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SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )
| Filed by the Registrant /x/ |
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| Filed by a Party other than the Registrant / / | ||
| Check the appropriate box: |
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| / / | Preliminary Proxy Statement | |
| / / | Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2)) | |
| /x/ | Definitive Proxy Statement | |
| / / | Definitive Additional Materials | |
| / / | Soliciting Material Pursuant to §240.14a-11(c) or §240.14a-12 |
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| RURAL CELLULAR CORPORATION |
| (Name of Registrant as Specified In Its Charter) |
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| (Name of Person(s) Filing Proxy Statement, if other than the Registrant) |
Payment of Filing Fee (Check the appropriate box):
| /x/ | No fee required. | |||
| / / | Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11. |
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| (1) | Title of each class of securities to which transaction applies: |
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| (2) | Aggregate number of securities to which transaction applies: |
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| (3) | Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined): |
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| (4) | Proposed maximum aggregate value of transaction: |
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| (5) | Total fee paid: |
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Fee paid previously with preliminary materials. |
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Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. |
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Amount Previously Paid: |
| (2) | Form, Schedule or Registration Statement No.: |
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[LOGO]
February 14, 2000
Dear Shareholder:
On behalf of the board of directors and management of Rural Cellular Corporation, it is my pleasure to invite you to a special meeting of shareholders.
The special meeting will be held on Wednesday, March 22, 2000, at our headquarters, 3905 Dakota Street S.W., Alexandria, Minnesota, at 3:00 p.m., Minnesota time. At the meeting, we will vote on the matters described in the attached proxy statement and notice of special meeting of shareholders.
We urge you to read the enclosed proxy statement and notice and to exercise your right to vote.
Please mark, sign and return your proxy(ies) promptly in the enclosed envelope, which requires no postage if mailed in the United States. If you prefer, you may vote by phone. The instructions are contained on the proxy card. Please return your proxy or vote by phone even if you intend to be present at the meeting.
On behalf of the board of directors and management, I thank you for your participation by voting and for your continued support of and interest in Rural Cellular Corporation.
We hope that you will be able to attend the meeting and look forward to seeing you there.
Sincerely,
[SIGNATURE]
Richard P. Ekstrand
President and Chief Executive Officer
RURAL CELLULAR CORPORATION
3905 Dakota Street S.W.
Alexandria, Minnesota 56308
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
March 22, 2000
Please take notice that a special meeting of the shareholders of Rural Cellular Corporation, a Minnesota corporation, will be held at the Company's headquarters, 3905 Dakota Street S.W., Alexandria, Minnesota, on Wednesday, March 22, 2000 at 3:00 p.m., Minnesota time, to consider and vote upon the following matters:
The Board of Directors of the Company has fixed the close of business on February 7, 2000, as the record date for the determination of shareholders entitled to notice of and to vote at the special meeting. The transfer books of the Company will not be closed.
You are urged to complete, date, sign, and return the accompanying proxy card in the enclosed, self-addressed envelope or to vote by phone as described on the proxy card. In addition, please attend the special meeting if you can do so.
BY ORDER OF THE BOARD OF DIRECTORS
[SIGNATURE]
Don
C. Swenson
Secretary
Dated: February 14, 2000
TABLE OF CONTENTS
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Page |
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|---|---|---|
| Solicitation and Revocation of Proxies | 1 | |
| Voting Rights | 2 | |
| Votes Required and Board Recommendations | 2 | |
| Ownership of Voting Securities | 2 | |
| Proposal No. 1: Approval of Issuance of Class M Convertible Preferred Stock | 6 | |
| Proposal No. 2: Approval of Amendment to Articles of Incorporation | 10 | |
| Proposal No. 3: Approval of Amendment to Bylaws | 13 | |
| Shareholder Proposals for 2000 Annual Meeting | 17 | |
| Independent Accountants | 17 | |
| Forward-Looking Statements | 17 | |
| Appendix: | ||
| Where You Can Find More Information | A-1 | |
| Incorporation of Certain Documents by Reference | A-1 | |
| Business of Rural Cellular | A-3 | |
| Pending Acquisition | A-6 | |
| Business of Triton | A-7 | |
| Description of Financing Arrangements | A-8 | |
| Description of Capital Stock | A-17 | |
| Price of Common Stock | A-20 | |
| Selected Financial and Operating Data | A-21 | |
| Unaudited Pro Forma Condensed Consolidated Financial Data | A-27 | |
| Management's Discussion and Analysis of Financial Condition and Results of Operations | A-45 | |
| Index to Financial Statements | F-1 |
RURAL CELLULAR CORPORATION
3905 Dakota Street S.W.
Alexandria, Minnesota 56308
PROXY STATEMENT
FOR SPECIAL MEETING OF SHAREHOLDERS
March 22, 2000
SOLICITATION AND REVOCATION OF PROXIES
The accompanying proxy is solicited by the board of directors of Rural Cellular Corporation in connection with a special meeting of the shareholders of Rural Cellular Corporation, which will be held on March 22, 2000, and any adjournments thereof.
How To Vote
How Your Proxy Will be Voted
How to Revoke Your Proxy
Abstentions
Broker Non-Votes
Costs of Solicitation
Copies of this proxy statement and proxies will first be mailed to shareholders on or about February 14, 2000.
Only shareholders of record at the close of business on February 7, 2000 are entitled to notice of and to vote at the special meeting or any adjournment thereof. As of that date, there were issued and outstanding 8,134,230 shares of Class A common stock and 1,032,163 shares of Class B common stock, the only classes of our securities entitled to vote at the meeting. Each holder of record of Class A common stock is entitled to one vote for each share registered in his or her name as of the record date, and each holder of record of Class B common stock is entitled to ten votes for each share registered in his or her name as of the record date. No shareholder will have appraisal rights or similar dissenter's rights as a result of any matters expected to be voted on at the meeting. The presence in person or by proxy of holders of a majority of the voting power represented by the outstanding shares of the Class A and Class B common stock, in the aggregate, entitled to vote at the special meeting will constitute a quorum for the transaction of business.
VOTES REQUIRED AND BOARD RECOMMENDATIONS
Adoption of the proposal to issue the Class M convertible preferred stock and adoption of the amendment to our Articles of Incorporation require the affirmative vote of a majority of voting power of all shares present and entitled to vote (in person or by proxy). Adoption of the amendment to the Bylaws requires the affirmative vote of the holders of not less than 2/3 of the voting power of all shares outstanding and entitled to vote, voting together as a single class.
Our board of directors recommends that you vote FOR the issuance of the Class M convertible preferred stock, FOR the amendment to our Articles of Incorporation, and FOR the amendment to our Bylaws. Your proxy will be so voted unless you specify otherwise.
OWNERSHIP OF VOTING SECURITIES
The following table sets forth information provided to us by the holders, or contained in our stock ownership records, regarding beneficial ownership of our common stock as of February 7, 2000 (except as otherwise noted) by:
Unless otherwise indicated, each person has sole voting and investment power with respect to the shares listed.
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Class A |
Class B |
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Percentage of combined voting power |
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| Name and address of beneficial owner |
Number of shares |
Percentage of class |
Number of shares |
Percentage of class |
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| Baron Capital Group, Inc.(1) 767 Fifth Avenue 24th Floor New York, NY 10153 |
830,000 | 10.2 | % | - | - | 4.5 | % | ||||
| Franklin Resources, Inc.(2) 777 Mariners Island Boulevard San Mateo, CA 94404 |
732,200 | 9.0 | - | - | 4.0 | ||||||
| Telephone & Data Systems, Inc.(3) 30 North LaSalle Street Chicago, IL 60602 |
586,799 | 7.2 | 132,597 | 12.8 | % | 10.4 | |||||
| Goldman Sachs Asset Management (4) 85 Broad Street New York, New York 10004 |
478,950 | 5.9 | - | - | 2.6 | ||||||
| Consolidated Telephone Company 1102 Madison Street Brainerd, MN 56401 |
171,107 | 2.1 | 86,189 | 8.4 | 5.6 | ||||||
| Arvig Enterprises, Inc. 160 2nd Ave. S.W. Perham, MN 56573 |
169,545 | 2.1 | 121,664 | 11.8 | 7.5 | ||||||
| Sherburne TelCom, Inc. 444 N. Eagle Lake Road Big Lake, MN 55309 |
93,123 | 1.1 | 54,289 | 5.3 | 3.4 | ||||||
| Paul Bunyan Rural Telephone Cooperative(5) 1831 Anne Street NW Bemidji, MN 56601 |
54,106 | * | 85,332 | 8.3 | 4.9 | ||||||
| West Central CelCom, Inc. 209 Minnesota Avenue Sebeka, MN 56477 |
- | - | 79,857 | 7.7 | 4.3 | ||||||
| Melrose Telcom, Inc. 320 East Main Street Melrose, MN 56352 |
- | - | 79,493 | 7.7 | 4.3 | ||||||
| Hector Communications Corporation(6) 211 South Main Street Hector, MN 55342 |
- | * | 75,362 | 7.3 | 4.1 | ||||||
| Richard P. Ekstrand(7) | 205,177 | 2.5 | 32,708 | 3.2 | 2.9 | ||||||
| Jeffrey S. Gilbert(8) | 70,956 | * | 85,332 | 8.3 | 5.0 | ||||||
| Ann K. Newhall(9) | 32,000 | * | - | - | * | ||||||
| Marvin C. Nicolai(10) | 188,257 | 2.3 | 86,189 | 8.4 | 5.7 | ||||||
| George M. Revering(11) | 100,100 | 1.2 | - | - | * | ||||||
| Wesley E. Schultz(12) | 79,517 | * | - | - | * | ||||||
| Don C. Swenson(13) | 192,359 | 2.4 | % | 121,664 | 11.8 | % | 7.6 | % | |||
| George W. Wikstrom(14) | 95,535 | 1.2 | 34,944 | 3.4 | 2.4 | ||||||
| Scott G. Donlea(15) | 41,664 | * | - | - | * | ||||||
| David J. Del Zoppo(16) | 8,347 | * | - | - | * | ||||||
| All directors and executive officers as a group (10 persons)(17) | 1,013,912 | 12.0 | % | 360,837 | 35.0 | % | 24.6 | % | |||
PROPOSAL NO. 1
APPROVAL OF ISSUANCE OF CLASS M CONVERTIBLE PREFERRED STOCK
We propose to issue up to 200,000 shares of Class M convertible preferred stock pursuant to an agreement with Madison Dearborn Capital Partners III, L.P., Madison Dearborn Special Equity III, L.P.; Special Advisors Fund I, LLC (collectively, "Madison Dearborn"); Boston Ventures Limited Partnership V; and Toronto Dominion Investments, Inc. If all 200,000 shares are issued, these shares would be immediately convertible, at the initial conversion price of $53.00 per share, to 3,773,585 shares of our Class A common stock (or approximately 36% of our Class A common stock to be outstanding after the issuance of Class A common stock as a part of the funding for the Triton acquisition. See "Description of Financing Arrangements" in the Appendix). We are required by the terms of our agreement with the investors to issue a minimum of 110,000 shares, which could be converted at the initial conversion price of $53.00 per share to 2,075,472 shares of our Class A common stock (or approximately 20% of our Class A common stock post-Triton financing). The Class M preferred stock is to be issued concurrently with the closing of the Triton acquisition (described in the Appendix under "Pending Acquisition"). The rules that govern continued listing of our Class A common stock by the Nasdaq National Market require shareholder approval prior to the issuance of securities, other than in a public offering for cash, in connection with an acquisition which could result in the issuance of shares of common stock in an amount equal to 20% or more of the number of shares outstanding immediately prior to the issuance. Accordingly, we are seeking your approval of the issuance of the Class M convertible preferred stock in an amount that, upon conversion, would exceed 19.9% of our outstanding common stock.
If the shareholders do not approve the issuance of Class M convertible preferred stock above the 19.9% ceiling, we may nonetheless proceed to issue the full 200,000 shares of Class M preferred stock, except that shares in excess of the 19.9% ceiling will have no voting or conversion rights. Such nonconvertible shares would have certain additional redemption rights, as described below.
Terms of Class M Preferred Stock
The 200,000 shares of Class M preferred stock will include redeemable voting convertible preferred stock and may include redeemable nonvoting nonconvertible preferred stock. The issue price is $1,000 per share. Redeemable voting convertible preferred stock will represent no more than 19.9% of the combined voting power or number of shares of common stock outstanding as of the date of issuance of the Class M preferred stock (reduced by any other convertible securities issued in connection with the Triton acquisition) unless our shareholders vote to approve the issuance of additional shares in accordance with the rules of the Nasdaq Stock Market.
Dividends; Conversion; Ranking. The Class M preferred stock will be entitled to cumulative dividends at a rate of 8.0% per annum and will participate in any dividends payable on the Class A common stock. The Class M convertible preferred stock may be converted into Class A common stock at an initial conversion price of $53.00 per share at the option of an investor at any time after it is issued. The per share conversion price represents an 18.3% premium to the trailing 15-trading-day average closing price of the Class A common stock from September 27, 1999 to (and including) October 15, 1999. The per share conversion price will be adjusted if we issue (or are deemed to issue, by reason of issuance of warrants, options or convertible securities) common stock at a price less than the market price of the common stock. The Class M preferred stock will rank junior to our senior exchangeable preferred stock, junior exchangeable preferred stock, Class T convertible preferred stock and junior bridge preferred stock, if issued, with respect to dividend rights and rights on liquidation, winding-up, and dissolution. At our option, at any time, we may exchange junior subordinated debentures for all or any portion of the Class M convertible preferred stock, but only if the exchange will not trigger recognition of any material income by the holders for any U.S. federal or state income tax purposes. Exchange debentures, if issued, will mature in 2012 and will have terms substantially equivalent to the terms of the Class M convertible preferred stock, including but not limited to coupons or discounts equivalent to the dividends on the Class M convertible preferred stock, put rights, redemption rights, convertibility into Class A common stock with antidilution protection, and registration rights.
Redemption. The Class M preferred stock is subject to redemption, as described below.
| When |
Terms |
At Whose Election |
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|---|---|---|---|---|
| Within 90 days after issuance | A maximum of $25 million may be redeemed and a minimum of $110 million must remain outstanding after redemption. The redemption price is 102% of issue price ($1,000) plus accrued dividends | At our option, but we must redeem nonconvertible shares (if any) before redeeming any convertible shares | ||
| Any time when less than $25 million in Class M preferred stock remains outstanding | The redemption price of Class M convertible preferred stock is $1,000/share (issue price) plus all accrued dividends. The redemption price of Class M nonconvertible preferred stock (if any) (the "nonconvertible redemption price") is the greater of (i) the issue price ($1,000), plus accrued dividends or (ii) a price based on the trailing 15-day average market price of our Class A common stock multiplied by the number of shares of Class A common stock into which the nonconvertible shares could be converted if they were convertible shares | At our option. However, holders of nonconvertible Class M preferred stock can elect to receive the redemption price in cash or Class A common stock. Accordingly, we can exercise this option only if we can pay the redemption price for the nonconvertible Class M preferred stock with shares of our Class A common stock | ||
| Twelve years after date of issuance | The redemption price of Class M convertible preferred stock is $1,000/share (issue price) plus all accrued dividends. The redemption price of Class M nonconvertible preferred stock (if any) is the nonconvertible redemption price described above | Mandatory redemption. We may pay the redemption price in cash or Class A common stock, at our option | ||
| Five years after date of issuance | The redemption price of Class M convertible preferred stock is $1,000/share (issue price) plus all accrued dividends. The redemption price of Class M nonconvertible preferred stock (if any) is the nonconvertible redemption price described above | At our option. However, holders of nonconvertible Class M preferred stock can elect to receive the redemption price in cash or Class A common stock. Accordingly, we can exercise this option only if we can pay the redemption price for the Class M nonconvertible preferred stock with shares of our Class A common stock | ||
| Any time after three years from date of issuance if the closing price of our Class A common stock is at least 175% of the conversion price for 30 consecutive days | The redemption price of Class M convertible preferred stock is $1,000/share (issue price) plus all accrued dividends. The redemption price of Class M nonconvertible preferred stock (if any) is the nonconvertible redemption price described above | At our option. However, holders of nonconvertible Class M preferred stock can elect to receive the redemption price in cash or Class A common stock. Accordingly, we can exercise this option only if we can pay the redemption price for the Class M nonconvertible preferred stock with shares of our Class A common stock | ||
| After August 15, 2003 | Applies only to nonconvertible shares (if any). The redemption price is the nonconvertible redemption price described above. This option is not exercisable if the repurchase would violate the terms of our outstanding senior securities | At the option of the holders. We may pay the redemption price in cash or Class A common stock, at our option |
Change of Control. The investors have the right to require us to buy back the Class M preferred stock upon a change in control of Rural Cellular at a repurchase price equal to the greater of 101% of the issue price, plus accrued dividends, or the per share purchase price that the holder would have received in the change of control transaction if the holder had converted to common stock before that event.
Restrictions on Company. So long as the Class M preferred stock is outstanding, we will not be permitted to declare, pay, or set apart for payment any dividends or other distribution on any stock junior to the Class M preferred stock (other than dividends payable in shares of junior stock), or purchase, redeem, retire, or otherwise acquire any shares of junior stock, or any option or warrant in respect thereof, other than out of cumulative earnings available to common stock, net proceeds from the sale of junior stock subsequent to the issue date, or equity subscription or stock option agreements in effect on the issue date. In addition, we will be limited in our ability to expand our business to include any business which is not substantially similar to or incidental to our current business. These and other restrictions and limitations contained in the agreement concerning the Class M preferred stock may be waived by the prior written consent of the holders of a majority of the Class M preferred stock then outstanding.
Registration Rights. Holders of the Class A common stock issued upon conversion of the Class M stock will be entitled to certain demand and participatory registration rights.
Board Membership. Madison Dearborn and Boston Ventures will each have the right to designate one member of our board of directors. This right terminates at any time that the investor holds an amount of Class M preferred stock less than 50% of the Class M preferred stock originally issued to Madison Dearborn.
Voting Rights. The holders of the Class M convertible preferred stock will vote on all matters with the holders of our Class A common stock (with the exception of certain matters affecting their particular rights, in which case they will vote as a class) on an as-converted basis. For example, if all 200,000 shares of the Class M preferred stock are voting preferred shares, the holders of the Class M preferred stock would have the equivalent of 3,773,585 shares of Class A common stock for voting purposes.
Undrawn Commitment Fee. We are required to pay the investors a fee equal to 2% of any portion of their $200 million commitment which we do not draw down. For example, if we sell only 110,000 shares of Class M preferred stock ($110 million), we will be required to pay a fee of $1.8 million to the investors.
Use of Proceeds from Sale of Class M Preferred Stock
We will use the proceeds of issuance of the Class M preferred stock, with other funds, to complete the proposed acquisition of the licenses, operations, and related assets of Triton Cellular Partners, L.P. and its affiliates. The Triton acquisition is described under "Pending Acquisition" in the Appendix to this proxy statement. As stated above, your approval of the issuance of the Class M preferred stock in an amount convertible into Class A common stock above the 19.9% ceiling is required by our listing agreement with The Nasdaq Stock Market. We are not asking you to vote on the Triton acquisition since under Minnesota corporate law, your approval of the acquisition is not required.
Although the issuance of the Class M preferred stock is not a condition precedent to the completion of the Triton acquisition, the failure to approve the issuance of the Class M convertible preferred stock in amounts in excess of the 19.9% ceiling could delay the completion of the acquisition and add to the Company's costs. If the acquisition is not completed, the Class M preferred stock may not be issued.
Effects of Issuance
The issuance of the Class M convertible preferred stock, like the authorization and potential issuance of capital stock described under Proposal No. 2, could discourage or make more difficult a change in control of the Company. The existence of the Class M convertible preferred stock (and the potential for issuance of additional shares of Class A common stock upon conversion of the Class M convertible preferred stock) could frustrate the efforts of persons seeking to take over or gain control of the Company, whether or not the change in control is favored by a majority of unaffiliated shareholders. The issuance of the Class M convertible preferred stock and its conversion into Class A common stock will have the effect of reducing the percentage voting interest of currently outstanding voting securities. In addition, the issuance of the Class M convertible preferred stock and its conversion to Class A common stock may have a dilutive effect on our earnings per share and on the trading price of our outstanding securities. The likelihood or magnitude of these effects is difficult to predict since they are dependent in part on circumstances beyond our control.
The funding for the Triton acquisition entails the issuance of additional series of preferred stock (described in the Appendix to this proxy statement under "Description of Financing Arrangements") which may compound these effects. In addition, we have adopted other antitakeover devices, including classification of our board of directors and share rights plans. (See the discussion under Proposal No. 3 and "Description of Capital Stock" in the Appendix).
Further, the Class M convertible preferred stock is convertible at a price which is less than the recent market prices for our Class A common stock. Thus, the Company may be issuing Class A common stock for less consideration than it might receive if it sold Class A common stock directly to the public or other investors at the time of conversion.
PROPOSAL NO. 2
APPROVAL OF AMENDMENT TO ARTICLES OF INCORPORATION
Rural Cellular's authorized capital is currently 30,000,000 shares of capital stock, consisting of 15,000,000 shares of Class A common stock, par value $.01 per share; 5,000,000 shares of Class B common stock, par value $.01 per share; and 10,000,000 undesignated shares, par value $.01 per share, of which 450,000 shares have been designated as 113/8% senior exchangeable preferred stock, 400,000 shares have been designated as 121/4% junior exchangeable preferred stock, 200,000 shares have been designated as Series A junior participating preferred stock, and 50,000 shares have been designated as Series B junior participating preferred stock. We are proposing an amendment to our Articles of Incorporation to increase the authorized capital stock to 300,000,000 shares, consisting of 200,000,000 shares of Class A common stock, par value $.01 per share; 10,000,000 shares of Class B common stock, par value $.01 per share; and 90,000,000 undesignated shares, par value $.01 per share (which includes the 1,100,000 currently designated shares, described above).
As of February 7, 2000, 8,134,230 shares of Class A common stock, 1,032,163 shares of Class B common stock, and 147,489 shares of 113/8% senior exchangeable preferred stock were issued and outstanding. In addition, 1,539,565 shares of Class A common stock are reserved for issuance under stock option and stock purchase plans (including 1,191,447 shares subject to outstanding options) and the Company intends to issue approximately 2,390,000 shares of Class A common stock, 25,000 shares of 113/8% senior exchangeable preferred stock, and 140,000 shares of 121/4% junior exchangeable preferred stock in public offerings anticipated to be completed prior to the special meeting. If the issuance of the Class M convertible preferred stock is approved, and if 200,000 shares of such convertible preferred stock are issued, we expect to reserve for issuance on conversion of the Class M convertible preferred stock approximately 3,773,585 shares of Class A common stock.
A principal reason for adopting the amendment to our Articles of Incorporation is to provide the Company with additional authorized shares to permit issuance of up to 3,773,585 shares of Class A common stock upon conversion of the Class M preferred stock, the issuance of which is discussed under Proposal No. 1 in this proxy statement. In addition, we believe that we will need additional authorized shares for issuance in future acquisitions and for other corporate purposes, including but not limited to equity financings, convertible security financings, stock dividends and stock splits, and options and other stock-based compensation for employees.
Approval of the amendment to our Articles of Incorporation, like the issuance of the Class M convertible preferred stock, is not a condition precedent to the Triton acquisition. In addition, if the Articles of Amendment are approved and for any reason the acquisition is not completed or the Class M preferred stock is not issued, the Articles of Amendment will be implemented notwithstanding. As noted above, we believe that the increase in authorized capital stock is desirable for a variety of reasons, whether or not such increase is required in connection with the issuance of the Class M convertible preferred stock.
Form of Articles Amendment
The form of the amendment is set forth below.
Section 2.01 of Article II of the Articles of Incorporation of the Corporation is hereby amended and restated in its entirety to read as follows:
2.01 Number and Classes of Shares. The aggregate number of shares of capital stock which this Corporation shall have the authority to issue is 300,000,000 shares, of which 200,000,000 shares shall be Class A Common Stock, $.01 par value per share (the "Class A Common Stock"), 10,000,000 shares shall be Class B Common Stock, $.01 par value per share (the "Class B Common Stock"), and 90,000,000 shares shall be undesignated shares of capital stock, $.01 par value per share (the "Undesignated Shares"). (The Class A Common Stock and Class B Common Stock are sometimes referred to collectively herein as the "Common Stock.") The board of directors is authorized to establish from the Undesignated Shares, by resolution adopted and filed in the manner provided by law, one or more classes or series of shares, to set forth the designation of each such class or series, and to fix the relative rights and preferences of each such class or series to the full extent permitted by law. In addition, and without limitation of the foregoing, the board of directors is authorized to designate additional shares of any designated class or series of capital stock (including Class A Common Stock, Class B Common Stock and any class of junior or preferred stock) from the Undesignated Shares. Except as otherwise provided in Section 2.02 hereof, the board of directors shall be authorized to issue shares of Common Stock to holders of Common Stock and to holders of any class or series of Undesignated Shares and to issue shares of any class or series of Undesignated Shares to holders of Common Stock and to holders of any class or series of Undesignated Shares, in any case, for any purpose. If at any time no Class B Common Stock remains outstanding, the board of directors is authorized to redesignate the remaining authorized Class B Common Stock as authorized Class A Common Stock. Prior to the effective date of this amended and restated Section 2.01, the board of directors utilized a portion of the Undesignated Shares to establish several classes and series of capital stock and no such class or series of capital stock shall be affected in any respect by this amended and restated Section 2.02, regardless of whether a statement with respect to such capital stock has heretofore been filed with the office of the Minnesota Secretary of State pursuant to Minnesota Statutes Section 302A.401, Subd. 3(b).
Future Issuance of Authorized Shares
Although a principal purpose of the adoption of the amendment is to provide sufficient shares for conversion of the Class M convertible preferred stock, other important purposes are to provide additional authorized capital stock for issuance in future acquisitions and for other corporate purposes, including but not limited to equity financings, convertible security financings, stock dividends and stock splits, and options and other stock-based compensation for employees. Our board of directors will have the ability to authorize the issuance of the additional shares and to determine the terms of issuance of such shares in its sole discretion without obtaining shareholder approval, except where shareholder approval is required by applicable stock exchange rules or state law. Further, all or any of the authorized shares may be issued without first offering those shares to existing shareholders for subscription. The issuance of shares otherwise than on a pro-rata basis to all shareholders would reduce the proportionate interest in the Company of each existing shareholder.
During the last several years we have completed a number of acquisitions as part of our strategy to broaden our product offerings, to augment our technological capabilities and to expand our geographic markets and distribution channels. We may make additional acquisitions for these and other business reasons and, from time to time, we may pay for acquisitions with our stock. We continue to actively evaluate possible acquisitions and may effect one or more such transactions if we determine that such transactions are in the best interests of the Company and its shareholders.
If we experience significant increases in the market price of our Class A common stock, the board may determine that it is appropriate to effect a stock split. If the proposed amendment is not approved, the current number of authorized shares of common stock that are not outstanding or reserved may not be sufficient to enable us to complete a stock split. Although we cannot guarantee that our stock price will rise or that the board would declare a stock split at any specific price or at all, the board believes that the proposed increase in the number of authorized shares will provide us with the flexibility necessary to maintain a reasonable stock price through future stock splits (effected in the form of a stock dividend) without the expense of a special shareholder meeting or having to wait until the next annual meeting.
In connection with the Triton acquisition, and in order to comply with Federal Communications Commission requirements, we have reached an agreement with Telephone & Data Systems, Inc. to reduce its ownership of our Class A and Class B common stock to less than 5% by exchanging for such shares either shares of Class T convertible preferred stock or convertible debentures which will be created specifically for the exchange.
Except for the issuances noted above, and except for the shares which may be issued upon conversion of the Class M preferred stock and otherwise in connection with the funding of the Triton acquisition, we currently do not have any plans, commitments, or undertakings to issue any additional shares of stock.
Possible Effect of Increase in Authorized Shares
One result of the proposed increase in the number of shares of capital stock authorized for future issuance is that it may discourage or make more difficult a change in control of the Company. Additional shares could be used under certain circumstances to dilute the voting power of, create voting impediments for, or otherwise frustrate the efforts of persons seeking to effect the takeover or gain control of the Company, whether or not the change of control is favored by a majority of unaffiliated shareholders. For example, such shares could be privately placed with purchasers who might side with the board of directors in opposing a hostile takeover bid. We have other defenses available against acts of third parties that are designed to effect a change of control of the Company. These defenses are described in the Appendix to this proxy statement under "Description of Capital Stock." We have not proposed the increase in the authorized number of shares with the intention of using the additional shares for antitakeover purposes, although we could theoretically use the additional shares to make more difficult or to discourage an attempt to acquire control of the Company.
Any issuance of Class A common stock would have, and any issuance of any other voting stock, including preferred stock, could have, the effect of reducing the percentage voting interest of currently outstanding common stock. It is not possible to predict in advance whether the issuance of additional shares will have a dilutive effect on earnings per share or on the trading price of the Class A common stock, as such effects depend on the specific circumstances of particular transactions, as well as events outside of our control.
See also the discussion of this topic under Proposal No. 1 and Proposal No. 3 in this Proxy Statement.
PROPOSAL NO. 3
APPROVAL OF AMENDMENT TO BYLAWS
The board of directors has unanimously adopted an amendment to Section 3.02 of Article III of our Bylaws, which will increase the maximum number of directors which may be appointed by the board or elected by the shareholders from nine to eleven. We are submitting this amendment to you for your approval by vote of the shareholders. The Bylaws currently permit the maximum number of our directors to be increased by the number of any additional directors required to comply with the applicable terms of any class or series of stock (not including common stock) that allows for election of directors by the holders under certain circumstances, such as default, in accordance with Section 3.01 of the Company's Articles of Incorporation. We are not proposing any change in this provision.
As provided in Section 9.01 of the Bylaws, the proposed amendment of Section 3.02 requires the affirmative vote of the holders of not less than two-thirds (2/3) of the voting power of all shares outstanding and entitled to vote, voting together as a single class.
The proposed amendment will allow an increase in the size of the board of directors to accommodate appointments of directors on behalf of the investors in the Class M preferred stock.
Summary of Provisions of Section 3.02 and the Proposed Amendment
The Bylaws currently provide for a board of directors divided into three classes of directors serving staggered three-year terms, with a minimum of three directors and a maximum of nine directors. At present, eight directors are serving. The proposed amendment to Section 3.02 of the Bylaws provides for a minimum of three and a maximum of eleven directors. The amendment would permit the total number of directors to be increased to not more than eleven by the board of directors. In addition, the total number of directors could be increased to not more than eleven or decreased to not less than three (provided any such decrease does not shorten the term of an incumbent director) by the holders of a majority of the voting power of the outstanding shares present at a duly held meeting of the shareholders. Section 3.02 currently provides that if the number of directors is increased or decreased, such increase or decrease is to be apportioned among the three classes to maintain approximate equality of the number of directors in each class.
The Bylaws currently provide that any additional director of any class appointed by the board of directors to fill a vacancy resulting from an increase in the number of directors will hold office until the next meeting of shareholders at which directors are elected. The proposed amendment will provide that any such director will hold office until the end of the current term of the class to which the director is appointed. Section 3.02 further provides that, notwithstanding the other provisions of Section 3.02, if the holders of any class or series of capital stock other than common stock (e.g. preferred stock) have the right, voting separately as a class, to elect one or more directors (such as is often required by the terms of preferred stock in the event dividend payments are in arrears for a period of time), then the total number of directors shall be increased by the number of directors that such holders are entitled to elect. Other matters, such as the method of election, term of office, filling of vacancies and other features of such directorships will be governed by or pursuant to the terms of the certificate of designation or other instrument creating such class or series of stock, and such directors would not be classified pursuant to Section 3.02 unless so provided by such terms.
The text of the proposed amendment to Section 3.02 of the Bylaws follows:
Section 3.02. Number and Terms of Directors.
(a) The number of directors in each class shall be the number last elected by the shareholders, provided that the aggregate number of directors in the three classes shall not be less than three nor more than eleven (except as provided in Section 3.02(c), below). The number of directors in any class may be increased by the Board of Directors from the number of directors last elected by the shareholders and the resulting vacancy may be filled pursuant to Section 3.15 hereof; provided, however, that the Board of Directors may not increase the aggregate number of directors in the three classes to more than eleven. Vacancies occurring on the Board of Directors resulting from the death, resignation, removal or disqualification of a director or as a result of the expiration of a director's term need not be filled by the Board or shareholders, provided that the Board continues to have at least the minimum number of members required by the Articles of Incorporation.
(b) The directors shall be divided into three (3) classes, designated Class I, Class II, and Class III, and each class shall be as nearly equal in number as possible. Each class shall be elected to three-year terms, with one class to be elected each year. At each regular meeting of the shareholders, directors shall be elected for a full term of three years to succeed those whose terms expire. When the number of directors is changed, any increase or decrease in directorships shall be so apportioned among the classes as to make all classes as nearly equal in number as possible, and any additional director of any class elected to fill a vacancy resulting from an increase in such class shall hold office for a term that shall coincide with the remaining term of that class. In no case will a decrease in the number of directors shorten the term of any incumbent director. A director shall hold office until the regular meeting for the year in which the director's term expires and until a successor shall be elected and qualify, subject, however, to prior death, resignation, retirement, disqualification or removal from office.
(c) Notwithstanding the foregoing, whenever the holders of any one or more classes of capital stock (other than common stock) issued by the corporation shall have the right, voting separately by class or series, to elect directors at a regular or special meeting of shareholders, pursuant to the applicable terms of the certificate of designation or other instrument creating such class or series of stock as provided in the last paragraph of Section 3.01 of the Articles of Incorporation, any directors so elected shall be in addition to the aggregate number of directors determined in the manner set forth in the preceding paragraphs and shall increase the maximum number of directors permitted pursuant to the provisions of the preceding paragraphs. Any directors so elected shall not be divided into classes as provided in paragraph (b), above, unless expressly provided by the applicable terms of the certificate of designation or other such instrument.
Potential Antitakeover Effects
The board of directors believes that adoption of the proposed amendment will not have significant impact on the current ability of shareholders to change the composition of the incumbent board of directors, but, in conjunction with other provisions already contained in the Articles of Incorporation and Bylaws, could make more difficult attempts to acquire control of the Company. The limitation on the total number of directors may deter attempts to take control of the board by increasing its size and filling the resulting vacancies with individuals in favor of the takeover. However, the proposed amendment is not being proposed as a result of any current effort to change the composition of the board, gain control of the Company, or organize a proxy contest. Except as described under Proposal No. 1 and Proposal No. 2 in this proxy statement, the board of directors does not currently contemplate adopting, or recommending to the shareholders for their adoption, any further amendments to the Company's Articles of Incorporation or Bylaws that would affect the ability of third parties to take over or change control of the Company.
Certain other provisions of the Articles of Incorporation and Bylaws, discussed below, could also 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. None of these provisions will be changed by the amendment to Section 3.02 or are submitted for shareholder vote. In addition, certain provisions of the Minnesota Business Corporation Act ("MBCA") and certain Company stock plans and employment agreements could also deter such attempts.
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.
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 a 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 board of directors or 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 of 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 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. However, 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.
Undesignated Shares. Our authorized capital stock currently consists of 15,000,000 shares of Class A common stock, par value $.01 per share; 5,000,000 shares of Class B common stock, par value $.01 per share; and 10,000,000 undesignated shares, par value $.01 per share. If Proposal No. 2 is approved, these amounts will be increased. 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 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 designation and issuance of stock 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. In addition, shares issued with voting, conversion, or redemption rights may adversely affect the voting power of the holders of common stock and could discourage any attempt to obtain control of the Company.
Minnesota Law. We are subject to certain provisions of Minnesota law which may deter a change in control of the Company. Under the Minnesota Business Combination Act, we are precluded from entering into certain specified business combinations with, or proposed by, or on behalf of, an interested shareholder (that is, a beneficial holder of at least 10% of the outstanding voting shares, or an affiliate or associate of the Company who, within the preceding four years, was a 10% shareholder regardless of such person's present shareholdings), for at least four years after the shareholder acquires its 10% stock interest unless a committee of the board consisting of all of its disinterested directors (excluding present officers and employees of the Company and persons who were officers or employees of the Company within the preceding five years) approves the acquisition of the 10% stock interest or the business combination before the date on which the shareholder acquires its 10% interest.
For purposes of the statute, business combinations include the following transactions with an interested shareholder (or affiliated or associated persons of the interested shareholder): (i) certain mergers of the Company or its subsidiaries, statutory share exchanges or dispositions of substantial assets of the Company or its subsidiaries; (ii) issuances or transfers by the Company or its subsidiaries of substantial shares of the Company or its subsidiaries; (iii) loans or other financial assistance or tax advantages provided by the Company or its subsidiaries; and (iv) recapitalizations that increase the proportionate voting power of the interested shareholder or affiliated or associated persons. Plans for the liquidation, dissolution or reincorporation in another state of the Company proposed by, or on behalf of, or pursuant to agreements, arrangements or understandings with an interested shareholder (or affiliated or associated persons) also constitute business combinations.
We are also subject to the Minnesota Control Share Acquisition Act which, subject to certain exceptions, requires the approval of the holders of a majority of our voting shares and a majority of our voting shares held by disinterested shareholders before a person purchasing 20% or more of our voting shares can vote the shares in excess of 20%. Similar shareholder approvals are required at the 331/3% and majority thresholds.
Stock Option Plans and Employment Agreements. Our 1995 Stock Compensation Plan and Stock Option Plan for Nonemployee Directors permit the grant of options that provide, or the amendment of outstanding option agreements to provide, that the option will become fully exercisable in the event of certain changes in control of the Company, notwithstanding any other limitations in the plans regarding exercisability. In addition, employment agreements with certain of our executive officers provide for compensation if the individual's employment is terminated under certain circumstances following a change in control.
SHAREHOLDER PROPOSALS FOR 2000 ANNUAL MEETING
Our next annual meeting of shareholders is expected to be held on or about May 18, 2000, and proxy materials in connection with that meeting are expected to be mailed on or about April 3, 2000. In order to be included in the proxy materials for the annual meeting, shareholder proposals prepared in accordance with the proxy rules must have been received by us on or before December 8, 1999.
In addition, pursuant to Rule 14a-4 under the Exchange Act, a shareholder must give notice prior to February 21, 2000, of any proposal which such shareholder intends to raise at the annual meeting. According to Rule 14a-4, if we receive notice of such proposal on or after February 21, 2000, the persons named in the proxy solicited by our board of directors for the annual meeting may exercise discretionary voting power with respect to such proposal.
Further, under our Bylaws, a shareholder must give notice in writing to our Secretary no later than March 30, 2000, for business to be properly brought before the annual meeting. Any proposal not submitted by such date will not be considered at the annual meeting.
Arthur Andersen LLP, independent auditors, have audited the following financial statements. We have included these financial statements in this proxy statement in reliance on Arthur Andersen LLP's reports, given their authority as experts in accounting and auditing.
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 proxy statement, have been audited by KPMG 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 giving said report.
Representatives of Arthur Andersen LLP are expected to be present at the special meeting, will be given an opportunity to make a statement if they choose to do so, and will be available to respond to appropriate questions from shareholders.
All statements contained in this proxy statement (including the Appendix) and in the documents incorporated by reference in this proxy statement that are not historical facts, including but not limited to statements regarding the proposed Triton acquisition and the Company's plans for future development and operation of its business, are based on current expectations. These statements are forward-looking in nature and involve a number of known and unknown risks and uncertainties. Actual results may differ materially. We caution you not to place undue reliance on any forward-looking statements, which statements are made pursuant to the Private Securities Litigation Reform Act of 1995 and, as such, speak only as of the date made. Statements regarding parties other than Rural Cellular are based upon representations of such other parties.
* * *
It is important that proxies be returned promptly. We ask that you sign, date, and forward the proxy promptly.
BY ORDER OF THE BOARD OF DIRECTORS
[SIGNATURE]
Don
C. Swenson
Secretary
Dated: February 14, 2000
APPENDIX
Table of Contents
| |
Page |
|
|---|---|---|
| Where You Can Find More Information | A-1 | |
| Incorporation of Certain Documents by Reference | A-1 | |
| Business of Rural Cellular | A-3 | |
| Pending Acquisition | A-6 | |
| Business of Triton | A-7 | |
| Description of Financing Arrangements | A-8 | |
| Description of Capital Stock | A-17 | |
| Price of Common Stock | A-20 | |
| Selected Financial and Operating Data | A-21 | |
| Unaudited Pro Forma Condensed Consolidated Financial Data | A-27 | |
| Management's Discussion and Analysis of Financial Condition and Results of Operations | A-45 | |
| Index to Financial Statements | F-1 |
WHERE YOU CAN FIND MORE INFORMATION
Rural Cellular files annual, quarterly and special reports, proxy statements and other information with the Securities and Exchange Commission. You may read and copy any reports, statements or other information that Rural Cellular files with the Securities and Exchange Commission at the Securities and Exchange Commission's public reference rooms at the following locations:
| PUBLIC REFERENCE ROOM 450 Fifth Street, N.W. Room 1024 Washington, D.C. 20549 |
NEW YORK REGIONAL OFFICE 7 World Trade Center Suite 1300 New York, NY 10048 |
CHICAGO REGIONAL OFFICE Citicorp Center 500 West Madison Street Suite 1400 Chicago, IL 60661-2511 |
Please call the Securities and Exchange Commission at 1-800-SEC-0330 for information on the operations of the public reference rooms. These Securities and Exchange Commission filings are also available to the public from commercial document retrieval services and at the Internet world wide web site maintained by the Securities and Exchange Commission at "http://www.sec.gov."
Rural Cellular has filed with the Securities and Exchange Commission a registration statement on Form S-3 (Commission File No. 333-94195) to register Class A common stock and a registration statement on Form S-3 (Commission File No. 333-94197) to register its senior exchangeable preferred stock and junior exchangeable preferred stock. Both registration statements contain further information about Rural Cellular and the Triton acquisition.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Securities and Exchange Commission allows Rural Cellular to "incorporate by reference" information into this proxy statement, which means that Rural Cellular can disclose important information to you by referring you to other documents filed separately with the Securities and Exchange Commission. The information incorporated by reference is considered part of this proxy statement, except for any information superseded by information contained directly in this proxy statement or in later filed documents incorporated by reference in this proxy statement.
This proxy statement incorporates by reference the documents set forth below that Rural Cellular has previously filed with the Securities and Exchange Commission. These documents contain important business and financial information about Rural Cellular that is not included in or delivered with this proxy statement.
| 1. | Annual Report on Form 10-K | Fiscal year ended December 31, 1998 | ||
| 2. | Quarterly Reports on Form 10-Q | Quarters ended March 31, 1999, June 30, 1999, and September 30, 1999 | ||
| 3. | Current Reports on Form 8-K | Filed on May 5, 1999, and June 18, 1999, as amended on July 24, 1999 | ||
| 4. | The description of Rural Cellular common stock and rights to acquire junior preferred stock set forth in the Rural Cellular registration statements on Form 8-A | Filed under Section 12(g) of the Securities Exchange Act of 1934 on December 13, 1995 and May 19, 1999 |
Rural Cellular also incorporates by reference additional documents that may be filed with the Securities and Exchange Commission under Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act after the date of this proxy statement and prior to the time of the special meeting which is the subject of this proxy statement. These include periodic reports, such as Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, as well as proxy statements.
Documents incorporated by reference are available from Rural Cellular without charge, excluding all exhibits, except that if Rural Cellular has specifically incorporated by reference an exhibit in this proxy statement, the exhibit will also be provided without charge. You may obtain documents incorporated by reference in this proxy statement by requesting them in writing or by telephone from Rural Cellular at the following address:
Rural
Cellular Corporation
P.O. Box 2000
3905 Dakota Street S.W.
Alexandria, MN 56308
Telephone: (320) 762-2000
We are a leading cellular operator in the United States, primarily in rural markets, covering a total population of approximately 4.7 million and serving 427,000 cellular customers as of September 30, 1999, on a pro forma basis after giving effect to our pending acquisition of the licenses, operations, and related assets of Triton Cellular Partners, L.P. We currently provide cellular communications services in three regional clusters operating in seven states, and upon completion of the Triton acquisition, we will add two additional regional clusters operating in five states. We also own a 70% interest in Wireless Alliance, which provides personal communications services covering a total population of 708,000 and serving 11,000 customers in four states. We believe that owning and operating wireless systems in rural markets provides strong growth opportunities because these systems have lower penetration rates, a higher proportion of roamer revenues, and less competition for customers than wireless systems located in larger metropolitan areas due to their lower population density.
Our markets generally are characterized by concentrations of small businesses, vacation destinations, and, given the distance between population centers, substantial travel time. We believe these characteristics promote strong local wireless usage and allow us to generate significant roamer revenues. We operate our wireless systems using a decentralized management approach, which allows us to achieve substantial marketing and distribution benefits, as well as operating efficiencies. This decentralized management approach allows us to develop a strong local presence in the communities we serve, which enhances our competitive position and allows us to tailor our products and services to meet our customers' specific needs. We believe that our ability to customize our products and services results in greater customer satisfaction, customer retention, and market penetration. In addition, where appropriate, we share our successful service programs and operating practices among our various markets. As a result of these strategies, we have been able to generate strong internal growth and improve the operating and financial performance of our systems.
We follow a disciplined strategy of acquiring cellular systems primarily in rural markets. We focus on acquiring underdeveloped cellular systems that include a high concentration of highway corridors and, as a result, tend to have a significant amount of roaming activity. In November 1999, we reached an agreement to acquire the cellular licenses, operations, and related assets of Triton Cellular Partners, L.P. and its affiliates, covering portions of Alabama, Kansas, Mississippi, Oregon, and Washington, for a purchase price of approximately $1.24 billion in cash plus the assumption of specified liabilities. This is the latest in a series of acquisitions, which have included:
In November 1996, we extended our wireless communications footprint in our Midwest region through the formation of Wireless Alliance, a joint venture between us and an affiliate of Aerial Communications, which owns and operates personal communications services licenses in Minnesota, North Dakota, South Dakota, and Wisconsin. Wireless Alliance began providing personal communications services in 1998 and continues to fund the development of its customer base.
We believe that we have been successful in integrating our acquired systems into our operations and intend to seek opportunities to further expand our existing clusters and, where appropriate, pursue the acquisition of wireless systems in new markets with similar demographics and operating characteristics.
We have invested substantial capital and resources to enhance the quality of our networks, expand our geographic footprint, and broaden our service offerings. As a result of our significant network investments, 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 expanded digital services. We offer a wide array of digital services, including caller identification, short message services, and numeric paging, as well as other ancillary services including voicemail and call waiting. We believe our quality network coverage combined with our enhanced services promotes increased cellular usage and greater customer satisfaction. With the exception of our Atlantic region, digital services are available in all of our markets, including the Triton regions. We plan to have digital services available in our Atlantic region by year end 2000.
The following chart summarizes our existing wireless systems and the systems covered by the Triton acquisition as of September 30, 1999:
| Regions |
Percentage Ownership |
Total Population Served(1) |
Customers(2) |
Penetration(2) |
Square Miles |
Location by State |
||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Cellular Clusters: | ||||||||||||
| Midwest | 100 | % | 705,000 | 75,000 | 10.6 | % | 45,000 | MN, SD | ||||
| Maine | 100 | 595,000 | 51,000 | 8.6 | 24,000 | ME | ||||||
| Atlantic | 100 | 1,110,000 | 92,000 | 8.3 | 21,000 | MA, NH, NY, VT | ||||||
| South (pending) | 100 | 1,435,000 | 86,000 | 6.0 | 71,000 | AL, KS, MS | ||||||
| Northwest (pending) | 100 | 890,000 | 123,000 | 13.8 | 81,000 | OR, WA | ||||||
| Cellular Total | 4,735,000 | 427,000 | 9.0 | % | 242,000 | |||||||
| PCS Cluster: |
|
|
|
|
|
|
|
|
|
|
|
|
| Wireless Alliance | 70 | % | 708,000 | 11,000 | 1.6 | % | 19,000 | MN, ND, SD, WI | ||||
| Total | 5,443,000 | 438,000 | 8.0 | % | 261,000 | |||||||
Our objectives are to continue to expand our market position as the leading full service provider of wireless communications services in our markets by offering a full set of quality products and services that meet our customers' needs and providing extensive coverage and superior customer service at competitive prices. The key elements of our strategy are to:
In November 1999, we entered into an asset purchase agreement to acquire the Alabama, Kansas, Mississippi, Oregon, and Washington cellular licenses, operations, and related assets of Triton Cellular Partners, L.P. and its affiliates for a purchase price of approximately $1.24 billion in cash plus the assumption of specified liabilities. Subject to regulatory approvals and other conditions, the Triton acquisition is expected to close in the spring of 2000. The cellular systems being acquired are clustered in rural markets in the Northwest and South regions of the United States, with a total service area of approximately 152,000 square miles, and, as of September 30, 1999, covering a total population of approximately 2.3 million and serving 209,000 customers.
Financing of the Triton acquisition will come from the following sources:
We believe that the financing described above will be sufficient to fund the Triton acquisition, repay our existing credit facility, and pay related fees and expenses.
The Triton acquisition is conditioned upon our satisfying Federal Communications Commission requirements regarding cross-ownership of cellular licenses. An affiliate of Telephone & Data Systems, Inc., a significant shareholder of Rural Cellular, operates the other cellular licensee in two of the rural service areas involved in the Triton acquisition. In order to satisfy Federal Communications Commission requirements, we will issue shares of Class T convertible preferred stock or a convertible debenture to Telephone & Data Systems, Inc. in exchange for a sufficient number of shares of Class A and Class B common stock to reduce its holdings below the threshold allowed.
Our principal executive offices are located at 3905 Dakota Street S.W., Alexandria, Minnesota 56308. Our telephone number is 320-762-2000 and our website is located at www.rccwireless.com. The information on our website is not part of this proxy statement.
In November 1999, we entered into an asset purchase agreement to acquire the cellular licenses, operations, and related assets of Triton Cellular Partners, L.P. and its affiliates for a purchase price of approximately $1.24 billion in cash, plus the assumption of specified liabilities.
Under the agreement with Triton, we will acquire licenses to operate cellular systems in rural markets in the Northwest and South regions of the United States, with a total service area of approximately 152,000 square miles, and, as of September 30, 1999, covering a total population, or POPs, of 2.3 million and serving 209,000 customers.
As of September 30, 1999, on a pro forma basis, after giving effect to the Triton acquisition, our markets cover 5.4 million POPs (4.7 million cellular POPs and 0.7 million PCS POPs), serving 427,000 cellular and 11,000 PCS customers.
The cellular properties to be acquired from Triton include:
The purchase price is subject to adjustment, based on the amount by which Triton's current assets exceed, or are less than, Triton's current liabilities on the closing date. We will assume Triton's current liabilities and all of Triton's obligations under contracts entered into in the ordinary course of business. We will not assume bank debt or long-term liabilities of Triton. In the event that, prior to closing, Triton breaches any representations, warranties, or covenants that would, individually or in total, reasonably be expected to have a material adverse effect on the business or operations of the cellular systems we are acquiring, we would have the right to terminate the agreement with Triton. Triton's representations and warranties do not survive the closing of the acquisition.
The Triton acquisition will be treated as an asset purchase for federal income tax purposes. Therefore, we expect that neither Rural Cellular nor the shareholders of Rural Cellular will recognize gain or loss for federal income tax purposes as a result of the Triton acquisition.
Closing of the Triton acquisition is expected to occur in the spring of 2000 following the latest of:
We have received notification of the early termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act.
The agreement may be terminated by either party if closing has not occurred (for example, due to failure or delay in obtaining Federal Communications Commission or other regulatory approvals which are material to the transaction) on or before May 6, 2000.
We are engaging in the Triton acquisition as a part of our overall strategy to expand our market presence through acquisitions. We believe, based on our investigation of the business of Triton, that its systems have important similarities to our existing systems, including similar demographics and operating characteristics.
In connection with the Triton acquisition, we have agreed to exchange shares of Class T convertible preferred stock or convertible debentures for shares of our Class A and Class B common stock held by Telephone & Data Systems, Inc. in order to reduce Telephone & Data Systems, Inc.'s holdings to 5%. This reduction is required under a Federal Communications Commission rule limiting the ownership of competing cellular licenses. An affiliate of Telephone & Data Systems, Inc. operates licensees that compete with licenses that we will acquire in two rural service areas in Oregon.
Triton Cellular Partners, L.P. was formed in 1997 by former members of the Horizon Cellular Group executive management team and a group of private investors. Triton has grown through an acquisition strategy focusing on rural properties with attractive demographic profiles and favorable operating environments.
Triton operates cellular licenses in rural service areas in the states of Alabama, Kansas, Mississippi, Oregon, and Washington, as more specifically described under "Business of Rural Cellular." These properties cover approximately 152,000 square miles with, as of September 30, 1999, 2.3 million population served and 209,000 customers.
Triton operates under the CELLULARONE® brand in each of its three regions. The Triton regions are located in the Northwest, Central and Southern United States. Each market has similar characteristics including:
The Triton markets are supported by a decentralized management team consisting of over 450 employees. In addition, Triton has 44 retail locations. Sales personnel consist of approximately 110 retail and 65 major account employees and 91 independent sales agents.
Beginning in 1998, Triton has made significant investments in its network. Through June 1999, Triton has spent a total of $39.4 million adding digital capacity and improving overall coverage and quality. Triton currently has over 260 cell sites in service.
Triton Cellular Partners, L.P., is located at 1100 Cassatt Road, Berwyn, Pennsylvania 19312. The telephone number is 610-722-4484.
DESCRIPTION OF FINANCING ARRANGEMENTS
The following is a summary of our current and proposed financing arrangements, with the exception of the Class M preferred stock (which is described under Proposal No. 1 in the proxy statement). This summary is qualified in its entirety by reference to the various documents governing the financing arrangements.
Existing Credit Facility
As of the date of this proxy statement, we are party to a loan agreement dated as of July 1, 1998 with a consortium of banks. The existing credit facility comprises a revolving credit line in the maximum principal amount of $200.0 million and a $100.0 million term loan. It is anticipated that the proceeds from common and preferred stock offerings, together with the proceeds of the new credit facility described below, will pay all remaining obligations under the existing credit facility in full. As of September 30, 1999, $182.1 million was outstanding under our existing credit facility.
Our obligations under the existing credit facility are secured by a first security interest in all of our assets, excluding our ownership interest in Cellular 2000, and in some of our real estate. Repayment is unconditionally guaranteed by some of our subsidiaries, each of which has 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 us and our subsidiaries pledge 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 is payable quarterly on borrowings under the existing credit facility at rates based on, at our option, either (i) the 1, 2, 3, 6 or, if made available by the banks, 9 or 12 months London Interbank Offer Rate for U.S. dollar deposits, or LIBOR, or (ii) the Base Rate, which is the higher of the prime rate quoted by Toronto Dominion (Texas), Inc., which is the administrative agent for the banks, or the Federal Funds Rate plus 0.5%. In each case, an additional margin of interest is payable by us above the Base Rate or LIBOR. The margin is based on the ratio of our total debt (including debt of our subsidiaries) to our operating cash flow and that of our 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 to 1.25%. The margin above LIBOR fluctuates from 0.75% to 2.25%.
Under specified terms and conditions, subject to the approval of a majority of the lender interests in the existing credit facility, the amount available may be increased from $300.0 million to an amount not to exceed $425.0 million. The $125.0 million incremental facility will have a maturity no earlier than 12 months after the maturity of the $300.0 million debt under the existing credit facility, with principal repayments commencing not earlier than and in amounts not larger than, the repayment of the $300.0 million debt under the existing credit facility.
Subsequent to an event of default under the existing credit facility that continues beyond the applicable cure period, interest on outstanding amounts is payable at the highest applicable margin plus 2.0%.
The existing credit facility requires that the outstanding commitment be reduced in quarterly installments beginning March 31, 2001. The installment amounts payable each year increase over the term of the loan agreement, with a reduction of 1.875% each quarter in the first year, increasing to a reduction of 6.875% each quarter in the final year ending December 31, 2006, when payment in full is due.
The existing credit facility contains covenants that, subject to specified exceptions, restrict our ability to:
The existing credit facility also requires that we satisfy specified financial tests and maintain specified financial ratios. We are required to enter into specified interest rate swap agreements which rank pari passu with the existing credit facility. In addition to the scheduled reductions of outstanding principal described above, we are required to reduce the amount of commitment available under the existing credit facility on each March 31, beginning on March 31, 2001, by an amount equal to 50% of our excess cash flow for the immediately preceding year or portion thereof. In addition, we must pay specified costs if we prepay LIBOR advances.
Upon the occurrence of an event of default under the existing credit facility, the banks may cease making loans, terminate the facility, and declare all amounts outstanding to be immediately due and payable. The existing 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.
New Credit Facility
We have received a commitment from an affiliate of TD Securities (USA) Inc. to replace our existing credit facility. Concurrent with the closing of the Triton acquisition, we intend to close on a new credit facility in a total amount of $1.2 billion, which, together with the proceeds from common and preferred stock offerings described below and the issuance of the Class M preferred stock described under Proposal No. 1, will be used to finance the Triton acquisition, repay borrowings under our existing credit facility, pay related fees and expenses, fund additional acquisitions, and for capital expenditures and other corporate purposes. In the event the Triton acquisition does not close, the existing credit facility will remain in place, and we will not enter into the new credit facility.
The new credit facility will be subject to negotiation of definitive terms and conditions. As of the date of this proxy statement, assuming the Triton acquisition closes, it is expected that the new credit facility will consist of:
Our obligations under the new credit facility will be secured by a first security interest in all of our assets, excluding certain real estate and our ownership interest in some of our subsidiaries. Repayment will be unconditionally guaranteed by some of our subsidiaries, including our wholly owned subsidiaries, each of which will execute 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 us and our wholly owned subsidiaries will 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 our option, either (i) the 1, 2, 3, 6 or, if made available by the lender, 9 or 12 months LIBOR or (ii) the Base Rate, which is the higher of the prime rate of Toronto Dominion (Texas), Inc. or the Federal Funds Rate, plus 0.5%. In each case, we will be required to pay an additional margin of interest above the Base Rate or LIBOR. The margin will be based on the ratio of our debt (including the debt of our subsidiaries) to our annualized operating cash flow as of the end of the most recently completed fiscal quarter. The margin above the Base Rate ranges from 0.50% to 2.375%. The margin above LIBOR fluctuates from 1.50% to 3.375%.
Under specified terms and conditions, the amount available under the new credit facility may be increased from $1.2 billion to an amount not to exceed $1.375 billion. The $175.0 million incremental facility will have a maturity no earlier than 12 months after the maturity of the $1.2 billion debt under the new credit facility, with principal repayments commencing not earlier than and in amounts not larger than, the repayments under the $1.2 billion debt under the new credit facility.
Subsequent to an event of default under the agreements governing the new credit facility that 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.
It is anticipated that the closing on the new credit facility will occur immediately prior to the closing of the Triton acquisition. Interest only will be payable for the first three years. Thereafter, the new credit facility commitment shall be reduced and outstanding borrowings will be repaid in installments increasing over its term. Payment in full of the Revolving Credit and Term Loan A will be due eight years following closing of the new credit facility. The balance of Term Loan B is due 81/2 years from the date of closing, and the balance of Term Loan C is due 9 years from the date of closing.
In addition to the scheduled reductions of outstanding principal described above, we will be required to reduce the amount of commitment available under the new credit facility on each March 31, beginning on March 31, 2004, by an amount equal to 50% of our excess cash flow for the immediately preceding year or portion thereof. We must also pay specified costs if we prepay LIBOR advances. We will also be required, subject to specified exceptions, to reduce the amount of commitment available upon any material sale of assets unless the after-tax proceeds are used to acquire substitute assets in the ordinary course of business within 12 months from the date of sale.
The new credit facility will contain covenants that, subject to specified exceptions, restrict our ability to:
The new credit facility will also require that we satisfy specified financial tests and maintain specified financial ratios. We will be required to enter into specified 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.
Senior Subordinated Notes Due 2008
In 1998, we issued $125.0 million principal amount 95/8% senior subordinated notes due 2008. The notes are unsecured, senior subordinated obligations, subordinated in right of payment to our senior debt, including amounts outstanding under the existing credit facility prior to the consummation of the Triton acquisition and under the new credit facility after the consummation of the Triton acquisition, pari passu in right of payment with all of our future senior subordinated debt and senior in right of payment to any future subordinated debt. The notes mature on May 15, 2008. Interest on the notes accrues at a rate of 95/8% per annum and is payable in cash semiannually on each May 15 and November 15. After May 15, 2003, the notes may be redeemed at any time at our option, at a redemption price of 104.813% of their principal amount. The indenture governing the senior subordinated notes specifies that the redemption price declines annually at May 15th, to 103.208% at May 15, 2004, to 101.604% at May 15, 2005, and to 100.000% of the principal amount on or after May 15, 2006.
The indenture governing the senior subordinated notes contains specified restrictions with respect to the conduct of our business and specified restrictive covenants, including, among others, limitations on our ability to:
The indenture specifies a number of events of default, including, among others, a failure to make timely principal or interest payments or to perform the covenants contained therein. If an event of default occurs and is continuing, the trustee under the indenture or the holders of a specified principal amount of the outstanding notes may declare the principal of and accrued but unpaid interest on all the notes to be due and payable on the date provided for in accordance with the indenture. An acceleration of the notes may, under specified circumstances, be rescinded by the holders of a majority of the total principal amount of the then outstanding notes.
Senior Exchangeable Preferred Stock
In May 1998, we issued 125,000 shares of 113/8% senior exchangeable preferred stock. An additional 25,000 shares are reserved for possible future issuance. Additional shares may also be used to pay dividends on the 113/8% senior exchangeable preferred stock if we elect to pay dividends in additional shares of this stock. We have filed a registration statement (Commission File No. 333-94197) pursuant to which we intend to sell the additional 25,000 shares of the senior exchangeable preferred stock concurrently with this proxy solicitation.
The senior exchangeable preferred stock, with respect to dividend rights and rights upon our liquidation, winding-up and dissolution, ranks:
When, as and if dividends are declared by our board of directors out of funds legally available therefor, holders of the outstanding shares of senior exchangeable preferred stock are entitled to receive dividends at a rate per annum equal to 113/8%.
On or before May 15, 2003 we may, at our option, pay dividends in cash or in shares of senior exchangeable preferred stock having an aggregate liquidation preference equal to the amount of the dividends. After May 15, 2003, dividends may be paid only in cash. After May 15, 2003, we may redeem the senior exchangeable preferred stock at any time, at a redemption price of 105.688% of the then effective liquidation preference, plus without duplication, all accumulated and unpaid dividends, if any, to but excluding the redemption date. The redemption price declines annually to 104.266% at May 15, 2004, to 102.844% at May 15, 2005, to 101.422% at May 15, 2006, and to 100.000% of the liquidation preference on or after May 15, 2007.
The senior exchangeable preferred stock contains specified restrictions with respect to the conduct of our business and specified restrictive covenants, including, among others, limitations on our ability to:
The senior exchangeable preferred stock specifies a number of events, including, among others, a failure to make timely dividend payments or to perform the covenants contained therein, that, if continuing, entitle the holders of the outstanding senior exchangeable preferred stock to elect the lesser of two directors or 25% of the members of the board of directors.
We may, at our option, on any scheduled dividend payment date, exchange, in whole but not in part, the exchangeable preferred stock for debentures containing similar provisions regarding dividend or interest rate, covenants, and other matters.
Class A Common Stock
We have filed a registration statement (Commission File No. 333-94195) pursuant to which we intend to sell 2,390,000 shares of our Class A common stock. An additional 358,500 shares may be sold if the underwriters exercise their overallotment option in full. We intend to use the net proceeds of this offering to fund, in part, the Triton acquisition, and for working capital and other corporate purposes. Our offering of Class A common stock is not contingent upon completion of the Triton acquisition or upon completion of any of the offerings of preferred stock which are described in this Appendix.
Junior Exchangeable Preferred Stock
We have filed a registration statement (Commission File No. 333-94197) pursuant to which we intend to sell 140,000 shares of 121/4% junior exchangeable preferred stock, with an aggregate liquidation preference of $140.0 million. An additional 50,000 shares are reserved for possible future issuance. Additional shares may also be used to pay dividends on this stock.
The junior exchangeable preferred stock, with respect to dividend rights and rights upon our liquidation, winding-up and dissolution will rank:
When, as and if dividends are declared by our board of directors out of funds legally available therefor, holders of the outstanding shares of junior exchangeable preferred stock are entitled to receive dividends at a rate per annum equal to 121/4%.
On or before February 15, 2005 we may, at our option, pay dividends in cash or in shares of senior exchangeable preferred stock having an aggregate liquidation preference equal to the amount of the dividends. After that date, dividends may be paid only in cash. At any time on or before February 15, 2005, we may redeem all, but not less than all, of the junior exchangeable preferred stock at a price equal to 100% of the aggregate liquidation preference thereof plus a specified premium and accumulated and unpaid dividends, if any, to the date of redemption. After that date, we may redeem the junior exchangeable preferred stock at any time, at a redemption price of 106.125% of the then effective liquidation preference, plus without duplication, all accumulated and unpaid dividends, if any, to but excluding the redemption date. The redemption price declines annually to 104.594% at February 15, 2006, to 103.063% at February 15, 2007, to 101.531% at February 15, 2008, and to 100.000% of the liquidation preference on or after February 15, 2009.
The junior exchangeable preferred stock contains specified restrictions with respect to the conduct of our business and specified restrictive covenants, including, among others, limitations on our ability to:
The junior exchangeable preferred stock specifies a number of events, including, among others, a failure to make timely dividend payments or to perform the covenants contained therein, that, if continuing, entitle the holders of the outstanding senior exchangeable preferred stock to elect the lesser of two directors or 25% of the members of the board of directors.
If we do not complete the Triton acquisition on or before June 30, 2000, subject to extension under some circumstances, we are required to redeem this stock at 101% of its total liquidation preference. We may, at our option, on any scheduled dividend payment date, exchange, in whole but not in part, the exchangeable preferred stock for debentures containing similar provisions regarding dividend (interest) rate, covenants, and other matters. These exchange debentures will rank on parity with any debentures issued in exchange for shares of senior exchangeable preferred stock with respect to any payment or distribution of our assets in the event of a liquidation or dissolution.
Junior Bridge Preferred Stock
We have entered into an agreement with TD Securities (USA) Inc., First Union Investors, Inc. and First Union Securities, Inc. under which they will purchase up to 135,000 shares of junior cumulative exchangeable pay-in-kind preferred stock for $135.0 million. This is a contingent financing arrangement, intended to ensure that we have sufficient financing to fund the Triton acquisition. This stock will not be issued if, among other things, the proceeds from common and preferred stock offerings and the Class M preferred stock are sufficient to provide the funds necessary for the Triton acquisition and related expenses. The junior bridge preferred stock will have a liquidation preference of $1,000 per share. The purchase price will be $1,000 per share. The commitment of the investors to purchase the stock is conditioned on the Triton acquisition closing and obtaining the new credit facility in the amount of $1.2 billion.
With respect to our payment of dividends and distributions upon our liquidation, dissolution and winding-up, the junior bridge preferred stock will rank junior to the senior exchangeable preferred stock and to the Class T convertible preferred stock and senior to any other class and series of our capital stock, whether presently issued or to be issued in the future.
This junior bridge preferred stock will be entitled to dividends which increase every three months based on a formula tied to the three-month LIBOR. Dividends will accumulate from the date of issuance of the junior bridge preferred stock whether or not they have been declared and whether or not there are profits available for payment of dividends. All unpaid dividends will accrue and be compounded quarterly. During the first year after the date of issuance, the dividend rate will be not less than 13.0%, nor more than 16.5% per year.
After one year, the dividend rate will be reset to the greater of either the rate in effect on the first anniversary date plus 50 basis points, or the treasury rate plus 900 basis points. The treasury rate is the interest rate on direct obligations of the United States maturing on or close to the eleventh anniversary date after the purchase, as published by the Board of Governors of the Federal Reserve System. In any event, the dividend rate in effect after the first anniversary date shall not be less than 14.0% and shall not exceed 17.5% per year.
We will be required to pay the dividends on a quarterly basis. At our option, for the first five years, the dividends can be paid either in cash or by issuing additional shares of junior bridge preferred stock with a liquidation preference equal to the amount of the dividends. After the fifth anniversary of the purchase of the junior bridge preferred stock, dividends will be payable only in cash.
If dividends are in arrears on the junior bridge preferred stock, we will not be permitted to pay dividends on or repurchase any shares of our capital stock or our preferred stock except for a mandatory or scheduled redemption of the senior preferred stock, or pro-rata redemption of the junior bridge preferred stock or an exchange of qualified junior stock for other qualified junior stock.
In addition, we will not be permitted to pay any dividend on any class or series of capital stock prior to the first anniversary of the purchase of the junior bridge preferred stock other than preferred stock which is senior in rank to the junior bridge preferred stock and dividends on certain qualified junior stock.
The certificate of designation governing this preferred stock contains specified restrictions with respect to the conduct of our business, including limitations on our ability to:
We must redeem the junior bridge preferred stock on the eleventh anniversary date of its issuance at a price equal to the liquidation preference plus accrued and unpaid dividends to the date of redemption. We have the option to redeem this junior bridge preferred stock in whole or in part, on or prior to the first anniversary of the date of issuance at a price equal to the liquidation preference plus any accrued and unpaid dividends to the date of redemption. After the first anniversary of the date of issuance, the redemption of the junior bridge preferred stock will be subject to specified restrictions, including certain premiums for redemption.
Under specified circumstances, we are required to redeem the junior bridge preferred stock on or prior to the first anniversary of the date of issuance, and to make an offer to purchase the bridge preferred stock after the first anniversary date. The price of this redemption or purchase is equal to the liquidation amount of each share plus accrued and unpaid dividends to the date of redemption or purchase. This requirement is triggered if we have proceeds from the incurrence of any debt, the issuance of any equity or sale of any assets after deducting, among other things, any amounts required to repay outstanding credit facilities, out-of-pocket expenses, and a reserve for any resulting taxes. This requirement will be subject to certain exceptions, including any requirement to make an offer to purchase our existing senior subordinated notes in accordance with their terms.
In addition, we will be required to redeem or repurchase the junior bridge preferred stock in the event of a change of control. If the change of control occurs prior to the first anniversary of the issuance of the junior bridge preferred stock, we will be required to redeem all outstanding shares of junior bridge preferred stock at a redemption price equal to its liquidation preference plus accumulated and unpaid dividends to the date of redemption. If the change of control occurs after the first anniversary date, we will be required to make an offer to purchase all of the outstanding shares of the junior bridge preferred stock at a purchase price equal to 101% of the liquidation preference of the junior bridge preferred stock, plus accumulated and unpaid dividends to the date of purchase.
The holders of the junior bridge preferred stock will not have voting rights except as required under Minnesota law. However, without an affirmative vote or consent of the holders of the outstanding shares of junior bridge preferred stock, we may not:
In the event of certain defaults in our obligations under the junior bridge preferred stock, voting rights will be triggered for the holders of the junior bridge preferred stock. These voting rights will consist of the right to elect the lesser of two directors or 25% of our board of directors.
At our option, we can exchange the junior bridge preferred stock in whole but not in part for a senior subordinated pay-in-kind debenture on terms and conditions similar to the junior bridge preferred stock.
The holders of the junior bridge preferred stock will have the right to transfer it without our consent to an entity which is not engaged in the wireless communications business. However, prior to the first anniversary date after the purchase of the junior bridge preferred stock, one of the investors, TD Securities (USA) Inc., has agreed that it and/or its affiliates will continue to hold a majority of the outstanding shares and voting power of the junior bridge preferred stock.
Within 30 days after the first anniversary of the date of issuance of the junior bridge preferred stock, we will be required to file a registration statement with respect to an offer to exchange a new series of preferred stock (with terms identical to the junior bridge preferred stock) for the junior bridge preferred stock. If not permitted to consummate such exchange offer, or if an investor would not receive freely tradable preferred stock as a result of the exchange pursuant to such exchange offer, we will (if we are eligible to do so) be required to file a shelf registration statement with respect to resales of the junior bridge preferred stock and keep such shelf registration statement effective for a period of up to two years. If we default with respect to our registration obligations, the dividend rate on the junior bridge preferred stock will increase by 0.50% for the first 90 days of such default, and by an additional 0.50% for each subsequent 90-day period until such default is cured, although the default dividend rate increases shall not exceed 2.0% in the aggregate.
The following description of our existing capital stock is based, in part, on the provisions of our Articles of Incorporation, as amended, and our Bylaws. For a complete description, you should review our Articles of Incorporation and Bylaws.
Our authorized capital stock consists of 15,000,000 shares of Class A common stock, par value $.01 per share, 5,000,000 shares of Class B common stock, par value $.01 per share, and 10,000,000 undesignated shares of capital stock, par value $.01 per share. As of February 7, 2000, 8,134,230 shares of Class A common stock, 1,032,163 shares of Class B common stock, and 147,489 shares of 113/8% senior exchangeable preferred stock, par value $.01 per share, were issued and outstanding. As of February 7, 2000, there were 117 holders of record of Class A common stock and 25 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 not traded on any market.
See Proposal No. 2 in the proxy statement concerning the proposed amendment to our Articles increasing our authorized capital stock.
Common Stock
The Class A common stock and the Class B 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. Holders of Class A common stock and Class B common stock vote as one class on all matters, including the election of directors, to be voted on by our shareholders, unless otherwise required by the Minnesota Business Corporation Act. Holders of the Class B common stock effectively control all matters requiring approval of our shareholders voting as a single class. Our directors and executive officers, together with entities with which they are affiliated, control approximately 35% of the outstanding Class B common stock.
Shares of Class B common stock are to be converted into Class A common stock on a share-for-share basis:
Holders of common stock have no cumulative voting rights or preemptive rights. Subject to preferences that may be applicable to any outstanding preferred stock, holders of common stock are entitled to receive ratably dividends as may be declared by our board of directors out of legally available funds. 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, 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 preferred stock.
We have appointed Norwest Bank Minnesota, N.A., Shareowner Services as the transfer agent and registrar for the Class A common stock.
Undesignated Shares
The Articles of Incorporation authorize the board of directors to establish and issue one or more series of capital stock from the undesignated shares, and to fix the relative rights and preferences of the 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 without further action by the shareholders. 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 Rural Cellular. As of the date of this proxy statement, the board of directors has authorized the issuance of 450,000 shares of senior exchangeable preferred stock, 400,000 shares of junior exchangeable preferred stock, 200,000 shares of Series A junior participating preferred stock, 50,000 shares of Series B junior participating preferred stock, and, except for the shares being offered in common and preferred stock offerings and the shares of Class M and Class T convertible preferred stock, currently has no plan or intention to issue any additional series or class of capital stock.
Limitation on Foreign Ownership and Transfers of Control
The Communications Act and related regulations prohibit the holding of a common carrier license by a corporation if more than 25% of the capital stock of the licensee's controlling company is owned directly or beneficially by non-U.S. citizens. For this purpose, capital stock includes all equity interests, including our Class A and Class B common stock and our preferred stock. Absent Federal Communications Commission approval of foreign ownership exceeding these limits, failure to comply with these requirements may result in a Federal Communications Commission order requiring divestiture of alien ownership. In addition, fines or denial of renewal or revocation of the license is possible. The Articles of Incorporation permit us to redeem our common stock from shareholders where necessary to protect our licenses.
The Communications Act and related regulations also require prior approval of changes in control of entities holding common carrier licenses.
Limitation of Liability and Indemnification
As permitted by the Minnesota Business Corporation Act, our Articles of Incorporation provide that none of our directors will be liable to us or to our shareholders for monetary damages for breach of a fiduciary duty as a director other than for:
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 Minnesota Business Corporation Act, our Articles of Incorporation and our Amended and Restated Bylaws provide that we must indemnify any director, officer, employee or agent 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 specified statutory standards are met. "Proceeding" means a threatened, pending, or completed civil, criminal, administrative, arbitration, or investigative proceeding, including one by us or in our behalf. For a complete statement of these indemnification rights, please see Section 302A.521 of the Minnesota Business Corporation Act, our Articles of Incorporation and our Bylaws.
Antitakeover Effects
In addition to our undesignated shares, specific provisions of the Minnesota Business Corporation Act, our Articles of Incorporation and our Bylaws could have the effect of discouraging attempts to acquire us, including a hostile takeover, or remove incumbent management even if some or a majority of our shareholders were to deem the 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 our shareholders.
Classified Board of Directors, Removal, Vacancies
Our Articles of Incorporation and our Bylaws provide that the board of directors 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. Our Articles of Incorporation and our Bylaws also 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.
Advance Notice Provisions for Shareholder Proposals and Nominations of Directors
Our Bylaws establish procedures with regard to the nomination, other than by our board of directors, of candidates for election as directors and with regard to matters to be brought before a meeting of our shareholders. The nomination procedures require that a shareholder give prior written notice, in specified form, of a planned nomination to the 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. 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. If business is not properly brought before a meeting in accordance with the established procedures, the business will not be transacted at the meeting. Although our Bylaws do not give the board of directors the 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 procedures may have the effect of precluding a nomination for the election of directors or precluding the conduct of business at a particular annual or special meeting and 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 the solicitation or attempt might be beneficial to the Company and its shareholders.
Supermajority Vote
Our Articles of Incorporation require the affirmative vote of at least two-thirds of the voting power of all outstanding shares entitled to vote to authorize any merger, consolidation, exchange, sale, or other disposition of all or substantially all of our assets or our voluntary dissolution. Supermajority shareholder approval is not required if two-thirds of our directors approve the transaction. These actions require only majority shareholder approval if the proposed action has been approved by the affirmative vote of two-thirds of the directors.
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 specified provisions of our Articles of Incorporation and our Bylaws, including those described above.
Statutory Provisions
Section 302A.671 of the Minnesota Business Corporation Act applies, with specified exceptions, to any acquisition of our voting stock resulting in the acquisition of beneficial ownership of 20% or more of the voting stock then outstanding. Section 302A.671 requires approval of any acquisition by a majority of our shareholders prior to its consummation. In general, shares acquired in the absence of approval are denied voting rights and are redeemable by us at their then fair market value within 30 days after the acquiring person has failed to provide us with a timely information statement or the date the shareholders have voted not to grant voting rights to the acquiring person's shares.
Section 302A.673 of the Minnesota Business Corporation Act generally prohibits any shareholder that owns 10% or more of our voting shares to enter into any business combination with us, or with any of our subsidiaries, for four years following the 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 before the interested shareholder's share acquisition.
Share Rights Plans
The board of directors has authorized share rights plans which provide for a dividend distribution of one right for each share of our Class A and Class B common stock. With some exceptions, the rights will be distributed on the 15th day after an acquiring party accumulates 15% or more of our voting stock or a party announces an offer to acquire 15% or more of the voting stock. The rights will expire on May 20, 2009, if not previously redeemed or exercised. Each right will entitle the holder to purchase 1/100 of a share of preferred stock at a price of $120, subject to adjustment under specified circumstances. In addition, upon the occurrence of specified events, holders of the rights will be entitled to purchase a defined number of shares of an acquiring entity or shares of our common stock at half its then current market value. We will generally be entitled to redeem the rights at $.001 per right at any time prior to a triggering event.
The following table shows the high and low sale prices per share on the Nasdaq National Market of our Class A common stock as of November 5, 1999, which was the last trading day prior to the public announcement of the proposed transaction with Triton, and as of February 8, 2000, which was the latest practicable trading day before the printing of this proxy statement.
| |
High |
Low |
||||
|---|---|---|---|---|---|---|
| Market value per share: | ||||||
| November 5, 1999 | $ | 64.75 | $ | 59.50 | ||
| February 8, 2000 | $ | 63.50 | $ | 60.00 | ||
SELECTED FINANCIAL AND OPERATING DATA
(In thousands, except per share amounts and operating data)
Rural Cellular
The following tables set forth certain of our historical consolidated financial and operating data as of and for each of the five years in the period ended December 31, 1998 and the nine months ended September 30, 1998 and 1999. We derived consolidated financial data for each of the five years ended December 31 from our consolidated financial statements, which have been audited by Arthur Andersen LLP. The consolidated financial data for the nine months ended September 30, 1998 and 1999 are derived from our unaudited consolidated financial statements, which include all adjustments, consisting of normal recurring accruals, which our management considers necessary for a fair presentation of our financial position and results of operations for these periods.
Operating results for the nine months ended September 30, 1998 and 1999 are not necessarily indicative of the results that may be expected for an entire year.
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 consolidated financial statements and accompanying notes included elsewhere in this proxy statement.
| |
Year Ended December 31 |
Nine Months Ended September 30 |
||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
1994 |
1995 |
1996 |
1997 |
1998 |
1998 |
1999 |
|||||||||||||||
| |
|
|
|
|
|
(Unaudited) |
||||||||||||||||
| Revenues: | ||||||||||||||||||||||
| Service | $ | 9,784 | $ | 14,289 | $ | 23,120 | $ | 43,408 | $ | 75,633 | $ | 51,178 | $ | 78,263 | ||||||||
| Roamer | 3,897 | 4,562 | 6,413 | 9,475 | 20,199 | 13,577 | 33,310 | |||||||||||||||
| Equipment | 2,008 | 1,476 | 927 | 1,020 | 2,700 | 1,669 | 5,704 | |||||||||||||||
| Total revenues | 15,689 | 20,327 | 30,460 | 53,903 | 98,532 | 66,424 | 117,277 | |||||||||||||||
| Operating expenses: | ||||||||||||||||||||||
| Network costs | 3,293 | 4,974 | 6,731 | 11,578 | 18,877 | 13,335 | 14,352 | |||||||||||||||
| Cost of equipment sales | 2,214 | 1,914 | 1,375 | 2,807 | 5,968 | 4,012 | 8,145 | |||||||||||||||
| Selling, general and administrative | 6,570 | 7,700 | 13,575 | 25,225 | 39,156 | 25,811 | 39,318 | |||||||||||||||
| Depreciation and amortization | 2,426 | 3,249 | 5,539 | 12,458 | 26,532 | 17,523 | 29,549 | |||||||||||||||
| Total operating expenses | 14,503 | 17,837 | 27,220 | 52,068 | 90,533 | 60,681 | 91,364 | |||||||||||||||
| Operating income | 1,186 | 2,490 | 3,240 | 1,835 | 7,999 | 5,743 | 25,913 | |||||||||||||||
| Other income (expense): | ||||||||||||||||||||||
| Interest expense | (1,195 | ) | (1,365 | ) | (280 | ) | (6,065 | ) | (19,060 | ) | (12,340 | ) | (20,207 | ) | ||||||||
| Interest and dividend income | 170 | 277 | 335 | 232 | 1,461 | 1,318 | 289 | |||||||||||||||
| Other income (expense) | (37 | ) | (37 | ) | 51 | (350 | ) | (535 | ) | (645 | ) | (210 | ) | |||||||||
| Minority interest | — | — | 331 | 3,082 | 4,553 | 3,126 | 1,538 | |||||||||||||||
| Other income (expense) | (1,062 | ) | (1,125 | ) | 437 | (3,101 | ) | (13,581 | ) | (8,541 | ) | (18,590 | ) | |||||||||
| Income (loss) before income tax and extraordinary item | 124 | 1,365 | 3,677 | (1,266 | ) | (5,582 | ) | (2,798 | ) | 7,323 | ||||||||||||
| Income tax (benefit) provision | (486 | ) | 575 | 200 | — | — | — | 34 | ||||||||||||||
| Income (loss) before extraordinary item | 610 | 790 | 3,477 | (1,266 | ) | (5,582 | ) | (2,798 | ) | 7,289 | ||||||||||||
| Extraordinary item—early retirement of debt | — | — | — | — | (1,042 | ) | (1,042 | ) | — | |||||||||||||
| Net income (loss) | 610 | 790 | 3,477 | (1,266 | ) | (6,624 | ) | (3,840 | ) | 7,289 | ||||||||||||
| Preferred stock dividend | — | — | — | — | (9,090 | ) | (5,398 | ) | (11,765 | ) | ||||||||||||
| Net income (loss) applicable to common shares | $ | 610 | $ | 790 | $ | 3,477 | $ | (1,266 | ) | $ | (15,714 | ) | $ | (9,238 | ) | $ | (4,476 | ) | ||||
| Net income (loss) per basic and diluted common share | $ | 0.11 | $ | 0.13 | $ | 0.41 | $ | (0.14 | ) | $ | (1.76 | ) | $ | (1.04 | ) | $ | (0.50 | ) | ||||
| Weighted average common shares outstanding, basic and diluted | 5,522 | 5,983 | 8,509 | 8,853 | 8,916 | 8,893 | 9,029 | |||||||||||||||
SELECTED FINANCIAL AND OPERATING DATA
(In thousands, except per share amounts and operating data)
| |
Year Ended December 31 |
Nine Months Ended September 30 |
||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
1994 |
1995 |
1996 |
1997 |
1998 |
1998 |
1999 |
|||||||||||||||
| |
|
|
|
|
|
(Unaudited) |
||||||||||||||||
| Balance sheet data: | ||||||||||||||||||||||
| Cash and cash equivalents | $ | 236 | $ | 125 | $ | 237 | $ | 1,995 | $ | 2,062 | $ | 9,149 | $ | 1,073 | ||||||||
| Property and equipment, net | 16,479 | 23,517 | 41,936 | 77,920 | 131,714 | 119,753 | 128,764 | |||||||||||||||
| Total assets | 22,439 | 30,138 | 60,507 | 181,588 | 480,524 | 475,833 | 495,334 | |||||||||||||||
| Total debt | 15,117 | 19,123 | 8,492 | 128,000 | 298,851 | 298,874 | 307,143 | |||||||||||||||
| Senior exchangeable preferred stock | — | — | — | — | 132,201 | 124,316 | 143,767 | |||||||||||||||
| Total shareholders' equity | 4,668 | 5,458 | 34,996 | 33,731 | 19,279 | 25,720 | 15,572 | |||||||||||||||
| Other financial data: | ||||||||||||||||||||||
| EBITDA(1): | ||||||||||||||||||||||
| Cellular | $ | 3,612 | $ | 5,739 | $ | 9,450 | $ | 19,860 | $ | 39,356 | $ | 26,778 | $ | 57,543 | ||||||||
| Wireless Alliance | — | — | (671 | ) | (5,567 | ) | (4,825 | ) | (3,512 | ) | (2,081 | ) | ||||||||||
| Total | $ | 3,612 | $ | 5,739 | $ | 8,779 | $ | 14,293 | $ | 34,531 | $ | 23,266 | $ | 55,462 | ||||||||
| EBITDA margin(1): | ||||||||||||||||||||||
| Cellular | 23.0 | % | 28.2 | % | 31.0 | % | 41.7 | % | 44.9 | % | 45.9 | % | 52.0 | % | ||||||||
| Wireless Alliance | — | — | — | (75.9 | ) | (39.0 | ) | (37.9 | ) | (29.7 | ) | |||||||||||
| Capital expenditures: | ||||||||||||||||||||||
| Cellular | $ | 6,933 | $ | 10,011 | $ | 23,850 | $ | 26,127 | $ | 29,563 | $ | 15,726 | $ | 12,584 | ||||||||
| Wireless Alliance | — | — | 364 | 8,801 | 13,300 | 8,230 | 3,110 | |||||||||||||||
| Total | $ | 6,933 | $ | 10,011 | $ | 24,214 | $ | 34,928 | $ | 42,863 | $ | 23,956 | $ | 15,694 | ||||||||
| Roamer revenue as a percentage of adjusted revenue(2) | 28.5 | % | 24.2 | % | 21.7 | % | 20.3 | % | 23.7 | % | 23.9 | % | 31.4 | % | ||||||||
| Operating data: | ||||||||||||||||||||||
| Customers at end of period: | ||||||||||||||||||||||
| Cellular | 17,402 | 26,764 | 45,094 | 84,600 | 186,892 | 175,847 | 217,689 | |||||||||||||||
| Wireless Alliance-PCS | — | — | — | — | 5,129 | 2,264 | 11,110 | |||||||||||||||
| Wireless Alliance-Cellular | — | — | — | 17,167 | 11,079 | 15,481 | 1,840 | |||||||||||||||
| Other(3) | 2,089 | 3,783 | 6,890 | 9,312 | 11,550 | 11,469 | 13,790 | |||||||||||||||
| Total | 19,491 | 30,547 | 51,984 | 111,079 | 214,650 | 205,061 | 244,429 | |||||||||||||||
| Penetration(4): | ||||||||||||||||||||||
| Cellular | 2.9 | % | 4.5 | % | 7.5 | % | 7.6 | % | 8.0 | % | 7.5 | % | 9.0 | % | ||||||||
| Wireless Alliance-PCS | — | — | — | — | 0.7 | 0.3 | 1.6 | |||||||||||||||
| Retention(5): | ||||||||||||||||||||||
| Cellular | 99.2 | % | 99.0 | % | 98.7 | % | 98.4 | % | 98.5 | % | 98.6 | % | 98.4 | % | ||||||||
| Wireless Alliance-PCS | — | — | — | — | 98.2 | 98.8 | 98.1 | |||||||||||||||
| Average monthly revenue per customer(6): | ||||||||||||||||||||||
| Cellular | $84 | $69 | $66 | $55 | $52 | $52 | $55 | |||||||||||||||
| Wireless Alliance-PCS | — | — | — | — | 64 | 65 | 52 | |||||||||||||||
| Acquisition cost per customer(7): | ||||||||||||||||||||||
| Cellular | $448 | $395 | $307 | $403 | $362 | $393 | $367 | |||||||||||||||
| Wireless Alliance-PCS | — | — | — | — | 565 | 525 | 518 | |||||||||||||||
| Cell sites: | ||||||||||||||||||||||
| Cellular | 55 | 64 | 72 | 121 | 233 | 204 | 257 | |||||||||||||||
| Wireless Alliance-PCS | — | — | — | — | 53 | 40 | 57 | |||||||||||||||
NOTES TO RURAL CELLULAR'S SELECTED FINANCIAL AND OPERATING DATA
SELECTED FINANCIAL AND OPERATING DATA
(In thousands, except operating data)
Triton
The following tables set forth certain of Triton and its predecessor's historical consolidated financial and operating data as of and for the years ended December 31, 1997 and 1998, for the period from January 1, 1998 through January 15, 1998, and the nine months ended September 30, 1998 and 1999. We derived consolidated financial data for the year ended December 31, 1998 and the nine months ended September 30, 1999 from Triton's consolidated financial statements, which have been audited by Arthur Andersen LLP. We derived consolidated financial data for Triton's predecessor for the year ended December 31, 1997 and for the period from January 1, 1998 through January 15, 1998 from its consolidated financial statements, which have been audited by Arthur Andersen LLP. The consolidated financial data for the nine months ended September 30, 1998 are derived from Triton's unaudited financial statements, which include all adjustments, consisting of normal recurring accruals, which Triton's management considers necessary for a fair presentation of the financial position and financial results for the interim period.
Operating results for the nine months ended September 30, 1998 and 1999 are not necessarily indicative of the results that may be expected for a full year.
The data set forth below should be read in conjunction with the consolidated financial statements and accompanying notes included elsewhere in this proxy statement.
| |
Predecessor |
Triton |
||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
Year Ended December 31, 1997 |
January 1- January 15, 1998 |
Year Ended December 31, 1998 |
Nine Months Ended September 30, 1998 |
Nine Months Ended September 30, 1999 |
|||||||||||
| |
|
|
(Unaudited) |
|||||||||||||
| Revenues: | ||||||||||||||||
| Service | $ | 12,793 | $ | 556 | $ | 31,464 | $ | 18,515 | $ | 61,053 | ||||||
| Roamer | 4,802 | 342 | 14,208 | 8,451 | 37,870 | |||||||||||
| Equipment | 981 | 66 | 2,605 | 1,722 | 4,744 | |||||||||||
| Total revenues | 18,576 | 964 | 48,277 | 28,688 | 103,667 | |||||||||||
| Operating expenses: | ||||||||||||||||
| Network costs | 3,662 | 280 | 7,210 | 2,165 | 12,380 | |||||||||||
| Cost of equipment sales | 1,371 | 73 | 3,650 | 2,064 | 7,644 | |||||||||||
| Selling, general and administrative | 6,337 | 621 | 17,841 | 11,865 | 34,192 | |||||||||||
| Nonrecurring compensation | — | — | — | — | 53,954 | |||||||||||
| Nonrecurring charges | — | — | — | — | 624 | |||||||||||
| Depreciation and amortization | 984 | 46 | 17,950 | 9,893 | 32,993 | |||||||||||
| Total operating expenses | 12,354 | 1,020 | 46,651 | 25,987 | 141,787 | |||||||||||
| Operating income (loss) | 6,222 | (56 | ) | 1,626 | 2,701 | (38,120 | ) | |||||||||
| Other income (expense): | ||||||||||||||||
| Interest expense | (687 | ) | — | (13,797 | ) | (9,913 | ) | (26,076 | ) | |||||||
| Interest and dividend income | 666 | 9 | — | — | 283 | |||||||||||
| Other income (expense) | — | — | — | 2 | — | |||||||||||
| Other income (expense) | (21 | ) | 9 | (13,797 | ) | (9,911 | ) | (25,793 | ) | |||||||
| Income (loss) before income tax | 6,201 | (47 | ) | (12,171 | ) | (7,210 | ) | (63,913 | ) | |||||||
| Income tax benefit | — | — | (115 | ) | — | 3,524 | ||||||||||
| Net income (loss) | $ | 6,201 | $ | (47 | ) | $ | (12,056 | ) | $ | (7,210 | ) | $ | (67,437 | ) | ||
| |
Predecessor |
Triton |
||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
Year Ended December 31, 1997 |
January 1- January 15, 1998 |
Year Ended December 31, 1998 |
Nine Months Ended September 30, 1998 |
Nine Months Ended September 30, 1999 |
|||||||||||
| |
|
|
(Unaudited) |
|||||||||||||
| Balance sheet data: | ||||||||||||||||
| Cash and cash equivalents | $ | 635 | $ | — | $ | 3,890 | $ | 6,321 | $ | — | ||||||
| Property and equipment, net | 7,868 | — | 48,822 | 45,635 | 90,788 | |||||||||||
| Total assets | 11,159 | — | 350,682 | 352,403 | 595,906 | |||||||||||
| Total debt | 2,510 | — | 261,500 | 259,500 | 463,916 | |||||||||||
| Total shareholders' equity | 7,447 | — | 66,821 | 71,687 | 46,475 | |||||||||||
| Other financial data: | ||||||||||||||||
| EBITDA(1) | $ | 7,206 | $ | (10 | ) | $ | 19,576 | $ | 12,594 | $ | (5,127 | ) | ||||
| EBITDA margin(1) | 38.8 | % | (1.0 | )% | 40.5 | % | 43.9 | % | (4.9 | )% | ||||||
| Capital expenditures | $ | 2,156 | $ | 4 | $ | 4,277 | $ | 7,929 | $ | 25,773 | ||||||
| Roamer revenue as a percentage of adjusted revenue(2) | 27.3 | % | 38.1 | % | 31.1 | % | 31.3 | % | 38.3 | % | ||||||
| Operating data: | ||||||||||||||||
| Customers at end of period | 28,026 | 28,089 | 117,709 | 109,507 | 208,843 | |||||||||||
| Penetration(3) | 11.9 | % | 12.0 | % | 7.1 | % | 6.6 | % | 8.8 | % | ||||||
| Retention(4) | 98.6 | % | 98.6 | % | 98.3 | % | 98.3 | % | 98.2 | % | ||||||
| Average monthly revenue per customer(5) | $56 | $64 | $52 | $44 | $67 | |||||||||||
| Acquisition cost per customer(6) | — | — | $280 | $291 | $301 | |||||||||||
| Cell sites | 25 | 25 | 150 | — | 262 | |||||||||||
NOTES TO TRITON'S SELECTED FINANCIAL AND OPERATING DATA
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA
We derived summary unaudited pro forma consolidated financial and operating data as of and for the nine months ended September 30, 1999 and for the year ended December 31, 1998 from historical consolidated financial statements of Rural Cellular Corporation and other financial statements included elsewhere in this proxy statement. Rural Cellular financial results have been adjusted based on currently available information and assumptions that we believe are reasonable to give effect to the following transactions as if each transaction had occurred as of January 1, 1998:
Pro forma results for the nine months ended September 30, 1999 are not necessarily indicative of the results that may be expected for a full year.
We provide the following unaudited pro forma condensed consolidated financial statements and the related notes for informational purposes only. The unaudited pro forma condensed consolidated financial data are based on currently available information and assumptions that we believe are reasonable. The accompanying data do not purport to represent what our results of operations would have been if the pro forma transactions had been completed on the dates indicated, nor do they purport to indicate our future financial position or results of operations. The "Unaudited Pro Forma Condensed Consolidated Financial Data" includes consolidated financial data both prior to, and after giving effect, to the Triton acquisition.
The data set forth below should be read in conjunction with "Selected Financial and Operating Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations," and the consolidated financial statements and accompanying notes included elsewhere in this proxy statement.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
(In thousands, except per share amounts)
| |
Rural Cellular Historical |
Adjustments for Senior Exchangeable Preferred Stock and Common Stock Offerings |
Rural Cellular as Adjusted |
Triton Pro Forma(4) |
Other Adjustments(5)(6)(7) |
Pro Forma as Adjusted |
|||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Revenues: | |||||||||||||||||||
| Service | $ | 78,263 | $ | — | $ | 78,263 | $ | 63,062 | $ | — | $ | 141,325 | |||||||
| Roamer | 33,310 | — | 33,310 | 39,184 | — | 72,494 | |||||||||||||
| Equipment | 5,704 | — | 5,704 | 4,906 | — | 10,610 | |||||||||||||
| Total revenues | 117,277 | — | 117,277 | 107,152 | — | 224,429 | |||||||||||||
| Operating expenses: | |||||||||||||||||||
| Network costs | 14,352 | — | 14,352 | 12,558 | — | 26,910 | |||||||||||||
| Cost of equipment sales | 8,145 | — | 8,145 | 7,930 | — | 16,075 | |||||||||||||
| Selling, general and administrative | 39,318 | — | 39,318 | 33,051 | — | 72,369 | |||||||||||||
| Depreciation and amortization | 29,549 | — | 29,549 | 34,380 | 10,532 | (8) | 74,461 | ||||||||||||
| Total operating expenses | 91,364 | — | 91,364 | 87,919 | 10,532 | 189,815 | |||||||||||||
| Operating income | 25,913 | — | 25,913 | 19,233 | (10,532 | ) | 34,614 | ||||||||||||
| Other income (expense): | |||||||||||||||||||
| Interest expense | (20,207 | ) | 10,457 | (1) | (9,750 | ) | — | (74,183) | (9) | (83,933 | ) | ||||||||
| Interest and dividend income |
289 | — | 289 | — | (289) | (10) | — | ||||||||||||
| Other expense | (210 | ) | — | (210 | ) | — | — | (210 | ) | ||||||||||
| Minority interest | 1,538 | — | 1,538 | — | — | 1,538 | |||||||||||||
| Other income (expense) | (18,590 | ) | 10,457 | (8,133 | ) | — | (74,472 | ) | (82,605 | ) | |||||||||
| Income (loss) before income tax and extraordinary item | 7,323 | 10,457 | 17,780 | 19,233 | (85,004 | ) | (47,991 | ) | |||||||||||
| Income tax provision | 34 | — | 34 | — | (34) | (11) | — | ||||||||||||
| Income (loss) before extraordinary item | 7,289 | 10,457 | 17,746 | 19,233 | (84,970 | ) | (47,991 | ) | |||||||||||
| Extraordinary item-early retirement of debt | — | — | — | — | — | — | |||||||||||||
| Net income (loss) | 7,289 | 10,457 | 17,746 | 19,233 | (84,970 | ) | (47,991 | ) | |||||||||||
| Preferred stock dividend | (11,765 | ) | (3,029) | (2) | (14,794 | ) | — | (22,449) | (12) | (37,243 | ) | ||||||||
| Net income (loss) applicable to common shares | $ | (4,476 | ) | $ | 7,428 | $ | 2,952 | $ | 19,233 | $ | (107,419 | ) | $ | (85,234 | ) | ||||
| Net income (loss) per basic and diluted common share | $ | (0.50 | ) | $ | 0.26 | $ | (7.57 | ) | |||||||||||
| Weighted average common shares outstanding, basic and diluted | 9,029 | 11,419 | (3) | 11,265 | (3) | ||||||||||||||
NOTES TO THE UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
(In thousands)
The following notes are provided for purposes of determining pro forma effects of the transactions described above on the historical consolidated statement of operations of Rural Cellular both prior to, and after giving effect to, the Triton acquisition for the nine months ended September 30, 1999. Certain assumptions are required to present this pro forma data, including the Rural Cellular stock offering price of $61.875 and the junior exchangeable preferred stock dividend rate of 121/4%. The interest rates related to our new credit facility are based on the 3 month London Interbank Offer Rates as of February 4, 2000 plus an estimated margin factor as described in note 9, below.
| Net proceeds from issuance of senior exchangeable preferred stock |
|
$ |
23,922 |
| Net proceeds from issuance of Class A common stock | 140,107 | ||
| Reduction in long-term debt | 164,029 | ||
| Interest rate | 8.5% | ||
| Annual reduction in interest expense | $ | 13,942 | |
| Factor for nine months | .75 | ||
| Pro forma adjustment | $ | 10,457 | |
| Senior exchangeable preferred stock dividend |
|
$ |
14,794 |
|
| Less historical preferred stock dividend | (11,765 | ) | ||
| Pro forma adjustment | $ | 3,029 | ||
| Rural Cellular historical common shares outstanding |
|
9,029 |
|
| Issuance of Class A common stock | 2,390 | ||
| Rural Cellular common shares outstanding as adjusted | 11,419 | ||
| Conversion of common stock owned by Telephone & Data Systems, Inc. to Class T convertible preferred stock | (154 | ) | |
| Pro forma common shares outstanding as adjusted | 11,265 | ||
| |
Triton Historical Nine Months Ended September 30, 1999 |
BMCT, L.P. One Month Ended January 31, 1999 |
Adjustments |
Triton Pro Forma |
||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Revenues: | ||||||||||||
| Service | $ | 61,053 | $ | 2,009 | $ | — | $ | 63,062 | ||||
| Roamer | 37,870 | 1,314 | — | 39,184 | ||||||||
| Equipment | 4,744 | 162 | — | 4,906 | ||||||||
| Total revenues | 103,667 | 3,485 | — | 107,152 | ||||||||
| Operating expenses: | ||||||||||||
| Network costs | 12,380 | 178 | — | 12,558 | ||||||||
| Cost of equipment sales | 7,644 | 286 | — | 7,930 | ||||||||
| Selling, general and administrative | 34,192 | 1,266 | (2,407 | )(a) | 33,051 | |||||||
| Deferred compensation | 53,954 | 3,164 | (57,118 | )(b) | — | |||||||
| Nonrecurring charges | 624 | 1,061 | (1,685 | )(c) | — | |||||||
| Depreciation and amortization |
32,993 | 1,387 | — | 34,380 | ||||||||
| Total operating expenses | 141,787 | 7,342 | (61,210 | ) | 87,919 | |||||||
| Operating income (loss) | (38,120 | ) | (3,857 | ) | 61,210 | 19,233 | ||||||
| Other income (expense): | ||||||||||||
| Interest expense | (26,076 | ) | (725 | ) | 26,801 | (d) | — | |||||
| Interest income | 283 | 4 | (287 | )(d) | — | |||||||
| Other income (expense) | — | 11 | (11 | )(d) | — | |||||||
| Other income (expense) | (25,793 | ) | (710 | ) | 26,503 | — | ||||||
| Income (loss) before income tax |
(63,913 | ) | (4,567 | ) | 87,713 | 19,233 | ||||||
| Income tax expense (benefit) | 3,524 | — | (3,524 | )(d) | — | |||||||
| Net income (loss) | $ | (67,437 | ) | $ | (4,567 | ) | $ | 91,237 | $ | 19,233 | ||
bridge preferred stock were issued, and we utilize $5.0 million of our available cash, preferred stock dividends would increase from $22,449 to $22,938 for the nine months ended September 30, 1999.
| |
|
Estimated Fair Value |
|
Asset Life |
|
Pro Forma Expense |
|
||
|---|---|---|---|---|---|---|---|---|---|
| Licenses | $ | 829,100 | 40 | $ | 15,546 | ||||
| Goodwill | 221,450 | 20 | 8,304 | ||||||
| Subscriber lists | 106,000 | 7 | 11,357 | ||||||
| Total amortization expense | 35,207 | ||||||||
| Triton pro forma amortization expense | (24,817 | ) | |||||||
| Amortization adjustment | 10,390 | ||||||||
| Triton fixed asset valuation adjustment | 1,700 | 9 | 142 | ||||||
| Pro forma adjustment | $ | 10,532 | |||||||
| |
|
Principal |
|
Interest Rate |
|
Pro Forma Expense |
|
||
|---|---|---|---|---|---|---|---|---|---|
| Senior secured revolving credit facility | $ | 140,398 | 8.84 | % | $ | 9,412 | |||
| Senior secured term loan A | 450,000 | 8.84 | 30,166 | ||||||
| Senior secured term loan B | 237,500 | 9.22 | 16,597 | ||||||
| Senior secured term loan C | 237,500 | 9.47 | 17,047 | ||||||
| Senior subordinated notes | 125,000 | 9.63 | 9,023 | ||||||
| Amortization of deferred financing costs | 1,688 | ||||||||
| Pro forma expense | 83,933 | ||||||||
| Rural Cellular as adjusted interest expense | (9,750 | ) | |||||||
| Pro forma adjustment | $ | 74,183 | |||||||
A change of 1/8% in interest rates would increase or decrease interest expense by $1,488 per annum.
| Class T convertible preferred stock dividend |
|
$ |
233 |
| Junior exchangeable preferred stock dividend | 14,961 | ||
| Class M preferred stock dividend | 6,600 | ||
| Amortization of Class M and junior exchangeable preferred stock issuance costs | 655 | ||
| Pro forma adjustment | $ | 22,449 | |
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
(In thousands, except per share amounts)
| |
Rural Cellular Historical |
Atlantic Pro Forma(1) |
Rural Cellular Combined |
Adjustments for Senior Exchangeable Preferred Stock and Common Stock Offerings |
Rural Cellular as Adjusted |
Triton Pro Forma(5) |
Other Adjustments (6)(7)(8) |
Pro Forma as Adjusted |
|||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Revenues: | |||||||||||||||||||||||||
| Service | $ | 75,633 | $ | 15,688 | $ | 91,321 | $ | — | $ | 91,321 | $ | 73,042 | $ | — | $ | 164,363 | |||||||||
| Roamer | 20,199 | 7,475 | 27,674 | — | 27,674 | 30,545 | — | 58,219 | |||||||||||||||||
| Equipment | 2,700 | 1,843 | 4,543 | — | 4,543 | 5,650 | — | 10,193 | |||||||||||||||||
| Total revenues | 98,532 | 25,006 | 123,538 | — | 123,538 | 109,237 | — | 232,775 | |||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||||
| Network costs | 18,877 | 3,289 | 22,166 | — | 22,166 | 14,959 | — | 37,125 | |||||||||||||||||
| Cost of equipment sales | 5,968 | 1,911 | 7,879 | — | 7,879 | 9,515 | — | 17,394 | |||||||||||||||||
| Selling, general and administrative | 39,156 | 7,614 | 46,770 | — | 46,770 | 39,328 | — | 86,098 | |||||||||||||||||
| Depreciation and amortization | 26,532 | 6,544 | 33,076 | — | 33,076 | 40,345 | 18,492 | (9) | 91,913 | ||||||||||||||||
| Total operating expenses | 90,533 | 19,358 | 109,891 | — | 109,891 | 104,147 | 18,492 | 232,530 | |||||||||||||||||
| Operating income (loss) | 7,999 | 5,648 | 13,647 | — | 13,647 | 5,090 | (18,492 | ) | 245 | ||||||||||||||||
| Other income (expense): | |||||||||||||||||||||||||
| Interest expense | (19,060 | ) | (6,593 | ) | (25,653 | ) | 13,942 | (2) | (11,711 | ) | — | (99,127 | ) (10) | (110,838 | ) | ||||||||||
| Interest and dividend income | 1,461 | — | 1,461 | — | 1,461 | — | (1,461 | ) (11) | — | ||||||||||||||||
| Other expense | (535 | ) | — | (535 | ) | — | (535 | ) | — | — | (535 | ) | |||||||||||||
| Minority interest | 4,553 | — | 4,553 | — | 4,553 | — | — | 4,553 | |||||||||||||||||
| Other income (expense) | (13,581 | ) | (6,593 | ) | (20,174 | ) | 13,942 | (6,232 | ) | — | (100,588 | ) | (106,820 | ) | |||||||||||
| Income (loss) before income tax and extraordinary item | (5,582 | ) | (945 | ) | (6,527 | ) | 13,942 | 7,415 | 5,090 | (119,080 | ) | (106,575 | ) | ||||||||||||
| Income tax provision | — | — | — | — | — | — | — | — | |||||||||||||||||
| Income (loss) before extraordinary item | (5,582 | ) | (945 | ) | (6,527 | ) | 13,942 | 7,415 | 5,090 | (119,080 | ) | (106,575 | ) | ||||||||||||
| Extraordinary item-early retirement of debt | (1,042 | ) | 1,042 | — | — | — | — | — | — | ||||||||||||||||
| Net income (loss) | (6,624 | ) | 97 | (6,527 | ) | 13,942 | 7,415 | 5,090 | (119,080 | ) | (106,575 | ) | |||||||||||||
| Preferred stock dividend | (9,090 | ) | (5,332 | ) | (14,422 | ) | (3,472 | )(3) | (17,894 | ) | — | (27,938 | )(12) | (45,832 | ) | ||||||||||
| Net income (loss) applicable to common shares | $ | (15,714 | ) | $ | (5,235 | ) | $ | (20,949 | ) | $ | 10,470 | $ | (10,479 | ) | $ | 5,090 | $ | (147,018 | ) | $ | (152,407 | ) | |||
| Net loss per basic and diluted common share | $ | (1.76 | ) | $ | (0.93 | ) | $ | (13,67 | ) | ||||||||||||||||
| Weighted average common shares outstanding, basic and diluted | 8,916 | 11,306 | (4) | 11,152 | (4) | ||||||||||||||||||||
NOTES TO THE UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
(In thousands)
The following notes are provided for purposes of determining the pro forma effects of the transactions described above on the historical consolidated statement of operations of Rural Cellular both prior to, and after giving effect to, the Triton acquisition for the year ended December 31, 1998. Certain assumptions are required to present this pro forma data, including the Rural Cellular stock offering price of $61.875 and the junior exchangeable preferred stock dividend rate of 121/4%. The interest rates related to our new credit facility are based on the three month London Interbank Offer Rates as of February 4, 2000 plus an estimated margin factor as described in note 10, below.
| |
Atlantic Cellular Historical Six Months Ended June 30, 1998 |
|
Adjustments |
|
Atlantic Cellular Pro Forma |
|
|||
|---|---|---|---|---|---|---|---|---|---|
| Revenues: | |||||||||
| Service | $ | 25,006 | $ | (9,318 | )(a) | $ | 15,688 | ||
| Roamer | — | 7,475 | (a) | 7,475 | |||||
| Equipment | — | 1,843 | (a) | 1,843 | |||||
| Total revenues | 25,006 | — | 25,006 | ||||||
| Operating expenses: | |||||||||
| Network costs | 11,759 | (8,470 | )(a) | 3,289 | |||||
| Cost of equipment sales | — | 1,911 | (a) | 1,911 | |||||
| Selling, general and administrative | 2,101 | 5,513 | (a)(b) | 7,614 | |||||
| Depreciation and amortization | 4,964 | 1,580 | (c)(d) | 6,544 | |||||
| Total operating expenses | 18,824 | 534 | 19,358 | ||||||
| Operating income (loss) | 6,182 | (534 | ) | 5,648 | |||||
| Other income (expense): | |||||||||
| Interest expense | (1,571 | ) | (5,022 | )(e) | (6,593 | ) | |||
| Interest income | 90 | (90 | )(c) | — | |||||
| Other income (expense) | 3,395 | (3,395 | )(c) | — | |||||
| Equity in net income of unconsolidated partnership | 886 | (886 | )(c) | — | |||||
| Minority interest | 13 | (13 | )(c) | — | |||||
| Other income (expense) | 2,813 | (9,406 | ) | (6,593 | ) | ||||
| Income (loss) before income tax and extraordinary item | 8,995 | (9,940 | ) | (945 | ) | ||||
| Income tax provision | — | — | — | ||||||
| Income (loss) before extraordinary item | 8,995 | (9,940 | ) | (945 | ) | ||||
| Extraordinary item-early retirement of debt | — | 1,042 | (f) | 1,042 | |||||
| Net income (loss) | 8,995 | (8,898 | ) | 97 | |||||
| Preferred stock dividend | — | (5,332 | )(g) | (5,332 | ) | ||||
| Net income (loss) applicable to common shares | $ | 8,995 | $ | (14,230 | ) | $ | (5,235 | ) | |
| Amortization of intangible assets from the Atlantic Cellular acquisition |
|
$ |
4,218 |
|
| Elimination of historical amortization | (2,420 | ) | ||
| Pro forma adjustment | $ | 1,798 | ||
| Net proceeds from issuance of senior exchangeable preferred stock |
|
$ |
23,922 |
| Net proceeds from issuance of Class A common stock | 140,107 | ||
| Reduction in long-term debt | 164,029 | ||
| Interest rate | 8.5% | ||
| Pro forma adjustment | $ | 13,942 | |
| Senior exchangeable preferred stock dividend |
|
$ |
17,894 |
|
| Less Rural Cellular combined preferred stock dividend | (14,422 | ) | ||
| Pro forma adjustment | $ | 3,472 | ||
| Rural Cellular historical common shares outstanding |
|
8,916 |
|
| Issuance of Class A common stock | 2,390 | ||
| Rural Cellular common shares outstanding as adjusted | 11,306 | ||
| Conversion of common stock owned by Telephone & Data Systems, Inc. to Class T convertible preferred stock | (154 | ) | |
| Pro forma common shares outstanding as adjusted | 11,152 | ||
| |
Triton Historical Year Ended December 31, 1998 |
Point Telesystems, Inc. January 1- January 15, 1998 |
"A Markets" of U.S. Unwired, Inc. and Subsidiary Six Months Ended June 30, 1998 |
BMCT, L.P. Year Ended December 31, 1998 |
Other Acquisitions |
Adjustments |
Triton Pro Forma |
|||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Revenues: | ||||||||||||||||||||
| Service | $ | 31,464 | $ | 556 | $ | 11,050 | $ | 23,923 | $ | 6,508 | $ | (459 | )(a) | $ | 73,042 | |||||
| Roamer | 14,208 | 342 | 5,448 | 10,172 | 375 | — | 30,545 | |||||||||||||
| Equipment | 2,605 | 66 | 507 | 2,096 | 376 | — | 5,650 | |||||||||||||
| Total revenues | 48,277 | 964 | 17,005 | 36,191 | 7,259 | (459 | ) | 109,237 | ||||||||||||
| Operating expenses: | ||||||||||||||||||||
| Network costs | 7,210 | 280 | 4,040 | 1,949 | 1,939 | (459 | )(a) | 14,959 | ||||||||||||
| Cost of equipment sales | 3,650 | 73 | 1,833 | 3,243 | 716 | — | 9,515 | |||||||||||||
| Selling, general and administrative | 17,841 | 621 | 6,501 | 13,421 | 2,419 | (1,475 | )(b) | 39,328 | ||||||||||||
| Deferred compensation | — | — | — | 2,353 | — | (2,353 | )(c) | — | ||||||||||||
| Nonrecurring charges | — | — | — | 1,308 | — | (1,308 | )(d) | — | ||||||||||||
| Depreciation and amortization | 17,950 | 46 | 4,802 | 16,379 | 1,168 | — | 40,345 | |||||||||||||
| Total operating expenses | 46,651 | 1,020 | 17,176 | 38,653 | 6,242 | (5,595 | ) | 104,147 | ||||||||||||
| Operating income (loss) | 1,626 | (56 | ) | (171 | ) | (2,462 | ) | 1,017 | 5,136 | 5,090 | ||||||||||
| Other income (expense): | ||||||||||||||||||||
| Interest expense | (13,797 | ) | — | (3,994 | ) | (8,783 | ) | (782 | ) | 27,356 | (e) | — | ||||||||
| Interest and dividend income | — | 9 | 48 | 136 | 3 | (196 | )(e) | — | ||||||||||||
| Other income (expense) | — | — | — | — | 6 | (6 | )(e) | — | ||||||||||||
| Other income (expense) | (13,797 | ) | 9 | (3,946 | ) | (8,647 | ) | (773 | ) | 27,154 | — | |||||||||
| Income (loss) before income tax | (12,171 | ) | (47 | ) | (4,117 | ) | (11,109 | ) | 244 | 32,290 | 5,090 | |||||||||
| Income tax benefit | (115 | ) | — | — | — | — | 115 | (e) | — | |||||||||||
| Net income (loss) | $ | (12,056 | ) | $ | (47 | ) | $ | (4,117 | ) | $ | (11,109 | ) | $ | 244 | $ | 32,175 | $ | 5,090 | ||
| |
|
Estimated Fair Value |
|
Asset Life |
|
Pro Forma Expense |
|
||
|---|---|---|---|---|---|---|---|---|---|
| Licenses | $ | 829,100 | 40 | $ | 20,728 | ||||
| Goodwill | 221,450 | 20 | 11,073 | ||||||
| Subscriber lists | 106,000 | 7 | 15,143 | ||||||
| Total amortization expense | 46,944 | ||||||||
| Triton pro forma amortization expense | (28,640 | ) | |||||||
| Amortization adjustment | 18,304 | ||||||||
| Triton fixed asset valuation adjustment | 1,700 | 9 | 188 | ||||||
| Pro forma adjustment | $ | 18,492 | |||||||
| |
|
Principal |
|
Interest Rate |
|
Pro Forma Expense |
|
||
|---|---|---|---|---|---|---|---|---|---|
| Senior secured revolving credit facility | $ | 140,938 | 8.84 | % | $ | 12,411 | |||
| Senior secured term loan A | 450,000 | 8.84 | 39,780 | ||||||
| Senior secured term loan B | 237,500 | 9.22 | 21,886 | ||||||
| Senior secured term loan C | 237,500 | 9.47 | 22,479 | ||||||
| Senior subordinated notes | 125,000 | 9.63 | 12,031 | ||||||
| Amortization of deferred financing costs | 2,251 | ||||||||
| Pro forma expense | 110,838 | ||||||||
| Rural Cellular as adjusted interest expense | (11,711 | ) | |||||||
| Pro forma adjustment | $ | 99,127 | |||||||
A change of 1/8% in interest rates would increase or decrease interest expense by $1,488 per annum.
| Class T convertible preferred stock dividend |
|
$ |
311 |
| Junior exchangeable preferred stock dividend | 17,954 | ||
| Class M preferred stock dividend | 8,800 | ||
| Amortization of Class M and junior exchangeable preferred stock issuance costs | 873 | ||
| Pro forma adjustment | $ | 27,938 | |
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 1999
(In thousands)
| |
Rural Cellular Historical |
Adjustments for Senior Exchangeable Preferred Stock and Common Stock Offerings |
Rural Cellular as Adjusted |
Triton Pro Forma(4) |
Other Adjustments(5)(6) |
Pro Forma as Adjusted |
|||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Assets | |||||||||||||||||||
| Current assets: | |||||||||||||||||||
| Cash and cash equivalents | $ | 1,073 | $ | — | $ | 1,073 | $ | — | $ | (19,000 | )(7) | $ | 20,073 | ||||||
| Accounts receivable, less allowance |
22,944 | — | 22,944 | 20,759 | — | 43,703 | |||||||||||||
| Inventories | 3,068 | — | 3,068 | 3,974 | — | 7,042 | |||||||||||||
| Other current assets | 631 | — | 631 | 1,314 | — | 1,945 | |||||||||||||
| Total current assets | 27,716 | — | 27,716 | 26,047 | (19,000 | ) | 72,763 | ||||||||||||
| Property and equipment, less accumulated depreciation | 128,764 | — | 128,764 | 90,735 | 1,700 | (8) | 221,199 | ||||||||||||
| Licenses and other assets: | |||||||||||||||||||
| Licenses and other intangible assets | 321,135 | — | 321,135 | 474,988 | 681,562 | (9) | 1,477,685 | ||||||||||||
| Deferred financing costs, less accumulated amortization | 10,949 | — | 10,949 | — | 14,980 | (10) | 25,929 | ||||||||||||
| Other assets | 6,770 | — | 6,770 | — | — | 6,770 | |||||||||||||
| Total licenses and other assets | 338,854 | — | 338,854 | 474,988 | 696,542 | 1,510,384 | |||||||||||||
| Total assets | $ | 495,334 | $ | — | $ | 495,334 | $ | 591,770 | $ | 717,242 | $ | 1,804,346 | |||||||
| Liabilities and shareholders' equity | |||||||||||||||||||
| Current liabilities: | |||||||||||||||||||
| Accounts payable | $ | 11,906 | $ | — | $ | 11,906 | $ | 7,835 | $ | — | $ | 19,741 | |||||||
| Advance billings and customer deposits | 3,795 | — | 3,795 | 2,047 | — | 5,842 | |||||||||||||
| Accrued interest | 6,305 | — | 6,305 | — | — | 6,305 | |||||||||||||
| Dividends payable | 2,044 | — | 2,044 | — | — | 2,044 | |||||||||||||
| Other accrued expenses | 4,802 | — | 4,802 | 8,826 | — | 13,628 | |||||||||||||
| Total current liabilities | 28,852 | — | 28,852 | 18,708 | — | 47,560 | |||||||||||||
| Long-term debt | 307,143 | (164,029 | )(1) | 143,114 | 463,916 | 583,368 | (11) | 1,190,398 | |||||||||||
| Total liabilities | 335,995 | (164,029 | ) | 171,966 | 482,624 | 583,368 | 1,237,958 | ||||||||||||
| Senior exchangeable preferred stock | 143,767 | 23,922 | (2) | 167,689 | — | — | 167,689 | ||||||||||||
| Class T convertible preferred stock | — | — | — | — | 7,778 | (12) | 7,778 | ||||||||||||
| Junior exchangeable preferred stock | — | — | — | — | 135,520 | (13) | 135,520 | ||||||||||||
| Class M preferred stock | — | — | — | — | 107,500 | (14) | 107,500 | ||||||||||||
| Total preferred stock | 143,767 | 23,922 | 167,689 | — | 250,798 | 418,487 | |||||||||||||
| Partners' equity | — | — | — | 109,146 | (109,146 | )(15) | — | ||||||||||||
| Shareholders' equity: | |||||||||||||||||||
| Class A common stock, $.01 par value, | 79 | 24 | (3) | 103 | — | (1 | )(12) | 102 | |||||||||||
| Class B common stock, $.01 par value, | 11 | — | 11 | — | (1 | )(12) | 10 | ||||||||||||
| Additional paid-in capital | 36,476 | 140,083 | (3) | 176,559 | — | (7,776 | )(12) | 168,783 | |||||||||||
| Accumulated deficit | (20,994 | ) | — | (20,994 | ) | — | — | (20,994 | ) | ||||||||||
| Total shareholders' equity | 15,572 | 140,107 | 155,679 | — | (7,778 | ) | 147,901 | ||||||||||||
| Total liabilities and shareholders' equity | $ | 495,334 | $ | — | $ | 495,334 | $ | 591,770 | $ | 717,242 | $ | 1,804,346 | |||||||
NOTES TO THE UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
BALANCE SHEET
AS OF SEPTEMBER 30, 1999
(In thousands)
The following notes are provided for purposes of determining pro forma effects of the transactions described above on the historical consolidated balance sheet of Rural Cellular both prior to, and after giving effect to, the Triton acquisition as of September 30, 1999. Certain assumptions are required to present this pro forma data, including the Rural Cellular stock offering price of $61.875.
| Net proceeds from issuance of senior exchangeable preferred stock |
|
$ |
23,922 |
| Net proceeds from issuance of Class A common stock | 140,107 | ||
| Reduction in long-term debt | $ | 164,029 | |
| Gross proceeds from issuance of senior exchangeable preferred stock |
|
$ |
24,722 |
|
| Less deferred issuance costs | (800 | ) | ||
| Pro forma adjustment | $ | 23,922 | ||
| Gross proceeds from issuance of Class A common stock |
|
$ |
147,881 |
|
| Less issuance costs | (7,774 | ) | ||
| Pro forma adjustment | $ | 140,107 | ||
| |
|
Triton Historical |
|
Adjustments |
|
Triton Pro Forma |
|||
|---|---|---|---|---|---|---|---|---|---|
| Assets | |||||||||
| Current assets: | |||||||||
| Cash | $ | — | $ | — | $ | — | |||
| Accounts receivable, less allowance | 24,842 | (4,083 | )(a) | 20,759 | |||||
| Inventories | 3,974 | — | 3,974 | ||||||
| Other current assets | 1,314 | — | 1,314 | ||||||
| Total current assets | 30,130 | (4,083 | ) | 26,047 | |||||
| Property and equipment, less accumulated depreciation | 90,788 | (53 | )(a) | 90,735 | |||||
| Licenses and other assets: | |||||||||
| Licenses and other intangible assets | 474,988 | — | 474,988 | ||||||
| Total licenses and other assets | 474,988 | — | 474,988 | ||||||
| Total assets | $ | 595,906 | $ | (4,136 | ) | $ | 591,770 | ||
| Liabilities and partners' equity | |||||||||
| Current liabilities: | |||||||||
| Accounts payable | $ | 7,835 | $ | — | $ | 7,835 | |||
| Advance billings and customer deposits | 2,047 | — | 2,047 | ||||||
| Accrued interest | 2,052 | (2,052 | )(a) | — | |||||
| Other accrued expenses | 8,826 | — | 8,826 | ||||||
| Due to related parties, net | 1,046 | (1,046 | )(a) | — | |||||
| Tax payable | 8,244 | (8,244 | )(a) | — | |||||
| Total current liabilities | 30,050 | (11,342 | ) | 18,708 | |||||
| Long-term debt | 463,916 | — | 463,916 | ||||||
| Deferred compensation | 53,954 | (53,954 | )(b) | — | |||||
| Deferred income tax | 1,511 | (1,511 | )(b) | — | |||||
| Total liabilities | 549,431 | (66,807 | ) | 482,624 | |||||
| Partners' equity | 46,475 | 62,671 | (c) | 109,146 | |||||
| Total liabilities and partners' equity | $ | 595,906 | $ | (4,136 | ) | $ | 591,770 | ||
| Licenses |
|
$ |
829,100 |
|
| Goodwill | 221,450 | |||
| Subscriber lists | 106,000 | |||
| Total valuation of acquired licenses and intangibles | 1,156,550 | |||
| Less current net book value of Triton's licenses and intangibles | (474,988 | ) | ||
| Pro forma adjustment | $ | 681,562 | ||
| Deferred financing costs related to new credit facility |
|
$ |
18,000 |
|
| Less write-off of deferred financing costs related to existing credit facility | (3,020 | ) | ||
| Pro forma adjustment | $ | 14,980 | ||
| Senior secured revolving credit facility |
|
$ |
140,398 |
|
| Senior secured term loan A | 450,000 | |||
| Senior secured term loan B | 237,500 | |||
| Senior secured term loan C | 237,500 | |||
| Senior subordinated debt | 125,000 | |||
| Total long term-debt | 1,190,398 | |||
| Elimination of Rural Cellular as adjusted debt | (143,114 | ) | ||
| Elimination of Triton pro forma debt | (463,916 | ) | ||
| Pro forma adjustment | $ | 583,368 | ||
| Gross proceeds from issuance of junior exchangeable preferred stock |
|
$ |
140,000 |
|
| Less deferred issuance costs | (4,480 | ) | ||
| Pro forma adjustment | $ | 135,520 | ||
| Gross proceeds from issuance of Class M preferred stock |
|
$ |
110,000 |
|
| Less issuance cost | (2,500 | ) | ||
| Pro forma adjustment | $ | 107,500 | ||
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with Rural Cellular and Triton's audited and unaudited financial statements and the notes thereto appearing elsewhere in this proxy statement. The discussion contains forward-looking statements that involve risks and uncertainties.
INTRODUCTION
We have materially expanded our business over the last three years through acquisitions. For example, the acquisitions of Unity Cellular, Atlantic Cellular, and Triton Cellular Partners in 1997, 1998, and 1999, respectively, approximately doubled our number of customers at the time of each transaction, on a pro forma basis. All acquisitions have been accounted for under the purchase method of accounting and, therefore, our historical results of operations include the results of operations for each acquired system, other than the Triton acquisition, subsequent to its respective acquisition date. We anticipate closing the Triton acquisition in the spring of 2000.
Over the past three years, our financial performance, and the year-to-year comparability of such performance, has been affected by:
Accordingly, we do not believe the discussion and analysis of our historical financial condition and results of operations set forth below are indicative nor should they be relied upon as an indicator of our future performance.
Acquisition and Joint Venture History
We follow a disciplined strategy of acquiring and developing wireless systems, primarily in rural markets. Through September 30, 1999, we have entered into a joint venture to develop and offer personal communications services, or PCS, and have completed four acquisitions of cellular systems as described below:
GENERAL
Rural Cellular's principal operating objective is to increase revenues and profitability through the acquisition and development of new markets and increased penetration in existing markets. We believe that owning and operating wireless systems in rural markets provides strong growth opportunities because these systems have lower penetration rates, a higher proportion of roamer revenues, and less competition for customers than wireless systems located in larger metropolitan areas due to lower population density.
We have a disciplined strategy of acquiring cellular systems primarily in rural markets and focus on acquiring underdeveloped cellular systems that include a high concentration of highway corridors and, as a result, tend to have a significant amount of roamer activity. We intend to pursue acquisitions to the extent they enhance or extend our network.
We operate our wireless systems using a decentralized management approach that allows us to achieve substantial marketing and distribution benefits, as well as operating efficiencies. We develop a strong local presence in the communities we serve, which enhances our competitive position and allows us to tailor our products and services to meet our customers' specific needs. We believe that our ability to customize our products and services results in greater customer satisfaction, customer retention and market penetration. We also believe that we will be able to continue to maintain high retention rates due in part to our territory manager distribution philosophy, by offering communication service packages and value-added features anticipating customer needs, and by providing high quality and knowledgeable customer service. For the nine months ended September 30, 1999, we experienced an average monthly cellular retention rate of 98.4%.
We have continued to penetrate our existing Midwest, Atlantic, and Maine regions through innovative sales initiatives, resulting in increased revenues in the nine months ended September 30, 1999 as compared to the same period in the prior year, and intend to roll out our successful marketing strategies throughout our existing systems and newly acquired systems, including systems acquired in the Triton acquisition. As a result of these strategies, we have been able to generate strong internal growth and improve the operating and financial performance of our systems.
Our revenues primarily consist of service, roamer and equipment revenues, each of which is described below:
Our operating expenses include network costs, cost of equipment sales, selling, general and administrative expenses and depreciation and amortization, each of which is described below:
In addition to the operating expenses discussed above, we also incur other income (expense), primarily interest expense related to our financing and acquisition activities.
Preferred stock dividends are related to our issuance in May 1998 of 125,000 shares of 113/8% senior exchangeable preferred stock in conjunction with our acquisition of Atlantic Cellular. Dividends on the senior exchangeable preferred stock are cumulative, are payable quarterly, and may be paid, at our option, on any dividend payment date occurring on or before May 15, 2003, either in cash or by the issuance of additional shares of senior exchangeable preferred stock having an aggregate liquidation preference equal to the amount of such dividends.
Wireless Alliance is our joint venture with an affiliate of Aerial Communications. Our policies and practices in accounting for Wireless Alliance are the same as those we use in our other regions. We follow generally accepted accounting principles in accounting for the minority ownership and eliminate all inter-company transactions on consolidation. Any allocable Wireless Alliance losses are first applied to reduce the carrying value of the minority interest in the joint venture and, thereafter consolidated with Rural Cellular's operating results. As of September 30, 1999, the minority ownership interest had been fully used to offset Wireless Alliance's losses.
EBITDA represents the sum of earnings before interest, taxes, depreciation, and amortization. EBITDA:
EBITDA is included in this prospectus because our management believes that EBITDA is a meaningful measurement commonly used in the wireless industry and by the investment community. Our definition of EBITDA may not be identical to similarly titled measures reported by other companies.
RESULTS OF OPERATIONS
The following table presents certain consolidated statement of operations data as a percentage of total revenues as well as other operating data for the periods indicated.
| |
Year Ended December 31 |
Nine Months Ended September 30 |
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|---|---|---|---|---|---|---|---|---|---|---|---|
| |
1996 |
1997 |
1998 |
1998 |
1999 |
||||||
| REVENUES: | |||||||||||
| Service | 75.9 | % | 80.5 | % | 76.8 | % | 77.0 | % | 66.7 | % | |
| Roamer | 21.1 | 17.6 | 20.5 | 20.5 | 28.4 | ||||||
| Equipment | 3.0 | 1.9 | 2.7 | 2.5 | 4.9 | ||||||
| Total revenues | 100.0 | 100.0 | 100.0 | 100.0 | 100.0 | ||||||
| OPERATING EXPENSES: | |||||||||||
| Network costs | 22.1 | 21.5 | 19.2 | 20.1 | 12.2 | ||||||
| Cost of equipment sales | 4.5 | 5.2 | 6.1 | 6.0 | 7.0 | ||||||
| Selling, general and administrative | 44.6 | 46.8 | 39.7 | 38.9 | 33.5 | ||||||
| Depreciation and amortization | 18.2 | 23.1 | 26.9 | 26.4 | 25.2 | ||||||
| Total operating expenses | 89.4 | 96.6 | 91.9 | 91.4 | 77.9 | ||||||
| OPERATING INCOME | 10.6 | 3.4 | 8.1 | 8.6 | 22.1 | ||||||
| OTHER INCOME (EXPENSE): | |||||||||||
| Interest expense | (0.9 | ) | (11.3 | ) | (19.4 | ) | (18.6 | ) | (17.2 | ) | |
| Interest and dividend income | 1.1 | 0.4 | 1.5 | 2.0 | 0.2 | ||||||
| Other income (expense) | 0.2 | (0.6 | ) | (0.5 | ) | (1.0 | ) | (0.2 | ) | ||
| Minority interest | 1.1 | 5.7 | 4.6 | 4.7 | 1.3 | ||||||
| Other income (expense) | 1.5 | (5.8 | ) | (13.8 | ) | (12.9 | ) | (15.9 | ) | ||
| INCOME (LOSS) BEFORE INCOME TAX AND EXTRAORDINARY ITEM | 12.1 | (2.4 | ) | (5.7 | ) | (4.3 | ) | 6.2 | |||
| INCOME TAX PROVISION | 0.7 | — | — | — | — | ||||||
| INCOME (LOSS) BEFORE EXTRAORDINARY ITEM | 11.4 | (2.4 | ) | (5.7 | ) | (4.3 | ) | 6.2 | |||
| EXTRAORDINARY ITEM—EARLY RETIREMENT OF DEBT | — | — | (1.0 | ) | (1.6 | ) | — | ||||
| NET INCOME (LOSS) | 11.4 | (2.4 | ) | (6.7 | ) | (5.9 | ) | 6.2 | |||
| PREFERRED STOCK DIVIDEND | — | — | (9.2 | ) | (8.1 | ) | (10.0 | ) | |||
| NET INCOME (LOSS) APPLICABLE TO COMMON SHARES | 11.4 | % | (2.4 | )% | (15.9 | )% | (14.0 | )% | (3.8 | )% | |
| EBITDA MARGIN | 28.8 | % | 26.5 | % | 35.0 | % | 35.0 | % | 47.3 | % | |
Nine Months Ended September 30, 1999 and 1998
Revenues
Service Revenues. Service revenues for the nine months ended September 30, 1999 increased 52.9% to $78.3 million from $51.2 million in 1998. The revenue growth reflects the effect of 23,000 additional customers added through increased penetration in existing markets and our acquisitions of Atlantic Cellular, Western Maine Cellular, and Glacial Lakes Cellular. We expect service revenues to increase in the future primarily as a result of future acquisitions, further anticipated industry-wide growth in subscribers, and expansion of our coverage. During the nine months ended September 30, 1999, Wireless Alliance generated $6.5 million in service revenues.
Roamer Revenues. Roamer revenues for the nine months ended September 30, 1999 increased 145.4% to $33.3 million from $13.6 million in 1998. Roamer revenues have increased due to the activation of additional cell sites, acquisitions of new service areas, and increased industry-wide wireless usage resulting from the now popular single rate calling plans. Partially offsetting the effect of increases in roaming minutes of use during the nine months ended September 30, 1999 was the impact of lower roaming rates with two major roaming partners. Wireless Alliance generated $334,000 in PCS roamer revenue during the nine months ended September 30, 1999.
Equipment Revenues. Equipment revenues for the nine months ended September 30, 1999 increased 241.8% to $5.7 million from $1.7 million in the comparable period of the prior year. This growth reflects network equipment reselling and increases in direct phone sales programs.
Key Revenue Indicators. Our cellular penetration increased to 9.0% at September 30, 1999 as compared to 7.5% at September 30, 1998. Wireless Alliance PCS penetration increased to 1.6% at September 30, 1999 as compared to 0.3% at September 30, 1998. Cellular average monthly revenue per customer for the nine months ended September 30, 1999 increased to $55, as compared to $52 in the comparable period of the prior year. Wireless Alliance average monthly revenue per customer for the nine months ended September 30, 1999 decreased to $52, as compared to $65 in the comparable period of the prior year.
Operating Expenses
Network Costs. Network costs for the nine months ended September 30, 1999, have increased 7.6% over the comparable period of the prior year to $14.4 million from $13.3 million. Wireless Alliance network costs for the nine months ended September 30, 1999 decreased to $3.5 million from $7.1 million in the comparable period of the prior year. As a percentage of total revenues, network costs for the nine months ended September 30, 1999 decreased to 12.2% from 20.1% in the comparable period of the prior year. The increase in network costs resulted primarily from expenses incurred in our Atlantic region, which more than offset Wireless Alliance network cost reductions. We expect consolidated network costs to continue to decline as a percentage of revenues as revenues continue to outpace the fixed components of network costs.
Cost of Equipment Sales. Cost of equipment sales for the nine months ended September 30, 1999 increased 103.0% over the comparable period of the prior year to $8.1 million from $4.0 million. As a percentage of revenue, cost of equipment sales for the nine months ended September 30, 1999 increased to 7.0% as compared to 6.0% in the comparable period of the prior year. This growth was primarily due to the cost of resold network equipment combined with an increase in the number of phones sold to customers.
Selling, General and Administrative. Selling, general and administrative expenses for the nine months ended September 30, 1999 increased 52.3% over the comparable period of the prior year to $39.3 million from $25.8 million. The increase in selling, general and administrative expenses resulted primarily from additional costs related to the operation of our Atlantic region. Reflecting certain economies achieved through the acquisition of the Atlantic assets and the relatively fixed nature of selling, general and administrative expenses, selling, general and administrative expenses decreased as a percentage of total revenues for the nine months ended September 30, 1999 to 33.5% as compared to 38.9% in the comparable period of the prior year. Due to the seasonality of our revenue stream, selling, general and administrative expenses as a percentage of total revenues has typically been higher in the fourth quarter as compared to the first three quarters.
Depreciation and Amortization. Depreciation and amortization expense for the nine months ended September 30, 1999 increased 68.6% over the comparable period of the prior year to $29.6 million from $17.5 million. The increase reflects the depreciable assets acquired as part of the Atlantic Cellular acquisition, our continued construction and acquisition efforts, and our investments in network facilities, including our launch of PCS services through Wireless Alliance, and rental equipment.
Other Income (Expense)
Interest Expense. Interest expense for the nine months ended September 30, 1999 increased 63.8% to $20.2 million as compared to $12.3 million in the comparable period of the prior year. The increase resulted from higher average borrowings under the existing credit facility and interest related to the senior subordinated notes. Borrowings under the existing credit facility and senior subordinated notes were used to finance the acquisitions of Atlantic Cellular and Western Maine Cellular, the continued build-out of additional cell sites, and other growth initiatives.
Other Income. Other income for the nine months ended September 30, 1999 includes a decrease of 50.8% in the minority partner's absorption of Wireless Alliance losses, to $1.5 million from $3.1 million in the comparable period of the prior year.
Preferred Stock Dividends
Preferred Stock Dividends. Preferred stock dividends increased 117.9% to $11.8 million in the nine months ended September 30, 1999 as compared to $5.4 million for the comparable period in 1998. The increase primarily resulted from the senior exchangeable preferred stock having been outstanding for a full nine months in 1999, versus less than four months in the same period in 1998. The preferred stock dividends were paid by issuing additional shares of senior exchangeable preferred stock.
EBITDA
EBITDA. EBITDA increased 138.4% to $55.5 million in the nine months ended September 30, 1999 as compared to $23.3 million for the comparable period in 1998. For the nine months ended September 30, 1999, our cellular operations generated $57.5 million in EBITDA, which was partially offset by Wireless Alliance's negative EBITDA of $2.1 million. We expect that Wireless Alliance will continue to have negative EBITDA in the remaining quarter of 1999.
Years Ended December 31, 1998 and 1997
Revenues
Service Revenues. Service revenues for the year ended December 31, 1998 increased 74.2% to $75.6 million from $43.4 million in 1997. This growth was primarily due to a 26.1% increase in customers from existing markets and a 67.1% increase in customers through the acquisition of Atlantic Cellular. During the year ended December 31, 1998, Wireless Alliance generated service revenues of $12.2 million.
Roamer Revenues. Roamer revenues for the year ended December 31, 1998 increased 113.2% to $20.2 million from $9.5 million in 1997. Roamer revenues have increased due to the activation of additional cell sites and acquisitions of new service areas. Wireless Alliance generated an immaterial amount in roamer revenues during 1998 and had no roamer revenues in 1997 because it was exclusively engaged in reselling cellular services.
Equipment Revenues. Equipment revenues for the year ended December 31, 1998 increased 164.7% to $2.7 million from $1.0 million in 1997. This growth was primarily due to an increase in the number of customers, as a result of our acquisition of Atlantic Cellular, who purchase their phones as opposed to the number of customers who participate in the equipment rental program currently popular in our Midwest region.
Key Revenue Indicators. Our cellular penetration as of December 31, 1998 increased to 8.0% from 7.6% as of December 31, 1997. Reflecting its market launch, Wireless Alliance PCS penetration reached 0.7% for 1998. Cellular average monthly revenue per customer for the year ended December 31, 1998 decreased to $52 as compared to $55 in 1997. Wireless Alliance PCS average revenue per customer was $64 in 1998.
Operating Expenses
Network Costs. Network costs for the year ended December 31, 1998, increased 63.0% to $18.9 million from $11.6 million in 1997. The increase in network costs resulted primarily from expenses incurred by Wireless Alliance and our Maine and Atlantic regions, which more than offset network cost reductions in our Midwest operations. However, as a percentage of total revenues, network costs decreased to 19.2% in 1998 from 21.5% in 1997. Contributing to the reduction of network costs in the Midwest service area was the completed installation of our switch in the third quarter of 1997, thereby reducing our network costs for switching services. Network costs for Wireless Alliance increased to $9.3 million for the year ended December 31, 1998, from $6.0 million in 1997. The increase is attributable to additional network costs associated with an increase in the average number of cellular reselling customers.
Cost of Equipment Sales. Cost of equipment sales for the year ended December 31, 1998 increased 112.6% to $6.0 million from $2.8 million in 1997. As a percentage of total revenues, cost of equipment sales for the year ended December 31, 1998 increased to 6.1% as compared to 5.2% in the comparable period of the prior year. This growth primarily reflects our Atlantic region customers who prefer to purchase their phones as opposed to utilizing the equipment rental program currently popular in our Midwest region.
Selling, General and Administrative. Selling, general and administrative expenses for the year ended December 31, 1998 increased 55.2% to $39.2 million from $25.2 million in 1997. The increase in selling, general and administrative expenses over the prior year resulted primarily from additional costs related to the acquisition of Atlantic Cellular in July 1998 and from operating our Maine region during all of 1998. As a percentage of total revenues, selling, general and administrative expenses decreased to 39.7% in 1998 from 46.8% in 1997, reflecting operating efficiencies achieved through the integration of our Atlantic operation.
Depreciation and Amortization. Depreciation and amortization expense for the year ended December 31, 1998 increased 113.0% to $26.5 million from $12.5 million in 1997. The increase reflects our continued construction and acquisition efforts and our investments in network facilities and rental equipment. Specifically contributing to the increase was the depreciation relating to the construction of 23 additional cell sites in our Midwest region, an additional 89 cell sites from the acquisition of Atlantic Cellular, and the activation of 53 Wireless Alliance PCS cell sites. In addition, license and other intangible asset amortization resulting from acquisitions increased to $8.1 million for the year ended December 31, 1998 from $1.5 million in the prior year.
Other Income (Expense)
Interest Expense. Interest expense for the year ended December 31, 1998 increased to $19.1 million from $6.1 million in 1997. The increase in interest expense resulted from higher average borrowings under our credit facilities and interest related to the senior subordinated notes used to finance the acquisitions of Atlantic Cellular and Western Maine Cellular, the construction of 23 cell sites, and other growth initiatives.
Other Income. Other income includes an increase in the year ended December 31, 1998 in the minority partner's absorption of Wireless Alliance losses.
Extraordinary Item
In May 1998, we repaid approximately $140.0 million of the outstanding principal amount under our $160.0 million credit facility utilizing the proceeds from our issuance of $125.0 million in senior subordinated notes and $125.0 million in senior exchangeable preferred stock. Accordingly, we recognized an extraordinary loss of approximately $1.0 million related to the early retirement of debt representing the unamortized debt issuance costs.
Preferred Stock Dividends
Preferred Stock Dividends. Preferred stock dividends of $9.1 million were paid in the year ended December 31, 1998. The preferred stock dividends were incurred as a result of our issuance of 125,000 shares of senior exchangeable preferred stock in May 1998. The preferred stock dividends were paid by issuing additional shares of senior exchangeable preferred stock.
EBITDA
EBITDA. EBITDA for the year ended December 31, 1998 increased 141.6% to $34.5 million as compared to $14.3 million in 1997. In 1998, our cellular operations generated $39.4 million in EBITDA, which was partially offset by Wireless Alliance's negative EBITDA of $4.8 million due to the significant costs associated with customer growth.
Years Ended December 31, 1997 and 1996
Revenues
Service Revenues. Service revenues for the year ended December 31, 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. 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 acquisition of our Maine region and the formation of Wireless Alliance. In 1997, Wireless Alliance generated service revenues of $7.3 million.
Roamer Revenues. Roamer revenues for the year ended December 31, 1997 increased 47.7% to $9.5 million from $6.4 million in 1996, reflecting the increase in the number of markets served. Markets have increased as a result of the activation of additional cell sites and acquisitions of new service areas.
Equipment Revenues. Equipment revenues for the year ended December 31, 1997 increased 10.0% to $1.0 million from $927,000 in 1996. This growth reflects an increase in customers, acquired through the acquisition of our Maine region, purchasing their cellular handsets and equipment as compared to our Midwest customers who more frequently rent them.
Key Revenue Indicators. Our cellular penetration as of December 31, 1997 increased to 7.6% from 7.5% at December 31, 1996. Cellular average monthly revenue per customer for the year ended December 31, 1997 decreased to $55 as compared to $66 in 1996.
Operating Expenses
Network Costs. Network costs for the year ended December 31, 1997 increased 72.0% to $11.6 million from $6.7 million in 1996 and improved as a percentage of total revenues to 21.5% in 1997 from 22.1% in 1996. The increase in network costs resulted primarily from expenses incurred by Wireless Alliance and in Maine, which more than offset network cost reductions in our Midwest operations. Contributing to the reduction of network costs in the Midwest service area was the substantial completion in late 1996 of our digital microwave network, which reduced our reliance on third-party assistance in connecting cell site communication to the switch. In addition, we completed installation of our own switch in the third quarter of 1997, thereby reducing our network costs for switching services. 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.
Cost of Equipment Sales. Cost of equipment sales for the year ended December 31, 1997 increased 104.1% to $2.8 million from $1.4 million in 1997. As a percentage of total revenues, cost of equipment sales for the year ended December 31, 1997 increased to 5.2% as compared to 4.5% in the comparable period of the prior year. This growth was primarily due to our recently acquired Maine customers purchasing their phones as opposed to renting them through our phone rental program currently popular in the Midwest region.
Selling, General and Administrative. Selling, general and administrative expenses for the year ended December 31, 1997 increased 85.8% to $25.2 million from $13.6 million in 1996. The increase in selling, general and administrative expenses over the prior year results primarily from additional costs in Maine and a $6.2 million increase in costs of Wireless Alliance.
Depreciation and Amortization. Depreciation and amortization expense for the year ended December 31, 1997 increased 124.9% to $12.5 million from $5.5 million in 1996. The increase reflects our continued construction and acquisition efforts and our investment in network facilities, including our newly installed switch, 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. In addition, we shortened the depreciable life from three years to two years for new rental telephones placed in service during 1997.
Other Income (Expense)
Interest expense. Interest expense for the year ended December 31, 1997 increased to $6.1 million from $280,000 in 1996. The increase in interest expense was a result of higher average borrowings to finance the acquisition of our Maine region, the construction of 15 cell sites for our cellular network, and other growth initiatives.
Other Income. Other income includes an increase in the year ended December 31, 1997 in the minority partner's absorption of losses of Wireless Alliance.
EBITDA
EBITDA. EBITDA for the year ended December 31, 1997 increased 62.8% to $14.3 million as compared to $8.8 million in 1996. In 1997, our cellular operations 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.
Liquidity and Capital Resources
Our primary liquidity requirements are for working capital, capital expenditures, debt service, acquisitions, and customer growth. In the past we have met these requirements through cash flow from operations, sales of our common and preferred stock, borrowings under our credit facility, and issuance of our senior subordinated notes. Our existing credit facility provides for borrowings up to $300.0 million. As of December 31, 1998 and September 30, 1999, we had $173.9 million and $182.1 million, respectively, outstanding under our credit facility. Under the existing credit facility, amounts may be borrowed, subject to mandatory repayments, or repaid at any time through maturity, provided that the outstanding borrowings do not exceed the total amount available under the existing credit facility.
In connection with the Triton acquisition, we intend to enter into a new credit facility, which will provide for up to $1.2 billion in borrowing capacity. We believe that the funds available under this facility, together with the proceeds of common and preferred stock offerings and the issuance of up to $110.0 million in Class M preferred stock (we have received a commitment for the purchase of up to $200.0 million of Class M preferred stock, but anticipate that the proceeds from the common stock offering will reduce the amount issued to $110.0 million), and cash from operations, will be sufficient to fund the Triton acquisition, repay amounts owing under the existing credit facility, and fund capital expenditures and operating expenses through fiscal 2000. We anticipate that after the Triton acquisition we will have $134.6 million available under the new credit facility. In the event that the Triton acquisition does not close, we will not enter into the new credit facility and will be required to redeem the junior exchangeable preferred stock. In that event, the funds available under our existing credit facility and proceeds from common and senior exchangeable preferred stock offerings will be adequate to fund anticipated capital expenditures and operations. Capital expenditures for 2000 are expected to be approximately $40.0 million (including $3.0 million for Wireless Alliance and $7.6 million for Triton).
Net cash provided by operating activities was $26.1 million for the nine months ended September 30, 1999. Adjustments to the $7.3 million net income to reconcile to net cash provided by operating activities included $29.5 million in depreciation and amortization and a $9.3 million increase in accounts receivable.
Net cash used in investing activities for the nine months ended September 30, 1999 was $36.1 million. The principal uses of cash included our $11.9 million acquisition of Glacial Lakes Cellular and $15.7 million in purchases of property and equipment, of which $3.1 million was attributable to Wireless Alliance capital expenditures. These purchases reflect our continued expansion of our existing cellular coverage and the continued upgrading of existing cell sites and switching equipment. In addition, one of our affiliates was a successful bidder in the auction of local multi-point distribution system licenses, acquiring 13 licenses at a cost of $7.0 million, and was a successful bidder in the PCS C block license auction, acquiring the license for the St. Cloud, Minnesota basic trading area for $1.6 million.
Net cash provided by financing activities was $9.0 million for the nine months ended September 30, 1999, consisting primarily of $8.0 million in additional borrowings under the $300.0 million credit facility, net of a partial repayment of $16.0 million.
Net cash provided by operating activities was $28.6 million for the year ended December 31, 1998. Adjustments to the $6.6 million net loss to reconcile to net cash provided by operating activities included $26.5 million in depreciation and amortization and a $9.1 million increase in accounts payable, partially offset by a $4.5 million decrease in minority interest.
Net cash used in investing activities for the year ended December 31, 1998 was $313.2 million. The principal uses of cash included our $270.0 million acquisition of the assets of Atlantic Cellular and all of the issued and outstanding stock of Western Maine Cellular and purchases of property and equipment of $41.5 million, of which $13.3 million was attributable to Wireless Alliance capital expenditures. These purchases reflect the construction and launch of Wireless Alliance's PCS network, expansion of existing coverage in our Midwest region, and the continued upgrading of existing cell sites and switching equipment.
Net cash provided by financing activities was $284.7 million for the year ended December 31, 1998. Financing activities for such period consisted primarily of the placement in May 1998 of $125.0 million of senior subordinated notes and 125,000 shares of senior exchangeable preferred stock. The net proceeds were used to repay a portion of indebtedness and to finance the acquisitions of Atlantic Cellular and Western Maine Cellular.
OTHER MATTERS
Seasonality
Somewhat offset by the higher year round roamer revenues generated in our Atlantic region, we experience seasonal fluctuations in revenues and operating income (loss). Our average monthly roamer revenue per cellular customer increases during the second and third calendar quarters. This increase reflects greater usage by our roamer customers who travel in our cellular service area for weekend and vacation recreation or work in seasonal industries. Because our cellular service area includes many seasonal recreational areas, we expect that roamer revenues will continue to fluctuate seasonally more than service revenues. With the Triton acquisition we will cover a more diverse geographic area, and we anticipate that this diversification will reduce the effects of seasonality on our operating results.
| |
1999 Quarter Ended |
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|---|---|---|---|---|---|---|---|---|---|---|---|
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March 31 |
June 30 |
September 30 |
|
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| |
(in thousands, except per customer data) |
|
|||||||||
| Total revenues | $ | 32,165 | $ | 38,170 | $ | 46,942 | |||||
| Operating income | 3,720 | 8,098 | 14,095 | ||||||||
| EBITDA | 13,446 | 18,025 | 23,991 | ||||||||
| Average monthly revenue per cellular customer |
$47 | $54 | $63 | ||||||||
| |
1998 Quarter Ended |
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|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
March 31 |
June 30 |
September 30 |
December 31 |
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| |
(in thousands, except per customer data) |
|||||||||||
| Total revenues | $ | 14,797 | $ | 17,672 | $ | 33,955 | $ | 32,108 | ||||
| Operating income (loss) | (524 | ) | 364 | 5,903 | 2,256 | |||||||
| EBITDA | 3,694 | 5,211 | 14,361 | 11,266 | ||||||||
| Average monthly revenue per cellular customer |
$46 | $53 | $57 | $51 | ||||||||
Year 2000 Matters
Prior to January 1, 2000, our Y2K project team, staffed with subject matter experts, evaluated our computerized systems to ensure that our business and operational systems would be Y2K ready. As a result, we believe all of our mission critical software and hardware were remedied and made Y2K ready.
We budgeted $2.0 million to cover costs associated with Y2K assessments, modifications, and associated upgrades, of which approximately $1.3 million had been spent on upgrades and replacements of non-Y2K compliant systems as of September 30, 1999.
Our cellular network has continued to function without service affecting outages due to Y2K problems. However, some network equipment suppliers were and/or continue to be unwilling or unable to give unqualified warranties that network equipment is Y2K compliant.
The terms and conditions under which we provide cellular and paging services to our customers provide that we are not liable for any consequential or incidental damages to our customers. Service affecting outages have occurred in limited geographic areas in the past and we have not been found liable to any person for damages in excess of the limitations imposed by the terms and conditions of service. We believe it is unlikely that an outage related to Y2K readiness would lead to a different result, but we cannot assure you that our liability will be limited to that extent. As we have not experienced any outages related to Y2K, we do not anticipate that any litigation involving us would arise as a result of Y2K readiness issues.
As the year 2000 progresses, we may experience problems associated with the year 2000 that have not yet been discovered. For example, due to the timing of our billing cycles, we have not completed an entire monthly billing cycle since December 31, 1999. We have tested our billing systems and we do not anticipate significant problems; however, a billing system interruption could have a material impact on the receipt of customer payments.
We continue to monitor and test our systems to identify and correct any problems. Our Y2K project team will remain in place at least through the first quarter of 2000.
Quantitative and Qualitative Disclosures About Market Risk
Incorporated by reference to our report on Form 10-K for the year ended December 31, 1998, and our report on Form 10-Q for the quarter ended September 30, 1999.
Forward-Looking Information
Forward-looking statements herein are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct. A number of factors could cause actual results, performance, achievements by us, 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, our ability to respond to the competitive environment in the wireless and telecommunications industries, changes in economic conditions in general and in our business, changes in legislation and regulations applicable to our business, demographic changes, changes in prevailing interest rates and the availability and terms of financing to fund the anticipated growth of our business, our ability to attract and retain qualified personnel, our significant indebtedness, our ability to achieve our growth plans, potential problems related to our Y2K readiness or the Y2K readiness of parties with whom we do business, and changes in our acquisition and capital expenditure plans. Investors are cautioned that all forward-looking statements involve risks, uncertainties, and assumptions.
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 Rural Cellular Corporation or persons acting on its behalf are expressly qualified in their entirety by the foregoing cautionary statements. We disclaim 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.
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Page |
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| Rural Cellular Corporation and Subsidiaries | ||
| Report of Independent Public Accountants | F-3 | |
| Consolidated Balance Sheets as of December 31, 1997 and 1998 and Unaudited September 30, 1999 | F-4 | |
| Consolidated Statements of Operations for the Years Ended December 31, 1996, 1997, and 1998 and Unaudited Nine Months Ended September 30, 1998 and 1999 | F-6 | |
| Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 1996, 1997, and 1998 and Unaudited Nine Months Ended September 30, 1999 | F-7 | |
| Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, 1997, and 1998 and Unaudited Nine Months Ended September 30, 1998 and 1999 | F-8 | |
| Notes to Consolidated Financial Statements | F-9 | |
| Atlantic Cellular Company, L.P. and Subsidiaries |
|
|
| Independent Auditors' Report | F-28 | |
| Consolidated Balance Sheets as of December 31, 1996 and 1997 and Unaudited June 30, 1998 |
F-29 | |
| Consolidated Statements of Operations for the Years Ended December 31, 1995, 1996 and 1997 and Unaudited Six Months Ended June 30, 1997 and 1998 | F-30 | |
| Consolidated Statements of Partners' Capital for the Years Ended December 31, 1995, 1996 and 1997 and Unaudited Six Months Ended June 30, 1998 | F-31 | |
| Consolidated Statements of Cash Flows for the Years Ended December 31, 1995, 1996 and 1997 and Unaudited Six Months Ended June 30, 1997 and 1998 | F-32 | |
| Notes to Consolidated Financial Statements | F-33 | |
| Triton Cellular Partners, L.P. and Subsidiaries |
|
|
| Report of Independent Public Accountants | F-41 | |
| Consolidated Balance Sheets as of December 31, 1998 and September 30, 1999 | F-42 | |
| Consolidated Statements of Operations for the Year Ended December 31, 1998 and Nine Months Ended September 30, 1999 | F-43 | |
| Consolidated Statements of Partners' Equity for the Year Ended December 31, 1998 and Nine Months Ended September 30, 1999 | F-44 | |
| Consolidated Statements of Cash Flows for the Years Ended December 31, 1998 and Nine Months Ended September 30, 1999 | F-45 | |
| Notes to Consolidated Financial Statements | F-46 | |
| Point Telesystems, Inc. |
|
|
| Report of Independent Public Accountants | F-59 | |
| Balance Sheet as of December 31, 1997 | F-60 | |
| Statements of Operations and Retained Earnings for the Year Ended December 31, 1997 and for the Period from January 1, 1998 to January 15, 1998 | F-61 | |
| Statements of Cash Flows for the Year Ended December 31, 1997 and for the Period from January 1, 1998 to January 15, 1998 | F-62 | |
| Notes to Financial Statements | F-63 |
Report of Independent Public Accountants
To Rural Cellular Corporation:
We have audited the accompanying consolidated balance sheets of Rural Cellular Corporation (a Minnesota corporation) and subsidiaries as of December 31, 1997 and 1998, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of Rural Cellular Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Rural Cellular Corporation and subsidiaries as of December 31, 1997 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Minneapolis,
Minnesota,
February 5, 1999
RURAL CELLULAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
ASSETS
| |
December 31 |
|
|||||||
|---|---|---|---|---|---|---|---|---|---|
| |
September 30, 1999 |
||||||||
| |
1997 |
1998 |
|||||||
| |
|
|
(Unaudited) |
||||||
| CURRENT ASSETS: |
|
|
|
|
|
|
|
|
|
| Cash | $ | 1,995 | $ | 2,062 | $ | 1,073 | |||
| Accounts receivable, less allowance of $1,146, $1,555 and $985 | 9,621 | 13,796 | 22,944 | ||||||
| Inventories | 1,774 | 2,321 | 3,068 | ||||||
| Other current assets | 766 | 813 | 631 | ||||||
| Total current assets | 14,156 | 18,992 | 27,716 | ||||||
| PROPERTY AND EQUIPMENT, less accumulated depreciation of $23,874, $42,538 and $60,903 |
|
|
77,920 |
|
|
131,714 |
|
|
128,764 |
| LICENSES AND OTHER ASSETS: |
|
|
|
|
|
|
|
|
|
| Licenses and other intangible assets, less accumulated amortization of $1,490 and $8,108 and $16,812 | 81,348 | 309,672 | 321,135 | ||||||
| Deferred debt issuance costs, less accumulated amortization of $120 and $509 and $1,429 | 1,080 | 11,761 | 10,949 | ||||||
| Other assets | 7,084 | 8,385 | 6,770 | ||||||
| Total licenses and other assets | 89,512 | 329,818 | 338,854 | ||||||
| $ | 181,588 | $ | 480,524 | $ | 495,334 | ||||
The accompanying notes are an integral part of these consolidated balance sheets.
RURAL CELLULAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY
| |
December 31 |
|
||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| |
September 30, 1999 |
|||||||||
| |
1997 |
1998 |
||||||||
| |
|
|
(Unaudited) |
|||||||
| CURRENT LIABILITIES: | ||||||||||
| Accounts payable | $ | 7,960 | $ | 16,524 | $ | 11,906 | ||||
| Advance billings and customer deposits | 2,541 | 3,229 | 3,795 | |||||||
| Accrued interest | 1,595 | 3,508 | 6,305 | |||||||
| Dividends payable | — | 1,880 | 2,044 | |||||||
| Other accrued expenses | 1,546 | 3,389 | 4,802 | |||||||
| Total current liabilities | 13,642 | 28,530 | 28,852 | |||||||
| LONG-TERM DEBT | 128,000 | 298,851 | 307,143 | |||||||
| Total liabilities | 141,642 | 327,381 | 335,995 | |||||||
| COMMITMENTS AND CONTINGENCIES (Note 9) | ||||||||||
| MINORITY INTEREST | 6,215 | 1,663 | — | |||||||
| SENIOR EXCHANGEABLE PREFERRED STOCK | — | 132,201 | 143,767 | |||||||
| SHAREHOLDERS' EQUITY: | ||||||||||
| Class A common stock; $.01 par value; 15,000 shares authorized, 7,593, 7,780 and 7,935 shares issued and outstanding | 76 | 78 | 79 | |||||||
| Class B common stock; $.01 par value; 5,000 shares authorized, 1,260, 1,203 and 1,144 shares issued and outstanding | 13 | 12 | 11 | |||||||
| Additional paid-in capital | 34,446 | 35,707 | 36,476 | |||||||
| Accumulated deficit | (804 | ) | (16,518 | ) | (20,994 | ) | ||||
| Total shareholders' equity | 33,731 | 19,279 | 15,572 | |||||||
| $ | 181,588 | $ | 480,524 | $ | 495,334 | |||||
The accompanying notes are an integral part of these consolidated balance sheets.
RURAL CELLULAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
| |
Years Ended December 31 |
Nine Months Ended September 30 |
||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
1996 |
1997 |
1998 |
1998 |
1999 |
|||||||||||
| |
|
|
|
(Unaudited) |
||||||||||||
| REVENUES: | ||||||||||||||||
| Service | $ | 23,120 | $ | 43,408 | $ | 75,633 | $ | 51,178 | $ | 78,263 | ||||||
| Roamer | 6,413 | 9,475 | 20,199 | 13,577 | 33,310 | |||||||||||
| Equipment | 927 | 1,020 | 2,700 | 1,669 | 5,704 | |||||||||||
| Total revenues | 30,460 | 53,903 | 98,532 | 66,424 | 117,277 | |||||||||||
| OPERATING EXPENSES: | ||||||||||||||||
| Network costs | 6,731 | 11,578 | 18,877 | 13,335 | 14,352 | |||||||||||
| Cost of equipment sales | 1,375 | 2,807 | 5,968 | 4,012 | 8,145 | |||||||||||
| Selling, general and administrative | 13,575 | 25,225 | 39,156 | 25,811 | 39,318 | |||||||||||
| Depreciation and amortization | 5,539 | 12,458 | 26,532 | 17,523 | 29,549 | |||||||||||
| Total operating expenses | 27,220 | 52,068 | 90,533 | 60,681 | 91,364 | |||||||||||
| OPERATING INCOME | 3,240 | 1,835 | 7,999 | 5,743 | 25,913 | |||||||||||
| OTHER INCOME (EXPENSE): | ||||||||||||||||
| Interest expense | (280 | ) | (6,065 | ) | (19,060 | ) | (12,340 | ) | (20,207 | ) | ||||||
| Interest and dividend income | 335 | 232 | 1,461 | 1,318 | 289 | |||||||||||
| Equity in earnings (losses) of unconsolidated affiliates | 51 | (350 | ) | (535 | ) | (645 | ) | (210 | ) | |||||||
| Minority interest | 331 | 3,082 | 4,553 | 3,126 | 1,538 | |||||||||||
| Other income (expense), net | 437 | (3,101 | ) | (13,581 | ) | (8,541 | ) | (18,590 | ) | |||||||
| INCOME (LOSS) BEFORE INCOME TAX AND EXTRAORDINARY ITEM | 3,677 | (1,266 | ) | (5,582 | ) | (2,798 | ) | 7,323 | ||||||||
| INCOME TAX PROVISION | 200 | — | — | — | 34 | |||||||||||
| INCOME (LOSS) BEFORE EXTRAORDINARY ITEM | 3,477 | (1,266 | ) | (5,582 | ) | (2,798 | ) | 7,289 | ||||||||
| EXTRAORDINARY ITEM—EARLY EXTINGUISHMENT OF DEBT | — | — | (1,042 | ) | (1,042 | ) | — | |||||||||
| NET INCOME (LOSS) | 3,477 | (1,266 | ) | (6,624 | ) | (3,840 | ) | 7,289 | ||||||||
| PREFERRED STOCK DIVIDEND | — | — | (9,090 | ) | (5,398 | ) | (11,765 | ) | ||||||||
| NET INCOME (LOSS) APPLICABLE TO COMMON SHARES | $ | 3,477 | $ | (1,266 | ) | $ | (15,714 | ) | $ | (9,238 | ) | $ | (4,476 | ) | ||
| NET INCOME (LOSS) PER BASIC AND DILUTED / COMMON SHARES | $ | 0.41 | $ | (0.14 | ) | $ | (1.76 | ) | $ | (1.04 | ) | $ | (0.50 | ) | ||
| WEIGHTED AVERAGE COMMON SHARES OUTSTANDING, BASIC AND DILUTED | 8,509 | 8,853 | 8,916 | 8,893 | 9,029 | |||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
RURAL CELLULAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For Years Ended December 31, 1996, 1997, and 1998 and
the (Unaudited) Nine Months Ended September 30, 1999
(In thousands)
| |
Class A Common Stock |
Class B Common Stock |
|
|
|
|||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
|
Retained Earnings (Accumulated Deficit) |
|
|||||||||||||||||
| |
Additional Paid-In Capital |
Total Shareholders' Equity |
||||||||||||||||||
| |
Shares |
Amount |
Shares |
Amount |
||||||||||||||||
| BALANCE, December 31, 1995 | 4,303 | $ | 43 | 1,680 | $ | 17 | $ | 8,413 | $ | (3,015 | ) | $ | 5,458 | |||||||
| Issuance of common stock, net of offering expenses | 2,870 | 29 | — | — | 26,033 | — | 26,062 | |||||||||||||
| Conversion of Class B common stock to Class A common stock | 330 | 3 | (330 | ) | (3 | ) | — | — | — | |||||||||||
| Net income applicable to common shares | — | — | — | — | — | 3,477 | 3,477 | |||||||||||||
| BALANCE, December 31, 1996 | 7,503 | 75 | 1,350 | 14 | 34,446 | 462 | 34,997 | |||||||||||||
| Conversion of Class B common stock to Class A common stock | 90 | 1 | (90 | ) | (1 | ) | — | — | — | |||||||||||
| Net loss applicable to common shares | — | — | — | — | — | (1,266 | ) | (1,266 | ) | |||||||||||
| BALANCE, December 31, 1997 | 7,593 | 76 | 1,260 | 13 | 34,446 | (804 | ) | 33,731 | ||||||||||||
| Conversion of Class B common stock to Class A common stock | 57 | 1 | (57 | ) | (1 | ) | — | — | 0 | |||||||||||
| Stock issued through employee stock purchase plan | 6 | 0 | — | — | 57 | — | 57 | |||||||||||||
| Stock options exercised | 124 | 1 | — | — | 1,204 | — | 1,205 | |||||||||||||
| Net loss applicable to common shares | — | — | — | — | — | (15,714 | ) | (15,714 | ) | |||||||||||
| BALANCE, December 31, 1998 | 7,780 | 78 | 1,203 | 12 | 35,707 | (16,518 | ) | 19,279 | ||||||||||||
| Conversion of Class B common stock to Class A common stock (Unaudited) | 59 | 1 | (59 | ) | (1 | ) | — | — | — | |||||||||||
| Stock issued through employee stock purchase plan (Unaudited) | 17 | — | — | — | 151 | — | 151 | |||||||||||||
| Stock options exercised (Unaudited) | 79 | — | — | — | 618 | — | 618 | |||||||||||||
| Net loss applicable to common shares (Unaudited) | — | — | — | — | — | (4,476 | ) | (4,476 | ) | |||||||||||
| BALANCE, September 30, 1999 (Unaudited) | 7,935 | $ | 79 | 1,144 | $ | 11 | $ | 36,476 | $ | (20,994 | ) | $ | 15,572 | |||||||
The accompanying notes are an integral part of these consolidated financial statements.
RURAL CELLULAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| |
Years Ended December 31 |
Nine Months Ended September 30 |
||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
1996 |
1997 |
1998 |
1998 |
1999 |
|||||||||||
| |
|
|
|
(Unaudited) |
||||||||||||
| OPERATING ACTIVITIES: | ||||||||||||||||
| Net income (loss) | $ | 3,477 | $ | (1,266 | ) | $ | (6,624 | ) | $ | (3,840 | ) | $ | 7,289 | |||
| Adjustments to reconcile to net cash provided by operating activities | ||||||||||||||||
| Depreciation and amortization | 5,539 | 12,458 | 26,532 | 17,523 | 29,549 | |||||||||||
| Extraordinary item—early extinguishment of debt | — | — | 1,042 | 1,042 | — | |||||||||||
| Equity in (earnings) losses of unconsolidated affiliates | (52 | ) | 350 | 655 | 654 | 2 | ||||||||||
| Change in minority interest | (331 | ) | (3,082 | ) | (4,552 | ) | (3,125 | ) | (1,663 | ) | ||||||
| Other | (184 | ) | (42 | ) | 7 | (60 | ) | 769 | ||||||||
| Change in other operating elements: | ||||||||||||||||
| Accounts receivable | (3,220 | ) | (1,008 | ) | (1,058 | ) | (1,512 | ) | (9,273 | ) | ||||||
| Inventories | (682 | ) | (27 | ) | (230 | ) | 249 | (748 | ) | |||||||
| Other current assets | (246 | ) | (262 | ) | 365 | (308 | ) | 189 | ||||||||
| Accounts payable | 4,872 | (2,525 | ) | 9,097 | 1,220 | (4,494 | ) | |||||||||
| Advance billings and customer deposits | 435 | 797 | (16 | ) | 6,230 | 557 | ||||||||||
| Other accrued expenses | 31 | 2,649 | 3,346 | (83 | ) | 3,917 | ||||||||||
| Net cash provided by operating activities | 9,639 | 8,042 | 28,564 | 17,990 | 26,094 | |||||||||||
| INVESTING ACTIVITIES: | ||||||||||||||||
| Purchases of property and equipment, net | (24,214 | ) | (34,928 | ) | (41,491 | ) | (23,956 | ) | (15,694 | ) | ||||||
| Contributions to unconsolidated affiliates | (225 | ) | (2 | ) | — | — | — | |||||||||
| Acquisition of Glacial Lakes Cellular | — | — | — | — | (11,156 | ) | ||||||||||
| Acquisition of Atlantic and Western Maine Cellular | — | — | (269,984 | ) | (269,984 | ) | — | |||||||||
| Acquisition of Unicel and Northern Maine | — | (85,706 | ) | — | — | — | ||||||||||
| Acquisition of FCC licenses | — | — | — | — | (8,655 | ) | ||||||||||
| Other | (997 | ) | (3,983 | ) | (1,734 | ) | (1,621 | ) | (550 | ) | ||||||
| Net cash used in investing activities | (25,436 | ) | (124,619 | ) | (313,209 | ) | (295,561 | ) | (36,055 | ) | ||||||
| FINANCING ACTIVITIES: | ||||||||||||||||
| Proceeds from exercise of stock options | — | — | 1,262 | 1,227 | 770 | |||||||||||
| Proceeds from issuance of senior subordinated notes | — | — | 125,000 | 125,000 | — | |||||||||||
| Proceeds from issuance of senior exchangeable preferred stock | — | — | 125,000 | 125,000 | — | |||||||||||
| Proceeds from issuance of common stock | 26,540 | — | — | — | — | |||||||||||
| Proceeds from issuance of long-term debt | 14,741 | 137,695 | 193,625 | 188,625 | 24,000 | |||||||||||
| Proceeds from termination of interest rate swap | — | — | 1,003 | 1,003 | 360 | |||||||||||
| Repayments of long-term debt | (25,372 | ) | (18,161 | ) | (148,625 | ) | (143,625 | ) | (16,000 | ) | ||||||
| Payments of debt issuance costs | — | (1,199 | ) | (12,553 | ) | (12,505 | ) | (158 | ) | |||||||
| Net cash provided by financing activities | 15,909 | 118,335 | 284,712 | 284,725 | 8,972 | |||||||||||
| NET INCREASE (DECREASE) IN CASH | 112 | 1,758 | 67 | 7,154 | (989 | ) | ||||||||||
| CASH, at beginning of period | 125 | 237 | 1,995 | 1,995 | 2,062 | |||||||||||
| CASH, at end of period | $ | 237 | $ | 1,995 | $ | 2,062 | $ | 9,149 | $ | 1,073 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
RURAL CELLULAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1998
(Including data applicable to unaudited periods)
1. Organization and Nature of Business:
Rural Cellular Corporation and its subsidiaries (the Company or Rural Cellular) provide cellular communication service in the northern half of Minnesota and portions of New England and paging service in northern Minnesota, eastern North Dakota and portions of Maine. The Company operates cellular and paging systems under licenses granted by the Federal Communications Commission (FCC). Its operations are subject to the applicable rules and regulations of the FCC.
2. Acquisitions:
Unity Cellular System, Inc.
In May 1997, the Company completed the acquisition of the Maine wireless telephone operations and related assets of Unity Cellular Systems, Inc. and related cellular and microwave licenses from InterCel, Inc. ("InterCel"). In addition, the Company acquired InterCel's 51% interest in the Northern Maine Cellular Partnership, and acquired the remaining 49% from an unrelated third party. The cost for all of the acquired properties in Maine was approximately $85.7 million. The acquired licenses cover the Bangor, Maine metropolitan statistical area (MSA), Maine rural service area (RSA) 2 and Maine RSA 3 (which includes Augusta, the state capitol). Rural Cellular operates its Maine operations through a wholly owned subsidiary, MRCC, Inc. Headquartered in Bangor, MRCC serves a 20,500 square-mile service area that encompasses approximately 518,000 POPs.
Atlantic Cellular Company, L.P.
In July 1998, the Company completed the acquisition of the Massachusetts, New Hampshire, New York and Vermont cellular telephone licenses, operations and related assets of Atlantic Cellular Company L.P. and one of its subsidiaries, for approximately $262.5 million. Under the terms of the agreement, the Company acquired a contiguous, multi-state service area of 21,000 square miles, encompassing approximately 1.1 million POPs. The cellular properties acquired from Atlantic include: (i) northwestern Massachusetts (RSA 1); (ii) western New Hampshire (RSA 1); (iii) the northeastern corner of New York (RSA 2); and (iv) the entire state of Vermont (RSA 1, RSA 2, and the Burlington MSA). In addition, the Company acquired Atlantic's long distance business. The Atlantic operations are operated through a wholly-owned subsidiary, RCC Atlantic, Inc.
Western Maine Cellular, Inc.
In August 1998, the Company completed the acquisition of the outstanding stock of Western Maine Cellular, Inc. (WMC), a wholly-owned subsidiary of Utilities, Inc. for approximately $7.5 million. WMC provides cellular service to western Maine RSA 1, which incorporates a 3,700 square-mile service area of western Maine and encompasses 83,000 POPs. WMC is operated through MRCC, Inc.
Glacial Lakes Cellular 2000.
In February 1999, the Company acquired RGI, Inc. d/b/a Glacial Lakes Cellular 2000 (Glacial) for approximately $11.9 million. Operating under the name Cellular 2000®, Glacial provides cellular service to northeastern South Dakota (RSA 4), which includes eight counties and is adjacent to Rural Cellular's existing cellular operation in northern and central Minnesota. Glacial's service area encompasses 69,000 POPs.
Accounting Treatment
The purchase prices for Atlantic, WMC and Glacial were allocated to the net assets based on their estimated fair values and the excess was recorded as goodwill and is being amortized over 39 years. All of the above acquisitions have been accounted for under the purchase method of accounting; accordingly, operating results have been included from the date of acquisition.
The following unaudited pro forma information presents the consolidated results of operations as if the acquisitions of Atlantic, WMC and Glacial had occurred as of January 1, 1997. This summary is not necessarily indicative of what the results of operations of the Company and the acquired entities would have been if they had been a single entity during such period, nor does it purport to represent results of operations for any future periods.
| |
Years Ended December 31 |
Nine Months Ended September 30 |
|||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
1997 |
1998 |
1998 |
1999 |
|||||||||
| |
(In thousands, except per share data) |
||||||||||||
| Total revenues | $ | 104,601 | $ | 126,613 | $ | 93,260 | $ | 117,630 | |||||
| Operating income | 9,178 | 13,454 | 11,026 | 25,943 | |||||||||
| Net loss | $ | (28,557 | ) | $ | (25,432 | ) | $ | (19,972 | ) | $ | (4,548 | ) | |
| Basic and diluted net loss per share | $ | (3.23 | ) | $ | (2.85 | ) | $ | (2.25 | ) | $ | (0.50 | ) | |
3. Summary of Significant Accounting Policies:
Recently Issued Accounting Pronouncements
Rural Cellular adopted Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income," effective January 1, 1998. SFAS 130 establishes standards for reporting and display of comprehensive earnings and its components in financial statements; however, the adoption of this Statement had no impact on the Company's net earnings or shareholders' equity. SFAS 130 requires minimum pension liability adjustments, unrealized gains or losses on the Company's available-for-sale securities and foreign currency translation adjustments, which prior to adoption were reported separately in shareholders' equity, to be included in other comprehensive earnings.
Rural Cellular adopted SFAS 131, "Disclosures about Segments of an Enterprise and Related Information" effective January 1, 1998. This standard requires companies to disclose segment data based on how management makes decisions about allocating resources to segments and how it measures segment performance. SFAS 131 requires companies to disclose a measure of segment profit or loss (operating income, for example), segment assets and reconciliations to consolidated totals. It also requires entity-wide disclosures about a company's products and services, its major customers and the material countries in which it holds assets and reports revenues.
SFAS 133, "Accounting for Derivative Instruments and for Hedging Activities," was issued in July 1998. This standard establishes accounting and reporting standards requiring that every derivative instrument be recorded on the balance sheet as either an asset or liability measured at fair value. SFAS 133 requires that changes in a derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement and requires that a company must formally document, and designate and assess the effectiveness of transactions that receive hedge accounting treatment. SFAS 133 is effective for fiscal years beginning after June 15, 2000, and cannot be applied retroactively. The Company has not yet quantified the impact of adopting SFAS 133 on its financial statements; however, SFAS 133 could increase the volatility of reported earnings and other comprehensive income once adopted.
In April 1998, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants (AICPA) issued Statement of Position (SOP) 98-5, "Reporting on the Costs of Start-up Activities." SOP 98-5 requires costs of start-up activities and organization costs to be expensed as incurred. The initial application of SOP 98-5 will be reported as the cumulative effect of a change in accounting principle. The Company adopted SOP 98-5 effective January 1, 1999. The adoption of SOP 98-5 has not had a material effect on its financial position or results of operations.
Principles of Consolidation
The consolidated financial statements include the accounts of Rural Cellular and its wholly-owned subsidiaries, RCC Atlantic, Inc., MRCC, Inc., RCC Paging, Inc., RCC Atlantic Long Distance, Inc., RCC Network, Inc. and the majority owned joint venture, Wireless Alliance, LLC ("Wireless Alliance"). All significant intercompany balances and transactions have been eliminated. Investments in unconsolidated affiliates represent investments in companies in which RCC has a 20% to 50% ownership interest and which are accounted for under the equity method.
Revenue Recognition
Rural Cellular receives revenues by providing cellular and paging services to its customers and other cellular carriers traveling (roaming) in its service areas 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 its service area as well as related airtime revenue for use of the Company'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 1997, the Company adopted SFAS 128, "Earnings per Share." SFAS 128 replaced primary earnings per share (EPS) with basic EPS. Basic EPS is computed by dividing net income (loss) applicable to common shares 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. At the time of adoption, 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 that do not enhance or extend the asset's useful life are charged to operating expenses as incurred. Depreciation is computed using the straight-line method based on the estimated useful life of the asset.
The components of property and equipment and the useful lives of the assets are as follows:
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December 31 |
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|---|---|---|---|---|---|---|---|---|---|---|---|
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September 30, 1999 |
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|||||||||
| |
1997 |
1998 |
Useful Lives |
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| |
(In thousands) |
|
|||||||||
| Land | $ | 1,965 | $ | 4,247 | $ | 4,806 | — | ||||
| Building and towers | 23,836 | 43,947 | 48,810 | 15 Years | |||||||
| Equipment | 62,164 | 115,661 | 124,451 | 2-10 Years | |||||||
| Furniture and fixtures | 6,604 | 9,620 | 11,219 | 3-10 Years | |||||||
| Assets under construction | 7,225 | 777 | 381 | — | |||||||
| 101,794 | 174,252 | 189,667 | |||||||||
| Less: accumulated depreciation | (23,874 | ) | (42,538 | ) | (60,903 | ) | |||||
| Property and equipment, net | $ | 77,920 | $ | 131,714 | $ | 128,764 | |||||
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 its engineering employees during the construction period for projects that extend beyond one year.
Licenses and Other Intangible Assets
Licenses consist of the cost of acquiring paging licenses, the value assigned to the Wireless Alliance personal communication systems (PCS) licenses, other PCS licenses, local multi-point distribution (LMDS) licenses, and the value assigned to cellular licenses acquired through the acquisitions of Unicel, Northern Maine, Atlantic, Western Maine Cellular, and Glacial Lakes Cellular. Other intangibles, resulting primarily from the acquisitions of Unicel, Northern Maine, Atlantic, Western Maine Cellular and Glacial Lakes Cellular, include the value assigned to subscriber lists and goodwill.
The components of licenses and other intangible assets and their amortizable lives are as follows:
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December 31 |
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|---|---|---|---|---|---|---|---|---|---|---|---|
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September 30, 1999 |
Amortizable Lives |
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| |
1997 |
1998 |
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| |
(In thousands) |
|
|||||||||
| Licenses: | |||||||||||
| Cellular | $ | 31,891 | $ | 135,407 | $ | 138,857 | 33 - 39 Years | ||||
| PCS | 9,629 | 9,629 | 11,115 | 40 Years | |||||||
| Paging | 275 | 275 | 275 | 30 Years | |||||||
| LMDS | — | — | 7,044 | 40 Years | |||||||
| Other intangible assets: |
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| Goodwill | 26,452 | 122,744 | 127,826 | 33 - 39 Years | |||||||
| Subscriber lists | 14,591 | 49,725 | 52,830 | 10 Years | |||||||
| 82,838 | 317,780 | 337,947 | |||||||||
| Less: accumulated amortization | (1,490 | ) | (8,108 | ) | (16,812 | ) | |||||
| Licenses and other intangible assets, net | $ | 81,348 | $ | 309,672 | $ | 321,135 | |||||
Deferred Debt Issuance Costs
Deferred debt issuance costs relate to the Credit Facility, the Senior Subordinated Notes and the Exchangeable Preferred Stock (see Notes 4 and 6). These costs are being amortized over the respective instruments' terms.
Other Assets
Other assets primarily consist of costs related to spectrum relocation, restricted investments, and investments in unconsolidated affiliates. Investments in unconsolidated affiliates are accounted for using the equity method and represent the Company's ownership interests in Cellular 2000, Inc., an entity organized to own the trade name and related trademark for Cellular 2000. Restricted investments represent 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.
Business and Credit Concentrations
The Company's cellular customers are geographically located in the northern half of Minnesota, eastern North Dakota, western and central Maine, Vermont, New Hampshire, northeastern New York, and north central Massachusetts. No single customer accounted for a significant amount of revenues or accounts receivable.
Long-Lived Assets
Rural Cellular 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. If asset recovery is in question, Rural Cellular 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
SFAS 107, "Disclosures about Fair Value of Financial Instruments," requires disclosure of fair value information about financial instruments for which it is practicable to estimate that value, whether or not recognized in the balance sheet. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. SFAS 107 excludes certain financial instruments and all non-financial instruments from the disclosure requirements. Accordingly, the aggregate fair value amounts do not represent the underlying value.
The carrying amounts and fair values of financial instruments are as follows:
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Carrying Amount |
Estimated Fair Value |
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December 31 |
September 30 |
December 31 |
September 30 |
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| |
1997 |
1998 |
1999 |
1997 |
1998 |
1999 |
|||||||||||||
| |
(In thousands) |
||||||||||||||||||
| Financial asset: | |||||||||||||||||||
| Cash | $ | 1,995 | $ | 2,062 | $ | 1,073 | $ | 1,995 | $ | 2,062 | $ | 1,073 | |||||||
| Financial liabilities: |
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| $300 million credit facility | — | 173,000 | 181,000 | — | 173,000 | 181,000 | |||||||||||||
| $160 million credit facility | 128,000 | — | — | 128,000 | — | — | |||||||||||||
| 95/8% Senior Subordinated Notes | — | 125,000 | 125,000 | — | 131,250 | 130,000 | |||||||||||||
| Other financial instruments: |
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| $65 million Toronto Dominion Bank interest rate swap agreement | — | — | — | — | (1,701 | ) | (112 | ) | |||||||||||
| $65 million Bank Boston interest rate swap agreement | — | — | — | — | (2,238 | ) | (77 | ) | |||||||||||
| $35 million PNC Bank interest rate swap agreement | — | — | — | — | (819 | ) | (302 | ) | |||||||||||
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 September 30, 1999, the statements of operations and cash flows for the nine months ended September 30, 1998 and 1999 and the statement of shareholders' equity for the nine months ended September 30, 1999 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 nine months ended September 30, 1999 are not necessarily indicative of results to be expected for the entire year.
Reclassifications
Certain 1997 and 1996 amounts in the accompanying consolidated financial statements have been reclassified to conform to the 1998 and September 30, 1999 presentation. These reclassifications had no effect on consolidated net income or total shareholders' equity as previously reported.
4. Long-Term Debt:
Rural Cellular had the following long-term debt outstanding:
| |
December 31 |
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|---|---|---|---|---|---|---|---|---|---|
| |
September 30, 1999 |
||||||||
| |
1997 |
1998 |
|||||||
| |
(In thousands) |
||||||||
| $160.0 million credit facility | $ | 128,000 | $ | — | $ | — | |||
| $300.0 million credit facility | — | 173,000 | 181,000 | ||||||
| Deferred gain on hedge agreement | — | 851 | 1,143 | ||||||
| 95/8% Senior Subordinated Notes | — | 125,000 | 125,000 | ||||||
| Long-term debt | $ | 128,000 | $ | 298,851 | $ | 307,143 | |||
$160.0 Million Credit Facility—On May 28, 1998, the Company repaid $140.0 million of the outstanding principal amount of its $160.0 million credit facility utilizing the proceeds from the issuance of Senior Subordinated Notes and $125.0 million in 113/8% Senior Exchangeable Preferred Stock. Accordingly, the Company recognized an extraordinary loss of $1.0 million related to the early retirement of debt, representing the unamortized debt issuance costs.
$300.0 Million Credit Facility—On July 1, 1998, the Company entered into a revolving credit facility for $300.0 million with a syndicate of banks, which replaced the $160.0 million credit facility. At RCC's discretion, advances under the $300.0 million credit facility bear interest at the London Interbank Offering Rate (LIBOR) plus an applicable margin (1.75% and 1.25% as of December 30, 1998 and September 30, 1999, respectively) and will be based on the ratio of indebtedness to annualized operating cash flow as of the end of the most recently completed fiscal quarter. As of December 31, 1998 and September 30, 1999, the effective rate of interest on the $300.0 million credit facility, excluding the impact of the hedge agreements, was 7.07% and 7.04%, respectively. A commitment fee of 0.375% on the unused portion of the $300.0 million credit facility is payable quarterly. Borrowings under the $300.0 million credit facility are secured by a pledge of all the assets of Rural Cellular excluding our ownership in the stock of Cellular 2000, Inc. Mandatory commitment reductions will be required upon any material sale of assets. The $300.0 million 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, 1998 and September 30, 1999, Rural Cellular was in compliance with all covenants under the $300.0 million credit facility.
The $300.0 million credit facility is to be reduced in equal quarterly amounts as follows:
| Year |
Amount |
||
|---|---|---|---|
| |
(In thousands) |
||
| 1999 | $ | — | |
| 2000 | — | ||
| 2001 | 13,575 | ||
| 2002 | 18,100 | ||
| 2003 | 27,150 | ||
| 2004 | 36,200 | ||
| Thereafter | 85,975 | ||
| Total | $ | 181,000 | |
95/8% Senior Subordinated Notes—On May 14, 1998, the Company issued $125.0 million principal amount of 95/8% Senior Subordinated Notes due 2008 (Senior Subordinated Notes). Interest on the Senior Subordinated Notes began to accrue on May 14, 1998, and is payable semi-annually on May 15 and November 15 of each year, commencing on November 15, 1998. The Senior Subordinated Notes will mature on May 15, 2008, and are redeemable, in whole or in part, at the Company's option, at any time on or after May 15, 2003. In addition, at any time prior to May 15, 2001, the Company may redeem up to 25% of the aggregate principal amount of the Senior Subordinated Notes with the net cash proceeds of a qualified event at a price equal to 109.625% of the aggregate principal amount thereof, plus accrued and unpaid interest, if any, to the date of redemption; provided that at least $90.0 million in aggregate principal amount of the Senior Subordinated Notes remains outstanding immediately after such redemption. A qualified event is a public equity offering or one or more strategic equity investments which in either case results in aggregate net proceeds of not less than $50.0 million. Within 30 days after the occurrence of a change of control, the Company will be required to make an offer to purchase all outstanding Senior Subordinated Notes at a price equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid interest, if any, to the date of purchase. The Senior Subordinated Notes are unsecured senior subordinated obligations and will be subordinated in right of payment to future senior indebtedness (as defined in the Indenture related to the Senior Subordinated Notes) and effectively subordinated to all obligations of the Company's subsidiaries (including the guarantees by such subsidiaries of the $300.0 Million Credit Facility described above).
5. Financial Instruments:
As required by the $300.0 million credit facility, Rural Cellular maintains interest rate swaps on at least 50% of the principal amount of the loans outstanding such that the weighted average term of all interest rate protection is not less than three years at all dates of determination, and as otherwise provided in the $300.0 million credit facility. Under the interest rate swap agreements, the Company will pay the difference between LIBOR and the fixed swap rate if the LIBOR exceeds the swap rate. Income and expense associated with swap transactions are accrued over the periods prescribed by the contracts. As of December 31, 1998 and September 30, 1999, the Company was party to three interest rate swaps expiring August 6, 2003, with a total outstanding notional amount of $165.0 million and a fair market value of $(4.8) million and $(491,000) respectively.
In anticipation of the offering of the Senior Subordinated Notes and Senior Exchangeable Preferred Stock, the Company also entered into a $150.0 million hedge agreement. On May 12, 1998, Rural Cellular settled the hedge agreement, resulting in a gain of $1.0 million. This gain is being accreted as a reduction of interest expense over the lives of the underlying debt instruments.
On February 2, 1999, Rural Cellular also entered into two swap transactions with TD Bank Financial Group, which, together, effectively lower the interest rate on the Senior Subordinated Notes from 9.625% to 8.535% through May 2003. During the period of June 2003 through May 2008, the Company will pay the difference between LIBOR and the fixed swap rate if the swap rate exceeds LIBOR, and will receive the difference between LIBOR and the fixed swap rate if LIBOR exceeds the swap rate. Settlement occurs on the semiannual reset dates specified by the terms of the contracts. The notional principal amount of the interest rates swaps outstanding was $125.0 million at February 2, 1999. As of September 30, 1999, the positive fair market value of the swap transactions was $3.3 million.
6. Senior Exchangeable Preferred Stock:
On May 14, 1998, the Company completed the placement of 125,000 shares of 113/8% Senior Exchangeable Preferred Stock with a liquidation preference of $1,000 per share. The Senior Exchangeable Preferred Stock is senior to all classes of junior preferred stock and common stock of Rural Cellular with respect to dividend rights and rights on liquidation, winding-up and dissolution. The Senior Exchangeable Preferred Stock is non-voting, except as otherwise required by law and as provided in the Certificate of Designation. Dividends on the Senior Exchangeable Preferred Stock are cumulative, accrue at 113/8% per annum from May 14, 1998, are payable quarterly, and may be paid, at the Company's option, on any dividend payment date occurring on or before May 15, 2003, either in cash or by the issuance of additional shares of Senior Exchangeable Preferred Stock having an aggregate liquidation preference equal to the amount of such dividends. Thereafter, all dividends will be payable in cash only. As of December 31, 1998 and September 30, 1999, Rural Cellular had accrued $1.9 million and $2.0 million, respectively, in preferred stock dividends which were distributed on February 15, 1999 and November 15, 1999 respectively.
7. Shareholders' Equity:
Authorized Shares
The Restated Articles of Incorporation authorize the issuance of 30,000,000 shares of $.01 par value stock. Of such authorized shares, 9,550,000 shares and 9,300,000 shares have not been designated as to class as of December 31, 1998 and September 30, 1999, respectively.
Initial Public Offering
During 1996, Rural Cellular completed an initial public offering of 3,450,000 shares of Class A common stock, of which 2,869,863 shares were sold by Rural Cellular and 580,137 previously issued shares were sold by certain shareholders. The net proceeds were approximately $26.0 million and were used to repay long-term debt and to provide capital for future expansion. In connection with the initial public 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 initial public offering.
Common Stock Rights
Class A common shareholders are entitled to one vote for each share owned and 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 662/3 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 Rural Cellular.
Stock Compensation Plans
The stock compensation plan (the Plan) for employees authorizes the issuance of up to 1,400,000 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 vest and become exercisable as determined by the Board of Directors or a stock option committee.
The stock option plan for nonemployee directors authorizes the issuance of up to 210,000 shares of Class A common stock. The plan provides that the option price shall not be less than the fair market value of the Class A common stock as of the date of grant. The options vest and become exercisable over one to three years and expire between four and six years from the date of grant.
The employee stock purchase plan authorizes the issuance of 200,000 shares of Class A common stock. Employees who satisfy certain length of service and other criteria are permitted to purchase shares at 85% of the fair market value of the Class A common stock on January 1 or December 31 of each year, whichever is lower.
Options outstanding as of September 30, 1999 have exercise prices ranging between $8.75 and $43.25. Information related to stock options is as follows:
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December 31 |
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September 30, 1999 |
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1996 |
1997 |
1998 |
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| Options |
Shares |
Weighted Average Exercise Price |
Shares |
Weighted Average Exercise Price |
Shares |
Weighted Average Exercise Price |
Shares |
Weighted Average Exercise Price |
||||||||||||
| Outstanding, beginning of period | — | $ | — | 459,700 | $ | 9.99 | 735,200 | $ | 9.47 | 872,700 | $ | 11.17 | ||||||||
| Granted | 549,700 | 10.32 | 319,750 | 9.09 | 291,250 | 14.66 | 323,250 | 14.53 | ||||||||||||
| Exercised | — | — | — | — | (123,750 | ) | 9.78 | (86,478 | ) | 9.85 | ||||||||||
| Canceled | (90,000 | ) | 12.00 | (44,250 | ) | 8.75 | (30,000 | ) | 9.13 | (12,500 | ) | 10.74 | ||||||||
| Outstanding, end of period | 459,700 | 9.99 | 735,200 | 9.47 | 872,700 | 11.17 | 1,096,972 | 12.27 | ||||||||||||
| Exercisable, end of period | 55,200 | $ | 9.92 | 161,895 | $ | 9.92 | 264,590 | $ | 10.06 | 307,862 | $ | 11.31 | ||||||||
| Weighted average fair value of options granted | $ | 5.60 | $ | 6.40 | $ | 10.94 | $ | 10.82 | ||||||||||||
Rural Cellular accounts for stock options under Accounting Principles Board Opinion No. 25, under which no compensation cost has been recognized. Had compensation cost for the plans been determined consistent with SFAS 123, "Accounting for Stock-Based Compensation," the Company's results of operations and net income (loss) per share would have approximated the following pro forma amounts:
| |
Years Ended December 31 |
Nine Months Ended September 30 |
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|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
1996 |
1997 |
1998 |
1998 |
1999 |
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| |
(in thousands, except per share data) |
|||||||||||||||
| Net income (loss): | ||||||||||||||||
| As reported | $ | 3,477 | $ | (1,266 | ) | $ | (15,714 | ) | $ | (9,238 | ) | $ | (4,476 | ) | ||
| Pro forma | 3,215 | (1,890 | ) | (16,790 | ) | (10,045 | ) | (5,925 | ) | |||||||
| Basic and diluted net income (loss) per share: | ||||||||||||||||
| As reported | $ | 0.41 | $ | (0.14 | ) | $ | (1.76 | ) | $ | (1.04 | ) | $ | (0.50 | ) | ||
| Pro forma | 0.38 | (0.21 | ) | (1.88 | ) | (1.13 | ) | (0.66 | ) | |||||||
The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants in 1997, 1998 and the nine months period ended September 30, 1999: expected volatility of 51.6%, 50.5% and 53.3%, respectively; risk-free interest rates of 6.3%, 5.6% and 8.3%; and no expected dividend yield. The per share weighted average fair value of options granted in 1997, 1998 and the nine months ended September 30, 1999 was $6.40, $10.04, and $10.82, respectively.
8. Income Taxes:
The components of the Company's income tax provisions are as follows:
| |
Years Ended December 31 |
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|---|---|---|---|---|---|---|---|---|---|
| |
1996 |
1997 |
1998 |
||||||
| |
(in thousands) |
||||||||
| Current: | |||||||||
| Federal | $ | 106 | $ | – | $ | – | |||
| State | 94 | – | – | ||||||
| 200 | – | – | |||||||
| Deferred | – | – | – | ||||||
| $ | 200 | $ | – | $ | – | ||||
Reconciliation between the federal income tax rate and the effective income tax rate is as follows:
| |
Years Ended December 31 |
||||||
|---|---|---|---|---|---|---|---|
| |
1996 |
1997 |
1998 |
||||
| Federal income tax rate | 34.0 | % | — | % | — | % | |
| Tax benefit of loss carryforwards | (29.8 | ) | — | — | |||
| State income taxes, net of federal tax benefit | 1.2 | — | — | ||||
| 5.4 | % | — | % | — | % | ||
The income tax effect of the items that create deferred income tax assets and liabilities are as follows:
| |
December 31 |
||||||
|---|---|---|---|---|---|---|---|
| |
1997 |
1998 |
|||||
| |
(in thousands) |
||||||
| Deferred income tax assets: | |||||||
| Operating loss carryforwards | $ | 4,488 | $ | 14,383 | |||
| Tax credit carryforwards | — | 485 | |||||
| Temporary differences: | |||||||
| Allowance for doubtful accounts | 450 | 616 | |||||
| Other | 302 | 1,745 | |||||
| Valuation allowance | (400 | ) | (7,781 | ) | |||
| Total deferred income tax assets | 4,840 | 9,448 | |||||
| Deferred income tax liabilities: | |||||||
| Depreciation | (3,971 | ) | (6,225 | ) | |||
| Intangible assets | (724 | ) | (3,223 | ) | |||
| Other | (145 | ) | — | ||||
| Net deferred income tax asset | $ | — | $ | — | |||
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, 1998, the Company had tax operating loss carryforwards of $36.0 million available to offset future income tax liabilities. These carryforwards expire in the years 2006 through 2018. 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 its common stock.
9. Commitments and Contingencies:
Employment Agreements
Rural Cellular has employment agreements with executive officers 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 $3.0 million at September 30, 1999.
Legal and Regulatory Matters
Rural Cellular 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 its financial position or results of operations.
Leases (In thousands)
Rural Cellular leases office space and real estate under noncancelable operating leases. Future minimum payments under these leases as of September 30, 1999, are as follows:
| Year |
Amount |
||
|---|---|---|---|
| 1999 (three months ended December 31, 1999) | $ | 728 | |
| 2000 | 2,393 | ||
| 2001 | 1,473 | ||
| 2002 | 1,193 | ||
| 2003 | 988 | ||
| Thereafter | 1,418 | ||
| Total | $ | 8,193 | |
Under the terms of the lease agreements, Rural Cellular also is responsible for certain operating expenses and taxes. Total rent expense of $379, $839 and $2,300 was charged to operations for the years ended December 31, 1996, 1997 and 1998, respectively. For the nine months ended September 30, 1998 and 1999, rent expense was $1,266 and $2,427, respectively.
10. Related-Party Transactions (in thousands):
Service Agreement
Rural Cellular paid Switch 2000 LLC for cellular switching and interconnection services. The rates of reimbursement are negotiated by the parties to the agreement and are similar to rates charged by other service providers. Amounts billed by Switch 2000, Inc. to RCC totaled $4,824, $3,230 and $710 for the years ended December 31, 1996, 1997, and 1998, respectively. In September 1998, the Company sold its interest in Switch 2000 for book value.
Roaming Agreement
Rural Cellular has a roaming agreement with a partnership that is affiliated with a beneficial owner of greater than 10% of our common stock. Roaming charges are passed through to the customer. The rates of reimbursement are negotiated by the parties to the agreement and reflect rates charged by other service providers. Net payments by the Company to the partnership were $331, $167 and $664 for the years ended December 31, 1996, 1997 and 1998, respectively. For the nine months ended September 30, 1998 and 1999, net payments to the partnership were $498 and $871, respectively.
11. Defined Contribution Plan (in thousands):
Rural Cellular 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, Rural Cellular contributes a percentage of employees' salaries. Contributions charged to operations for the years ended December 31, 1996, 1997 and 1998 were $74, $162 and $297, respectively. Contributions charged to operations for the nine months ended September 30, 1998 and 1999 were $191 and $391, respectively. The percentages matched 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.
12. Segment Information:
Rural Cellular's consolidated financial statements consist of the business units RCC Cellular and Wireless Alliance. RCC Cellular includes cellular operations in Minnesota, Maine, Massachusetts, New Hampshire, New York and Vermont. Wireless Alliance, a joint venture that commenced cellular reselling operations in November 1996 and launched its first PCS networks in the second quarter of 1998, is 70% owned by the Company and 30% owned by APT Inc., an affiliate of Aerial Communications, Inc. Information about operations in these business units for the years ended December 31, 1998 and 1997 and the nine months ended September 30, 1998 and 1999 are as follows:
| |
Years Ended December 31 |
Nine Months Ended September 30 |
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|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
1997 |
1998 |
1998 |
1999 |
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| |
(In thousands) |
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| Statements of Operations: | |||||||||||||
| Revenues | |||||||||||||
| RCC Cellular | $ | 47,591 | $ | 87,720 | $ | 58,391 | $ | 110,581 | |||||
| Wireless Alliance LLC | 7,339 | 12,369 | 9,273 | 7,008 | |||||||||
| Eliminating | (1,027 | ) | (1,557 | ) | (1,240 | ) | (312 | ) | |||||
| Total revenues | 53,903 | 98,532 | 66,424 | 117,277 | |||||||||
| Operating expenses | |||||||||||||
| RCC Cellular | 39,531 | 71,853 | 47,133 | 78,921 | |||||||||
| Wireless Alliance LLC | 13,564 | 20,237 | 14,788 | 12,755 | |||||||||
| Eliminating | (1,027 | ) | (1,557 | ) | (1,240 | ) | (312 | ) | |||||
| Total operating expenses | 52,068 | 90,533 | 60,681 | 91,364 | |||||||||
| Operating income (loss) | |||||||||||||
| RCC Cellular | 8,060 | 15,867 | 11,258 | 31,660 | |||||||||
| Wireless Alliance LLC | (6,225 | ) | (7,868 | ) | (5,515 | ) | (5,747 | ) | |||||
| Total operating income | 1,835 | 7,999 | 5,743 | 25,913 | |||||||||
| Depreciation and amortization | |||||||||||||
| RCC Cellular | 11,800 | 23,490 | 15,520 | 25,883 | |||||||||
| Wireless Alliance LLC | 658 | 3,042 | 2,003 | 3,666 | |||||||||
| Total depreciation and amortization | 12,458 | 26,532 | 17,523 | 29,549 | |||||||||
| Interest expense | |||||||||||||
| RCC Cellular | 6,065 | 19,208 | 12,487 | 20,207 | |||||||||
| Wireless Alliance LLC | 65 | 1,439 | 871 | 1,901 | |||||||||
| Eliminating | (65 | ) | (1,587 | ) | (1,018 | ) | (1,901 | ) | |||||
| Total interest expense | 6,065 | 19,060 | 12,340 | 20,207 | |||||||||
| Other Operating Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| EBITDA(1) | |||||||||||||
| RCC Cellular | $ | 19,860 | $ | 39,357 | $ | 26,778 | $ | 57,543 | |||||
| Wireless Alliance LLC | (5,567 | ) | (4,826 | ) | (3,512 | ) | (2,081 | ) | |||||
| Total EBITDA | 14,293 | 34,531 | 23,266 | 55,462 | |||||||||
| Capital expenditures | |||||||||||||
| RCC Cellular | 26,127 | 29,563 | 15,726 | 12,584 | |||||||||
| Wireless Alliance LLC | 8,801 | 13,300 | 8,230 | 3,110 | |||||||||
| Total capital expenditures | 34,928 | 42,863 | 23,956 | 15,694 | |||||||||
| Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Property and equipment | |||||||||||||
| RCC Cellular | 92,630 | 151,227 | 139,435 | 165,815 | |||||||||
| Wireless Alliance LLC | 9,164 | 23,025 | 17,385 | 23,852 | |||||||||
| Total property and equipment | 101,794 | 174,252 | 156,820 | 189,667 | |||||||||
| Total assets | |||||||||||||
| RCC Cellular | 175,612 | 480,251 | 504,422 | ||||||||||
| Wireless Alliance LLC | 24,273 | 34,870 | 33,995 | ||||||||||
| Eliminating | (18,297 | ) | (34,597 | ) | (43,083 | ) | |||||||
| Total assets | $ | 181,588 | $ | 480,524 | $ | 495,334 | |||||||
13. Supplemental Cash Flow Information:
| |
Years Ended December 31 |
|
||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
Nine Months Ended September 30 1999 |
|||||||||||
| |
1996 |
1997 |
1998 |
|||||||||
| |
(In thousands) |
|||||||||||
| Cash paid for: | ||||||||||||
| Interest | $ | 564 | $ | 4,630 | $ | 16,273 | $ | 16,302 | ||||
| Income taxes | 805 | 64 | — | 34 | ||||||||
| Non-cash investing and financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
| Preferred stock dividends paid in kind | — | — | 7,201 | 11,566 | ||||||||
| Contribution by an affiliate of Aerial Communications, Inc. of PCS licenses | 6,453 | 3,175 | — | — | ||||||||
14. Events Subsequent to September 30, 1999:
On November 8, 1999 the Company announced that its subsidiary, RCC Holdings, Inc., entered into a definitive agreement to acquire the cellular telephone licenses, operations and related assets of Triton Cellular Partners, L.P. The transaction is valued at approximately $1.24 billion. Triton Cellular's Partners, L.P. multi-state service area covers approximately 152,000 square miles with approximately 2.3 million POPs. This acquisition will bring the Company's total managed POPs to approximately 5.4 million. In addition, Triton Cellular Partners, L.P.'s 209,000 cellular customers will increase the Company's customer base from approximately 244,000 at the end of third quarter 1999 to 453,000.
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 LLP
Providence,
Rhode Island
February 17, 1998
ATLANTIC CELLULAR COMPANY, L.P. AND SUBSIDIARIES
Consolidated Balance Sheets
| |
December 31, |
|
|||||||
|---|---|---|---|---|---|---|---|---|---|
| |
1996 |
1997 |
June 30, 1998 |
||||||
| |
|
|
(Unaudited) |
||||||
| Assets | |||||||||
| Current assets (notes 7 and 9): | |||||||||
| Cash and cash equivalents | $ | 124,789 | $ | 1,014,060 | $ | 995,462 | |||
| Due from Hawaiian Wireless, Inc. (notes 2(a) and 3(e)) | 405,235 | 659,568 | 688,398 | ||||||
| Due from Michiana Partnership, L.P. | 15,622 | 4,620 | 15,050 | ||||||
| Accounts receivable, net of allowance for doubtful accounts of $277,000 in 1996, $447,000 in 1997 and $534,000 (unaudited) in 1998 | 3,890,862 | 3,676,212 | 5,928,470 | ||||||
| Inventories of cellular telephones and equipment | 1,083,699 | 602,882 | 413,735 | ||||||
| Total current assets | 5,520,207 | 5,957,342 | 8,041,115 | ||||||
| Property and equipment (notes 4, 5, 7, 8 and 9): | |||||||||
| Cellular telephone systems | 179,053,629 | 162,555,149 | 163,891,393 | ||||||
| PCS Licenses | — | 9,996,948 | — | ||||||
| Other property and equipment | 5,490,066 | 4,913,454 | 4,994,927 | ||||||
| 184,543,695 | 177,465,551 | 168,886,320 | |||||||
| Less accumulated depreciation and amortization | 38,439,343 | 41,064,781 | 46,028,418 | ||||||
| Net property and equipment | 146,104,352 | 136,400,770 | 122,857,902 | ||||||
| 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 | 102,563 | ||||||
| Other assets | 11,900 | — | — | ||||||
| Deferred financing costs, net of accumulated amortization | 1,965,366 | 1,637,805 | 1,474,025 | ||||||
| Total other assets | 5,625,308 | 1,935,640 | 1,576,588 | ||||||
| Total assets | $ | 157,249,867 | $ | 144,293,752 | $ | 132,475,605 | |||
| Liabilities and Partners' Capital |
|||||||||
| Current liabilities: | |||||||||
| Accounts payable | $ | 17,608 | $ | 19,321 | $ | 102,392 | |||
| Due to Atlantic Cellular Management Company (note 2(a)) | 2,890,849 | 911,689 | 576,909 | ||||||
| Accrued consulting fees (note 2(c)) | 75,000 | 75,000 | — | ||||||
| Accrued interest (note 7) | 546,638 | 458,089 | — | ||||||
| Deposits on sales of other wireless entities | — | 123,345 | 123,345 | ||||||
| Current portion of capital lease obligations (note 8) | 73,635 | 49,316 | 37,967 | ||||||
| Total current liabilities | 3,603,730 | 1,636,760 | 840,613 | ||||||
| Notes payable — bank (note 7) | 81,500,000 | 40,000,000 | 23,000,000 | ||||||
| Capital lease obligations, net of current portion (note 8) | 83,595 | 32,059 | 28,652 | ||||||
| Total liabilities | 85,187,325 | 41,668,819 | 23,869,265 | ||||||
| Minority interests in partnerships (note 3) | 7,689,420 | 7,536,804 | 7,523,144 | ||||||
| Partners' capital | 64,708,945 | 95,088,129 | 101,083,196 | ||||||
| Valuation allowance for unrealized loss on equity securities | (335,823 | ) | — | — | |||||
| Partners' capital, net | 64,373,122 | 95,088,129 | 101,083,196 | ||||||
| Commitments (note 8) | |||||||||
| Total liabilities and partners' capital | $ | 157,249,867 | $ | 144,293,752 | $ | 132,475,605 | |||
See accompanying notes to consolidated financial statements.
ATLANTIC CELLULAR COMPANY, L.P. AND SUBSIDIARIES
Consolidated Statements of Operations
| |
Year ended December 31, |
|
|
|||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
Six months ended June 30, 1997 |
Six months ended June 30, 1998 |
||||||||||||||
| |
1995 |
1996 |
1997 |
|||||||||||||
| |
|
|
|
(Unaudited) |
(Unaudited) |
|||||||||||
| Revenues from cellular operations | $ | 34,350,693 | $ | 43,283,440 | $ | 45,087,272 | $ | 22,041,848 | $ | 25,005,945 | ||||||
| Operating costs: | ||||||||||||||||
| Costs of cellular operations | 22,605,996 | 25,870,905 | 25,604,407 | 13,338,297 | 11,758,921 | |||||||||||
| Corporate overhead expenses (notes 2(a) and 3) | 2,595,020 | 3,034,394 | 4,078,365 | 1,681,778 | 2,101,693 | |||||||||||
| Depreciation and amortization | 9,264,938 | 10,204,142 | 9,885,345 | 5,339,456 | 4,963,637 | |||||||||||
| Total operating costs | 34,465,954 | 39,109,441 | 39,568,117 | 20,359,531 | 18,824,251 | |||||||||||
| Income (loss) from operations | (115,261 | ) | 4,173,999 | 5,519,155 | 1,682,317 | 6,181,694 | ||||||||||
| Other income (expenses): | ||||||||||||||||
| Gain on sale of Mountain Cellular assets (note 3(b)) | — | — | 28,076,875 | 28,076,875 | — | |||||||||||
| Management fee income (note 2(a)) | — | 1,200,000 | 1,200,000 | 600,000 | 600,000 | |||||||||||
| Interest expense | (6,958,712 | ) | (6,502,602 | ) | (4,170,338 | ) | (2,474,266 | ) | (1,406,765 | ) | ||||||
| Interest income | 142,010 | 145,552 | 201,073 | 100,537 | 89,866 | |||||||||||
| Amortization of deferred financing fees | (629,637 | ) | (590,802 | ) | (327,561 | ) | (163,780 | ) | (163,780 | ) | ||||||
| Consulting fees (note 2(c)) | (150,000 | ) | (150,000 | ) | (150,000 | ) | (75,000 | ) | (75,000 | ) | ||||||
| Loss on sale of equity securities | (206,540 | ) | — | (50,799 | ) | — | — | |||||||||
| Gain (loss) on sale of equipment | — | — | (79,723 | ) | 68,176 | — | ||||||||||
| Gain from sale of PCS licenses and SMR Channels | — | 50,625 | — | — | 2,869,531 | |||||||||||
| Equity in net income (loss) of Michiana Partnership, L.P. and distribution from related gain on sale | (466 | ) | 4,545 | 7,886 | — | 885,861 | ||||||||||
| Total other income (expenses), net | (7,803,345 | ) | (5,842,682 | ) | 24,707,413 | 26,132,542 | 2,799,713 | |||||||||
| Income (loss) before minority partners' share of loss | (7,918,606 | ) | (1,668,683 | ) | 30,226,568 | 27,814,859 | 8,981,407 | |||||||||
| Minority partners' share of income (loss) | (694,557 | ) | (221,687 | ) | (152,616 | ) | (82,777 | ) | (13,660 | ) | ||||||
| Net income (loss) | $ | (7,224,049 | ) | $ | (1,446,996 | ) | $ | 30,379,184 | $ | 27,897,636 | $ | 8,995,067 | ||||
See accompanying notes to consolidated financial statements.
ATLANTIC CELLULAR COMPANY, L.P. AND SUBSIDIARIES
Consolidated Statements of Partners' Capital
| 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) | (3,000,000 | ) | ||
| Net income (unaudited) | 8,995,067 | |||
| Balance at June 30, 1998 (unaudited) | $ | 101,083,196 | ||
See accompanying notes to consolidated financial statements.
ATLANTIC CELLULAR COMPANY, L.P. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
| |
Year ended December 31 |
Six months ended June 30, 1997 (Unaudited) |
Six months ended June 30, 1998 (Unaudited) |
|||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
1995 |
1996 |
1997 |
|||||||||||||
| Cash flows from operating activities: | ||||||||||||||||
| Net income (loss) | $ | (7,224,049 | ) | $ | (1,446,996 | ) | $ | 30,379,184 | $ | 27,897,636 | $ | 8,995,067 | ||||
| Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities: | ||||||||||||||||
| Gain on sale of Mountain Cellular assets | — | — | (28,076,875 | ) | (28,076,875 | ) | — | |||||||||
| (Gain) loss on sale of equipment | — | — | 79,723 | (68,176 | ) | — | ||||||||||
| Depreciation and amortization | 9,849,573 | 10,794,944 | 10,212,906 | 5,503,236 | 5,127,417 | |||||||||||
| Gain on sale of PCS Licenses and SMR Channels | — | (50,625 | ) | — | — | (2,869,531 | ) | |||||||||
| Loss on sale of equity securities | 206,540 | — | 50,799 | 50,799 | — | |||||||||||
| Equity in income of unconsolidated investment | — | 4,545 | 7,886 | — | 5,601 | |||||||||||
| Minority partners' share of loss | (694,557 | ) | (221,687 | ) | (152,616 | ) | (82,777 | ) | (13,660 | ) | ||||||
| Provision for doubtful accounts | 446,793 | 276,610 | 521,517 | 210,910 | 221,899 | |||||||||||
| Changes in assets and liabilities: | ||||||||||||||||
| (Increase) decrease in due from Hawaiian Wireless, Inc. | — | (405,235 | ) | (254,333 | ) | 78,745 | (28,830 | ) | ||||||||
| Decrease (increase) in due from Michiana Partnership, L.P. | 25,108 | 4,587 | 11,002 | (117,434 | ) | (10,430 | ) | |||||||||
| Increase in accounts receivable | (1,638,288 | ) | (385,860 | ) | (791,330 | ) | (223,343 | ) | (2,474,157 | ) | ||||||
| Decrease (increase) in inventories | 581,562 | (223,907 | ) | 480,817 | 540,133 | 189,147 | ||||||||||
| (Decrease) increase in accounts payable | 52,982 | (315,977 | ) | 1,713 | 551,574 | 83,071 | ||||||||||
| Increase (decrease) in advances from Atlantic Cellular Management Company | 1,107,686 | 622,369 | (1,979,160 | ) | (3,703,516 | ) | (334,780 | ) | ||||||||
| Decrease in accrued interest | (138,406 | ) | (78,568 | ) | (88,549 | ) | (546,638 | ) | (458,089 | ) | ||||||
| Decrease in accrued consulting fees | (75,000 | ) | (75,000 | ) | ||||||||||||
| Increase in deposit | — | — | 123,345 | — | — | |||||||||||
| Net cash provided by operating activities | 2,574,944 | 8,574,200 | 10,526,029 | 1,939,274 | 8,357,725 | |||||||||||
| Cash flows from investing activities: | ||||||||||||||||
| Net proceeds from sale of Mountain Cellular assets | — | — | 41,314,294 | 41,314,294 | — | |||||||||||
| Purchase and/or build-out of cellular telephone systems | (9,541,700 | ) | (6,053,502 | ) | (2,745,947 | ) | (1,677,091 | ) | (1,417,717 | ) | ||||||
| Purchase of PCS licenses | — | — | (9,996,948 | ) | — | — | ||||||||||
| Proceeds from sale of PCS licenses and disposal of other wireless investments | — | — | — | — | 13,056,150 | |||||||||||
| Other capital expenditures | (1,187,873 | ) | (967,700 | ) | (374,039 | ) | — | — | ||||||||
| Investment in specialized mobile radio systems | (1,509,511 | ) | — | — | — | — | ||||||||||
| (Increase) decrease in other investments | 8,716 | (42,680 | ) | 50,000 | (456,105 | ) | — | |||||||||
| Proceeds from sale of equity securities | 373,460 | — | 577,514 | 577,514 | — | |||||||||||
| Proceeds from sale of equipment | — | — | 88,018 | — | — | |||||||||||
| Decrease in other assets | — | — | — | 11,900 | — | |||||||||||
| (Increase) decrease in deposits | — | (3,000,000 | ) | 3,000,000 | 3,000,000 | — | ||||||||||
| Net cash provided by (used in) investing activities | (11,856,908 | ) | (10,063,882 | ) | 31,912,892 | 42,770,512 | 11,638,433 | |||||||||
| Cash flows from financing activities: | ||||||||||||||||
| (Payments) borrowings under senior secured revolver, net | 7,000,000 | — | (41,500,000 | ) | (41,500,000 | ) | (17,000,000 | ) | ||||||||
| Decrease (increase) in note receivable | (1,500,000 | ) | 1,500,000 | — | (2,879,300 | ) | — | |||||||||
| Repayment of note payable other, net | (500,000 | ) | — | — | — | — | ||||||||||
| Payments on capital lease obligations | (27,120 | ) | (62,500 | ) | (49,650 | ) | (157,230 | ) | (14,756 | ) | ||||||
| Proceeds from minority partners' capital contributions | 160,800 | — | — | — | — | |||||||||||
| Increase in deferred financing costs | (193,811 | ) | (115,878 | ) | — | — | — | |||||||||
| Distribution to partners | — | — | — | — | (3,000,000 | ) | ||||||||||
| Net cash provided by (used in) financing activities | 4,939,869 | 1,321,622 | (41,549,650 | ) | (44,536,530 | ) | (20,014,756 | ) | ||||||||
| Net increase (decrease) in cash and cash equivalents | (4,342,095 | ) | (168,060 | ) | 889,271 | 173,256 | (18,598 | ) | ||||||||
| Cash and cash equivalents at beginning of period | 4,634,944 | 292,849 | 124,789 | 124,789 | 1,014,060 | |||||||||||
| Cash and cash equivalents at end of period | $ | 292,849 | $ | 124,789 | $ | 1,014,060 | $ | 298,045 | $ | 995,462 | ||||||
| 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 | $ | 2,474,000 | $ | 1,407,000 | ||||||
| - Acquisition of property and equipment through capital lease | $ | 141,000 | $ | — | $ | — | $ | — | $ | — | ||||||
See accompanying notes to consolidated financial statements.
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.
(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.
(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.
(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, 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.
(4) Property and Equipment:
Property and equipment consists of the following at December 31:
| |
1996 |
1997 |
||||
|---|---|---|---|---|---|---|
| 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 | |||
(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 $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:
| Last Days of March, June, September and December in: |
Quarterly Commitment Reduction |
Annual Commitment Reduction |
|||
|---|---|---|---|---|---|
| 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 | ||||
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.
The future minimum lease payments required pursuant to capital and operating leases as of December 31, 1997 are as follows:
| |
Operating |
Capital |
||||
|---|---|---|---|---|---|---|
| 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 | ||||
(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.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Triton Cellular Partners, L.P.:
We have audited the accompanying consolidated balance sheets of Triton Cellular Partners, L.P. and Subsidiaries as of December 31, 1998 and September 30, 1999, and the related consolidated statements of operations, partners' equity and cash flows for the year ended December 31, 1998 and the nine months ended September 30, 1999. These consolidated financial statements are the responsibility of the Company'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 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Triton Cellular Partners, L.P. and Subsidiaries as of December 31, 1998 and September 30, 1999, and the results of its operations and its cash flows for the year ended December 31, 1998 and the nine months ended September 30, 1999, in conformity with generally accepted accounting principles.
| ARTHUR ANDERSEN LLP |
Philadelphia,
Pennsylvania,
December 23, 1999
TRITON CELLULAR PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
| |
December 31, 1998 |
September 30, 1999 |
|||||
|---|---|---|---|---|---|---|---|
| ASSETS | |||||||
| CURRENT ASSETS: |
|
|
|
|
|
|
|
| Cash and cash equivalents | $ | 3,890 | $ | — | |||
| Accounts receivable, less allowance of $2,936 and $1,986 | 12,646 | 24,842 | |||||
| Inventories | 1,282 | 3,974 | |||||
| Other current assets | 3,131 | 1,314 | |||||
| Total current assets | 20,949 | 30,130 | |||||
| PROPERTY AND EQUIPMENT, less accumulated depreciation of $3,736 and $12,898 | 48,822 | 90,788 | |||||
| LICENSES AND OTHER INTANGIBLE ASSETS, less accumulated amortization of $13,882 and $37,713 | 280,911 | 474,988 | |||||
| $ | 350,682 | $ | 595,906 | ||||
| LIABILITIES AND PARTNERS' EQUITY |
|
|
|
|
|||
| CURRENT LIABILITIES: |
|
|
|
|
|
|
|
| Accounts payable | $ | 1,021 | $ | 7,835 | |||
| Accrued expenses | 7,433 | 8,826 | |||||
| Accrued interest | 5,067 | 2,052 | |||||
| Due to related parties, net | 951 | 1,046 | |||||
| Income tax payable | — | 8,244 | |||||
| Advance billings and customer deposits | 1,658 | 2,047 | |||||
| Total current liabilities | 16,130 | 30,050 | |||||
| LONG-TERM DEBT | 261,500 | 463,916 | |||||
| DEFERRED COMPENSATION | — | 53,954 | |||||
| DEFERRED INCOME TAXES | 6,231 | 1,511 | |||||
| Total liabilities | 283,861 | 549,431 | |||||
| COMMITMENTS AND CONTINGENCIES (NOTE 12) |
|
|
|
|
|
|
|
| PARTNERS' EQUITY: |
|
|
|
|
|
|
|
| Partners' contributions | 78,877 | 125,968 | |||||
| Accumulated deficit | (12,056 | ) | (79,493 | ) | |||
| Total partners' equity | 66,821 | 46,475 | |||||
| $ | 350,682 | $ | 595,906 | ||||
The accompanying notes are an integral part of these consolidated balance sheets.
TRITON CELLULAR PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
| |
Year Ended December 31, 1998 |
Nine Months Ended September 30, 1999 |
|||||
|---|---|---|---|---|---|---|---|
| REVENUES: | |||||||
| Service | $ | 31,464 | $ | 61,053 | |||
| Roamer | 14,208 | 37,870 | |||||
| Equipment | 2,605 | 4,744 | |||||
| Total revenues | 48,277 | 103,667 | |||||
| OPERATING EXPENSES: | |||||||
| Network costs | 7,210 | 12,380 | |||||
| Cost of equipment sales | 3,650 | 7,644 | |||||
| Sales and marketing | 6,633 | 14,738 | |||||
| General and administrative | 11,208 | 20,078 | |||||
| Deferred compensation | — | 53,954 | |||||
| Depreciation and amortization | 17,950 | 32,993 | |||||
| Total operating expenses | 46,651 | 141,787 | |||||
| OPERATING INCOME (LOSS) | 1,626 | (38,120 | ) | ||||
| OTHER INCOME (EXPENSE): |
|
|
|
|
|
|
|
| Interest expense | (14,059 | ) | (26,076 | ) | |||
| Interest income | 262 | 283 | |||||
| Other income (expense), net | (13,797 | ) | (25,793 | ) | |||
| LOSS BEFORE INCOME TAXES | (12,171 | ) | (63,913 | ) | |||
| INCOME TAX EXPENSE (BENEFIT) |
|
|
(115 |
) |
|
3,524 |
|
| NET LOSS | $ | (12,056 | ) | $ | (67,437 | ) | |
The accompanying notes are an integral part of these consolidated financial statements.
TRITON CELLULAR PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF PARTNERS' EQUITY
(In thousands)
| |
Partners' Contributions |
Accumulated Deficit |
Total |
|||||||
|---|---|---|---|---|---|---|---|---|---|---|
| BALANCE, December 31, 1997 | $ | — | $ | — | $ | — | ||||
| Partners' contributions | 79,384 | — | 79,384 | |||||||
| Costs related to capital contributions | (486 | ) | — | (486 | ) | |||||
| Return of contribution | (21 | ) | — | (21 | ) | |||||
| Net loss | — | (12,056 | ) | (12,056 | ) | |||||
| BALANCE, December 31, 1998 | 78,877 | (12,056 | ) | 66,821 | ||||||
| Partners' contributions | 47,148 | — | 47,148 | |||||||
| Costs related to capital contributions | (57 | ) | — | (57 | ) | |||||
| Net loss | — | (67,437 | ) | (67,437 | ) | |||||
| BALANCE, September 30, 1999 | $ | 125,968 | $ | (79,493 | ) | $ | 46,475 | |||
The accompanying notes are an integral part of these consolidated financial statements.
TRITON CELLULAR PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| |
Year Ended December 31, 1998 |
Nine Months Ended September 30, 1999 |
|||||
|---|---|---|---|---|---|---|---|
| CASH FLOWS FROM OPERATING ACTIVITIES: | |||||||
| Net loss | $ | (12,056 | ) | $ | (67,437 | ) | |
| Adjustments to reconcile net loss to net cash provided by operating activities— | |||||||
| Depreciation and amortization | 17,950 | 32,993 | |||||
| Deferred income taxes | (115 | ) | (4,720 | ) | |||
| Provision for bad debts | 1,061 | 2,162 | |||||
| Deferred compensation | — | 53,954 | |||||
| Accreted interest on seller notes | — | 566 | |||||
| Change in other operating elements: | |||||||
| Accounts receivable | (5,565 | ) | (10,383 | ) | |||
| Inventories | (34 | ) | (1,853 | ) | |||
| Other current assets | (2,933 | ) | 2,018 | ||||
| Accounts payable | (3,009 | ) | 5,240 | ||||
| Accrued expenses | 10,215 | (2,492 | ) | ||||
| Income tax payable | — | 8,244 | |||||
| Other current liabilities | 657 | 612 | |||||
| Net cash provided by operating activities | 6,171 | 18,904 | |||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | |||||||
| Purchase of property and equipment | (4,277 | ) | (25,773 | ) | |||
| Acquisitions, net of cash acquired | (314,014 | ) | (213,932 | ) | |||
| Net cash used in investing activities | (318,291 | ) | (239,705 | ) | |||
| CASH FLOWS FROM FINANCING ACTIVITIES: | |||||||
| Borrowings under credit facility | 253,000 | 175,600 | |||||
| Financing costs | (4,346 | ) | (5,859 | ) | |||
| Capital contributions from partners | 66,922 | 47,148 | |||||
| Costs related to capital contributions | (486 | ) | (57 | ) | |||
| Return of capital contribution | (21 | ) | — | ||||
| Advances from related parties, net | 951 | 95 | |||||
| Other | (10 | ) | (16 | ) | |||
| Net cash provided by financing activities | 316,010 | 216,911 | |||||
| NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 3,890 | (3,890 | ) | ||||
| CASH AND CASH EQUIVALENTS, beginning of period | — | 3,890 | |||||
| CASH AND CASH EQUIVALENTS, end of period | $ | 3,890 | $ | — | |||
The accompanying notes are an integral part of these consolidated financial statements.
TRITON CELLULAR PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and September 30, 1999
1. Organization and Nature of the Business:
Triton Cellular Partners, L.P. was formed on December 3, 1997 by Triton Cellular, Inc., the general partner of the partnership, and commenced operations during 1998. Triton Cellular Partners, L.P. and its subsidiaries (Triton or the Company) provide cellular communication services in Washington, Oregon, Kansas, Alabama and Mississippi. The Company operates under licenses granted by the Federal Communications Commissions (FCC). The Company's operations are subject to the applicable rules and regulations of the FCC.
2. Summary of Significant Accounting Policies:
Principles of Consolidation
The consolidated financial statements of the Company include the accounts of Triton Cellular Partners, L.P. and its wholly owned subsidiaries. All significant intercompany accounts and balances have been eliminated in consolidation.
Cash and Cash Equivalents
Cash and cash equivalents includes cash on hand, demand deposits and short-term investments with original maturities of three months or less.
Inventories
Inventories, consisting primarily of wireless handsets and accessories held for resale, are valued at the lower of cost or market. Cost is determined by the first-in, first-out method.
Property and Equipment
Property and equipment are recorded at cost. Additions, improvements or major renewals are capitalized, while expenditures that do not enhance or extend the asset's useful life are charged to operating expenses as incurred. In connection with network construction-related activities, the Company capitalizes salaries of the Company's engineering employees responsible for the design and construction. Depreciation is calculated based on the straight-line method over the estimated useful lives of the respective assets as follows:
| Network infrastructure and equipment | 7 years | |
| Office furniture, fixtures and equipment | 5 years | |
| Leasehold improvements | 5 years or life of lease, if shorter | |
| Automobiles | 5 years | |
| Computer equipment and software | 3 years | |
| Buildings | 40 years |
Licenses and Other Intangible Assets
Licenses primarily consist of the cost of cellular licenses acquired through acquisitions. Other intangibles, resulting primarily from acquisitions, include the value assigned to covenants not to compete, subscriber lists and goodwill. License costs are amortized over a period of 40 years using the straight-line method. Goodwill is amortized over periods ranging from 20 to 40 years using the straight-line method. Covenants not to compete are amortized using the straight-line method over the covenant period and subscriber lists are amortized using the straight-line method over the estimated average customer life.
Deferred Costs (in thousands)
Deferred costs consist primarily of fees incurred to secure credit facilities. Deferred financing costs are being amortized over eight and one-half years, the estimated period the debt will remain outstanding.
Amortization expense of $489 and $793 was recorded in the year ended December 31, 1998 and nine months ended September 30, 1999, respectively.
Long-Lived Assets
The Company periodically evaluates the value of all long-lived assets to determine if events have occurred that indicate that the remaining estimated useful lives of these assets may warrant revision, or whether the remaining balance may not be recoverable. If asset recovery is in question, the Company uses an estimate of future net cash flows over the remaining useful lives of the long-lived assets to measure recoverability.
Revenue Recognition
The Company earns revenue by providing 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 of cellular and paging equipment and accessories. Service revenue consists of the base monthly service fee and airtime revenue. Base monthly service fees are primarily 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 fees charged to other cellular carriers' customers for roaming in the Company's service area as well as related airtime revenue for use of the Company's cellular network. Roamer revenue is recognized when the service is rendered. The Company recognizes other service revenues from equipment installations and connection fees when earned.
Income Taxes
As a partnership, the Company and a majority of its subsidiaries are not subject to income taxes. However, income taxes applicable to Mississippi-34 Cellular Corporation (Mississippi-34), which has not elected treatment as an S corporation, are accounted for in accordance with Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred income tax assets and liabilities are measured using statutory tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
Financial Instruments
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires disclosure of fair value information about financial instruments for which it is practicable to estimate that value, whether or not recognized in the balance sheet. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. SFAS No. 107 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts do not represent the underlying value of the Company.
The carrying amounts and fair values of the Company's financial instruments are as follows:
| |
Carrying Amount |
Estimated Fair Value |
||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
December 31, 1998 |
September 30, 1999 |
December 31, 1998 |
September 30, 1999 |
||||||||
| |
(In thousands) |
|||||||||||
| Financial Asset: | ||||||||||||
| Cash | $ | 3,890 | $ | — | $ | 3,890 | $ | — | ||||
| Financial Liabilities: | ||||||||||||
| $500.0 million credit facility | 253,000 | 428,600 | 253,000 | 428,600 | ||||||||
| Notes held by sellers (see Note 3) | 2,000 | 28,816 | 2,000 | 28,816 | ||||||||
| Purchase option payable | 6,500 | 6,500 | 6,500 | 6,500 | ||||||||
| Other Financial Instruments: | ||||||||||||
| $50.0 million JP Morgan interest rate swap agreement | — | — | (1,538 | ) | 218 | |||||||
| $75.0 million PNC interest rate swap agreement | — | — | 325 | 1,618 | ||||||||
| $50.0 million First Union interest rate swap agreement | — | — | 518 | 1,363 | ||||||||
| $35.0 million Rabobank interest rate swap agreement | — | — | — | 726 | ||||||||
Customer Acquisition Costs
Costs to acquire customers are charged to expense when incurred. Also, the Company charges advertising costs to expense when the advertisement occurs.
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 amount of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Business and Credit Concentrations
The Company's cellular customers are geographically located in Washington, Oregon, Kansas, Alabama and Mississippi. Revenues from one roaming partner represent approximately 10% and 17% of the Company's consolidated revenues for the year ended December 31, 1998 and the nine months ended September 30, 1999, respectively.
New Accounting Pronouncements
The Company adopted SFAS No. 130, "Reporting Comprehensive Income," effective January 1, 1998. SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components. The adoption of this statement had no impact on the Company's financial statements.
The Company adopted Statement of Position (SOP) 98-5, "Reporting on the Costs of Start-up Activities," effective January 1, 1998. This statement requires that the costs of start-up activities, including organization costs, be expensed as incurred and is effective for fiscal years beginning after December 31, 1998. The adoption did not have a material effect on the Company's financial position or results of operations.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. SFAS No. 133 is effective for fiscal years beginning after June 15, 2000. The Company is evaluating the impact of the implementation of this accounting standard.
3. Acquisitions:
During 1998 and 1999, the Company acquired six businesses for an aggregate purchase price of $563.0 million, consisting of approximately $515.8 million in cash, $34.8 million in debt and $12.4 million in limited partnership interest.
Point Telesystems, Inc.
Effective January 16, 1998, the Company acquired the Oregon cellular telephone license, operations and related assets of Point Telesystems, Inc. (Point), an independent provider of wireless communication services in Oregon, for approximately $77.7 million in cash. Point provided cellular service to western Oregon 4 RSA, a 3,946 square-mile service area that encompasses 234,800 POPs. The Company entered into an option agreement (the Option) for consideration of $1.5 million, which was paid at the closing, which entitles the Company to acquire certain cell sites in the future for $6.5 million. The Option expires February 28, 2003. Since the Company expects to exercise the Option after January 1, 2001 and prior to its expiration, the total cost of $8.0 million has been included in the purchase price and the unpaid portion of $6.5 million has been reflected in the consolidated balance sheet as long-term debt. The Company has entered into an agreement to utilize the assets covered by the Option for the period prior to exercising the Option. The ongoing payments paid pursuant to this agreement have been reflected as interest expense in the consolidated statement of operations. The average effective interest rate over the term of the Option is 5.5%.
Columbia River Cellular Partners, L.P.
Effective April 16, 1998, the Company acquired the Washington cellular telephone licenses, operations and related assets of Columbia River Cellular Partners, L.P. (Columbia), an independent provider of wireless communication services in Washington, for approximately $34.6 million, consisting of $22.2 million in cash and a partnership interest in the Company valued at $12.4 million. Columbia provided cellular service to Washington 2 and 3 RSAs, a 16,494 square-mile service area that encompasses 198,200 POPs.
U.S. Unwired, Inc.
Effective July 1, 1998, the Company acquired the Western Kansas (Kansas 1, 2, 6, 7, 11, 12, and 13 RSAs and interim operating authority for Oklahoma 1 RSA) and Mississippi/Alabama (Mississippi 1 RSA and interim operating authority for the Mississippi 5 RSA and Alabama 3 and 4 RSAs) cellular telephone licenses, operations and related assets from U. S. Unwired, Inc. (U.S. Unwired), an independent provider of wireless communication services, for approximately $149.9 million in cash. These licenses allow the Company to provide cellular service to a 54,773 square-mile service area that encompasses 769,800 POPs.
Effective July 1, 1998, the Company acquired the outstanding stock of Mississippi-34 from U.S. Unwired and Bailey Cable & Wireless, Inc. for approximately $22.3 million in cash. Mississippi-34 provides cellular service to Mississippi 3 and 4 RSAs, a 7,435 square-mile service area that encompasses 287,800 POPs.
AAT RSA Company Limited Partnership
Effective August 7, 1998, the Company acquired the Alabama cellular telephone license, operations and related assets of AAT RSA Company Limited Partnership (AAT RSA), an independent provider of wireless communication services in Alabama for approximately $39.9 million, consisting of $37.9 million in cash and a 10% junior subordinated promissory note in the amount of $2.0 million payable on August 7, 2003. AAT RSA provided cellular service to Alabama 7 RSA, a 4,372 square-mile service area that encompasses 170,800 POPs.
BMCT, L.P.
Effective February 1, 1999, the Company acquired the Oregon and Washington cellular telephone licenses, operations and related assets of BMCT, L.P., an independent provider of wireless communications to portions of both Washington and Oregon, for approximately $208.2 million, consisting of $203.2 million in cash and a 10% junior subordinated promissory note in the amount of $5.0 million payable on February 1, 2009. BMCT, L.P. provided cellular service to Oregon 3 and 6 RSAs and Washington 8 RSA, a 60,280 square-mile service area that encompasses 486,100 POPs.
Cranford Cellular Communications, L.L.C.
Effective June 15, 1999, the Company acquired the Alabama 5 RSA license from Cranford Cellular Communications, L.L.C. (Cranford) for approximately $22.3 million, consisting of $1.0 million in cash and a 9% promissory note in the amount of $21.3 million payable on the later of i) January 2, 2000 or ii) the date that is 60 days after the date that the FCC permit order shall become a final order. Based upon all the facts that management currently has, the Company believes that it is probable that the FCC final order will not be issued within the next year. Therefore, the payable of $21.3 miliion has been classified as long-term debt in the accompanying balance sheets. The acquired license covers a 4,479 square-mile service area that encompasses 215,400 POPs.
The purchase price allocations have been completed on a preliminary basis, subject to adjustment should new or additional facts about the businesses become known. All of the above acquisitions have been accounted for under the purchase method of accounting with the excess of the purchase price over estimated fair value of net tangible assets being allocated to licenses, goodwill, customer lists and covenants not to compete; accordingly, operating results have been included from the date of acquisition. The following unaudited pro forma information presents the consolidated results of operations as if the above acquisitions had occurred as of January 1, 1998. This summary is not necessarily indicative of what the results of operations of the Company and the acquired entities would have been if they had been a single entity during such period, nor does it purport to represent results of operations for any future periods.
| |
Year Ended December 31, 1998 |
Nine Months Ended September 30, 1999 |
|||||
|---|---|---|---|---|---|---|---|
| |
(In thousands) |
||||||
| Total revenues | $ | 109,237 | $ | 107,152 | |||
| Operating loss | $ | (1,063 | ) | $ | (41,977 | ) | |
| Net loss | $ | (27,458 | ) | $ | (68,480 | ) | |
4. Property and Equipment (in thousands):
The Company's property and equipment consisted of the following:
| |
December 31, 1998 |
September 30, 1999 |
|||||
|---|---|---|---|---|---|---|---|
| Network infrastructure and equipment | $ | 48,855 | $ | 91,319 | |||
| Office furniture, fixtures and other equipment | 3,703 | 12,367 | |||||
| 52,558 | 103,686 | ||||||
| Less: accumulated depreciation | (3,736 | ) | (12,898 | ) | |||
| Property and equipment, net | $ | 48,822 | $ | 90,788 | |||
Depreciation expense was $4,068 for the year ended December 31, 1998 and $9,162 for the nine months ended September 30, 1999.
5. Licenses and Other Intangible Assets (In thousands):
The Company's intangible assets and their useful lives consisted of the following:
| |
December 31, 1998 |
September 30, 1999 |
Useful Lives |
|||||
|---|---|---|---|---|---|---|---|---|
| Licenses | $ | 140,053 | $ | 286,976 | 40 years | |||
| Goodwill | 110,399 | 143,771 | 20-40 years | |||||
| Customer lists | 25,458 | 52,447 | 4 years | |||||
| Covenants not to compete | 14,500 | 19,250 | 2-3 years | |||||
| Bank financing | 4,383 | 10,257 | 8.5 years | |||||
| 294,793 | 512,701 | |||||||
| Less: accumulated amortization | (13,882 | ) | (37,713 | ) | ||||
| Other assets, net | $ | 280,911 | $ | 474,988 | ||||
Amortization expense was $13,882 for the year ended December 31, 1998 and $23,831 for the nine months ended September 30, 1999.
6. Long-Term Debt:
The Company's long-term debt consisted of the following:
| |
December 31, 1998 |
September 30, 1999 |
||||
|---|---|---|---|---|---|---|
| |
(In thousands) |
|||||
| Credit facility | $ | 253,000 | $ | 428,600 | ||
| Note payable to AAT RSA (see Note 3) | 2,000 | 2,233 | ||||
| Note payable to BMCT, L.P. (see Note 3) | — | 5,333 | ||||
| Note payable to Cranford (see Note 3) | — | 21,250 | ||||
| Purchase option payable to Point (see Note 3) | 6,500 | 6,500 | ||||
| 261,500 | 463,916 | |||||
| Less: current portion of long-term debt | — | — | ||||
| Long-term debt | $ | 261,500 | $ | 463,916 | ||
The Company has a credit facility agreement (the Credit Facility) with a group of commercial banks. The Credit Facility provides for 1) a $100.0 million revolving credit facility (the Revolver), 2) a $270.0 million term loan facility (Term Loan A) and 3) a $130.0 million term loan facility (Term Loan B).
At the Company's discretion, advances under the Credit Facility bear interest at either the London Interbank Offered Rate (LIBOR) plus margin or the administrative agent's prime rate plus margin. The margin for the Revolver and Term Loan A is determined by the Company's leverage ratio and ranges between 1.5% and 2.75% for LIBOR advances and 0.5% and 1.75% for prime rate advances. With respect to Term Loan B, the margin is 3.25% for LIBOR advances and 2.25% for prime rate advances. The loan agreement requires an annual commitment fee of between .375% and 0.5% of the unused portion of the Revolver, depending on the Company's leverage ratio. Commitment fee payments are made quarterly.
The commitment to make advances under the Revolver reduces each quarter beginning on September 30, 2001 and continuing through maturity on June 30, 2007. Balances outstanding under the term loans are required to be repaid in quarterly installments beginning on September 30, 2001 (Term Loan A) and September 30, 2002 (Term Loan B) and continuing through maturity on June 30, 2007 (Term Loan A) and December 31, 2007 (Term Loan B).
The Credit Facility contains certain standard and customary covenants which, among other things, require the maintenance of certain financial ratios (including the ratio of indebtedness to annualized operating cash flow and the ratio of annualized operating cash flow to interest expense), the hedging of interest rate risk exposure, restrictions on partnership distributions and limitations on the sale of assets. During the periods presented, the Company was in compliance with all such covenants.
The Credit Facility is collateralized by substantially all of the assets of the Company as well as its subsidiaries and a pledge of substantially all of the ownership interests in the Company and its subsidiaries.
The weighted average interest rate for amounts outstanding under the Credit Facility was 7.99% at September 30, 1999 and 7.79% at December 31, 1998.
Scheduled principal payments under the Credit Facility are as follows (in thousands):
| 2000 | $ | — | |
| 2001 | 13,500 | ||
| 2002 | 27,650 | ||
| 2003 | 32,350 | ||
| 2004 and thereafter | 355,100 | ||
| $ | 428,600 | ||
In June 1999, the Company established a $5.0 million demand discretionary line of credit (the Swing Line), as a sublimit under the Revolver, with a lender under the Credit Facility. The Swing Line borrowing rate is negotiated daily based upon 1) the federal funds rate, plus 2) the applicable margin for Eurodollar advances, minus 3) the commitment fee rate. There were no borrowings outstanding as of September 30, 1999.
7. Partners' Capital:
Limited and general partners' capital contributions are recorded when received. Total committed capital of the limited partners at December 31, 1998 and September 30, 1999 was $155.1 million and $157.7 million, respectively, of which $79.3 million and $126.3 million, respectively, has been called and received. In addition, total committed capital of the general partner at December 31, 1998 and September 30, 1999 was $165,000 and $215,000, respectively, of which $67,000 and $215,000, respectively, has been called and funded. The Partnership Agreement provides for the following classes of limited partnership interest: Class A, Special Class A, Class B, Special Class B and Classes C, D, E, F and G.
In general, the general partner is vested with the right to operate, manage, control and make all decisions affecting the affairs of the Company's business, except those which would be unlawful, in breach of its fiduciary responsibility to the limited partners or inconsistent with the Partnership Agreement. The Company has established an advisory committee comprised of three representatives of the Class A limited partners and two members of the general partner. The general partner must receive approval from the advisory committee for significant actions including, but not limited to, acquisition of investments; sale, exchange or disposition of any investment; any capital call or distribution of cash or securities; any borrowings, loans or guarantees by the Partnership; admission of additional partners; and determinations of fair value.
Net profits and losses, both realized and unrealized, are allocated to the limited partners and general partner as prescribed in the Partnership Agreement. As set out in the Partnership Agreement, the general partner has the discretion to determine amounts available for distribution, subject to the approval of the advisory committee. However, proceeds from disposition of an investment (less reasonable reserves established by the general partner) must be distributed within 60 days of the disposition.
Costs related to capital contributions consist primarily of legal fees and expenses incurred in connection with the offering of limited partnership interests and the Partnership Agreement. These costs are presented in the accompanying financial statements as a reduction of total partners' equity.
8. Deferred Compensation:
During 1998 and 1999, the Company granted performance incentive awards to certain officers and key employees in the form of Class D, E and G limited partnership interests. Class F limited partnership interests have not been issued; however, the Company expects to issue such interests prior to the consummation of the transaction described in Note 15. These performance awards vest over four years from the date of issuance or 100% upon change of control. The performance awards entitle the holder to participate in the appreciation of the Company's value as defined in the limited partnership agreement. Deferred compensation expense for the performance awards is being recognized based upon a four-year vesting schedule as defined in the limited partnership agreement and the estimated value of the performance awards at the end of the applicable period. Compensation expense was $0 for the year ended December 31, 1998 and $53.6 million for the nine months ended September 30, 1999.
The unvested portion of the performance awards of approximately $40.5 million will continue to be recognized based upon a four-year vesting until the consummation of the transaction discussed in Note 15, at which time vesting will be accelerated to 100%.
9. Income Taxes:
Expense (benefit) for income taxes were as follows:
| |
Year Ended December 31, 1998 |
Nine Months Ended September 30, 1999 |
|||||
|---|---|---|---|---|---|---|---|
| |
(In thousands) |
||||||
| Federal income taxes: | |||||||
| Current | $ | — | $ | 7,172 | |||
| Deferred | (100 | ) | (4,102 | ) | |||
| (100 | ) | 3,070 | |||||
| State income taxes: | |||||||
| Current | — | 1,072 | |||||
| Deferred | (15 | ) | (618 | ) | |||
| (15 | ) | 454 | |||||
| Total income tax expense (benefit) | $ | (115 | ) | $ | 3,524 | ||
The income tax effect of the items that create deferred tax assets and liabilities are as follows:
| |
December 31, 1998 |
September 30, 1999 |
||||
|---|---|---|---|---|---|---|
| |
(In thousands) |
|||||
| Deferred tax assets: | ||||||
| Nondeductible accrued liabilities | $ | 123 | $ | 149 | ||
| Net operating loss carryforward | 2,156 | — | ||||
| Net deferred tax assets | 2,279 | 149 | ||||
| Deferred tax liabilities: | ||||||
| Intangible assets | 8,197 | 1,196 | ||||
| Fixed assets | 313 | 464 | ||||
| Deferred tax liabilities | 8,510 | 1,660 | ||||
| Net deferred tax liabilities | $ | 6,231 | $ | 1,511 | ||
The Company's income tax provision, relating to Mississippi-34, was computed based on the federal statutory rate and the average state statutory rates, net of the related federal benefit. The income tax provision for the nine months ended September 30, 1999 of approximately $3.5 million primarily relates to the transfer of FCC licenses by Mississippi-34 to a related party.
During 1999, Mississippi-34 distributed its FCC licenses to a wholly owned subsidiary, a limited liability corporation, of the Company. For book purposes the transfer of FCC licenses was recorded at net book value. For tax purposes this transaction was a taxable event resulting in an income tax provision of approximately $3.5 million and an income tax payable of approximately $8.2 million.
The Company recorded a deferred tax liability of $6.3 million when it acquired all of the outstanding stock of Mississippi-34. This represents the tax effect of temporary differences arising from the excess of the financial statement basis of the net assets acquired over the tax basis carried over from the predecessor.
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management has considered the scheduled reversal of deferred tax liabilities and tax planning strategies in making this assessment. Based upon the assessment, management believes it is more likely than not that the Company will realize the benefits of the deferred tax assets at September 30, 1999.
10. Financial Instruments:
The Company has entered into interest rate protection agreements to lock in interest rates on a portion of its variable rate debt. The Company does not use these agreements for trading or other speculative purposes. Although these agreements are subject to fluctuations in value, they are generally offset by fluctuations in the value of the underlying instrument or anticipated transaction.
Under each interest rate swap agreement, the Company pays the difference between LIBOR and the fixed rate if LIBOR exceeds the fixed rate. Income and expense associated with the transactions are recognized over periods prescribed by the contracts.
The following table summarizes the Company's off-balance sheet interest rate swap agreements (pay fixed rate, receive variable rate) at September 30, 1999 (in thousands):
| |
Settlement |
Notional Amount |
Fair Value |
Maturity |
Pay Fixed Rate |
Receive Variable Rate |
|||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 1. | Monthly | $ | 50,000 | $ | 1,363 | October 2001 | 4.7 | % | 5.1 | % | |||||
| 2. | Monthly | 75,000 | 1,618 | September 2001 | 4.9 | 5.1 | |||||||||
| 3. | Quarterly | 50,000 | 218 | June 2002 | 6.0 | 5.1 | |||||||||
| 4. | Monthly | 35,000 | 726 | March 2004 | 5.3 | 5.1 | |||||||||
11. Related-Party Transactions (in thousands):
The Company is affiliated with Triton PCS, Inc. and Triton Management Company, Inc. by certain common ownership and management overlap. As part of this affiliation, certain costs are incurred and paid by these related parties on behalf of the Company and are subsequently reimbursed. Such costs totaled $482 and $822 for the year ended December 31, 1998 and nine months ended September 30, 1999, respectively. In addition, under an agreement between the Company and Triton Management Company, Inc., management services rendered are charged to the Company. Such amounts totaled $469 and $405 for the year ended December 31, 1998 and the nine months ended September 30, 1999, respectively. The outstanding balance due to these related parties at December 31, 1998 and September 30, 1999 was $951 and $1,046, respectively.
12. Commitments and Contingencies (in thousands):
The Company has entered into various leases for its offices, land for cell sites, cell sites, and furniture and equipment under operating leases expiring through December 31, 2010. As of September 30, 1999, the estimated future minimum rental payments under these lease agreements having an initial or remaining term in excess of one year were as follows:
| 2000 | $ | 2,340 | |
| 2001 | 2,128 | ||
| 2002 | 1,958 | ||
| 2003 | 1,815 | ||
| 2004 | 1,080 | ||
| Thereafter | 1,982 | ||
| $ | 11,303 | ||
Rent expense under operating leases was $879 for year ended December 31, 1998 and $1,622 for the nine months ended September 30, 1999.
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.
13. 401(k) Savings Plan (in thousands):
The Company sponsors a 401(k) savings plan which permits employees to make contributions to the savings plan on a pretax salary reduction basis in accordance with the Internal Revenue Code. Substantially all full-time employees are eligible to participate in the next quarterly open enrollment after 90 days of service. The Company matches a portion of the voluntary employee contributions. The cost of the savings plan charged to expense was $50 for the year ended December 31, 1998 and $205 for the nine-month period ended September 30, 1999.
14. Supplemental Cash Flow Information (in thousands):
| |
Year Ended December 31, 1998 |
Nine Months Ended September 30, 1999 |
|||||
|---|---|---|---|---|---|---|---|
| Cash paid during the period for interest | $ | 9,046 | $ | 27,353 | |||
| Cash paid during the period for income taxes | — | 29 | |||||
| Noncash investing and financing activities: | |||||||
| Value of partnership interest exchanged for assets acquired | (12,462 | ) | — | ||||
| Liabilities assumed | (15,762 | ) | (28,942 | ) | |||
15. Events Subsequent to September 30, 1999:
On November 8, 1999, the Company entered into a purchase and sale agreement (the Agreement) with an unrelated third party for the sale of the Company's cellular operations. The Agreement provides that substantially all of the assets of the Company will be transferred to the buyer for a purchase price of approximately $1.24 billion, subject to potential adjustments for working capital as defined in the Agreement. The sale is expected to be consummated in the spring of 2000.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Point Telesystems, Inc.:
We have audited the accompanying balance sheet of Point Telesystems, Inc. as of December 31, 1997, and the related statements of operations and retained earnings and cash flows for the period from January 1, 1998 to January 15, 1998 and for the year ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Point Telesystems, Inc. as of December 31, 1997, and the results of its operations and its cash flows for the period from January 1, 1998 to January 15, 1998 and for the year ended December 31, 1997 in conformity with generally accepted accounting principles.
| ARTHUR ANDERSEN LLP |
Minneapolis,
Minnesota,
December 10, 1999
POINT TELESYSTEMS, INC.
BALANCE SHEET
As of December 31, 1997
| ASSETS | |||
| CURRENT ASSETS: |
|
|
|
| Cash and cash equivalents | $ | 635,171 | |
| Accounts receivable, less allowance for doubtful accounts of $105,000 | 2,321,461 | ||
| Inventories | 224,403 | ||
| Other current assets | 22,012 | ||
| Total current assets | 3,203,047 | ||
| PROPERTY AND EQUIPMENT, less accumulated depreciation of $3,546,955 |
|
|
7,868,493 |
| ORGANIZATION COSTS, less accumulated amortization of $16,234 |
|
|
87,880 |
| $ | 11,159,420 | ||
| LIABILITIES AND STOCKHOLDERS' EQUITY |
|||
| CURRENT LIABILITIES: |
|
|
|
| Accounts payable | $ | 574,035 | |
| Advance billings and customer deposits | 242,167 | ||
| Accrued liabilities | 387,048 | ||
| Current portion of long-term debt | 4,166 | ||
| Total current liabilities | 1,207,416 | ||
| LONG-TERM DEBT |
|
|
2,505,384 |
| Total liabilities | 3,712,800 | ||
| COMMITMENTS AND CONTINGENCIES (Note 4) |
|
|
|
| STOCKHOLDERS' EQUITY: |
|
|
|
| Common stock, $.01 par value; 25,000 shares authorized; 9,000 shares outstanding | 90 | ||
| Additional paid-in capital | 4,406,927 | ||
| Retained earnings | 3,039,603 | ||
| Total stockholders' equity | 7,446,620 | ||
| $ | 11,159,420 | ||
The accompanying notes are an integral part of this balance sheet.
POINT TELESYSTEMS, INC.
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
| |
Year Ended December 31, 1997 |
Period From January 1, 1998 To January 15, 1998 |
|||||
|---|---|---|---|---|---|---|---|
| REVENUES: | |||||||
| Service | $ | 12,792,723 | $ | 556,478 | |||
| Roamer | 4,801,757 | 341,943 | |||||
| Equipment | 981,093 | 65,664 | |||||
| Total revenues | 18,575,573 | 964,085 | |||||
| OPERATING EXPENSES: | |||||||
| Network costs | 3,662,273 | 280,087 | |||||
| Cost of equipment sales | 1,370,629 | 73,183 | |||||
| Selling, general and administrative | 6,337,281 | 620,897 | |||||
| Depreciation and amortization | 983,615 | 46,026 | |||||
| Total operating expenses | 12,353,798 | 1,020,193 | |||||
| OPERATING INCOME (LOSS) | 6,221,775 | (56,108 | ) | ||||
| OTHER INCOME (EXPENSE): |
|
|
|
|
|
|
|
| Interest expense | (686,808 | ) | (130 | ) | |||
| Interest income | 666,068 | 8,647 | |||||
| Other income (expense), net | (20,740 | ) | 8,517 | ||||
| NET INCOME (LOSS) | 6,201,035 | (47,591 | ) | ||||
| DISTRIBUTIONS TO STOCKHOLDERS |
|
|
(5,397,722 |
) |
|
(300,000 |
) |
| RETAINED EARNINGS, beginning of period |
|
|
2,236,290 |
|
|
3,039,603 |
|
| RETAINED EARNINGS, end of period |
|
$ |
3,039,603 |
|
$ |
2,692,012 |
|
The accompanying notes are an integral part of these financial statements.
POINT TELESYSTEMS, INC.
STATEMENTS OF CASH FLOWS
| |
Year Ended December 31, 1997 |
Period from January 1, 1998 to January 15, 1998 |
|||||
|---|---|---|---|---|---|---|---|
| OPERATING ACTIVITIES: | |||||||
| Net income (loss) | $ | 6,201,035 | $ | (47,591 | ) | ||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities— | |||||||
| Depreciation and amortization | 983,615 | 46,026 | |||||
| Change in other operating elements: | |||||||
| Accounts receivable | 26,502 | 227,530 | |||||
| Inventories | (29,801 | ) | 12,550 | ||||
| Other current assets | (9,760 | ) | 2,828 | ||||
| Accounts payable | 363,559 | (579,774 | ) | ||||
| Bank overdraft | — | 328,826 | |||||
| Customer security deposits | (6,365 | ) | (1,850 | ) | |||
| Accrued liabilities | (34,478 | ) | 322,172 | ||||
| Net cash provided by operating activities | 7,494,307 | 310,717 | |||||
| INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
| Purchases of property and equipment | (2,156,327 | ) | (4,115 | ) | |||
| Note receivable | 680,516 | – | |||||
| Sale of investments | 3,746,442 | – | |||||
| Net cash provided by (used in) investing activities | 2,270,631 | (4,115 | ) | ||||
| FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
| Distributions to stockholders | (5,397,722 | ) | (300,000 | ) | |||
| Proceeds from long-term debt | 16,249 | — | |||||
| Payments of long-term debt | (4,880,916 | ) | (329 | ) | |||
| Net cash used in financing activities | (10,262,389 | ) | (300,329 | ) | |||
| NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | (497,451 | ) | 6,273 | ||||
| CASH AND CASH EQUIVALENTS, beginning of period |
|
|
1,132,622 |
|
|
635,171 |
|
| CASH AND CASH EQUIVALENTS, end of period |
|
$ |
635,171 |
|
$ |
641,444 |
|
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: |
|
|
|
|
|
|
|
| Cash paid during the period for interest | $ | 686,808 | $ | 130 | |||
The accompanying notes are an integral part of these financial statements.
POINT TELESYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997 and January 15, 1998
1. Nature of Business:
Point Telesystems, Inc. (the Company), a Nevada S corporation, was formed on July 1, 1996 and provides cellular communication services for the Oregon-4 Rural Service Area. The Company operates its cellular services under a license granted by the Federal Communications Commission (FCC). The Company's operations are subject to the applicable rules and regulations of the FCC.
2. Summary of Significant Accounting Policies:
Recently Issued Accounting Pronouncements
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income," was issued in June 1997. SFAS No. 130 establishes standards for reporting and display of comprehensive earnings and its components in financial statements. This statement is effective for fiscal years beginning after December 15, 1997. The adoption of SFAS No. 130 did not materially affect the Company's results of operations or financial position.
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 reporting period. Ultimate results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents are comprised of deposits and highly liquid investments with a remaining maturity of three months or less at the time of purchase. All cash equivalents are recorded at cost, which approximates market.
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 stated at cost. Repair and maintenance costs are charged to expense when incurred. Renewals and betterments are capitalized. Gains or losses on disposition of equipment are reflected in operations currently. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, which range from 3 to 40 years. Leasehold improvements are amortized using the straight-line method over the shorter of the term of the lease or the estimated useful lives of the assets.
Property, plant and equipment consisted of the following as of December 31, 1997:
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| Land and buildings | $ | 1,519,051 | 40 | ||
| Antennas, equipment and tower | 8,730,406 | 10 | |||
| Vehicles | 88,938 | 5 | |||
| Office furniture and equipment | 1,077,053 | 3-5 | |||
| 11,415,448 | |||||
| Less—Accumulated depreciation | (3,546,955 | ) | |||
| $ | 7,868,493 | ||||
Long-Lived Assets
The Company periodically evaluates the value of all long-lived assets to determine if events have occurred that indicate that the remaining estimated useful lives of these assets may warrant revision, or whether the remaining balance may not be recoverable. If asset recovery is in question, 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
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires disclosure of fair value information about financial instruments for which it is practicable to estimate that value, whether or not recognized in the balance sheet. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. SFAS No. 107 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts do not represent the underlying value of the Company.
The carrying amounts and fair values of the Company's financial instruments at December 31, 1997 approximate market.
Revenue Recognition
Cellular airtime is recorded as revenue when services are provided. Sales of equipment and related services are recorded when goods and services are delivered. Cellular access charges are billed in advance or arrears, depending on the customer, and revenue is recognized when the services are provided.
Income Taxes
The Company is an S corporation and is not a taxpaying entity for federal or state income tax purposes. Accordingly, no income tax effects have been recorded in the accompanying financial statements. The Company's income or loss is included in the stockholders' individual returns.
Business and Credit Concentrations
The Company's cellular customers are geographically located in central Oregon. No single customer accounted for a significant amount of revenues or accounts receivable.
3. Long-Term Debt:
Long-term debt is summarized as follows as of December 31, 1997:
| Credit facility | $ | 2,493,613 | ||
| Auto note payable | 15,937 | |||
| Less: current maturities | (4,166 | ) | ||
| Long-term debt | $ | 2,505,384 | ||
On July 1, 1996, the Company entered into a credit facility with US Bank of Washington permitting the Company to borrow up to $15,000,000 through June 30, 1999. Subsequent to June 30, 1999, the maximum allowable outstanding balance decreases quarterly through March 31, 2006, when the maximum outstanding balance is limited to $750,000. The remaining balance is due June 30, 2006. Interest is paid monthly at an annual rate determined by a matrix included in the credit agreement. The rate is based on the ratio of funded debt to cash flow and one of three options chosen at the time of each advance. The interest rate is adjusted 90 days after each fiscal quarter. On December 31, 1997, the interest rate was 7.5%. As of December 31, 1997, the Company was in compliance with all covenants under the credit facility.
The Company has a $15,608 note payable to US Bank of Oregon collateralized by a vehicle, payable in monthly installments of $460 including interest at 9.50% per annum, due May 5, 2001.
Maturities of long-term debt are as follows:
| 1998 (period from January 16-December 31, 1998) | $ | 4,166 | |
| 1999 | 4,582 | ||
| 2000 | 5,037 | ||
| 2001 | 2,152 | ||
| 2002 | — | ||
| Thereafter | 2,493,613 | ||
| $ | 2,509,550 | ||
4. Commitments and Contingencies:
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's financial position or results of operations. Accordingly, no provision for any liability that may result from these matters has been made.
Operating Leases
The Company has entered into various operating leases for cell sites and office space. Most cell sites are on lease from a partnership related by common ownership. At January 15, 1998, future minimum payments for noncancelable operating leases were as follows:
| 1998 | $ | 284,610 | |
| 1999 | 288,760 | ||
| 2000 | 288,760 | ||
| 2001 | 38,760 | ||
| 2002 | 38,760 | ||
| $ | 939,650 | ||
Management expects that in the normal course of business, leases will be renewed or replaced by other leases. Cell site leases begin to expire in October 1998. Lease expense was $296,243 and approximately $12,300 for the year ended December 31, 1997 and for the period from January 1, 1998 to January 15, 1998, respectively.
5. 401(k) Retirement Plan:
The Company sponsors a 401(k) profit-sharing plan. Employees become eligible to participate in the plan after three months of service. An eligible employee may defer up to 15% of compensation. The Company makes a matching contribution of 50% of the deferral, up to 4% of compensation or less. Matching contributions for 1997 were $26,345. In addition, at the Company's discretion, profit-sharing contributions may be made at year-end. A discretionary profit-sharing contribution of $49,458 was made for 1997. There were no contributions made for the period from January 1, 1998 to January 15, 1998.
6. Subsequent Event:
Effective January 16, 1998, the Company consummated the sale of the Company's cellular operations to an unrelated third party. The transaction provided for the transfer of substantially all of the assets and liabilities of the Company to the buyer for a purchase price of approximately $85.7 million.
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SPECIAL MEETING OF SHAREHOLDERS |
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March 22, 2000 3:00 p.m. |
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3905 Dakota Street S.W. Alexandria, Minnesota |
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| Rural Cellular Corporation P.O. Box 2000 Alexandria, Minnesota 56308-2000 |
Proxy | |||
This proxy is solicited by the Board of Directors for use at the Special Meeting on March 22, 2000.
The shares of Class A Common Stock you hold in your account will be voted as you specify below.
If no choice is specified, the proxy will be voted "FOR" Items 1, 2, and 3.
By signing the proxy, you revoke all prior proxies and appoint Richard P. Ekstrand and Don C. Swenson, and each of them, with full power of substitution, to vote your shares of Class A Common Stock on the matters shown on the reverse side and any other matters that may properly come before the Special Meeting and all adjournments thereof.
See reverse side for voting instructions
| There are two ways to vote your Proxy. |
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Company # Control # |
VOTE BY PHONE
1-800-240-6326
Use any touch-tone telephone to vote your proxy 24 hours a day, 7 days a week. Have your proxy card in hand when you call. You will be prompted to enter your 3-digit company number and 7-digit control number, which are located in the upper right-hand corner of this card. Then follow the simple instructions given over the phone.
Note: If voting by phone
Your telephone vote authorizes the named proxies in the same manner as if you marked, signed and returned the proxy card. The deadline for telephone voting is noon CST, one business day before the special meeting.
VOTE BY MAIL
Postage-paid envelope provided
Mark, sign and date your proxy card and return it in the postage-paid envelope we have provided. If you vote by phone, do not return your proxy card.
[LOGO]
Please detach here
| 1. | Approve issuance of shares of Class M redeemable voting convertible preferred stock convertible into shares of Class A common stock, in an amount which, if converted, could result in issuance of Class A common stock comprising more than 20% of the Company's Class A common stock outstanding before such issuance. | / / For | / / Against | / / Abstain | ||||
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Approve an amendment to the Amended and Restated Articles of Incorporation of the Company which will increase the number of authorized shares of capital stock to 300,000,000 shares, consisting of 200,000,000 shares of Class A common stock, 10,000,000 shares of Class B common stock, and 90,000,000 undesignated shares. |
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/ / Abstain |
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Approve an amendment to the Bylaws to increase the maximum number of members of our Board of Directors to eleven. |
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/ / For |
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/ / Against |
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/ / Abstain |
| This proxy, when properly executed, will be voted as directed or, if no direction, FOR each proposal. |
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| Address Change? Mark Box / / Indicate changes below: |
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I Plan to Attend the Meeting / / |
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Dated: |
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Signature(s) exactly as your name appears hereon (Note: Executors, guardians, trustees, etc. should add their title as such and where more than one executor, etc. is named, a majority must sign. If the signer is a corporation, please sign full corporate name by a duly authorized officer.) |
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[LOGO] |
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SPECIAL MEETING OF SHAREHOLDERS |
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March 22, 2000 3:00 p.m. |
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3905 Dakota Street S.W. Alexandria, Minnesota |
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| Rural Cellular Corporation P.O. Box 2000 Alexandria, Minnesota 56308-2000 |
Proxy | |||
This proxy is solicited by the Board of Directors for use at the Special Meeting on March 22, 2000.
The shares of Class B Common Stock you hold in your account will be voted as you specify below.
If no choice is specified, the proxy will be voted "FOR" Items 1, 2, and 3.
By signing the proxy, you revoke all prior proxies and appoint Richard P. Ekstrand and Don C. Swenson, and each of them, with full power of substitution, to vote your shares of Class B Common Stock on the matters shown on the reverse side and any other matters that may properly come before the Special Meeting and all adjournments thereof.
See reverse side for voting instructions
| There are two ways to vote your Proxy. |
|
Company # Control # |
VOTE BY PHONE
1-800-240-6326
Use any touch-tone telephone to vote your proxy 24 hours a day, 7 days a week. Have your proxy card in hand when you call. You will be prompted to enter your 3-digit company number and 7-digit control number, which are located in the upper right-hand corner of this card. Then follow the simple instructions given over the phone.
Note: If voting by phone
Your telephone vote authorizes the named proxies in the same manner as if you marked, signed and returned the proxy card. The deadline for telephone voting is noon CST, one business day before the special meeting.
VOTE BY MAIL
Postage-paid envelope provided
Mark, sign and date your proxy card and return it in the postage-paid envelope we have provided. If you vote by phone, do not return your proxy card.
[LOGO]
Please detach here
| 1. | Approve issuance of shares of Class M redeemable voting convertible preferred stock convertible into shares of Class A common stock, in an amount which, if converted, could result in issuance of Class A common stock comprising more than 20% of the Company's Class A common stock outstanding before such issuance. | / / For | / / Against | / / Abstain | ||||
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Approve an amendment to the Amended and Restated Articles of Incorporation of the Company which will increase the number of authorized shares of capital stock to 300,000,000 shares, consisting of 200,000,000 shares of Class A common stock, 10,000,000 shares of Class B common stock, and 90,000,000 undesignated shares. |
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/ / For |
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/ / Against |
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/ / Abstain |
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Approve an amendment to the Bylaws to increase the maximum number of members of our Board of Directors to eleven. |
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/ / For |
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/ / Against |
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/ / Abstain |
| This proxy, when properly executed, will be voted as directed or, if no direction, FOR each proposal. |
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I Plan to Attend the Meeting / / |
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Dated: |
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Signature(s) exactly as your name appears hereon (Note: Executors, guardians, trustees, etc. should add their title as such and where more than one executor, etc. is named, a majority must sign. If the signer is a corporation, please sign full corporate name by a duly authorized officer.) |
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SOLICITATION AND REVOCATION OF PROXIES
VOTING RIGHTS
VOTES REQUIRED AND BOARD RECOMMENDATIONS
OWNERSHIP OF VOTING SECURITIES
PROPOSAL NO. 1 APPROVAL OF ISSUANCE OF CLASS M CONVERTIBLE PREFERRED STOCK
PROPOSAL NO. 2 APPROVAL OF AMENDMENT TO ARTICLES OF INCORPORATION
PROPOSAL NO. 3 APPROVAL OF AMENDMENT TO BYLAWS
SHAREHOLDER PROPOSALS FOR 2000 ANNUAL MEETING
INDEPENDENT ACCOUNTANTS
FORWARD-LOOKING STATEMENTS
WHERE YOU CAN FIND MORE INFORMATION
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
BUSINESS OF RURAL CELLULAR
Our Systems
Business Strategy
Recent Developments
Other Corporate Information
PENDING ACQUISITION
BUSINESS OF TRITON
DESCRIPTION OF FINANCING ARRANGEMENTS
DESCRIPTION OF CAPITAL STOCK
PRICE OF COMMON STOCK
SELECTED FINANCIAL AND OPERATING DATA
NOTES TO RURAL CELLULAR'S SELECTED FINANCIAL AND OPERATING DATA
NOTES TO TRITON'S SELECTED FINANCIAL AND OPERATING DATA
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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