use the Company's cellular service.
(K) FINANCIAL INSTRUMENTS
Financial instruments of the Partnership consist of cash, accounts
receivable, accounts payable, notes payable and capital lease obligations. The
carrying amounts of these financial instruments approximate their fair value.
(L) INCOME TAXES
No provision is made for income taxes since the income or loss of the
Partnership is included in the income tax returns of the partners. Income for
financial statement purposes will differ from taxable income because of the
requirement to capitalize organization and pre-operating expenses and because of
different methods of depreciation used for tax and financial statement purposes.
(M) 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 financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(2) RELATED PARTY TRANSACTIONS
(A) MANAGEMENT CONTRACTS
Atlantic Cellular Company, L.P. and Subsidiaries have entered into a
management agreement with Atlantic Cellular Management Company, the managing
general partner, to manage the business and affairs of the Partnership. Under
the terms of the management agreement, Atlantic Cellular Management Company is
reimbursed for all costs associated with its operation of the Partnership, which
totaled approximately $2,600,000, $3,000,000 and $4,000,000 in 1995, 1996, and
1997, respectively. The Partnership advances monies to the management company
which it uses to pay liabilities of the Partnership.
On March 6, 1996, Atlantic Cellular Company, L.P. entered into a management
agreement with Hawaiian Wireless, Inc. (see note 3(e)) to manage the design,
construction and operation of its SMR system in the State of Hawaii. The
Partnership is reimbursed for all out of pocket expenses reasonably incurred and
receives an annual management fee in an amount equal to the greater of
$1,200,000 or 5% of gross revenues of the SMR system, not to exceed $2,000,000
annually. This management fee amounted to $1,200,000 for both 1996 and 1997. At
December 31, 1996 and 1997, respectively, the Partnership was owed $405,235 and
$659,568 pursuant to the management agreement.
F-28
<PAGE>
ATLANTIC CELLULAR COMPANY, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, AND 1997
(2) RELATED PARTY TRANSACTIONS (CONTINUED)
(B) REIMBURSEMENT OF EXPENSES
Pursuant to the terms of the Partnership Agreement, all partners are
reimbursed by the Partnership for any reasonable and necessary expenses, as
defined in the Partnership Agreement, incurred by them on behalf of the
Partnership.
(C) CONSULTING FEES
Pursuant to the amended Partnership Agreement, the Partnership was obligated
for consulting fees to the following partners:
SP CELLULAR CORP.--Commencing July 1, 1990, SP Cellular Corp. is entitled
to an annual fee of $93,750 payable on June 27, 1991, and each succeeding
year until termination of the partnership. At December 31, 1996 and 1997,
$46,875 of this annual fee remained to be paid.
SAUGATUCK ASSOCIATES, INC.--Commencing July 1, 1990, Saugatuck
Associates, Inc. is entitled to an annual fee of $150,000 payable on June
27, 1991 and each succeeding year until June 27, 1994. Thereafter,
$56,250 will be paid each June 27th until termination of the partnership.
At December 31, 1996 and 1997, $28,125 of the annual fee remained to be
paid.
(3) CONSOLIDATED SUBSIDIARIES
(A) ATLANTIC CELLULAR/NEW HAMPSHIRE RSA NUMBER ONE LIMITED PARTNERSHIP
On February 21, 1991, the Partnership entered into an agreement to purchase
a 50.01% interest in the non-wireline New Hampshire Number One Rural Service
Area License (the license) from New Hampshire One Cellular Telephone Company,
Inc. (the Limited Partner), which owned 100% of the license. Concurrently with
the transaction to purchase, the Partnership and the Limited Partner formed a
new partnership, Atlantic Cellular/New Hampshire RSA Number One Limited
Partnership (NH #1), and each contributed its interests in the license (50.01%
and 49.99%, respectively) to NH #1. The purpose of NH #1 is to construct and
operate a cellular system in the license area.
The Partnership has a put/call option to purchase the remaining 49.99% from
the Limited Partner on August 31, 1998 at fair market value under the terms of
the agreement as amended on September 30, 1997. Upon transfer of any portion of
the Limited Partners' interest, the Partnership is to receive 20% of the sale
price in excess of the Limited Partners' adjusted capital contribution as
defined by the Partnership Agreement.
The Partnership manages NH #1 under a management agreement. The Partnership
is reimbursed for all direct costs. At December 31, 1996 and 1997, the amount
currently payable to/receivable from NH #1 was $226,484 and $752,092,
respectively (eliminated in consolidation). Indirect costs are reimbursed based
on the allocation of total indirect expenses of the Partnership to all cellular
systems managed by the Partnership according to the relative size of their 1980
and 1990 U.S. Census populations, but not to exceed $437,000 per year for NH #1.
In addition, the Partnership receives a management fee of $96,000 per year or 5%
of gross revenues calculated on a quarterly basis, whichever is higher. The
Partnership is currently restricted under the terms of a revolving loan
agreement with various banks to receive payment for indirect costs and
management fees. Indirect costs and management fees not paid currently are
stated as a deferred account receivable and are subject to interest at 13.5%. At
December 31,
F-29
<PAGE>
ATLANTIC CELLULAR COMPANY, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, AND 1997
(3) CONSOLIDATED SUBSIDIARIES (CONTINUED)
1996 and 1997, the deferred account receivable amounted to $5,416,840 and
$7,130,396 (eliminated in consolidation) and interest for the years ended
December 31, 1995, 1996, and 1997 amounted to $425,168, $604,839 and $850,449,
respectively (eliminated in consolidation).
(B) MOUNTAIN CELLULAR
On October 25, 1994, the Partnership, together with its existing partners,
formed Mountain Cellular, L.P. (MC) for the sole purpose of conducting its
business operations in the California Rural Service Area No. 11. As a result,
the Partnership contributed its assets used solely in the California system to
the new partnership. At December 31, 1996 the Partnership owned approximately
99% of MC, and the remaining 1% was owned by ACCCH.
On April 30, 1997, the Partnership sold substantially all its assets in MC
to an unrelated third party. Total proceeds of the sale were $41,500,000 plus
working capital on hand at the time of the sale. At the date of sale the
carrying value of the assets sold was approximately $13,200,000. Net income for
MC included in the operations of the Partnership for 1997 was approximately
$410,000. The proceeds of the sale were used to reduce the outstanding balance
of the Partnership's revolving loan agreement.
(C) ACC WIRELESS, L.P.
On October 25, 1994, the Partnership, together with its existing partners,
formed ACC Wireless, L.P. (ACCW) for the purpose of investing, developing and
operating wireless telephone systems other than cellular. The Partnership
contributed approximately $2,800,000 in cash plus other assets comprised of
options to purchase SMR channels and equipment to the new partnership. At
December 31, 1996 and 1997 the Partnership owned approximately 99% of ACCW, and
the remaining 1% is owned by ACCWH.
(D) ACC CELLULAR HOLDINGS, L.P. AND ACC WIRELESS HOLDINGS, L.P.
On October 25, 1994, the Partnership formed ACC Cellular Holdings, L.P.
(ACCCH) and ACC Wireless Holdings, L.P. (ACCWH). Concurrent with their
formation, the Partnership assigned its interest in ACCCH and ACCWH to its
existing partners in the same proportion of their respective ownership ratio in
ACLP.
(E) HAWAIIAN WIRELESS PARTNERS, L.P.
On October 25, 1994, ACCW formed Hawaiian Wireless Partners, L.P. (HWP) by
contributing options to purchase 100 SMR Channels for a 74.1% ownership. The
remaining 25.9% was owned by a single minority partner, who also contributed
options to purchase SMR channels. During 1995, ACCW contributed additional
options plus cash to HWP, increasing its ownership interest to 83.7% at December
31, 1995. The purpose of HWP, which was consolidated with the Partnership in the
1995 financial statements, is to purchase, develop and operate enhanced
specialized mobile radio systems in the State of Hawaii.
On March 6, 1996, substantially all the net assets of HWP totaling
approximately $3,900,000 were contributed to HW Holding, Inc. (HWH) in exchange
for 2,386 shares of HWH Series A Convertible Preferred Stock. The 2,386 shares
of HWH Series A Convertible Preferred Stock of HWH were concurrently distributed
to the partners of HWP with approximately 1,989 shares being distributed to the
Partnership. In July 1996, the Partnership Agreement was amended to allow for
the distribution of these shares to partners per the terms and conditions set
forth in the Amendment Agreement. On May 23, 1996, HWP was dissolved.
F-30
<PAGE>
ATLANTIC CELLULAR COMPANY, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, AND 1997
(4) PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31:
<TABLE>
<CAPTION>
1996 1997
-------------- --------------
<S> <C> <C>
Construction permits and licenses............................ $ 135,016,100 $ 121,016,080
Operating systems............................................ 44,037,529 41,539,069
PCS Licenses................................................. -- 9,996,948
Leasehold improvements....................................... 1,139,326 871,698
Other property and equipment................................. 4,350,740 4,041,756
-------------- --------------
$ 184,543,695 $ 177,465,551
-------------- --------------
-------------- --------------
</TABLE>
(5) DEPOSIT
On August 9, 1996 a wholly-owned subsidiary of ACC Wireless, L.P. deposited
$3,000,000 with the Federal Communications Commission as part of the
requirements enabling the subsidiary to participate in an auction of additional
spectrum which commenced in August 1996. In January 1997, the auction terminated
with the subsidiary of ACC Wireless L.P. winning high bids in nine markets for a
total cost of approximately $10,000,000 (see note 9).
(6) DEPOSITS ON SALES OF OTHER WIRELESS ENTITIES
During 1997, an unconsolidated investee of the Partnership entered into an
Assignment and Assumption Agreement with a third party to sell substantially all
of its assets. The buyer was required to pay a portion of the total anticipated
purchase price as a down payment. The Partnership's pro rata share of the down
payment, totaling $123,345, was distributed by the investee to the Partnership.
This amount has been recorded as deposits on sale of other wireless entities at
December 31, 1997. It is anticipated that the Partnership will recognize a gain
on its investment upon consummation of the sale which is expected to occur in
1998.
(7) NOTES PAYABLE -- BANK
On October 25, 1994 the Partnership entered into a $90,000,000 revolving
loan agreement with a consortium of banks. The loan agreement was amended on
September 11, 1996 to reduce the borrowing rate, to eliminate certain financial
covenants and to adjust the schedule of principal repayments. The interest rate
charged to the Partnership is based on a formula related to the bank's prime
lending rate and LIBOR. The weighted average interest rate charged on
outstanding balances was approximately 9%, 8% and 7% for the years ended
December 31, 1995, 1996, and 1997, respectively. In addition, the Partnership is
required to pay quarterly fees on the unused commitment. Substantially all of
the cellular assets of the Partnership are pledged as security under the loan
agreement. At December 31, 1996 and 1997, the outstanding borrowings under these
loan agreements were
F-31
<PAGE>
ATLANTIC CELLULAR COMPANY, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, AND 1997
(7) NOTES PAYABLE -- BANK (CONTINUED)
$81,500,000 and $40,000,000, respectively. In accordance with the new revolving
loan agreement, the Partnership's loan commitment will be reduced quarterly as
follows:
<TABLE>
<CAPTION>
LAST DAYS OF MARCH, QUARTERLY ANNUAL
JUNE, SEPTEMBER AND COMMITMENT COMMITMENT
DECEMBER IN: REDUCTION REDUCTION
- ----------------------------------------------------------------- ------------ -------------
<S> <C> <C>
1998............................................................. 1,125,000 $ 4,500,000
1999............................................................. 5,625,000 22,500,000
2000............................................................. 5,062,500 20,250,000
2001............................................................. 5,062,500 20,250,000
2002............................................................. 5,625,000 22,500,000
-------------
$ 90,000,000
-------------
-------------
</TABLE>
At December 31, 1996 and 1997 the Partnership had an interest rate cap
agreement on a notional amount of $35,000,000 of the note payable through June
4, 1998. As of December 31, 1996 and 1997 the fair value of this hedge
approximated its carrying value. The fair value of the hedge agreement is the
amount at which the agreement could be exchanged in a current transaction
between willing parties and its value or cost is estimated using option pricing
models and essentially values the potential for the agreement to become
in-the-money through changes in interest rates during the remaining terms.
The loan agreements contain various covenants including limitations on
indebtedness, investments and certain transactions with Partners. The
Partnership was in full compliance with all covenants at December 31, 1996 and
1997.
(8) COMMITMENTS
The Company is obligated under various capital leases entered into during
1996 and 1997 for vehicles used in its operations that expire at various dates
during the next three years. The total capitalized cost of vehicles leased at
December 31, 1996 and 1997 under capital leases is approximately $250,000 and
$230,000, respectively.
In addition, the Partnership leases facilities for its cellular offices,
installation and operation locations, cell sites and corporate offices under
operating lease agreements. Total rent expense was approximately $1,400,000,
$1,600,000 and $2,000,000 in 1995, 1996, and 1997, respectively.
F-32
<PAGE>
ATLANTIC CELLULAR COMPANY, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, AND 1997
(8) COMMITMENTS (CONTINUED)
The future minimum lease payments required pursuant to capital and operating
leases as of December 31, 1997 are as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
------------ ---------
<S> <C> <C>
Year ended December 31:
1998................................................................................. $ 1,356,222 $ 63,132
1999................................................................................. 1,055,287 29,842
2000................................................................................. 874,757 3,282
2001................................................................................. 665,250 --
2002................................................................................. 372,293 --
Thereafter........................................................................... 209,485 --
------------ ---------
Total minimum lease payments......................................................... $ 4,533,294 96,256
------------
------------
Less amount representing interest.................................................... 14,881
---------
Net minimum capital lease payments................................................... 81,375
Less current installments............................................................ 49,316
---------
Obligations under capital leases, excluding current installments..................... $ 32,059
---------
---------
</TABLE>
(9) SUBSEQUENT EVENT -- SALE OF CELLULAR OPERATIONS AND PCS LICENSES
On February 13, 1998, the Partnership entered into a purchase and sale
agreement (the "Agreement") with an unrelated third party for the sale of the
Partnership's cellular operations. The Agreement provides that substantially all
of the assets of the Partnership will be transferred to the buyer for a purchase
price of $256 million or $239 million depending on whether the transaction is
structured as a sale of assets or a sale of partnership interests, respectively.
The ultimate purchase price is subject to potential adjustments for working
capital and a failure to attain targeted cash flow and subscriber levels as
defined in the Agreement. The sale is expected to be consummated in 1998.
On February 17, 1998, the Partnership entered into a separate purchase and
sale agreement with a different third party buyer for the sale of all of the
Partnership's PCS licenses for approximately $13 million. The carrying value of
the PCS licenses is approximately $10 million. The sale is also expected to be
consummated in 1998.
F-33
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Unity Cellular System, Inc. and Subsidiary:
We have audited the accompanying consolidated balance sheets of UNITY
CELLULAR SYSTEM, INC. (a Maine corporation) AND SUBSIDIARY as of December 31,
1995 and 1996, and the related consolidated statements of operations, changes in
stockholder's equity, and cash flows for the years then ended. 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 Unity Cellular System, Inc.
and Subsidiary as of December 31, 1995 and 1996, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
As explained in Note 1 to the financial statements, effective January 1,
1996, the Company changed its method of accounting for promotional costs.
ARTHUR ANDERSEN LLP
Atlanta, Georgia,
February 3, 1997 (except Note 6, as to which
the date is May 1, 1997)
F-34
<PAGE>
UNITY CELLULAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
1995 1996
------------ -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.......................................................... $ 96,238 $ 186,288,853
Short-term investments............................................................. 0 75,658,893
Accounts receivable, less allowance for doubtful accounts of $152,842 and $99,244
in 1995 and 1996, respectively................................................... 1,843,118 2,085,419
Accounts receivable--affiliate..................................................... 38,692 0
Inventories........................................................................ 397,362 586,299
Deferred income taxes (NOTE 5)..................................................... 159,258 0
Prepaid expenses and other current assets.......................................... 268,239 163,949
------------ -------------
Total current assets............................................................. 2,802,907 264,783,413
------------ -------------
PROPERTY, PLANT, AND EQUIPMENT:
Land............................................................................... 353,160 414,172
Buildings and towers............................................................... 2,676,425 2,747,622
Equipment.......................................................................... 7,497,580 12,691,700
Furniture and fixtures............................................................. 163,485 191,967
Assets under construction.......................................................... 50,249 --
------------ -------------
10,740,899 16,045,461
Less accumulated depreciation...................................................... (2,289,841) (2,866,302)
------------ -------------
Property, plant, and equipment, net.............................................. 8,451,058 13,179,159
------------ -------------
OTHER ASSETS:
Goodwill, net of accumulated amortization of $1,445,484 and $2,057,090 in 1995 and
1996, respectively............................................................... 23,282,911 22,671,305
Deferred income taxes (NOTE 5)..................................................... 2,002,648 610,628
Deferred charges and other, net of accumulated amortization of $1,533,058 and
$122,293 in 1995 and 1996, respectively.......................................... 2,115,414 117,335
Other investments.................................................................. 389,515 389,515
------------ -------------
Total other assets............................................................... 27,790,488 23,788,783
------------ -------------
Total assets..................................................................... $ 39,044,453 $ 301,751,355
------------ -------------
------------ -------------
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable................................................................... $ 542,123 $ 485,397
Accounts payable--affiliate........................................................ 0 102,573
Accrued expenses and other current liabilities..................................... 865,648 893,689
Accrued income taxes............................................................... 0 3,222,662
Advanced billings and customer deposits............................................ 361,638 365,039
------------ -------------
Total current liabilities........................................................ 1,769,409 5,069,360
------------ -------------
DEFERRED REVENUE..................................................................... 389,515 389,515
------------ -------------
DUE TO PARENT (NOTE 3)............................................................... 14,734,789 264,015,666
------------ -------------
MINORITY INTEREST IN CELLULAR PARTNERSHIP............................................ 2,674,159 2,535,408
------------ -------------
COMMITMENTS AND CONTINGENCIES (NOTE 4)
STOCKHOLDER'S EQUITY:
Common stock, $1 par value; 100,000 shares authorized, 100 shares issued and
outstanding in 1995 and 1996..................................................... 100 100
Additional paid-in capital......................................................... 18,405,321 18,405,321
Retained earnings.................................................................. 1,071,160 11,335,985
------------ -------------
Total stockholder's equity....................................................... 19,476,581 29,741,406
------------ -------------
Total liabilities and stockholder's equity....................................... $ 39,044,453 $ 301,751,355
------------ -------------
------------ -------------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-35
<PAGE>
UNITY CELLULAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
1995 1996
------------- --------------
<S> <C> <C>
REVENUES AND SALES:
Monthly access revenue........................................................... $ 6,269,260 $ 7,612,423
Airtime revenue.................................................................. 2,561,826 3,277,268
Roaming revenue.................................................................. 1,235,981 1,288,357
Toll revenue..................................................................... 1,201,200 1,344,896
Installation, connection, and other revenue...................................... 345,960 388,797
------------- --------------
Total service revenues......................................................... 11,614,227 13,911,741
Equipment sales.................................................................. 2,354,543 2,172,409
------------- --------------
Total revenues and sales....................................................... 13,968,770 16,084,150
------------- --------------
OPERATING EXPENSES:
Cost of services................................................................. 1,418,883 1,817,877
Cost of equipment sales.......................................................... 1,783,813 1,786,673
Operations....................................................................... 1,595,992 2,038,979
Selling, general, and administrative............................................. 3,386,380 4,094,293
Depreciation and amortization.................................................... 3,184,061 4,190,078
------------- --------------
Total operating expenses....................................................... 11,369,129 13,927,900
------------- --------------
OPERATING INCOME................................................................... 2,599,641 2,156,250
------------- --------------
OTHER (INCOME) EXPENSE:
Interest expense................................................................. 859,924 987,828
Interest income.................................................................. 0 (15,207,288)
Other income..................................................................... 0 (7,658)
------------- --------------
Total other (income) expenses.................................................. 859,924 (14,227,118)
------------- --------------
INCOME BEFORE MINORITY INTEREST, INCOME TAXES, AND CUMULATIVE EFFECT............... 1,739,717 16,383,368
MINORITY INTEREST IN LOSS OF CELLULAR PARTNERSHIP.................................. 129,547 473,578
------------- --------------
INCOME BEFORE INCOME TAXES......................................................... 1,869,264 16,856,946
INCOME TAX PROVISION............................................................... 994,964 5,338,940
------------- --------------
NET INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE.............. 874,300 11,518,006
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE, NET OF TAX BENEFIT OF $565,000
(NOTE 1)......................................................................... 0 (1,253,181)
------------- --------------
NET INCOME......................................................................... $ 874,300 $ 10,264,825
------------- --------------
------------- --------------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-36
<PAGE>
UNITY CELLULAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK, PAID-IN RETAINED STOCKHOLDER'S
$1 PAR VALUE CAPITAL EARNINGS EQUITY
----------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1994......................... $ 100 $ 18,405,321 $ 196,860 $ 18,602,281
Net income....................................... 0 0 874,300 874,300
--- ------------- ------------- -------------
BALANCE, December 31, 1995......................... 100 18,405,321 1,071,160 19,476,581
Net income....................................... 0 0 10,264,825 10,264,825
--- ------------- ------------- -------------
BALANCE, December 31, 1996......................... $ 100 $ 18,405,321 $ 11,335,985 $ 29,741,406
--- ------------- ------------- -------------
--- ------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-37
<PAGE>
UNITY CELLULAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
1995 1996
----------- --------------
<S> <C> <C>
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net income........................................................................ $ 874,300 $ 10,264,825
----------- --------------
Adjustments to reconcile net income to net cash provided by operating activities-
Minority interest in loss of partnership........................................ (129,547) (473,578)
Cumulative effect of change in accounting principle, before tax benefit......... 0 1,818,181
Depreciation and amortization................................................... 3,184,061 4,190,078
Deferred taxes, net............................................................. 994,964 1,551,278
Changes in assets and liabilities:
Accounts receivable........................................................... (726,963) (242,301)
Inventory..................................................................... (23,871) (188,937)
Prepaid expenses and other current assets..................................... (146,392) 104,290
Deferred charges and other.................................................... (2,428,539) (1,676,239)
Accounts payable, advanced billings and customer deposits, and accrued
expenses.................................................................... 169,476 3,197,378
----------- --------------
Total adjustments........................................................... 893,189 8,280,150
----------- --------------
Net cash provided by operating activities................................... 1,767,489 18,544,975
----------- --------------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Additions to property, plant, and equipment....................................... (2,683,162) (6,450,436)
Increase in short-term investments................................................ 0 (75,658,893)
Receipt of proceeds from RTFC capital certificates................................ 1,840,592 0
----------- --------------
Net cash used in investing activities....................................... (842,570) (82,109,329)
----------- --------------
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Increase (decrease) in due to parent.............................................. (1,663,368) 249,280,877
Capital contributed by minority partner in Northern Maine Partnership............. 687,532 334,827
Advances from affiliate........................................................... 2,153 141,265
----------- --------------
Net cash provided by (used in) financing activities......................... (973,683) 249,756,969
----------- --------------
NET INCREASE (DECREASE) IN CASH..................................................... (48,764) 186,192,615
CASH, BEGINNING OF PERIOD........................................................... 145,002 96,238
----------- --------------
CASH, END OF PERIOD................................................................. $ 96,238 $ 186,288,853
----------- --------------
----------- --------------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-38
<PAGE>
UNITY CELLULAR SYSTEM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
OWNERSHIP
In February 1987, Unity Cellular System, Inc. ("UNICEL" or the "Company")
was formed as a wholly owned subsidiary of Unity Telephone Company ("Unity") to
operate a cellular telephone system throughout central and northern Maine,
including the Bangor, Maine, metropolitan service area and two rural service
areas ("RSA2" and "RSA3"). UNICEL is the managing partner, with a 51% interest
of the RSA2 cellular partnership (the "Northern Maine Partnership") (NOTE 2). On
January 31, 1994, Unity spun off all its assets and liabilities, except for its
common stock of UNICEL, into a newly formed company, Unitel. InterCel, Inc.
("InterCel") then exchanged common stock and cash for all of the stock of the
Company and purchased, for cash, from two principal stockholders of Unity,
warrants entitling the holders to purchase common stock of the Company. The
merger was accounted for as a purchase. Accordingly, the excess of the purchase
price over the net book value of the assets is recorded as goodwill in the
accompanying consolidated balance sheets.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated balance sheets include the accounts of the
Northern Maine Partnership. All significant intercompany accounts and
transactions have been eliminated in consolidation.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current
year presentation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the Company's 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. Estimates also affect the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from those
estimates.
REGULATION
The Company and its subsidiary are subject to the regulatory authority of
the Federal Communications Commission.
SOURCES OF SUPPLIES
The Company relies on local and long-distance telephone companies to provide
communications capacity. Although management feels that alternative
telecommunications facilities could be found in a timely manner, any disruption
of these services could have an adverse effect on operating results.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand, demand deposits, and
short-term investments with original maturities of three months or less.
F-39
<PAGE>
UNITY CELLULAR SYSTEM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995 AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SHORT-TERM INVESTMENTS
Investments having maturities of more than three months but less than one
year are categorized as held-to-maturity. Accordingly, they are carried at cost,
without recognition of gains or losses deemed to be temporary, because the
Company has both the intent and ability to hold these investments to maturity.
At December 31, 1996, the fair value of these investments approximated cost.
REVENUE RECOGNITION
The Company earns revenues by providing cellular service to both local
subscribers and subscribers of other cellular carriers traveling (roaming)
through the Company's service area as well as from sales of cellular equipment.
Local service revenues consist of base monthly service fees and airtime
revenues. Base monthly service fees are billed one month in advance and are
recognized when earned. Airtime revenues are recognized when service is
provided. Roamer revenues consist of daily fees charged to certain
nonsubscribers (depending on the nonsubscriber's cellular carrier) for roaming
in the service area as well as airtime revenues for the use of the cellular
network. Roamer revenues are recognized when service is rendered.
Long-distance revenues (toll revenues) are charged to both local and roamer
users and are recognized when service is rendered. Local toll (intra-LATA)
revenue is passed through to the end user with no markup. Equipment sales are
recognized upon delivery of the equipment to the customer. Installation and
connection revenues are recognized when provided.
CREDIT RISK
The Company's accounts receivable potentially subject the Company to credit
risk, as collateral is generally not required. The Company's risk of loss is
limited due to advance billings to customers for services and the ability to
terminate access on delinquent accounts. The concentration of credit risk is
mitigated by the large number of customers comprising the customer base. The
carrying amount of the Company's receivables approximates their fair value.
INVENTORIES
The Company maintains inventories of cellular telephones and accessory parts
(e.g., antennae, batteries, cable, etc.) for resale. Inventory is valued at the
lower of cost (which approximates first-in, first-out) or market.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at fair market value as of January 31,
1994 (which approximates historical cost), including certain labor, material,
and overhead costs. The Company records depreciation using the straight-line
method over the estimated useful lives of the assets, as follows:
<TABLE>
<S> <C>
10-20
Buildings and towers............................................ years
Leasehold improvements.......................................... 5-10 years
Equipment....................................................... 3-10 years
Furniture and fixtures.......................................... 5-10 years
</TABLE>
F-40
<PAGE>
UNITY CELLULAR SYSTEM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995 AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company's policy is to remove the cost and accumulated depreciation of
retirements from the accounts and recognize the related gain or loss upon the
disposition of assets. There were no material retirements in 1995. During 1996,
the Company purchased dual-mode analog/digital switching and transmission
equipment. In conjunction with this purchase, the Company traded in its original
switching equipment. The accumulated depreciation of the original switching
equipment was removed, and the net book value of the original switching
equipment, approximately $1,364,000, was included in the cost basis of the
acquired dual-mode analog/digital switching and transmission equipment.
GOODWILL
Goodwill is stated at cost, less accumulated amortization, and is amortized
using the straight-line method over 40 years. The Company periodically reviews
the value assigned to goodwill to determine whether it has been other than
temporarily impaired by adverse conditions affecting the Company. In
management's opinion, there has been no diminution in the value assigned to
goodwill.
INCOME TAXES
The Company is included in the consolidated federal income tax return of
InterCel. Under a joint consolidated income tax agreement, current and deferred
income taxes are allocated to the Company based on its stand-alone taxable
income.
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes," which requires the
use of the asset and liability approach for financial accounting and reporting
for income taxes.
OTHER ASSETS
Beginning in 1994, the Company began offering a promotional program under
which a customer could receive a substantial discount toward a cellular phone in
return for signing a noncancelable cellular telephone service agreement for a
term of one, two, or three years. Under the promotional program, the Company
deferred the cost associated with the program and amortized such cost over the
specific contract term. These costs are included in deferred charges and other
on the accompanying balance sheet as of December 31, 1995. Should a customer
cancel service prior to expiration of his/her service agreement or be
disconnected for nonpayment, the customer becomes liable to the Company for the
full original credit issued under this program. It is the Company's policy to
establish a full reserve for receivables that arise as a result of such
cancellations.
On January 1, 1996, the Company changed its method of accounting for
discounts offered through its promotional program. Rather than defer the costs
and amortize them over the contract term, the Company will expense the discounts
when provided. The change in accounting principle resulted in a write-off of net
deferred promotional costs of $1,253,181, which is net of an income tax benefit
of $565,000, for the year ended December 31, 1996, and this amount is presented
in the accompanying statement of operations as a cumulative effect of change in
accounting principle.
F-41
<PAGE>
UNITY CELLULAR SYSTEM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995 AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
OTHER INVESTMENTS
Other investments consist of noninterest-bearing patronage capital
certificates ("PCCs") issued by the RTFC. The PCCs are issued annually and may
be distributed as cash in the future at the discretion of the RTFC's board of
directors. The Company did not receive any PCCs from the RTFC during 1995 or
1996.
DEFERRED REVENUE
Deferred revenue consists of RTFC PCCs issued in connection with certain
debt financing which will be paid in the future at the discretion of the RTFC's
board of directors. They will be recognized as income when cash is received.
MINORITY INTEREST
Minority interest represents the minority partner's proportionate share of
the equity of the Northern Maine Partnership.
2. CELLULAR PARTNERSHIP
In June 1992, the Company entered into the Northern Maine Partnership with
New York Cellular Geographic Service Area ("NYCGSA"), a wholly owned subsidiary
of NYNEX Mobile Communication, Inc. The Northern Maine Partnership owns and
operates a cellular system in Maine RSA2 in Aroostook, Somerset, and Piscataquis
Counties.
Under the terms of the partnership agreement, the Company contributed
$2,325,600 to construct and begin operating the system in return for a 51%
ownership, and NYCGSA contributed the system construction permit, valued at
$2,234,400, for its 49% ownership. Subsequent capital requirements are to be met
based on the partners' respective ownership percentages.
In July 1995, NYCGSA transferred its interest to Cellco Partnership
("Cellco"). Cellco was formed pursuant to the merger of Bell Atlantic
Corporation and NYNEX Corporation.
In connection with the InterCel merger, UNICEL and InterCel entered into an
agreement with Cellco, the minority partner in the Northern Maine Partnership,
pursuant to which Cellco agreed not to exercise certain rights under the
partnership agreement.
The business and affairs of the Northern Maine Partnership are conducted by
a management committee (the "Management Committee"). The Management Committee is
composed of two individuals nominated by Cellco and three individuals nominated
by UNICEL.
The Northern Maine Partnership is functioning under a business plan for
1997, subject to review by the Management Committee, which includes capital
contributions from the partners to meet the expected operating and capital needs
of the Northern Maine Partnership through 1997. In management's opinion, funds
available from the partners are sufficient to meet the operating and capital
needs of the partnership through 1997 and beyond.
3. LONG-TERM DEBT
Subsequent to January 31, 1994, all RTFC obligations of the Company were
repaid by InterCel, and the Company executed notes payable, which is presented
as due to parent in the accompanying balance sheets, to
F-42
<PAGE>
UNITY CELLULAR SYSTEM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995 AND 1996
3. LONG-TERM DEBT (CONTINUED)
InterCel totaling approximately $18,085,000. For 1995, InterCel charged the
Company interest on the outstanding amount of the due to parent balance and
additional paid-in capital less gross goodwill at the rate of eight percent. For
1996, InterCel charged the Company interest on the outstanding amount of the due
to parent balance (excluding all items related to the InterCel offerings) and
additional paid-in capital less gross goodwill and investment balances at the
rate of eight percent.
InterCel's management has represented that the note, or any portion thereof,
will not be called in the normal course of business during 1997. Accordingly,
the unpaid balance of the note as of December 31, 1996 is classified as
long-term in the accompanying balance sheet.
4. COMMITMENTS AND CONTINGENCIES
LEASE
The Company leases office and warehouse space, dedicated lines and trunk
access facilities, and computer equipment. The leasing of certain dedicated
lines and trunk access is with the parent of the minority partner in the
cellular partnership. Lease expense under these leases totaled $553,649 and
$908,283 during 1995 and 1996, respectively.
At December 31, 1996, the Company's minimum rental commitments under
noncancelable operating leases with initial or remaining terms of more than one
year were as follows:
<TABLE>
<S> <C>
1997................ $ 339,016
1998................ 282,959
1999................ 203,903
2000................ 136,409
2001................ 127,918
Thereafter.......... 429,405
----------
Total............. $1,519,610
----------
----------
</TABLE>
Rental expense under these leases totaled $261,388 and $336,311 during 1995
and 1996, respectively.
LEGAL PROCEEDINGS
The Company is subject to legal proceedings and claims which arise in the
ordinary course of business. There are no material pending legal proceedings to
which the Company is a party.
5. INCOME TAXES
Components of the income tax provision are as follows as of December 31,
1995 and 1996:
<TABLE>
<CAPTION>
1995 1996
---------- ------------
<S> <C> <C>
Current provision................................................... $ 0 $ 3,222,662
Deferred provision.................................................. 994,964 1,551,278
---------- ------------
Total........................................................... $ 994,964 $ 4,773,940
---------- ------------
---------- ------------
</TABLE>
F-43
<PAGE>
UNITY CELLULAR SYSTEM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995 AND 1996
5. INCOME TAXES (CONTINUED)
The following is a summary of the items which caused recorded income taxes
to differ from taxes computed using the statutory federal income tax rate:
<TABLE>
<CAPTION>
1995 1996
----- -----
<S> <C> <C>
Statutory federal tax rate...................................................... 34% 34%
Increase (decrease) in tax provision resulting from:
Goodwill amortization......................................................... 11 1
State taxes, net of federal benefit........................................... 11 (4)
Other, net.................................................................... (3) 1
- -
53% 32%
- -
- -
</TABLE>
The sources of the differences between the financial accounting and tax
bases of assets and liabilities which give rise to the deferred tax assets as of
December 31, 1995 and 1996 are as follows:
<TABLE>
<CAPTION>
1995 1996
------------ ------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards................................ $ 2,651,667 $ 1,049,866
Allowance for doubtful accounts................................. 42,598 30,854
Other........................................................... 133,735 79,293
------------ ------------
2,828,000 1,160,013
Deferred tax liability:
Depreciation.................................................... (666,094) (549,385)
------------ ------------
Net deferred tax asset............................................ 2,161,906 610,628
Less current portion.............................................. (159,258) 0
------------ ------------
Deferred tax asset--noncurrent.................................... $ 2,002,648 $ 610,628
------------ ------------
------------ ------------
</TABLE>
6. ASSET SALE
Pursuant to an Asset Purchase Agreement, dated as of December 23, 1996,
between UNICEL; InterCel Licenses, Inc., a wholly owned subsidiary of InterCel;
and MRCC, Inc., a wholly owned subsidiary of Rural Cellular Corporation
("MRCC"), MRCC acquired substantially all the assets and FCC licenses of UNICEL,
constituting UNICEL's cellular telephone operations in Maine, for approximately
$77.2 million, including $5.4 million held in escrow, on May 1, 1997.
Additionally, Cellco sold its interest in the Northern Maine Partnership to
MRCC.
7. EMPLOYEE BENEFIT PLAN
As a former subsidiary of Unitel, the Company included its employees as
participants in Unitel's pension plan (the "Plan") as of January 31, 1994. The
Plan covered all eligible employees of Unitel, Unity Cable Television, Inc., and
the Company until April 29, 1994, when benefit accruals for all plan
participants who were employees of the Company were terminated. On September 26,
1994, the Plan spun off all assets and liabilities attributable to the Unity
Telephone and subsidiary participants. The Plan provides retirement, disability,
and survivor benefits to eligible employees. The Company's policy is to fund
pension cost in accordance with applicable regulations.
F-44
<PAGE>
UNITY CELLULAR SYSTEM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995 AND 1996
7. EMPLOYEE BENEFIT PLAN (CONTINUED)
During fiscal 1996, the Company's interest in the Plan was merged with the
InterCel pension plan. Effective November 1, 1996, InterCel notified
participants of its intent to terminate the plan. The effective date of
termination is expected in the first half of fiscal 1997. The effects of the
proposed termination were not material. The following table sets forth the
Company's portion of the defined benefit plan's funded status as of December 31,
1995 and 1996:
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Actuarial present value of benefit obligation:
Vested benefits--
Accumulated benefit obligation.................................. $ (126,314) $ (102,919)
Additional amounts related to projected salary increases........ 0 0
----------- -----------
Projected benefit obligation...................................... (126,314) (102,919)
Less--
Fair value of plan assets....................................... 145,425 114,612
Unrecognized net loss........................................... 5,727 14,292
----------- -----------
Prepaid pension cost recognized in the accompanying balance
sheets............................................................ $ 24,838 $ 25,985
----------- -----------
----------- -----------
</TABLE>
The actuarial present value of the projected benefit obligation was
determined using a discount rate of 6% for 1995 and 1996, and the expected
long-term rate of return on assets was 6%.
The net periodic pension (income) cost for the years ended December 31, 1995
and 1996 was not material to the financial statements.
F-45
<PAGE>
- ---------------------------------------------
---------------------------------------------
- ---------------------------------------------
---------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS (THE
"PROSPECTUS") AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO WHICH IT
RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, TO ANY PERSON
IN ANY JURISDICTION WHERE AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT AS
OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
--------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary............................................................. 6
Risk Factors.................................................................. 23
The Exchange Offer............................................................ 31
The Acquisitions.............................................................. 38
Use of Proceeds............................................................... 39
Capitalization................................................................ 40
Selected Financial Data....................................................... 41
Unaudited Pro Forma Condensed Consolidated Financial Data..................... 45
Management's Discussion and Analysis of Financial Condition and Results of
Operations.................................................................. 52
Business...................................................................... 62
Management.................................................................... 81
Certain Transactions.......................................................... 85
Security Ownership of Certain Beneficial Owners and Management................ 87
Description of Other Indebtedness............................................. 90
Description of Capital Stock.................................................. 92
Description of Senior Subordinated Notes...................................... 95
Description of Exchangeable Preferred Stock
and Exchange Debentures.................................................... 116
Certain United States Federal Income Tax Considerations...................... 157
Plan of Distribution......................................................... 168
Legal Matters................................................................ 169
Experts...................................................................... 169
Additional Information....................................................... 169
Index to Financial Statements................................................ F-1
</TABLE>
$250,000,000
[LOGO]
RURAL CELLULAR CORPORATION
$125,000,000
9 5/8% SENIOR SUBORDINATED NOTES
DUE 2008
125,000 SHARES
11 3/8% SENIOR EXCHANGEABLE
PREFERRED STOCK
--------------------
PROSPECTUS
--------------------
July 24, 1998
- ---------------------------------------------
---------------------------------------------
- ---------------------------------------------
---------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Unless prohibited in a corporation's articles or bylaws, Minnesota Statutes
Section 302A.521 requires indemnification of officers, directors, employees and
agents, under certain circumstances, against judgments, penalties, fines,
settlements and reasonable expenses (including attorneys' fees and
disbursements) incurred by such person in connection with a threatened or
pending proceeding with respect to the acts or omissions of such person in his
official capacity. The general effect of Minnesota Statutes Section 302A.521 is
to require the Registrant to reimburse (or pay on behalf of) directors and
officers of the Registrant any personal liability that may be imposed for
certain acts performed in their capacity as directors and officers of the
Registrant, except where such persons have not acted in good faith.
The Articles of Incorporation and Bylaws of the Registrant provide for such
indemnification to the maximum extent permitted by Minnesota Statutes. The
Registrant has purchased insurance covering the liability of its directors and
officers.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NO. DOCUMENT PAGE NO.
- ------ -------------------------------------------------------------------------------------- ---------
<C> <S> <C>
1.1 Purchase Agreement dated as of May 7, 1998 by and among the Company and TD Securities
(USA) Inc., NationsBanc Montgomery Securities LLC, and BancBoston Inc. (the Initial
Purchasers)......................................................................... [vi]
2.1 Asset Purchase Agreement dated December 23, 1996 by and among the Registrant, Unity
Cellular Systems, Inc., InterCel Licenses, Inc. and InterCel, Inc................... [ii]
2.2 Partnership Interest Purchase Agreement dated April 18, 1997 by and between Cellco
Partnership dba Bell Atlantic NYNEX Mobile, Inc. and MRCC, Inc...................... [ii]
2.3 Asset Purchase Agreement among Atlantic Cellular Company, L.P., Atlantic Cellular/New
Hampshire RSA Number One Limited Partnership and RCC Atlantic Inc., Rural Cellular
Corporation as of February 13, 1998................................................. [viii]
3.1 Articles of Incorporation, as amended and restated to date............................ [iii]
3.2 Bylaws, as amended and restated to date............................................... [iii]
4.1 Indenture dated May 14, 1998 between the Registrant, as Issuer, and Norwest Bank
Minnesota, N.A., as Trustee, with respect to the 9 5/8% Senior Subordinated Notes
Due 2008............................................................................ [vi]
4.2 Form of the 9 5/8% Senior Subordinated Notes Due 2008 (included as an exhibit to the
Indenture, filed herewith as Exhibit 4.5)........................................... [vi]
4.3 Notes Exchange and Registration Rights Agreement dated as of May 14, 1998 by and among
the Registrant and the Initial Purchasers........................................... [vi]
4.4 Certificate of Designation of 11 3/8% Senior Exchangeable Preferred Stock............. [vi]
4.5 Preferred Stock Exchange and Registration Rights Agreement dated as of May 14, 1998 by
and among the Registrant and the Initial Purchasers................................. [vi]
5.1 Opinion of Moss & Barnett, A Professional Association................................. [vi]
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NO. DOCUMENT PAGE NO.
- ------ -------------------------------------------------------------------------------------- ---------
<C> <S> <C>
10.1(a) Loan Agreement dated May 1, 1997 (the "Loan Agreement") 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")........................................................ [ii]
10.1(b) Amendment to the Loan Agreement dated August 4, 1997.................................. [vi]
10.1(c) Amendment to the Loan Agreement dated December 30, 1997............................... [ix]
10.1(d) Amendment to the Loan Agreement dated April 17, 1997.................................. [vi]
10.1(e) Amendment to the Loan Agreement dated April 24, 1997.................................. [vi]
10.2(a) Amended and Restated Loan Agreement among the Registrant, as borrower, the financial
institutions whose names appear as lenders on the signature pages thereof, TD
Securities (USA), Inc., as arranging agent for the lenders, and Toronto Dominion
(Texas), Inc., as administrative agent for the lenders, dated as of July 1, 1998.... [vii]
10.2(b) Exhibit A--Form of Amended and Restated Borrower's Pledge Agreement................... [vii]
10.2(c) Exhibit E--Form of Revolving Loan Note................................................ [vii]
10.2(d) Exhibit F--Form of Amended and Restated Security Agreement............................ [vii]
10.2(e) Exhibit G--Form of Subsidiary Guaranty................................................ [vii]
10.2(f) Exhibit H--Form of Subsidiary Pledge Agreement........................................ [vii]
10.2(g) Exhibit I--Form of Subsidiary Security Agreement...................................... [vii]
10.2(h) Exhibit J--Form of Term Loan Note..................................................... [vii]
10.2(i) Exhibit K--Form of Incremental Facility Note.......................................... [vii]
10.2(j) Exhibit Q--Form of Assignment and Assumption Agreement................................ [vii]
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 Harris Corporation, Farinon
Division, dated May 12, 1995........................................................ [iii]
10.6 Cell Site Purchase Agreement between Northern Telecom, Inc. and Registrant dated
November 24, 1993, as amended on October 25, 1995................................... [iii]
10.7(a) Trademark and Trade Name License Agreements between Cellular 2000, Inc. and:
(i) North Woods Cellular Partnership
(ii) Northern Lights Cellular Partnership
(iii) Great River Cellular Partnership
(iv) Cellular Five Partnership
(v) Heartland Cellular Partnership................................................... [iii]
10.7(b) Assignment and Assumption Agreements by and between the Registrant and each
partnership......................................................................... [iii]
10.8 Roaming Agreements with CSM of St. Cloud.............................................. [iii]
10.9 1995 Stock Compensation Plan, as amended to date...................................... [vi]
10.10 Stock Option Plan for Nonemployee Directors, as amended to date....................... [v]
10.11(a) Employment Agreement with Richard P. Ekstrand effective December 1, 1996.............. [iii]
10.11(b) Amendment to Employment Agreement with Mr. Ekstrand effective December 18, 1996....... [v]
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NO. DOCUMENT PAGE NO.
- ------ -------------------------------------------------------------------------------------- ---------
<C> <S> <C>
10.11(c) Amendment to Employment Agreement with Mr. Ekstrand effective December 18, 1997....... [ix]
10.12(a) Employment Agreement with Scott G. Donlea effective December 1, 1995.................. [v]
10.12(b) Amendment to Employment Agreement with Mr. Donlea effective December 18, 1996......... [v]
10.12(c) Amendment to Employment Agreement with Mr. Donlea effective December 18, 1997......... [ix]
10.13(a) Employment Agreement with Wesley E. Schultz effective May 14, 1996.................... [ix]
10.13(b) Amendment to Employment Agreement with Mr. Schultz effective December 18, 1996........ [ix]
10.13(c) Amendment to Employment Agreement with Mr. Schultz effective December 18, 1997........ [ix]
12 Statements re Computation of Ratios................................................... [vi]
21 Subsidiaries of Registrant............................................................ [ix]
23.1 Consent of Arthur Andersen LLP........................................................ [x]
23.2 Consent of KPMG Peat Marwick LLP...................................................... [x]
23.3 Consent of Arthur Andersen LLP........................................................ [x]
23.4 Consent of Moss & Barnett, A Professional Association (included in exhibit 5.1)....... [vi]
25 Statement of Eligibility of Trustee................................................... [vi]
99.1 Form of Letter of Transmittal for 9 5/8% Senior Subordinated Notes Due 2008 of the
Company............................................................................. [vi]
99.2 Form of Letter of Transmittal for 11 3/8% Senior Exchangeable Preferred Stock of the
Company............................................................................. [vi]
99.3 Form of Notice of Guaranteed Delivery for 9 5/8% Senior Subordinated Notes Due 2008... [vi]
99.4 Form of Notice of Guaranteed Delivery for 11 3/8% Senior Exchangeable Preferred
Stock............................................................................... [vi]
99.5 Form of Letter to Brokers, Dealers, Commercial Banks, Trust Companies and Other
Nominees for 9 5/8% Senior Subordinated Notes Due 2008.............................. [vi]
99.6 Form of Letter to Brokers, Dealers, Commercial Banks, Trust Companies and Other
Nominees for 11 3/8% Senior Exchangeable Preferred Stock............................ [vi]
99.7 Form of Letter to Clients of Brokers, Dealers, Commercial Banks, Trust Companies and
Other Nominees for 9 5/8% Senior Subordinated Notes Due 2008........................ [vi]
99.8 Form of Letter to Clients of Brokers, Dealers, Commercial Banks, Trust Companies and
Other Nominees for 11 3/8% Senior Exchangeable Preferred Stock...................... [vi]
99.9 Form of Instruction from Owner of 9 5/8% Senior Subordinated Notes Due 2008 of the
Company............................................................................. [vi]
99.10 Form of Instruction from Owner of 11 3/8 Exchangeable Preferred Stock of the
Company............................................................................. [vi]
</TABLE>
- ------------------------
[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.
II-3
<PAGE>
[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.
[vi] Filed previously.
[vii] Filed as an exhibit to Report on Form 8-K dated July 1, 1998 and
incorporated herein by reference.
[viii] Filed as an exhibit to Report on Form 10-Q for the quarter ended March
31, 1998 and incorporated herein by reference.
[ix] Filed as an exhibit to Report on Form 10-K for the year ended December 31,
1997 and incorporated herein by reference.
[x] Filed herewith.
(b) Financial Statement Schedule
Schedule II--Valuation and Qualifying Accounts ................. F-20
All schedules not included are omitted either because they are not
applicable or because the information required therein is included in the
Company's Notes to Consolidated Financial Statements.
ITEM 22. UNDERTAKINGS
(a) The undersigned Company hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in
the registration statement; and
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(4) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Company pursuant to the foregoing provisions, or
otherwise, the Company has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the Company of expenses incurred or paid by a director,
officer or controlling person of the Company in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Company will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
II-4
<PAGE>
(5) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Items 11, 12 and/or 13 of Form
S-4, within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means.
This includes information contained in documents filed subsequent to the
effective date of the registration statement through the date of responding
to the request.
(6) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein,
that was not the subject of and included in the registration statement when
it became effective.
(7) That for purposes of determining any liability under the Securities
Act of 1933, each filing of the registrant's annual report pursuant to
Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 (and,
where applicable, each filing of an employee benefit plan's annual report
pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is
incorporated by reference in the registration statement shall be deemed to
be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to Registration Statement on Form S-4 to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Alexandria, State of Minnesota, on the 23rd day of July, 1998.
<TABLE>
<S> <C> <C>
RURAL CELLULAR CORPORATION
By: /s/ RICHARD P. EKSTRAND
------------------------------------------
Richard P. Ekstrand
PRESIDENT AND C.E.O.
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to Registration Statement has been signed below on the 23rd day of July,
1998 by the following persons in the capacities indicated:
SIGNATURE TITLE
- ------------------------------ --------------------------
President, Chief Executive
/s/ RICHARD P. EKSTRAND Officer and Director
- ------------------------------ (principal executive
Richard P. Ekstrand officer)
Vice President -- Finance
/s/ WESLEY E. SCHULTZ and Chief Financial
- ------------------------------ Officer (principal
Wesley E. Schultz financial and accounting
officer)
*
- ------------------------------ Director
Jeffrey S. Gilbert
*
- ------------------------------ Director
Marvin C. Nicolai
*
- ------------------------------ Director
George M. Revering
*
- ------------------------------ Director
Don C. Swenson
*
- ------------------------------ Director
George W. Wikstrom
<TABLE>
<S> <C> <C> <C>
* Executed by the
undersigned as
attorney-in-fact for the
named signatory
/s/ WESLEY E. SCHULTZ
-------------------------
Wesley E. Schultz
</TABLE>
II-6
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
to Rural Cellular Corporation (and to all references to our Firm) included in
or made a part of this Registration Statement.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
July 23, 1998
<PAGE>
Exhibit 23.2
INDEPENDENT AUDITORS' CONSENT
The Partners of Atlantic Cellular Company, L.P.
and Subsidiaries:
We consent to the inclusion of our report dated February 17, 1998 with
respect to the consolidated balance sheets of Atlantic Cellular Company, L.P.
and Subsidiaries as of December 31, 1996 and 1997 and the related
consolidated statements of operations, partners' capital and cash flows for
each of the years in the three-year period ended December 31, 1997, which
report appears in the Registration Statement on Form S-4 of Rural Cellular
Corporation dated July 23, 1998 and to the reference to our firm under the
headings "Experts" and "Selected Financial Data" in the Prospectus. Our
report included an explanatory paragraph stating that the Partnership entered
into two separate purchase and sale agreements in February 1998 which will
result in the sale of substantially all of the Partnership's assets.
KPMG Peat Marwick LLP
Providence, Rhode Island
July 23, 1998
<PAGE>
Exhibit 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
to Unity Cellular System, Inc. and Subsidiary (and to all references to our
Firm) included in or made a part of this Registration Statement.
ARTHUR ANDERSEN LLP
Atlanta, Georgia,
July 23, 1998
