-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UdVmKQ39I7GNqsNmcx9bkezzBa9e0c0kMkftxLb5cTq0n3T4sWWbHbZucF+JT0Nq 71DAPvY1jEkx970aoQl8og== 0000912057-97-010535.txt : 19970329 0000912057-97-010535.hdr.sgml : 19970329 ACCESSION NUMBER: 0000912057-97-010535 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970328 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: RURAL CELLULAR CORP CENTRAL INDEX KEY: 0000869561 STANDARD INDUSTRIAL CLASSIFICATION: RADIO TELEPHONE COMMUNICATIONS [4812] IRS NUMBER: 411693295 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-27416 FILM NUMBER: 97565984 BUSINESS ADDRESS: STREET 1: 2819 HIGHWAY 29 SOUTH MIDWAY MALL CITY: ALEXANDRIA STATE: MN ZIP: 56308 BUSINESS PHONE: 2182835101 10-K 1 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the fiscal year ended December 31, 1996. / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from ____________________ TO ____________________. COMMISSION FILE NUMBER 0-27416 RURAL CELLULAR CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) MINNESOTA 41-1693295 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION) 3905 DAKOTA STREET ALEXANDRIA, MINNESOTA 56308 (320) 762-2000 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: CLASS A COMMON STOCK, PAR VALUE $.01 PER SHARE (TITLE OF CLASS) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. /X/ YES NO Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. / / Aggregate value of shares of common stock held by nonaffiliates of the Registrant based upon the closing price on The Nasdaq National Market on March 14, 1997: $69,278,730. Number of shares of common stock outstanding as of the close of business on March 14, 1997: Class A 7,502,552 Class B 1,350,744 DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Company's definitive Proxy Statement relating to the 1997 Annual Meeting of Shareholders ("Proxy Statement") are incorporated by reference into Part II, Item 9 and Part III of this report. TABLE OF CONTENTS Page PART I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 ITEM 1. BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 ITEM 2. PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . . 9 ITEM 3. LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . . . . . 9 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS. . . . . . 9 PART II. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10 ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. . . . . . . . . . . . . . . . . . . . . .10 ITEM 6. SELECTED FINANCIAL DATA. . . . . . . . . . . . . . . . . . . .11 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. . . . . . . . . . . . . .13 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. . . . . . . . . .18 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. . . . . . . . . . . . . .18 PART III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. . . . . .18 ITEM 11. EXECUTIVE COMPENSATION. . . . . . . . . . . . . . . . . . . .19 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. . . . . . . . . . . . . . . . . . . .19 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. . . . . . . .19 PART IV. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. . . . . . . . . . . . . . . . . . . . .20 SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21 i PART I ITEM 1. BUSINESS GENERAL Rural Cellular Corporation ("RCC" or the "Company") was incorporated in 1990. Effective April 1, 1991, five partnerships, each holding a license to provide cellular service in geographically contiguous Rural Service Areas (RSAs) merged into the Company to form a cellular service area serving most of the northern half of Minnesota. The Company currently markets its cellular services under the name "Cellular 2000-Registered Trademark-" and its paging services under the name "KEYPAGE-Registered Trademark-." In February 1996, the Company completed an initial public offering of 2,869,863 shares of its Class A Common Stock (the "Offering") and received net proceeds of approximately $26.0 million. In August 1996, the Company and APT Minneapolis, Inc., an affiliate of Aerial Communications, Inc. ("Aerial"), formed a joint venture known as Wireless Alliance, LLC ("Wireless Alliance") to construct and operate Personal Communications Services (PCS) networks in Duluth, Minnesota, Superior, Wisconsin, and Fargo and Grand Forks, North Dakota. On December 23, 1996, the Company entered into an agreement to acquire, subject to regulatory and other approvals, the Maine wireless telephone licenses, operations and related assets of Unity Cellular Systems, Inc. ("Unity"), a wholly-owned subsidiary of InterCel, Inc. All discussion in Item 1 pertains to Rural Cellular Corporation including Wireless Alliance and excluding Unity unless specifically referenced. BUSINESS STRATEGY The Company believes that the market for wireless telecommunication services will continue to expand rapidly as cost and service rates decline, equipment becomes more convenient and easy to use, and the functionality of wireless services becomes more diverse. The wireless industry will continue to shift from the professional and business market segments to include the broader mass consumer markets including the substitution of existing landline facilities with cellular services. In order to remain a leading provider of wireless telecommunication services, the Company intends to continue to expand its market presence and customer base by (i) offering significant and recognizable value to its customers, (ii) aggressively and creatively marketing a broad range of wireless telecommunication products and services at affordable prices, and (iii) proactively engineering the Company's network to have the most recent cellular technologies available for customers. The Company will manage this growth with a strong focus on positive cash flow and net earnings. Specifically, the Company's growth strategy is to continue to expand the Company's regional market presence by (i) continuing to increase penetration rates and minimize churn in existing markets, (ii) acquiring additional wireless properties that are comparable to the Company's existing market characteristics, and (iii) entering into strategic alliances and partnerships with other wireless service providers. ACQUISITIONS In August 1996, the Company and APT Minneapolis, Inc. ("APT"), an affiliate of Aerial Communications, Inc. formed a joint venture known as Wireless Alliance to construct and operate PCS networks in Duluth, Minnesota, Superior, Wisconsin and Fargo and Grand Forks, North Dakota ("PSC Service Area"). Wireless Alliance is 51% owned by the Company and 49% owned by APT. Wireless Alliance will use 20 megahertz (MHz) of broadband spectrum within the PCS Service Area portions of Aerial's Minneapolis Major Trading Area (MTA) 30 MHz PCS license. RCC will be responsible for constructing, operating, managing and marketing the networks. The Company began reselling cellular service in 1 the PCS Service Area in November 1996. Construction and operation of the PCS networks will begin following receipt of approvals needed from the Federal Communications Commission (FCC). Such approvals are expected in the second quarter of 1997. The Wireless Alliance network for Fargo, Grand Forks and Duluth-Superior is expected to be fully operational in the fourth quarter of 1997. Wireless Alliance networks will utilize GSM (Global System for Mobile Communications) technology, which is currently used by more than 35 million customers in 110 countries. In addition to voice service, GSM's advanced features include high-speed data, fax and two-way text messaging as well as smart card capabilities. Digital GSM networks also offer calling features such as caller ID, call forwarding and call waiting. The cellular resale program has allowed Wireless Alliance to establish relationships with incumbent wireless agents and resale customers in the PCS Service Area prior to PCS deployment. The Company expects that many customers will be transferred to Wireless Alliance PCS service when the PCS network construction is complete and FCC and other approvals are obtained. The Wireless Alliance PCS network and cellular network will be integrated so that all Wireless Alliance services and features can be provided on a virtually seamless basis. Seen as the next generation of digital wireless communications service, PCS is currently operational in several major cities in North America and worldwide. Like cellular, PCS services are designed for business, residential and mobile applications and provide mobility and compatibility with other telephone networks. In December 1996, the Company entered into an agreement to acquire, subject to regulatory and other approvals, the Maine wireless telephone licenses, operations and related assets of Unity, a wholly-owned subsidiary of Intercel, Inc. Unity markets its wireless service under the name "Unicel, A Maine Company." This acquisition is expected to be completed in the second quarter of 1997. Based in Bangor, Maine's third largest city, Unity operates in an area that encompasses the Bangor, Maine Metropolitan Statistical Area (MSA); Maine RSA 3, which includes Augusta, the state capitol; and Maine RSA 2, through Unity's 51% interest in Northern Maine Cellular Partnership, which is 49%-owned by Cellco Partnership, an affiliate of Bell Atlantic NYNEX Mobile, Inc. Unity's service area covers approximately 20,500 square miles of contiguous rural territory with a population of approximately 512,000. As of December 31, 1996, Unity served approximately 25,000 customers. Unity has recently converted its cellular operations to digital TDMA (Time Division Multiple Access) technology. Unity has many of the same operating characteristics as the Company. Both serve rural areas with low population densities and similar seasonal usage patterns that are influenced by the weather and the flow of tourists. Interstate Highway 95, the main artery of northeastern traffic in the United States, runs through Unity's service area. The Company believes that the similarities between the demographics, economy, geography, and climate of Unity's service area and those of the Company's existing service area create a strategic fit with the Company's experience and expertise. Also, the service-oriented and customer-focused corporate culture in place at Unity represents an excellent fit with the Company's basic business philosophy. MARKETING AND SALES The Company offers a number of service plan options to its customers. Most service plans have a fixed monthly access fee that includes a specified number of minutes. Usually, the higher the monthly access fee, the more minutes of use are included. Customers who subscribe to cellular service in connection with a special promotion are typically required to enter into a one-year commitment for service. The Company engages in ongoing analysis of its service plans and equipment pricing to ensure competitiveness. As a result of the Wireless Alliance joint venture, the Company has initiated three new service plans for the combined and contiguous areas of (1) Wireless Alliance, (2) the Company's existing service area and (3) the Minneapolis, Minnesota MSA, including adjacent cellular markets. These service plan options are known as Cellular 2000-Registered Trademark- Northland and offer a fixed and tiered monthly peak and off peak per minute charge with no long distance or roaming charges for calls within the Cellular 2000-Registered Trademark- Northland area. The Company offers a state wide personal toll free 800, 888 or 500 number to its Cellular 2000-Registered Trademark- customers. This encourages customers to distribute their cellular numbers and keep their phones turned on to accept incoming calls. Many customers have their cellular number printed on their business cards and publish them in the yellow 2 pages. With the Company's nationwide calling option, the Company's customers can elect to pay a flat monthly fee for unlimited nationwide calling from their cellular phone without long distance charges when calling from Cellular 2000-Registered Trademark- service areas (airtime charges still apply). Approximately 40% of the Company's customers subscribe to this feature, and of those that do, usage is stimulated by 20% or more. A majority of the Company's customers subscribe to voice mail service. There is no charge for leaving messages or retrieving messages. The Company believes that its voice mail strategy stimulates cellular use in the form of returned calls. The Company offers a product known as "Main Street" that offers lower rates within a limited local area and higher rates for calls outside the local area. This is ideal for customers that do not need wide area mobility but want the wireless convenience and features. The Company offers a product known as "Talk Back" that includes access to 911, voice mail, incoming calls and one preprogrammed outgoing number. With this product a customer can always call for emergency assistance or call the preprogrammed number while preventing unauthorized access to other numbers. The Company has established preferred roaming contracts and developed system integration with adjacent cellular carriers under the marketing name "Minnesota Advantage." This approach permits the Company's customers to receive automatic call delivery, call waiting, call forwarding, toll-free access to voice mail, call hand-off and reduced roaming rates throughout Minnesota. The Company and most other cellular carriers offer their customers Automatic Call Delivery (ACD) and reduced roaming rates on a nationwide basis. The Company markets this program as "Simplified Roaming." ACD allows roamers to use all of their home features including custom calling, making their roaming experience identical to their local service. Since Simplified Roaming was introduced, the use of airtime by roamers has increased, a result which the Company attributes to the ACD feature and lower roaming rates. As adjacent carriers increase their cellular customer base, and the industry as a whole expands, the number of roamers will continue to increase. Simplified Roaming allows the Company to capture roaming traffic on Interstate Highways 94, 35 and 29. The Company markets paging services provided both through the Company-owned system, covering northern Minnesota and eastern South Dakota, and as a reseller of paging services covering most of Minnesota and areas within Iowa, Wisconsin, and eastern North Dakota. The Company believes that paging services complement and stimulate cellular usage. DISTRIBUTION The Company markets its cellular and paging services through approximately 130 independent sales agents, which are managed by 11 territory managers. These sales agents include retail electronic stores, farm implement dealers, automobile dealers, automobile parts suppliers, college and university bookstores, video and music stores, and local telephone companies. Most of the agents sell the Company's service in conjunction with their principal business. The territory managers select, recruit, train, and support the independent sales agents. The training and support provided to agents is extensive and continual. Each year all agents must complete an "agent certification" assessment to ensure knowledge of the Company's current product and service offerings. The Company provides cellular telephone and paging equipment to the agents for sale or rent to customers and participates in the agents' advertising and promotion through a cooperative advertising program. In an effort to market its services more effectively and to better control customer acquisition costs, the Company added a new direct channel of distribution in 1996 by hiring 29 direct sales representatives. In 1996, the Company also expanded its existing distribution channels throughout its service area with additional retail outlets and assigning Company sales representatives to offer its services in stores of major retailers such as Wal-Mart. The Company currently employs sales agents in eight Wal-Mart stores and anticipates expanding into one additional Wal-Mart store in the Company's cellular service area during 1997. CUSTOMER SERVICE The Company believes that easy access to highly trained and motivated customer service professionals is essential to building and maintaining customer satisfaction and loyalty, both of which are essential to the long-term success of the Company. The Company's customer service center provides cellular and paging customers with 24-hour, toll- 3 free access to professional customer service representatives who have extensive training and information on equipment and service plan usage and are familiar with the Company's cellular service areas. The center also manages calls from the Company's sales representatives as well as from roamers traveling through the Company's cellular service area. The Company's customer service center management is available 24 hours a day to assist in resolving urgent customer issues as quickly as possible. The Company believes its strong emphasis on customer service contributes to its high customer retention rate. The customer service center is responsible for processing new service orders and service changes for existing customers. The customer service center also maintains customer records and manages the Company's collection process. During 1997, the customer service center will implement a quality control process that will monitor call center performance parameters and automatically balance customer service center resources to match call center load levels. Territory managers work closely with customer service center personnel to maintain high standards of service for their existing customers as well as to attract new customers. Company service center representatives attempt to contact every new customer within 30 days from the day they begin service to confirm customer satisfaction and elicit feedback. Customers are also contacted periodically to offer additional calling features such as voice mail, call waiting, and call forwarding and to recommend the best service pricing plan for the customer's usage levels. These contact programs enhance customer loyalty, maintain high retention, increase sales of additional features and generate customer referrals. SERVICE AREAS As of December 31, 1996, the Company provides cellular service to approximately 48,000 customers and paging service to approximately 7,000 customers. The Company's cellular service area including Wireless Alliance has a total population of approximately 1.1 million and covers approximately 75,000 square miles, including 240 miles of Interstate Highway 94 between Minneapolis-St. Paul and Fargo, North Dakota, 72 miles of Interstate Highway 35 between Minneapolis-St. Paul and Duluth, Minnesota, and 80 miles of Interstate Highway 29 between Grand Forks and Fargo, North Dakota including the Red River Valley. ROAMING MARKETS The Company carries traffic generated by customers of other cellular companies who are visiting or traveling through northern Minnesota. This traffic is profitable for the Company since the revenue is generated without any associated marketing, customer support or acquisition fees. While approximately 13% of cellular revenue nationally is from roaming traffic, the Company's percentage of roaming revenue is approximately 21%. The Company believes that roaming revenues will continue to increase as penetration in adjacent cellular markets continues to grow. SERVICE MARKS The Cellular 2000-Registered Trademark- name and related marks are owned by Cellular 2000, Inc. ("Cellular 2000"). The Company and other users of the service mark, all of which are cellular providers in Minnesota or South Dakota, are shareholders of Cellular 2000. The only business of Cellular 2000 is the licensing of its service mark to its shareholders. Each shareholder has entered into a license agreement with Cellular 2000 that allows the shareholder to use the "CELLULAR 2000" service mark for marketing within its cellular service area subject to certain restrictions. The license agreements are relatively restrictive and Cellular 2000 has extensive rights to control the use of the name. Cellular 2000 and its shareholders have entered into a buy-sell agreement that provides, in part, that if a Cellular 2000 shareholder no longer uses CELLULAR 2000 as the principal name under which it markets its cellular service, it must offer its shares of stock in Cellular 2000 for sale to Cellular 2000 and the other shareholders at the original cost. The Company does not pay any license fees for the use of the "CELLULAR 2000" service mark. The Company has registered the service mark "KEYPAGE", which it uses to identify and promote its paging operations. 4 NETWORK OPERATIONS CELLULAR The Company has constructed and maintains an integrated network of continuous cellular coverage throughout the Company's cellular service area so that a call can be handed off from one of the Company's cell sites to another as a customer travels. As a customer travels between cell sites, the antenna works with the switch to automatically monitor the signal strength of the call in progress. Call hand-off is automatic and virtually unnoticeable to customers. As of December 31, 1996, the Company's cellular network consisted of 72 cell sites. The Company continues to develop its cellular service area by building new cell sites in locations that increase capacity and improve coverage. The Company added eight cell sites during 1996 and plans to add 13 new cell sites in 1997. The additional cell sites will further expand capacity and will allow customers to use lower-powered or hand-held portable phones throughout the Company's service area. The switch used in the Company's cellular network is owned by Switch 2000 LLC ("Switch 2000"). All of the Switch 2000 switching equipment is digital and includes a Northern Telecom supernode cellular switch. The Company holds a 40.8% ownership interest in Switch 2000, with the balance of ownership held by other cellular providers operating in five Minnesota RSAs, one Minnesota MSA, and one South Dakota RSA. Ownership of the switch through Switch 2000 permits owners to share the costs of building and operating the switch. The Company currently purchases its switching services from Switch 2000 under a Cellular Switch User Agreement which is substantially the same for each of Switch 2000's owners/users (the "User Agreements"). According to the User Agreements, Switch 2000 provides cellular switching and related services to the Company, including: (i) landline telephone or microwave transmission between cell sites and the switch; (ii) interconnection for origination and termination of some landline traffic; and (iii) related maintenance. According to the User Agreements, the users collectively reimburse fixed costs, transport costs, and maintenance, operating, and administrative costs incurred by Switch 2000. The respective portions of the cost of providing the switching and transmission services under the User Agreements are based on a formula that incorporates ownership ratios, the number of cell sites, the distance between each cell site and the switch, and the number of radio channels used by each cell site over a given period of time. These costs are estimated annually, and each user is charged monthly based on the estimate, with annual accounting adjustments applied based on the actual costs incurred by Switch 2000. The Company plans to terminate the User Agreement and have its own switch installed and operational by the third quarter of 1997. DIGITAL CONVERSION The Company believes that over the next five years cellular telephones will gradually convert from analog to digital technology driven primarily by capacity constraints in the major metropolitan markets. The Company will begin to convert its network to digital TDMA technology in 1997. The Company began providing its own transport services between cell sites over its new digital microwave network in the first quarter of 1996 and the Company anticipates that a region-wide digital microwave network will be complete by the second quarter of 1997. This will result in the continued reduction in the purchase of transport services required from Switch 2000 in 1997 and will be used in conjunction with the Company's own digital switch in the third quarter of 1997 to further reduce transport and switching costs. Also, the Company plans to market excess network capacity beginning in the third quarter of 1997. PAGING The Company's paging network, as of December 31, 1996, consisted of 39 paging transmitters located throughout northern Minnesota and eastern North Dakota. The paging transmitters are connected to and controlled by a paging terminal, which is connected to the public telephone network. The paging transmitters use a transmit-only radio frequency licensed for a given coverage contour around the paging transmitter which allows messages to be broadcast to the paging customer. The Company, through its wholly-owned subsidiary, RCC Paging, Inc., holds licenses granted by the FCC, for paging and radiotelephone service on the radio common carrier frequency of 158.100 MHz. The Company's paging network complements the cellular service offerings. 5 PCS In the first half of 1997, the Company will begin construction of a GSM (Global System for Mobile communications) PCS network in the Wireless Alliance PCS Service Area, which is expected to be operational in the fourth quarter of 1997. COMPETITION The Company's current cellular competitors are Western Wireless Corporation ("Western Wireless") in northwestern Minnesota and PriCellular Corp. ("PriCellular") in the remainder of the Company's cellular service area. Both competitors offer service under the "Cellular One-Registered Trademark-" trade name and are members of the North American Cellular Network-TM-, a consortium of Cellular One-Registered Trademark- service providers located throughout the United States that reciprocally provide reduced roaming rates and automatic call delivery. As of December 31, 1996, the Company estimates that Western Wireless and PriCellular collectively had 53 cell sites, compared to the Company's 72 cell sites, within the operating area common to all three companies in Minnesota. The Company believes that Western Wireless and PriCellular compete against the Company primarily on the basis of price and have become significantly more aggressive during the past two years. AT&T Wireless, Inc. ("AT&T") is a significant shareholder of PriCellular and may provide significant financial and related support for PriCellular's network development and marketing efforts. AT&T provides cellular service in MSAs adjacent to the Company's cellular service area. Several companies operate relatively small paging networks in portions of the Company's service area. One competitor, American Paging, Inc. ("American Paging"), covers a large area within Minnesota and eastern North Dakota. The Company has entered into an agreement with American Paging to resell American Paging's 900 MHz paging service in the Company's service area as an additional paging option for the customers of the Company. This service is marketed under the trade name "KEYPAGE PLUS" and is sold in approximately 80% of the same areas in which the paging service of the Company, marketed under the trade name "KEYPAGE", is provided. Both KEYPAGE and KEYPAGE PLUS provide numeric display and alphanumeric display services. The services are differentiated by pricing and coverage areas. Other 900 MHz regional paging systems have been licensed within the Company's service area to other potential paging carriers, but the Company does not believe any of the networks of these license holders are operational. NEW TECHNOLOGIES The wireless telecommunications industry is experiencing significant technological change, as evidenced by the increasing pace of improvements in the capacity and quality of digital technology, shorter cycles for new products and enhancements, and changes in consumer preferences and expectations. The Company expects competition in the wireless communications industry to be intense and dynamic as a result of the entrance of new competitors and the development of new technologies, products, and services. SMR (Specialized Mobile Radio) and other private radio systems, such as those generally used by local dispatch, fleet services, and other communications services that have the technical capability to handle mobile telephone calls, including interconnection to the landline telephone network, may provide competition in certain markets. In addition, ESMR (Enhanced Specialized Mobile Radio) systems may compete with cellular service by providing higher quality digital communication technology, lower rates, enhanced privacy, and additional features such as built-in paging, particularly in metropolitan markets. The Company believes that PCS networks will be initially focused primarily in urban areas due to capital requirements and population coverage requirements. Narrowband PCS services typically are advanced paging and messaging services. Broadband PCS services will consist of wireless two-way telecommunications services for voice, data, and other transmissions employing digital micro-cellular technology. Many broadband PCS services are expected to compete with existing cellular systems. The FCC has issued licenses for both narrowband and broadband PCS services. Six broadband licenses were issued in each part of the Company's cellular service area. Under recent FCC rulings, license holders are allowed to disaggregate the spectrum covered by their license. Accordingly, the Company may face competition from additional providers of PCS services. 6 Continuing technological advances in telecommunications and FCC policies that encourage the development of new spectrum-based technologies make it impossible to predict the extent of future competition. The FCC has adopted rules that authorize the award of a "pioneer's preference" to companies that develop new spectrum-based communications technologies. Such a preference may encourage the development of new technologies that compete with cellular and paging service. In addition, the Omnibus Budget Reconciliation Act of 1993 requires, among other things, the allocation to commercial use of a portion of 200 MHz of the spectrum currently reserved for government use. It is possible that some portion of the spectrum that is reallocated will be used to create new land-mobile services or to expand existing land-mobile services. The Company is strategically positioned to compete with other communications technologies that now exist, such as conventional mobile telephone service, SMR and ESMR systems and PCS, and with cellular and paging resellers. Cellular service and paging will also compete more directly with traditional landline telephone service providers and with cable operators that are expanding into the offering of traditional communications services over their cable systems. The Company may face competition from new technologies not yet readily available such as low orbit satellite networks. The Company anticipates that market prices for wireless communications services will continue to decline in the future based upon increased competition and cost reductions. The Company will compete to attract and retain customers principally on the basis of service enhancements and features, quality and customer service, the size and location of its service areas and price. The Company's ability to compete successfully is dependent, in part, on its ability to anticipate and respond to various competitive factors affecting the industry. The Company's marketing and sales organization includes a group that carefully monitors and analyzes competitive products and service offerings, changes in consumer preferences, changes in demographic trends and economic conditions and pricing strategies by competitors that could adversely affect the Company's profitability or present strategic opportunities. REGULATION The Company is subject to extensive regulation as a provider of cellular and paging services. The FCC regulates the construction, operation, and acquisition of cellular and paging systems in the United States pursuant to the Communications Act of 1934, as amended (the "Communications Act"), and the rules, regulations, and policies promulgated by the FCC under the Communications Act. A cellular system operates under a license granted by the FCC within a market area (either an MSA or RSA) defined by the FCC. Each market is to be served by two competing licensees. The licenses are transferable, subject to FCC policies limiting a company that has an ownership interest in a licensee in one market from possessing an ownership interest in the other licensee in the same market. Paging licenses are granted for a relatively small, specific geographic area at a particular frequency. Near the conclusion of the initial term of a cellular license, licensees must file applications for renewal of licenses to obtain authority to operate for up to an additional ten-year term. Applications for license renewal may be denied if the FCC determines that the grant of a license would not serve the public interest, convenience, and necessity. The FCC also may revoke a license prior to the end of its term in extraordinary circumstances. In addition, at license renewal time, other parties may file competing applications for the authorization. The FCC has adopted specific standards stating that a renewal expectancy will be awarded to a cellular licensee that (i) has provided substantial service during its license term and (ii) has substantially complied with applicable FCC rules and policies and the Communications Act. If the FCC awards the cellular licensee a renewal expectancy, its license renewal application is granted and the competing applications are dismissed. The Company's cellular licenses expire on October 1, 2000. The Communications Act and FCC rules require the FCC's prior approval of the assignment or transfer of control of a cellular license. Any acquisition by the Company of an interest in any additional cellular service area may also require the prior approval of state or local regulatory authorities having jurisdiction over the cellular industry. The Communications Act prohibits the holding of a common carrier license by a corporation of which any officer or director is a non-U.S. person or any entity of which more than 20% of the capital stock is owned directly or beneficially by aliens. Failure to comply with these requirements may result in an FCC order to the Company requiring divestiture of alien ownership to bring the Company into compliance. In addition, fines, denial of renewal or revocation of the license are possible. The Company's Articles of Incorporation permit the redemption of the Company's Common Stock from shareholders when necessary to protect the Company's regulatory licenses. 7 Cellular service providers also must satisfy a variety of FCC requirements relating to technical and reporting matters, including coordination of proposed frequency usage with adjacent cellular systems in order to avoid electrical interference between adjacent systems. The FCC also regulates cellular service resale practices and the terms under which certain ancillary services may be provided through cellular facilities. The Communications Act preempts state and local regulation of the entry of, or the rates charged by, any commercial mobile service or any private mobile service, which includes cellular service. The State of Minnesota does not currently regulate the rates for any commercial mobile service, but could petition the FCC for such authority in the future. Cellular systems are subject to certain Federal Aviation Administration regulations respecting the location, lighting, and construction of cellular transmitter towers and antennas and may be subject to regulation under the National Environmental Policy Act and the environmental regulations of the FCC. The siting and construction of cellular transmitter towers, antennas and equipment shelters are often subject to state or local zoning, land use and other regulation. Such regulation may include zoning, environmental and building permit approvals or other state or local certification. The Company plans to use a common carrier point-to-point digital microwave network to connect most of its cell sites and to link them to the main switch. That facility will be separately licensed by the FCC and subject to regulation as to technical parameters and service. The Company's paging operations are also subject to regulation by the FCC. The FCC issues licenses for paging operations which expire either five or ten years from issuance and are subject to FCC approval for renewal. The Company holds 13 FCC licenses for paging and radiotelephone service. Applications for an additional six licenses have been approved by the FCC on a conditional basis and will be issued on a final basis after certification by the Company that the transmitter sites are ready for operation. The Company's paging licenses expire between July 1, 1998 and April 1, 1999. Renewals are generally granted to the license holder if it is in compliance with FCC regulations. Although the Company is unaware of any circumstances that would prevent the approval of any future renewal application, no assurance can be given that the Company's licenses will be renewed by the FCC. Moreover, although revocation and involuntary modification of licenses are extraordinary measures, the FCC has the authority to restrict the operation of a licensed facility or revoke or modify licenses. The Company's paging licenses have never been revoked or modified. States have limited regulatory power over paging operations. The Telecommunications Act of 1996 (the "Act"), which modifies and amends the Communications Act, covers virtually every element of communications. Congress's main objective was to promote competition and reduce regulation in order to secure lower prices and higher quality services for telecommunications customers and to encourage the rapid deployment of new telecommunications technologies. A substantial portion of the Act is aimed at removing restrictions that prevent local and long distance service providers from offering competing services in the same territory and redefining compensation arrangements between cellular carriers such as the Company, interexchange carriers ("IXCs"), local exchange carriers ("LECs"), and independent local exchange carriers ("ILECs"). The impact of the Act on the Company will be to reduce costs paid by the Company to interconnect and terminate calls on other IXC, LEC, and ILEC networks. The Act requires such carriers to base termination charges to the Company on cost and to compensate the Company for calls that they terminate. Legal challenges to the FCC's proceeding to implement those portions of the Act dealing with interconnection (Interconnection Order) have resulted in a U.S. Court of Appeals stay of part of the Interconnection Order's pricing rules. The Court recently lifted the stay with respect to the rules that govern the compensation received by LECs and wireless carriers for transporting and terminating each other's traffic. In addition, the Act mandates cellular carriers such as the Company to pay into the Universal Service Fund ("USF"). The purpose of the USF is to ensure basic telephone services are available, reasonable and affordable for all citizens. The USF will promote access to high capacity telecommunications services for schools, libraries, and rural health providers. The FCC is in the process of promulgating rules relating to the USF; therefore, the impact on the Company is currently unknown. States may create their own funds imposing charges only on intrastate service to supplement the resources available from the USF. State governments will be responsible for determining who will be eligible to receive such federal or state subsidies. Most states have not finalized the rules, but it is likely that the Company will be subject to additional state regulation should it elect to withdraw from the fund. 8 EMPLOYEES As of December 31, 1996 the Company had 164 employees, including 63 in sales and marketing, 43 in customer service, 28 in network and systems operations, 18 in administration and 12 in finance and accounting. Nineteen of the employees were part-time. In addition, the Company has approximately 130 independent sales agents. None of the Company's employees is represented by a labor organization, and the Company's management considers its employee relations to be good. ITEM 2. PROPERTIES In December 1996, the Company relocated its corporate headquarters to its new corporate office building located at 3905 Dakota Street, Alexandria, Minnesota 56308. The new corporate headquarters, which is owned by the Company, is a two-story, 50,000-square-foot facility with land available for a 24,000-square-foot expansion. As of December 31, 1996, the Company had 72 cell sites, of which 36 sites are leased, either for tower space or for land, and 36 sites are owned by the Company. The Company anticipates that additional sites will continue to be acquired primarily by outright purchase. ITEM 3. LEGAL PROCEEDINGS Except for claims asserted against the Company in the ordinary course of its business, the outcome of which would not materially adversely affect the Company's business, there are no legal proceedings pending or, to the best of the Company's knowledge, threatened against the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS No matters were submitted to a vote of security-holders during the fourth quarter of the fiscal year covered by this report. EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth certain information with regard to each of the executive officers of the Company: NAME AGE POSITION Richard P. Ekstrand 47 President, Chief Executive Officer and Director Scott G. Donlea 37 Vice President of Sales and Marketing Wesley E. Schultz 40 Vice President of Finance and Chief Financial Officer Richard P. Ekstrand has served as President, Chief Executive Officer and a director of the Company since its inception. Mr. Ekstrand became a full-time employee of the Company in January 1993. From June 1991 to January 1993, his services had been provided through a management agreement between the Company and R.P. Ekstrand Management Services Corp., a corporation wholly owned by Mr. Ekstrand. Since 1984, Mr. Ekstrand has also served as Vice President and a director of Lowry Telephone Co., Inc., a local telephone exchange company and a shareholder of the Company, of which Mr. Ekstrand is the sole shareholder. Mr. Ekstrand currently serves as chair of the Board of Governors of Switch 2000 LLC and a director of Cellular 2000, Inc. Mr. Ekstrand is past president and currently a director of the Minnesota Telephone Association, past president of the Association of Minnesota Telephone Utilities and currently a director of the Rural Cellular Association and of the Cellular Telephone Industry Association. Scott G. Donlea joined RCC in 1992 as Manager of Market Operations and has served as Vice President of Sales and Marketing since August 1995. From 1990 to 1992, Mr. Donlea was regional manager for marketing and sales in Iowa and South Dakota for CommNet Cellular, Inc., and from 1988 to 1990 he served as branch manager for US 9 WEST Cellular, Inc. Mr. Donlea is chairperson for the Rural Cellular Association's business and marketing committee. Wesley E. Schultz joined RCC in May 1996 as Vice President of Finance and Chief Financial Officer. Prior to joining the Company, Mr. Schultz had served as acting Chief Financial Officer of Spanlink Communications, Inc. since February 1996, as Chief Financial Officer of Nicollet Process Engineering, Inc. from March 1995 through October 1995, as Chief Financial Officer of Data Systems & Management, Inc. from November 1994 through March 1995, and as Vice President, Finance & Administration and Chief Financial Officer of Serving Software, Inc. from December 1991 through October 1994. Mr. Schultz is a CPA and served for 3 years as an auditor with Deloitte and Touche, LLP. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Class A Common Stock began trading on The Nasdaq National Market on February 8, 1996, under the symbol RCCC. The following table indicates the high and low closing price for each quarter of the 1996 fiscal year, beginning with such date: 1996 HIGH LOW -------- --------- First Quarter $12 1/4 $10 Second Quarter 13 1/2 11 5/32 Third Quarter 12 3/4 9 1/2 Fourth Quarter 10 1/2 8 3/4 As of March 14, 1997, there were approximately 85 holders of record of the Company's Class A Common Stock and approximately 34 holders of record of the Company's Class B Common Stock. The Company has never paid dividends on its Common Stock. The Company currently intends to retain all future earnings, if any, for the operation and expansion of its business and does not expect to pay any cash dividends on its Common Stock in the foreseeable future. 10 ITEM 6. SELECTED FINANCIAL DATA The financial information set forth below should be read in conjunction with "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and related notes thereto included in this Form 10-K. (in thousands, except per share and other cellular operating data)
YEARS ENDED DECEMBER 31, ------------------------------------------------------------------- 1996 1995 1994 1993 1992 ----------- ----------- ---------- ---------- ---------- STATEMENT OF OPERATIONS DATA: Revenues: Service revenues . . . . . . . . . . $ 23,120 $ 14,289 $ 9,784 $ 4,690 $ 2,578 Roamer revenues. . . . . . . . . . . 6,414 4,562 3,897 3,146 2,823 Equipment sales. . . . . . . . . . . 927 1,476 2,008 271 327 ----------- ----------- ---------- ---------- ---------- Total revenues . . . . . . . . . . 30,461 20,327 15,689 8,107 5,728 ----------- ----------- ---------- ---------- ---------- Operating expenses: Network costs. . . . . . . . . . . . 6,731 4,974 3,293 2,586 2,498 Costs of equipment sales . . . . . . 1,375 1,914 2,214 372 379 Selling, general and administrative. 13,576 7,700 6,570 4,949 3,538 Depreciation and amortization. . . . 5,539 3,249 2,426 1,687 977 ----------- ----------- ---------- ---------- ---------- Total operating expenses . . . . . 27,221 17,837 14,503 9,594 7,392 ----------- ----------- ---------- ---------- ---------- Operating income (loss). . . . . . . . 3,240 2,490 1,186 (1,487) (1,664) ----------- ----------- ---------- ---------- ---------- Other income (expense): Interest expense . . . . . . . . . . (281) (1,365) (1,195) (622) (316) Interest and dividend income . . . . 335 277 170 68 16 Equity in earnings (losses) of unconsolidated subsidiaries . . . . 52 (37) (37) (175) 159 Minority interest. . . . . . . . . . 331 - - - - ----------- ----------- ---------- ---------- ---------- Other income (expense), net. . . . 437 (1,125) (1,062) (729) (141) ----------- ----------- ---------- ---------- ---------- Income (loss) before income taxes. . . 3,677 1,365 124 (2,216) (1,805) Income tax provision (benefit) . . . . 200 575 (486) 4 - ----------- ----------- ---------- ---------- ---------- Net income (loss). . . . . . . . . . . $ 3,477 $ 790 $ 610 $ (2,220) $ (1,805) ----------- ----------- ---------- ---------- ---------- ----------- ----------- ---------- ---------- ---------- Net income (loss) per share. . . . . . $ 0.41 $ 0.13 $ 0.11 $ (0.42) $ (0.37) ----------- ----------- ---------- ---------- ---------- ----------- ----------- ---------- ---------- ---------- Weighted average common shares outstanding. . . . . . . . . . . . 8,509 5,983 5,522 5,261 4,943 YEARS ENDED DECEMBER 31, ------------------------------------------------------------------- 1996 1995 1994 1993 1992 ----------- ----------- ---------- ---------- ---------- Other Operating Data: Net capital expenditures . . . . . . $ 23,653 $ 10,011 $ 6,933 $ 2,750 $ 3,323 EBITDA(1). . . . . . . . . . . . . . $ 8,779 $ 5,739 $ 3,612 $ 200 $ (687) Other Cellular Operating Data:(2) Customers at year-end. . . . . . . . 45,094 26,764 17,402 9,352 3,960 Penetration. . . . . . . . . . . . . 7.5% 4.5% 2.9% 1.6% 0.7% Average monthly revenue per cellular customer(3) . . . . . . . $ 66 $ 69 $ 84 $ 98 $ 155 Average monthly retention rate(4). . 98.7% 99.0% 99.2% 99.0% 98.7% Cell sites at year-end . . . . . . . 72 64 55 36 28
11
DECEMBER 31, ------------------------------------------------------------------- 1996 1995 1994 1993 1992 ----------- ----------- ---------- ---------- ---------- Balance Sheet Data: Working capital (deficit). . . . . . $ (10,572) $ (4,415) $ 80 $ (1,230) $ 55 Net property and equipment . . . . . 41,935 23,517 16,479 11,014 9,750 Total assets . . . . . . . . . . . . 60,590 30,138 22,439 14,074 12,219 Total debt . . . . . . . . . . . . . 8,492 19,123 15,117 10,953 7,794 Total shareholders' equity . . . . . 34,996 5,458 4,668 760 2,980 - --------------------
(1) EBITDA represents earnings before interest, taxes, depreciation and amortization. EBITDA is not intended to be a performance measure that should be regarded as an alternative for other performance measures and should not be considered in isolation. EBITDA is provided because it is a measure commonly used in the cellular industry. EBITDA is not a measurement of financial performance under generally accepted accounting principles and does not reflect all expenses of doing business (e.g., interest expense, depreciation). Accordingly, EBITDA should not be considered an alternative to net income as a measure of performance or to cash flows as a measure of liquidity. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations." (2) Other Cellular Operating Data excludes Wireless Alliance. (3) Determined for each period by dividing the sum of access, airtime, roaming, long distance, features, connection, disconnection, and other revenues for such period by average customers for such period (beginning customers plus ending customers, divided by two), and dividing that result by the number of months in such period. (4) Determined for each period by dividing total customers discontinuing service during such period by the average customers for such period (beginning customers plus ending customers, divided by two), dividing that result by the number of months in the period and subtracting from one. 12 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Company's principal operating strategy is to increase service revenues and profitability by continuing to build and expand its cellular and paging customer base and to maximize the roaming potential of the Company's cellular service area. As of December 31, 1996, the Company's cellular customers totaled approximately 48,000, including Wireless Alliance, while the Company's paging customers totaled approximately 7,000. The cellular industry has seen average revenue per customer decline during recent years. The Company believes that this downward trend reflects new, lower-usage customers, who use cellular service for personal convenience, security or as an alternative communication resource backup for their traditional landline telephone service. Although the Company also has experienced a decline in average monthly revenues per customer to $66 in 1996 from $69 in 1995, the Company has introduced new service features to encourage higher usage from its customers in an effort to mitigate the effects of this trend. The Company emphasizes customer support in an effort to maximize its customer retention. For the year ended December 31, 1996, the Company experienced an average monthly retention rate of 98.7%, as compared to an industry average monthly retention rate of 98.3%, as reported in the Cellular Telephone Industry Association (CTIA) Data Survey dated June 30, 1996. Customer retention is expected to become a greater challenge as the Company's customer base grows and competition increases. However, the Company believes that it will continue to maintain relatively high retention rates by offering communication service packages and value-added features anticipating customer needs and by providing diligent and knowledgeable customer service. The Company's revenues consist of charges to customers for cellular and paging service, roaming revenues and equipment sales. Service revenues include monthly access charges, charges for airtime used in excess of the time included in the service package purchased, long distance charges derived from calls placed by the Company's customers, cellular and paging equipment lease revenues, and other charges, including activation and feature charges for such features as voice mail, call waiting, and call forwarding. The Company has substantially increased its service revenues over the past three years primarily by increasing the number of its cellular customers. The Company believes that its success in increasing its customer base results from a number of factors, including its customer support initiative and innovative packaging of services and features. In 1996, the Company's cellular customers increased by 68.5%. The Company plans to continue aggressively marketing its services and anticipates that the number of customers will continue to increase, but at a rate more in line with that experienced by the cellular industry. Roaming revenues consist of airtime, long distance and service fees charged for providing service to customers of other cellular systems that place or receive a call within the Company's cellular service area. The per minute rate paid by a roamer, or the intercarrier exchange rate, is determined by agreement between the Company and the roamer's cellular carrier. The Company has reciprocal agreements with cellular licensees in adjacent cellular service areas that allow the Company to provide service to its customers calling from or receiving calls in these territories at favorable rates. The Company believes that roaming revenues will continue to increase as a result of an increase in both the number of roaming customers and roaming minutes of use as the cellular industry matures. The Company believes these increases will more than offset an expected decline in intercarrier exchange rates. Equipment sales consist of cellular and paging equipment and accessory sales to customers. From time to time the Company has provided subsidies on such equipment to attract new customers, but these subsidies have not been substantial. However, as the Company's market becomes more competitive, the Company expects that discounts or subsidies relating to sales of cellular and paging equipment to the Company's customers will increase. In September 1995, the Company implemented a promotional program for renting equipment to customers in order to reduce customers' perception that the cost of initiating cellular service is prohibitive. As a result of this new rental program, the Company's revenues from equipment sales declined in 1996, while rental revenues, which are recognized as part of service revenues, increased. 13 During 1996, the Company continued to implement its a new agent compensation program and expanded its distribution channel to include direct sales employees and additional distribution through major retail outlets. Under the new agent compensation program, a lower commission is paid upon initial sale followed by monthly account maintenance payments. It is anticipated that the cost of sales through additional distribution channels will be lower than the agent compensation. Such expenses are expected to increase in subsequent periods as additional account maintenance payments are made under the new agent compensation program. During 1996, the Company continued construction of a digital microwave network. As a result of this investment during 1996, the Company's network costs as a percentage of total revenues declined because transport costs were lower than the Company anticipated. The increased capacity provided by the digital microwave network will also be available to lease to business customers. RESULTS OF OPERATIONS The following table presents certain consolidated statements of operations data as a percentage of total revenues for the periods indicated: YEARS ENDED DECEMBER 31, ------------------------------- 1996 1995 1994 ------- ------- ------- Revenues: Service revenues . . . . . . . . . . 75.9% 70.3% 62.4% Roamer revenues. . . . . . . . . . . 21.1 22.4 24.8 Equipment sales. . . . . . . . . . . 3.0 7.3 12.8 ------- ------- ------- Total revenues. . . . . . . . . . 100.0 100.0 100.0 ------- ------- ------- Operating expenses: Network costs. . . . . . . . . . . . 22.1 24.5 21.0 Cost of equipment sales. . . . . . . 4.5 9.4 14.1 Selling, general, and administrative . . . . . . . . . 44.6 37.9 41.9 Depreciation and amortization. . . . 18.2 16.0 15.4 ------- ------- ------- Total operating expenses. . . . . 89.4 87.8 92.4 ------- ------- ------- Operating income . . . . . . . . . . 10.6 12.2 7.6 ------- ------- ------- Other income (expense): Interest expense . . . . . . . . . . (0.9) (6.7) (7.6) Interest and dividend income . . . . 1.1 1.4 1.0 Equity in earnings (losses) of unconsolidated subsidiaries . . . . 0.2 (0.2) (0.2) Minority interest. . . . . . . . . . 1.1 - - ------- ------- ------- Other income (expense), net . . . 1.5 (5.5) (6.8) ------- ------- ------- Income before income taxes . . . . . . 12.1 6.7 0.8 Income tax provision (benefit) . . . . 0.7 2.8 (3.1) ------- ------- ------- Net income . . . . . . . . . . . . . . 11.4% 3.9% 3.9% ------- ------- ------- ------- ------- ------- YEARS ENDED DECEMBER 31, 1996 AND 1995 REVENUES Service revenues for 1996 increased 61.8% to $23,119,691 from $14,289,434 for 1995, resulting primarily from a 68.5% increase in the number of cellular customers, partially offset by a decrease of 4.1% in the corresponding average revenue per customer. The Company has achieved this growth through the implementation of customer sales and service strategies and by adherence to network service quality controls. This growth resulted in a market penetration rate of 7.5% at December 31, 1996, up significantly from 4.5% at December 31, 1995. Service revenues include paging revenues, which increased 69.6% to $836,177 for 1996 from $492,955 for 1995. 14 Roamer revenues for 1996 increased 40.6% to $6,413,524 from $4,561,760 for 1995. This increase was primarily due to a 138.8% increase in the number of roamer minutes resulting in part from expanded coverage provided by eight additional cell sites and overall increased usage of the Company's cellular service by a greater number of roamers in the Company's cellular service area. While total roamer revenues increased, the average revenue per roamer declined due in part to reductions in intercarrier exchange rates under reciprocal agreements with certain surrounding cellular carriers. Equipment revenues for 1996 decreased 37.2% from 1995. This decrease reflects the growing popularity of the Company's equipment rental program among new customers. The Company expects that equipment sales revenue will continue to decrease while rental revenues will continue to increase. OPERATING EXPENSES Network costs for 1996 increased 35.3% to $6,731,130 from $4,973,598 for 1995, while as a percentage of total revenues, declined to 22.1% from 24.5%. The increased expenses reflect additional operating expenses from new cell sites that were added during 1995 and 1996 and higher total variable costs resulting from increased network usage as a result of customer demand, offset by economy of scale efficiencies. Network expenses include switching and transport expenses and the expenses associated with the maintenance and operation of the Company's cellular and paging network facilities. Selling, general, and administrative ("SG&A") expenses for 1996 increased as a percentage of total revenues to 44.6% from 37.9% for 1995 and to $13,575,347 from $7,699,964. The increases were due primarily to an increase in the number and amount of commissions paid as a result of the Company's marketing and promotional strategies, additional employees and incremental wage and benefit increases. SG&A includes salaries, benefits, and operating expenses such as marketing, commissions, customer support, accounting, administration, and billing. Although SG&A increased due to strong customer growth, the average acquisition cost per gross cellular customer decreased by 22.4% to $307 for 1996 from $395 for 1995 due primarily to customer growth and the decline in equipment subsidies. Depreciation and amortization expenses for 1996 increased 70.5% to $5,539,067 from $3,249,313 for 1995. The increases were primarily a result of the continued increase in investments made by the Company in network facilities and rental equipment placed into service during 1996. OPERATING INCOME Operating income for 1996 was $3,239,819 with an operating margin of 10.6% compared to operating income of $2,490,371 with an operating margin of 12.2% in 1995. The increases in operating income were due primarily to the increases in total revenues for the respective periods and lower acquisition costs per gross cellular customer. The lower operating margin in 1996 was a result of higher SG&A expenses. OTHER INCOME (EXPENSE) Interest expense for 1996 decreased 79.5% to $280,146 from $1,365,852 for 1995 as a result of the repayment of debt with proceeds from the Company's initial public offering in February 1996. The Company reflected the minority interest's portion of the net loss of Wireless Alliance as income during 1996. NET INCOME Income before income taxes for 1996 increased 169.4% to $3,676,934 from $1,364,850 in 1995. The Company's effective tax rate is lower than the statutory rate because of the utilization of alternative minimum tax and net operating loss carryforwards. The provision for income taxes for the year ended December 31, 1996 of $200,000 results from the Company's providing for federal and state alternative minimum tax. Net income for 1996 increased 340.2% to $3,476,934 from $789,847 in 1995. The increase in net income was due primarily to an increase in total revenues and a decrease in interest expense as a result of the repayment of debt. 15 YEARS ENDED DECEMBER 31, 1995 AND 1994 REVENUES Service revenues for 1995 increased 46.1% to $14,289,434 from $9,783,821 for 1994, resulting primarily from a 53.8% increase over the prior year in the number of cellular customers. The service revenues for the year ended December 31, 1995 include $492,955 for paging services. Roamer revenues for 1995 increased 17.1% to $4,561,760 from $3,897,207 for 1994. This increase was primarily due to a 34.9% increase in the number of roaming minutes, resulting in part from expanded coverage provided by nine additional cell sites and overall increased usage of the Company's cellular service by a greater number of roamers in the Company's cellular service area. While total roamer revenues increased, average revenue per roamer declined due in part to reciprocal agreements with certain surrounding carriers in which the Company discounted its intercarrier exchange rates. Equipment sales for 1995 decreased 26.5% to $1,475,716 from $2,007,897 for 1994. This decrease primarily reflects the Company's shift toward leasing equipment to cellular customers. As the Company continues to lease equipment to cellular customers, the Company expects that equipment sales will continue to decline. OPERATING EXPENSES Network costs for 1995 increased as a percentage of total revenues to 24.5% from 21.0% for 1994. These increases reflect additional operating costs from new cell sites that were necessary to fulfill the Company's cellular geographic service area requirements. Cost of equipment sales for 1995 decreased as a percentage of total revenues to 9.4% from 14.1% for 1994 and decreased by 13.6% to $1,913,664 from $2,213,702. The equipment sales negative margin increased to 29.7% for 1995 from negative 10.2% for 1994 as a result of the Company's cellular equipment leasing programs. SG&A expenses decreased for 1995 as a percentage of total revenues to 37.9% from 41.9% for 1994, due to the rapid growth in revenues compared to the relatively fixed nature of certain general and administrative expenses. SG&A expenses for 1995 increased 17.2% to $7,699,964 from $6,569,725 for 1994. Increases in SG&A expenses reflect additional employees as well as incremental wage and benefit increases that were partially offset by lower commission costs resulting from the Company's new agent compensation program. Depreciation and amortization expenses for 1995 increased 34.0% to $3,249,313 from $2,425,820 for 1994, resulting primarily from increased investment in the Company's network. OPERATING INCOME Operating income for 1995 totaled $2,490,371 and operating margin increased to 12.2% as a result of a 29.6% increase in total revenues and a decrease in SG&A expenses as a percentage of total revenues. OTHER INCOME (EXPENSE) Interest expense for 1995 increased to $1,365,852 from $1,194,884 for 1994, reflecting higher debt levels required to finance network investments partially offset by lower average interest rates. Interest and dividend income increased to $277,352 for the year ended December 31, 1995 from $170,221 for the prior year, reflecting higher interest income on higher average cash balances and increased dividend income from restricted investments, which as of December 31, 1995 totaled $709,955 and consisted of stock in the St. Paul Bank for Cooperatives, the Company's principal lender. This investment is required by the terms of the Company's credit facility agreement with the lender. 16 NET INCOME Income before income taxes for 1995 increased to $1,364,850 for the year ended December 31, 1995 from $124,734 in 1995. The provision for taxes of $575,003 for 1995 results from the Company's providing for federal and state income taxes at its effective income tax rate. Net income for 1995 increased to $789,847 from $610,334 for 1994. LIQUIDITY AND CAPITAL RESOURCES The Company's primary liquidity requirements are for operating expenses, acquisitions, and for the expansion of network services and facilities to support customer growth. As of December 31, 1996, the Company had 72 cell sites and 39 paging transmitters. Net capital expenditures for the Company for 1996 were $23,653,427. The Company will continue to construct additional cell sites and purchase cellular equipment in order to increase capacity as the number of customers and usage volumes increase. Specific capital requirements of the Company are based on the property, equipment, and network facilities requirements associated with the Company's expansion plans and rate of customer growth. The principal use of cash in fiscal year 1996 was for the purchase of property and equipment for the Company's cellular network and construction of the digital microwave network, which became operational in the second quarter of 1996, and equipment purchased for the Company's cellular and paging equipment rental program. The Company completed construction of its new corporate office headquarters in Alexandria, Minnesota, in the fourth quarter of 1996. The total cost of the new building was approximately $3.0 million and was funded through additional borrowings under the line-of-credit agreement. In February 1996, the Company completed an Offering of 2,869,863 shares of Class A Common Stock and received proceeds of $26,061,913, net of offering expenses. The Company used approximately $20,484,759 of the net proceeds to repay substantially all outstanding debt. The Company has used the remaining net proceeds of the Offering, together with the funds available under its line-of-credit agreement, to fund planned capital expenditures and operating expenses. The Company expects to incur capital expenditures in 1997 of approximately $36 million primarily for additional cell sites, a digital switch, PCS networks, and cellular and paging equipment for renting to customers. The Company has funded network expansion with a combination of borrowings under a credit facility with the St. Paul Bank for Cooperatives or from other institutions, use of cash provided by operating activities, and net proceeds from the sale of the Company's Common Stock. The Company is currently negotiating with a commercial lending institution for a new revolving credit facility. The purpose of the facility will be (i) to acquire the Unity Cellular Systems, Inc. operations of Intercel, Inc., (ii) to refinance outstanding amounts under the Company's existing loan facility, (iii) for Wireless Alliance PCS investment requirements, and (iv) for other general corporate purposes. 17 SEASONALITY The Company experiences seasonal fluctuations in revenues and operating income (loss). The Company's average monthly revenue per cellular customer has historically increased during the second and third calendar quarters. This increase reflects greater usage by the Company's cellular customers and roamers who travel in the Company's cellular service area for weekend and vacation recreation or work in seasonal industries, such as agriculture and construction. Because the Company's cellular service area includes many seasonal recreational areas, the Company expects that roaming revenues will continue to fluctuate seasonally more than service revenues. Certain unaudited quarterly results for 1996 and 1995 are set forth below (in thousands, except average monthly revenue per cellular customer):
1996 QUARTER ENDED 1995 QUARTER ENDED ------------------------------------ ------------------------------------ Dec 31 Sep 30 June 30 Mar 31 Dec 31 Sep 30 June 30 Mar 31 ------ ------ ------- ------ ------ ------ ------- ------ Total revenues . . . . . . . . . $8,287 $9,046 $7,446 $5,682 $5,466 $6,030 $4,940 $3,891 Operating income (loss). . . . . . 242 2,354 896 (252) (102) 1,533 770 289 EBITDA(1). . . . . . . . . . . . . 2,001 3,854 2,206 718 774 2398 1532 1035 Average monthly revenue per cellular customer. . . . $62 $77 $68 $59 $66 $86 $73 $63 - ---------------------
(1) See footnote (1) on page 12 under "Item 6. Selected Financial Data" for a description and discussion of such measurement. FORWARD-LOOKING INFORMATION Forward-looking statements herein are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. There are certain important factors that could cause results to differ materially from those anticipated by some of the statements made herein. Investors are cautioned that all forward-looking statements involve risks and uncertainties. Such factors include but are not limited to: economic conditions, customer growth rates and the rate at which customer acquisition costs are recovered, higher than planned operating expenses and capital expenditures, competition from other cellular operators and the financial uncertainties associated with managing the Company's market expansion through the Wireless Alliance joint venture and the Unity acquisition. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See Consolidated Financial Statements and Notes thereto commencing on Page F-1. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Information required by this item is set forth in the Proxy Statement under the heading "Ratification of Appointment of Independent Auditors" and is incorporated herein by reference. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information regarding directors of the Company is set forth in the Proxy Statement under the heading "Election of Directors" and is incorporated herein by reference. The information regarding executive officers of the Company is contained in Part I of this Form 10-K. 18 ITEM 11. EXECUTIVE COMPENSATION Information required by this item is set forth in the Proxy Statement under the headings "Election of Directors - Compensation Committee Interlocks and Insider Participation in Compensation Decisions" and "Executive Compensation" and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information required by this item is set forth in the Proxy Statement under the heading "Common Stock Ownership" and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information required by this item is set forth in the Proxy Statement under the heading "Certain Transactions" and is incorporated herein by reference. 19 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K Page Number in this (a) (1) CONSOLIDATED FINANCIAL STATEMENTS Form 10-K --------------------------------- --------- Report of Independent Public Accountants F-1 Consolidated Balance Sheets as of December 31, 1996 and 1995 F-2 Consolidated Statements of Operations for the Years Ended December 31, 1996, 1995 and 1994 F-4 Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 1996, 1995 and 1994 F-5 Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, 1995 and 1994 F-6 Notes to Consolidated Financial Statements F-7 (2) CONSOLIDATED FINANCIAL STATEMENT SCHEDULE ----------------------------------------- The following financial statement schedule is filed as part of this Form 10-K: Report of Independent Public Accountants S-1 Schedule II - Valuation and Qualifying Accounts S-2 All schedules not included are omitted either because they are not applicable or because the information required therein is included in Notes to Consolidated Financial Statements. (3) EXHIBITS -------- See Exhibit Index on page 39. (b) REPORTS ON FORM 8-K None (c) EXHIBITS See Exhibit Index on page 39. (d) OTHER FINANCIAL STATEMENTS Not applicable. 20 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Rural Cellular Corporation /s/ Richard P. Ekstrand ------------------------------------- RICHARD P. EKSTRAND PRESIDENT AND CHIEF EXECUTIVE OFFICER Date: March 20, 1996 Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed by the following persons in the capacities and on the date indicated. SIGNATURE TITLE DATE - --------- ----- ---- /s/ Richard P. Ekstrand President and - -------------------------- Chief Executive Officer March 20, 1997 Richard P. Ekstrand (Principal Executive Officer) and Director /s/ Wesley E. Schultz Vice President of Finance and - -------------------------- Chief Financial Officer March 20, 1997 Wesley E. Schultz (Principal Financial and Accounting Officer) /s/ George W. Wikstrom Jr. Director March 20, 1997 - -------------------------- George W. Wikstrom Jr. /s/ Don C. Swenson Director March 20, 1997 - -------------------------- Don C. Swenson /s/ Nicholas R. Prom Director March 20, 1997 - -------------------------- Nicholas R. Prom /s/ Robert K. Eddy Director March 20, 1997 - -------------------------- Robert K. Eddy /s/ Jeffrey S. Gilbert Director March 20, 1997 - -------------------------- Jeffrey S. Gilbert /s/ Marvin C. Nicolai Director March 20, 1997 - -------------------------- Marvin C. Nicolai /s/ George M. Revering Director March 20, 1997 - -------------------------- George M. Revering 21 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Rural Cellular Corporation: We have audited the accompanying consolidated balance sheets of Rural Cellular Corporation (a Minnesota corporation) and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Rural Cellular Corporation and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Minneapolis, Minnesota, February 11, 1997 F-1 RURAL CELLULAR CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS DECEMBER 31, -------------------------- 1996 1995 ----------- ----------- CURRENT ASSETS: Cash . . . . . . . . . . . . . . . . . . . $ 237,499 $ 125,137 Accounts receivable, less allowance of $303,000 and $163,000 . . . . . . . 6,323,637 3,019,720 Inventories. . . . . . . . . . . . . . . 1,309,862 628,016 Other current assets . . . . . . . . . . . 984,097 95,693 ----------- ----------- Total current assets . . . . . . . . . 8,855,095 3,868,566 ----------- ----------- PROPERTY AND EQUIPMENT: Land . . . . . . . . . . . . . . . . . . . 1,233,007 1,075,202 Buildings and towers . . . . . . . . . . 13,680,928 8,721,385 Equipment. . . . . . . . . . . . . . . . . 35,650,325 16,066,315 Furniture and fixtures . . . . . . . . . . 3,626,247 2,193,718 Assets under construction. . . . . . . . 1,241,124 3,721,584 Less - accumulated depreciation. . . . . . (13,496,134) (8,261,125) ----------- ----------- Net property and equipment . . . . . . 41,935,497 23,517,079 ----------- ----------- INVESTMENTS AND OTHER ASSETS: Licenses, less accumulated amortization of $18,000 and $9,000 . . . 6,710,419 266,111 Investments in unconsolidated affiliates . 1,442,569 1,165,891 Restricted investments . . . . . . . . . 884,844 709,955 Other assets, less accumulated amortization of $35,000 and $783,000 . . 761,935 610,879 ----------- ----------- Total investments and other assets . . . 9,799,767 2,752,836 ----------- ----------- $60,590,359 $30,138,481 ----------- ----------- ----------- ----------- F-2 RURAL CELLULAR CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS LIABILITIES AND SHAREHOLDERS' EQUITY DECEMBER 31, -------------------------- 1996 1995 ----------- ----------- CURRENT LIABILITIES: Current maturities of long-term debt . . . $ 8,447,920 $ 2,725,496 Accounts payable . . . . . . . . . . . . 8,913,734 4,041,906 Advance billings and customer deposits . . 1,399,965 964,463 Other accrued expenses . . . . . . . . . 665,919 551,902 ----------- ----------- Total current liabilities. . . . . . . 19,427,538 8,283,767 LONG-TERM DEBT . . . . . . . . . . . . . . 43,886 16,397,209 ----------- ----------- Total liabilities. . . . . . . . . . . 19,471,424 24,680,976 ----------- ----------- MINORITY INTEREST. . . . . . . . . . . . . 6,122,583 - ----------- ----------- COMMITMENTS AND CONTINGENCIES (Note 7) SHAREHOLDERS' EQUITY: Undesignated shares, $.01 par value; 10,000,000 shares authorized; no shares issued and outstanding . . . . . . . . . - - Class A common stock; $.01 par value; 15,000,000 shares authorized; 7,502,552 and 4,302,671 shares issues and outstanding. 75,025 43,027 Class B common stock; $.01 par value; 5,000,000 shares authorized; 1,350,744 and 1,680,762 shares issued and outstanding 13,508 16,808 Additional paid-in capital. . . . . . . . . 34,445,849 8,412,634 Retained earnings (deficit) . . . . . . . . 461,970 (3,014,964) ----------- ----------- Total shareholders' equity . . . . . . . 34,996,352 5,457,505 ----------- ----------- $60,590,359 $30,138,481 ----------- ----------- ----------- ----------- The accompanying notes are an integral part of these consolidated financial statements. F-3 RURAL CELLULAR CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, --------------------------------------- 1996 1995 1994 ----------- ----------- ----------- REVENUES: Service. . . . . . . . . . . . . . $23,119,691 $14,289,434 $ 9,783,821 Roamer . . . . . . . . . . . . . . 6,413,524 4,561,760 3,897,207 Equipment. . . . . . . . . . . . . 927,128 1,475,716 2,007,897 ----------- ----------- ----------- Total revenues . . . . . . . . . 30,460,343 20,326,910 15,688,925 ----------- ----------- ----------- OPERATING EXPENSES: Network costs. . . . . . . . . . 6,731,130 4,973,598 3,293,581 Cost of equipment sales. . . . . 1,374,980 1,913,664 2,213,702 Selling, general and administrative . . . . . . . . . 13,575,347 7,699,964 6,569,725 Depreciation and amortization. . . 5,539,067 3,249,313 2,425,820 ----------- ----------- ----------- Total operating expenses . . . 27,220,524 17,836,539 14,502,828 ----------- ----------- ----------- OPERATING INCOME . . . . . . . . . 3,239,819 2,490,371 1,186,097 ----------- ----------- ----------- OTHER INCOME (EXPENSE): Interest expense . . . . . . . . (280,146) (1,365,852) (1,194,884) Interest and dividend income . . . 334,850 277,352 170,221 Equity in earnings (losses) of unconsolidated affiliates. . . . 51,519 (37,021) (36,700) Minority interest. . . . . . . . . 330,892 - - ----------- ----------- ----------- Other income (expense), net. . . 437,115 (1,125,521) (1,061,363) ----------- ----------- ----------- INCOME BEFORE INCOME TAX . . . . . . 3,676,934 1,364,850 124,734 INCOME TAX PROVISION (BENEFIT) . . . 200,000 575,003 (485,600) ----------- ----------- ----------- NET INCOME . . . . . . . . . . . . . $ 3,476,934 $ 789,847 $ 610,334 ----------- ----------- ----------- ----------- ----------- ----------- NET INCOME PER COMMON SHARE . . . . $ 0.41 $ 0.13 $ 0.11 ----------- ----------- ----------- ----------- ----------- ----------- WEIGHTED AVERAGE COMMON SHARES OUTSTANDING. . . . . . . . . . 8,508,908 5,983,420 5,522,099 The accompanying notes are an integral part of these consolidated financial statements. F-4 RURAL CELLULAR CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
CLASS A CLASS B COMMON STOCK COMMON STOCK ADDITIONAL RETAINED TOTAL ---------------------- ---------------------- PAID-IN EARNINGS SHAREHOLDERS' SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) EQUITY ---------- -------- ---------- -------- ------------ ----------- ----------- BALANCE, December 31, 1993 . . . . . . . 3,796,989 $37,970 1,464,036 $14,640 $ 5,122,846 $(4,415,145) $ 760,311 Issuance of common stock, net of offering expenses. . . . . . . . . . 352,800 3,528 151,200 1,512 2,953,680 - 2,958,720 Issuance of common stock in. . . . . . connection with an acquisition . . . 152,882 1,529 65,526 656 336,108 - 338,293 Net income . . . . . . . . . . . . . . - - - - - 610,334 610,334 ---------- -------- ---------- -------- ------------ ----------- ----------- BALANCE, December 31, 1994 . . . . . . . 4,302,671 43,027 1,680,762 16,808 8,412,634 (3,804,811) 4,667,658 Net income . . . . . . . . . . . . . . - - - - - 789,847 789,847 ---------- -------- ---------- -------- ------------ ----------- ----------- BALANCE, December 31, 1995 . . . . . . . 4,302,671 43,027 1,680,762 16,808 8,412,634 (3,014,964) 5,457,505 Issuance of common stock, net of offering expenses. . . . . . . . . . 2,869,863 28,698 - - 26,033,215 - 26,061,913 Conversion of Class B common stock to Class A common stock. . . . . . . 330,018 3,300 (330,018) (3,300) - - - Net income . . . . . . . . . . . . . . - - - - - 3,476,934 3,476,934 ---------- -------- ---------- -------- ------------ ----------- ----------- BALANCE, December 31, 1996 . . . . . . . 7,502,552 $ 75,025 1,350,744 $ 13,508 $ 34,445,849 $ 461,970 $34,996,352 ---------- -------- ---------- -------- ------------ ----------- ----------- ---------- -------- ---------- -------- ------------ ----------- -----------
The accompanying notes are an integral part of these consolidated financial statements. F-5 RURAL CELLULAR CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, --------------------------------------------- 1996 1995 1994 ----------- ----------- ----------- OPERATING ACTIVITIES: Net income . . . . . . . . . . . . . . . . . . . . . $ 3,476,934 $ 789,847 $ 610,334 Adjustments to reconcile to net cash provided by operating activities: Depreciation and amortization. . . . . . . . . . 5,539,067 3,249,313 2,425,820 Deferred income taxes. . . . . . . . . . . . . . . - 500,000 (500,000) Other. . . . . . . . . . . . . . . . . . . . . . . (184,036) (186,332) - Equity in earnings (losses) of unconsolidated affiliates . . . . . . . . . . . . . . . . . . (51,519) 37,021 36,700 Change in minority interest. . . . . . . . . . . (330,892) - - Change in other operating elements: Accounts receivable. . . . . . . . . . . . . . (3,303,917) (640,326) (1,106,603) Inventories. . . . . . . . . . . . . . . . . . . (681,846) 294,973 (459,070) Other current assets . . . . . . . . . . . . . (888,404) (7,283) (54,193) Accounts payable . . . . . . . . . . . . . . . 4,871,828 3,059,394 (661,143) Advance billings and customer deposits . . . . . 435,502 145,204 329,207 Other accrued expenses . . . . . . . . . . . . 114,017 (300,600) 565,136 ----------- ----------- ----------- Net cash provided by operating activities. . . 8,996,734 6,941,211 1,186,188 ----------- ----------- ----------- INVESTING ACTIVITIES: Purchases of property and equipment, net . . . . . (24,213,803) (9,312,820) (6,932,680) Contributions to unconsolidated affiliates . . . . (225,156) (368,964) (248,066) Purchases of restricted investments. . . . . . . . . - (101,178) (245,557) Other, net . . . . . . . . . . . . . . . . . . . . (354,580) (121,777) (32,139) ----------- ----------- ----------- Net cash used in investing activities. . . . . (24,793,539) (9,904,739) (7,458,442) ----------- ----------- ----------- FINANCING ACTIVITIES: Proceeds from issuance of common stock, net of offering expenses . . . . . . . . . . . . 26,540,066 (478,153) 2,958,720 Proceeds from issuance of long-term debt . . . . . 14,740,927 4,251,648 6,153,050 Repayment of long-term debt. . . . . . . . . . . . (25,371,826) (920,952) (2,608,290) ----------- ----------- ----------- Net cash provided by financing activities. . . 15,909,167 2,852,543 6,503,480 ----------- ----------- ----------- NET INCREASE (DECREASE) IN CASH. . . . . . . . . . . 112,362 (110,985) 231,226 CASH, at beginning of year . . . . . . . . . . . . . 125,137 236,122 4,896 ----------- ----------- ----------- CASH, at end of year . . . . . . . . . . . . . . . . . $ 237,499 $ 125,137 $ 236,122 ----------- ----------- ----------- ----------- ----------- -----------
The accompanying notes are an integral part of these consolidated financial statements. F-6 RURAL CELLULAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1995 1. ORGANIZATION AND NATURE OF BUSINESS: Rural Cellular Corporation and its subsidiaries (the Company or RCC) are principally engaged in providing cellular communication service in five contiguous Rural Service Areas (RSAs) comprising most of the northern half of Minnesota and in providing paging service in northern Minnesota and eastern North Dakota (the Company Service Area). The Company commenced operations effective April 1, 1991, following the merger into the Company of five partnerships, each holding a cellular license for a separate RSA. The Company operates its cellular and paging systems under licenses granted by the FCC, and the Company's operations are subject to the applicable rules and regulations of the FCC. 2. ACQUISITIONS: WIRELESS ALLIANCE In August 1996, the Company entered into Wireless Alliance, LLC (Wireless Alliance), a joint venture with APT Minneapolis, Inc., an affiliate of Aerial Communications, Inc., to construct and operate Personal Communications Services (PCS) networks in areas adjacent to the Company's service areas including Duluth, Minnesota and Superior, Wisconsin and Fargo and Grand Forks, North Dakota including the Red River Valley and 80 miles of Interstate Highway 29 in North Dakota. Wireless Alliance is owned 51 % by the Company and 49 % by APT Minneapolis, Inc. UNITY CELLULAR SYSTEMS, INC. In December 1996, the Company entered into a definitive agreement to purchase the net assets of Unity Cellular Systems, Inc., a wholly-owned subsidiary of InterCel, Inc. for approximately $77,350,000. Unity Cellular Systems, Inc. provides cellular service in the Bangor, Maine, MSA and Maine RSAs 2 and 3 to approximately 25,000 customers as of December 31, 1996, under the trade name Unicel. The acquisition, which will be accounted for under the purchase method of accounting, is expected to be completed in the second quarter of 1997, subject to receiving regulatory and other approvals. The Company is currently negotiating with a commercial lending institution for a revolving credit facility to fund the acquisition. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of RCC and its wholly-owned subsidiaries, RCC Paging, Inc., RCC Wireless Company, RCC Network, Inc. and its majority owned subsidiary Wireless Alliance. All significant intercompany balances and transactions have been eliminated in the consolidated financial statements. Investments in unconsolidated affiliates represent investments in companies in which RCC has a 20% to 50% ownership interest and which are accounted for under the equity method. REVENUE RECOGNITION The Company earns revenue by providing cellular and paging service to both customers of the Company and customers of other cellular carriers traveling (roaming) in the Company's service area and from sales and rentals of cellular and paging equipment and accessories. Service revenue consists of the base monthly service fee and airtime revenue. Base monthly service fees are billed one month in advance and are recognized in the month earned. Airtime revenue is recognized when service is provided. Roamer revenue consists of the fee charged to other cellular carriers' customers for roaming in the Company's Service Area as well as related airtime revenue for use of RCC's cellular network. Roamer revenue is recognized when the service is rendered. The Company recognizes other service revenues from equipment installations, equipment leases and connection fees when earned. F-7 RURAL CELLULAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1995 (CONTINUED) INCOME TAXES The Company follows the liability method of accounting for income taxes, and deferred income taxes are based on the estimated future tax effects of differences between the financial statement and tax bases of assets and liabilities based on enacted tax laws. NET INCOME PER COMMON SHARE Net income per common share for all periods presented was computed using the weighted average number of outstanding shares of Class A and Class B common stock and common equivalent shares, if dilutive. Fully diluted earnings per share did not differ significantly from primary earnings per share for any year presented. INVENTORIES Inventories consist of cellular telephone equipment, pagers and accessories and are stated at the lower of cost, determined using the specific identification method, or market. PROPERTY AND EQUIPMENT Property and equipment are recorded at cost. Additions, improvements or major renewals are capitalized, while expenditures which do not enhance or extend the asset's useful life are charged to operating expense as incurred. When an asset is retired, its cost less any proceeds from the sale is charged to accumulated depreciation. Depreciation is computed using the straight-line, composite method based on the estimated useful life of the asset as follows: YEARS ----- Buildings and towers.............. 15 Equipment......................... 3-10 Furniture and fixtures............ 3-10 The Company's network construction expenditures are recorded as assets under construction until the system or assets are placed in service, at which time the assets are transferred to the appropriate property and equipment category. As a component of assets under construction, the Company capitalizes salaries of the Company's construction employees during the construction period. INVESTMENTS Investments in unconsolidated affiliates are accounted for using the equity method and represent the Company's ownership interests in Switch 2000, Inc. and Switch 2000 LLC (Switch 2000), entities which provide cellular switching and interconnection services to the Company, and Cellular 2000, Inc., an entity organized to own the trade name and related trademark for Cellular 2000. Restricted investments represent the Company's investment in stock of the St. Paul Bank for Cooperatives and are stated at cost, which approximates fair value. The restricted investments were purchased pursuant to the terms of a loan agreement and are restricted as to withdrawal. LICENSES Licenses consist of the cost of acquiring paging licenses and the value assigned to the Wireless Alliance PCS license. Paging licenses are being amortized on a straight-line basis over 40 years. The Wireless Alliance PCS license will be amortized over 40 years when the PCS network becomes operational in 1997. F-8 RURAL CELLULAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1995 (CONTINUED) OTHER ASSETS Other assets primarily consist of costs related to the Unity Cellular Systems, Inc. acquisition and organizational costs. Organizational costs are being amortized on a straight line basis over five to seven years. BUSINESS AND CREDIT CONCENTRATIONS The Company's customers are geographically located in the northern half of Minnesota and eastern North Dakota and are concentrated in cellular communications. No single customer accounted for a significant amount of revenues or accounts receivable. LONG-LIVED ASSETS The Company periodically evaluates the value of all long-lived assets to determine if events have occurred that indicate the remaining estimated useful lives of these assets may warrant revision or whether the remaining balance may not be recoverable. At each balance sheet date, the Company uses an estimate of future net cash flows over the remaining useful lives of the assets to measure recoverability. FAIR VALUE OF FINANCIAL INSTRUMENTS The Company has estimated fair values using available market information and appropriate valuation methods. Long-term debt fair values were determined based on borrowing rates currently available to the Company and approximated carrying value at December 31, 1996 and 1995. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported periods. Ultimate results could differ from those estimates. RECLASSIFICATIONS Certain 1995 and 1994 amounts in the accompanying consolidated financial statements have been reclassified to conform to the 1996 presentation. These reclassifications had no effect on the consolidated net income or total shareholders' equity as previously reported. F-9 RURAL CELLULAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1995 (CONTINUED) 4. LONG-TERM DEBT: Long-term debt is as follows: DECEMBER 31, ----------------------- 1996 1995 ---------- ----------- St. Paul Bank for Cooperatives: Seasonal loan, payable on June 30, 1997, interest at a variable rate (7.1% at December 31, 1996).... $8,405,000 $ - Term loan, repaid in 1996...................... - 16,769,260 Subsidiary term loan, repaid in 1996........... - 1,082,305 Seasonal loan, repaid in 1996.................. - 500,000 Notes payable, unsecured, interest at 5% to 8%, payable in installments through 1998........... 86,806 130,271 Capital lease obligations, repaid in 1996........ - 640,869 ---------- ----------- Total........................................ 8,491,806 19,122,705 Less-current maturities.......................... 8,447,920 2,725,496 ---------- ----------- $ 43,886 $16,397,209 ---------- ----------- ---------- ----------- The loan from the St. Paul Bank for Cooperatives was issued pursuant to a comprehensive loan agreement (the Agreement) and is collateralized by substantially all assets of the Company. Under the Agreement, the Company may borrow up to a maximum of $10,000,000 as of December 31, 1996. Subsequent to year-end, the maximum amount the Company may borrow was increased to $15,000,000. The Agreement requires the Company to maintain certain levels of net worth, quarterly cash flow and other key financial ratios. In addition, the Company may not pay dividends or make distributions to its shareholders unless the Company is in compliance with all of the covenants under the Agreement before and after such payment or distribution. As of December 31, 1996, the Company was in compliance with all covenants. 5. SHAREHOLDERS' EQUITY: AUTHORIZED SHARES The Company's Restated Articles of Incorporation authorize the issuance of 30,000,000 shares of $.01 par value stock. Of such authorized shares, 10,000,000 have not been designated as to class as of December 31, 1996. INITIAL PUBLIC OFFERING During 1996, the Company completed an initial public offering (the Offering) of 3,450,000 shares of Class A common stock, of which 2,869,863 shares were sold by the Company and 580,137 previously issued shares were sold by certain shareholders. The net proceeds to the Company of approximately $26.0 million were used to repay long-term debt and to provide capital for future expansion. In connection with the Offering, the exercise price of 150,600 employee stock options was fixed at $10.00 per share, the price at which the stock was sold to the public in the Offering. COMMON STOCK RIGHTS Class A common shareholders are entitled to one vote for each share owned while Class B common shareholders are entitled to ten votes for each share owned. Each share of Class B common stock may at any time be converted into one share of Class A common stock at the option of the holder. Additionally, all issued Class B common shares will F-10 RURAL CELLULAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1995 (CONTINUED) be converted into an equivalent number of Class A common shares upon the affirmative vote of not less than 66-2/3 of the then issued Class B common shares. Furthermore, Class B common shares are automatically converted to an equal number of Class A common shares if they are transferred to anyone who is not an affiliate of the transferring shareholder of the Company. STOCK COMPENSATION PLANS The Company implemented stock option plans for employees and nonemployee directors during 1995. The stock compensation plan (the Plan) for employees authorizes the issuance of up to 890,000 shares of Class A common stock in the form of stock options, stock appreciation rights or other stock-based awards. The Plan provides that the exercise price of any option shall not be less than 85% of the fair market value of the Class A common stock as of the date of the grant (100% in the case of incentive stock options). Options and other awards granted under the Plan shall vest and become exercisable as determined by the Board of Directors or a stock option committee. The stock option plan for nonemployee directors authorizes the issuance of up to 210,000 shares of Class A common stock. The plan provides that the option price shall not be less than the fair market value of the Class A common stock outstanding on the date of grant. The options vest and become exercisable over one to three years and expire between four and six years from the date of grant. The Company accounts for stock options under Accounting Principles Board Opinion No. 25, under which no compensation cost has been recognized. Had compensation cost for the Company's plans been determined consistent with Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation," the Company's results of operations and net income per share would have been reduced to the pro forma amounts indicated below for 1996: AS REPORTED PRO FORMA ------------- ------------ Net income $ 3,476,934 $ 3,215,468 Net income per common share $ .41 $ .38 The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1996: expected volatility of 48.5%; risk-free interest rates of 6.2%; and no expected dividend yield. F-11 RURAL CELLULAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1995 (CONTINUED) Options issued during 1996, which remain outstanding at December 31, 1996, have exercise prices between $9.13 and $12.75 and a weighted average remaining contractual life of 6.7 years. Information related to stock options is as follows for 1996: WEIGHTED AVERAGE EXERCISE SHARES PRICE -------- ------- Outstanding, at beginning of year - $ - Granted 549,700 10.32 Canceled (90,000) 12.00 -------- ------- Outstanding, at end of year 459,700 $ 9.99 -------- ------- -------- ------- Exercisable, at end of year 55,200 $ 9.92 -------- ------- -------- ------- Weighted average fair value of options granted during the year $ 5.60 ------- ------- 6. INCOME TAXES: The components of the provision (benefit) for income taxes are as follows: YEARS ENDED DECEMBER 31, ---------------------------------- 1996 1995 1994 --------- --------- ---------- Current: Federal................. $106,000 $ 40,003 $ 85,000 State................... 94,000 35,000 16,000 --------- --------- ---------- 200,000 75,003 101,000 Deferred.................... - 500,000 (586,600) --------- --------- ---------- $200,000 $575,003 $(485,600) --------- --------- ---------- --------- --------- ---------- A reconciliation between the federal income tax rate and the effective income tax rate is as follows: YEARS ENDED DECEMBER 31, ---------------------------------- 1996 1995 1994 --------- --------- ---------- Federal income tax rate. . . . 34.0% 34.0% 34.0% Tax benefit of loss carryforwards . . . . . . . (29.8) - (485.0) Penalties and fines . . . . . . - (2.1) 32.3 State income taxes, net of federal tax benefit. . . . 1.2 6.5 (4.7) Other, net. . . . . . . . . . . - 3.7 6.7 --------- --------- ---------- 5.4% 42.1% (416.7)% --------- --------- ---------- --------- --------- ---------- F-12 RURAL CELLULAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1995 (CONTINUED) The income tax effect of the items which create deferred income tax assets and liabilities are as follows: DECEMBER 31, ----------------------- 1996 1995 ----------- ---------- Deferred income tax assets: Operating loss carryforwards. . . . . $ 1,795,000 $3,099,000 Temporary differences: Allowance for doubtful accounts.. 123,000 158,000 Other . . . . . . . . . . . . . . . 202,000 143,000 Valuation allowance . . . . . . . . . - (1,723,000) ----------- ---------- Total deferred income tax assets. . 2,120,000 1,677,000 Deferred income tax liabilities: Depreciation. . . . . . . . . . . . (1,948,000) (1,496,000) Other . . . . . . . . . . . . . . . . (172,000) (181,000) ----------- ---------- Net deferred income tax asset . . . $ - $ - ----------- ---------- ----------- ---------- A valuation allowance was established for certain net operating loss carryforwards due to the uncertainty of the realization of future tax benefits. The valuation allowance was eliminated in 1996 due to the realization of net operating loss carryforwards. As of December 31, 1996, the Company had tax operating loss carryforwards of approximately $4,435,000 available to offset future income tax liabilities. These carryforwards expire in the years 2006 through 2010. The Tax Reform Act of 1986 contains provisions which may limit the availability and timing of usage of net operating loss carryforwards in the event of certain changes in the ownership of the Company's common stock. 7. COMMITMENTS AND CONTINGENCIES: CAPITAL EXPENDITURE COMMITMENTS Excluding capital expenditure commitments for Unity Cellular Systems, Inc. and Wireless Alliance, the Company had capital expenditure purchase commitments outstanding of approximately $14,000,000 as of December 31, 1996. EMPLOYMENT AGREEMENTS The Company has employment agreements with executive officers and certain other management personnel with terms ranging from two to three years. These agreements provide for payment of amounts up to three times their annual compensation if there is a termination of their employment as a result of change in control of the Company, as defined in the agreement. The maximum contingent liability under these agreements was $1,300,000 at December 31, 1996. LEGAL AND REGULATORY MATTERS The Company is subject to legal and regulatory matters arising in the normal course of business. Management does not believe that any of these matters will have a significant effect on the Company and, accordingly, no provision for any liability that may result from these matters has been made. F-13 RURAL CELLULAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1995 (CONTINUED) LEASES The Company leases office space, vehicles and real estate under noncancelable operating leases. Future minimum payments under these leases as of December 31, 1996 are as follows: YEAR ---- 1997....................... $243,352 1998....................... 187,108 1999....................... 144,790 2000....................... 117,180 2001....................... 67,759 Thereafter................. 7,200 --------- --------- Total................. $767,389 --------- --------- Under the terms of the lease agreements, the Company also is responsible for certain operating expenses and taxes. Total rent expense of $379,000, $347,000, and $287,000 was charged to operations for the years ended December 31, 1996, 1995 and 1994. 8. INVESTMENTS IN UNCONSOLIDATED AFFILIATES: The Company holds a 40.77% ownership interest in Switch 2000 and a 41.67% ownership interest in Cellular 2000, Inc., an entity with no operations to date. As of December 31, 1996, the investment in unconsolidated affiliates represents $1,697,000 of stock and capital contributions less $254,000 of cumulative losses. Combined condensed results of operations and net assets of these entities are as follows: YEARS ENDED DECEMBER 31, ----------------------------------------- 1996 1995 1994 ----------- ----------- ----------- Results of Operations: Revenues..................... $ 9,201,380 $ 7,074,877 $ 4,904,668 Operating expenses........... (9,044,303) (7,035,889) (4,865,822) Other income (expense), net.. (11,811) (129,791) (128,863) ----------- ----------- ----------- Net income (loss).......... $ 145,266 $ (90,803) $ (90,017) ----------- ----------- ----------- ----------- ----------- ----------- Company's share of net income (loss)................. $ 51,519 $ (37,021) $ (36,700) ----------- ----------- ----------- ----------- ----------- ----------- AS OF DECEMBER 31, -------------------------- 1996 1995 ----------- ----------- Net assets: Current assets.......... $ 455,292 $ 1,292,484 Noncurrent assets....... 4,064,677 3,412,257 Current liabilities..... (743,309) (1,385,347) Noncurrent liabilities.. (228,000) (456,000) ----------- ----------- Equity............. $ 3,548,660 $ 2,863,394 ----------- ----------- ----------- ----------- 9. RELATED-PARTY TRANSACTIONS: AFFILIATE AGREEMENT F-14 RURAL CELLULAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1995 (CONTINUED) The Company pays Switch 2000 for cellular switching and interconnection services. Amounts billed by Switch 2000 to the Company totaled $4,824,000, $3,753,000 and $2,613,000 for the years ended December 31, 1996, 1995 and 1994. ROAMING AGREEMENT The Company has a roaming agreement with a partnership which is affiliated with a beneficial owner of greater than 10% of the Company's common stock. The rates of reimbursement are negotiated by the parties to the agreement and reflect rates charged by other carriers. Roaming charges are passed through to the customer. Net payments by the Company to the partnership were $331,000, $306,000 and $254,000 for the years ended December 31, 1996, 1995 and 1994. 10. DEFINED CONTRIBUTION PLAN: The Company has a defined contribution savings and profit-sharing plan for employees who meet certain age and service requirements. Under the savings portion of the plan, employees may elect to contribute a percentage of their salaries to the plan with the Company contributing a matching percentage of the employees' contributions. Under the profit-sharing portion of the plan, the Company contributes a percentage of employees' salaries. Contributions charged to operations for the years ended December 31, 1996, 1995 and 1994 were $74,000, $66,000 and $43,000. The percentages the Company matches under the savings portion of the plan and contributes under the profit-sharing portion of the plan are determined annually by the Company's board of directors. 11. SUPPLEMENTAL CASH FLOW INFORMATION: YEARS ENDED DECEMBER 31, ------------------------------------------- 1996 1995 1994 ----------- ----------- ----------- Cash paid for: Interest..................... $ 563,948 $1,400,722 $1,012,597 Income taxes................. 805,000 98,136 28,400 Non-cash investing and financing activity: Contribution by Aerial Communications, Inc. of PCS license........... 6,453,475 - - F-15 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Rural Cellular Corporation: We have audited, in accordance with generally accepted auditing standards, the consolidated financial statements included in Rural Cellular Corporation's Form 10-K and have issued our report thereon dated February 11, 1997. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The schedule listed in the index of consolidated financial statements is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commissions rules and is not part of the basic consolidated financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic consolidated financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole. ARTHUR ANDERSEN LLP Minneapolis, Minnesota, February 11, 1997 S-1 RURAL CELLULAR CORPORATION AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS: YEARS ENDED DECEMBER 31, -------------------------------- 1996 1995 1994 ---------- ---------- ---------- Balance, at beginning of year........... $162,845 $143,806 $126,527 Additions charged to income........... 597,291 246,156 184,576 Write-offs, net of recoveries......... (457,403) (227,117) (167,297) ---------- ---------- ---------- Balance, at end of year................. $302,733 $162,845 $143,806 ---------- ---------- ---------- ---------- ---------- ---------- S-2 EXHIBIT INDEX NUMBER DESCRIPTION PAGE 2 Asset Purchase Agreement dated December 23, 1996 by and [i] among the Registrant, Unity Cellular Systems, Inc., InterCel Licenses, Inc. and InterCel, Inc. 3.1 Articles of Incorporation, as amended and restated to date [ii] 3.2 Bylaws, as amended and restated to date [ii] 10.1 Loan Agreement with St. Paul bank for Cooperatives dated April 25, 1996 [iii] 10.2 Cellular Switch User Agreement, as amended [ii] 10.3 Switch 2000 LLC Cellular Equipment User Agreement [ii] 10.4 Purchase Agreement by and between RCC Network, Inc. and Harris Corporation, Farinon Division, dated May 12, 1995 [ii] 10.5 Cell Site Purchase Agreement between Northern Telecom, Inc. and Registrant dated November 24, 1993, as amended on October 25, 1995 [ii] 10.6(a) Trademark and Trade Name License Agreements between Cellular 2000, Inc. and: [ii] (i) North Woods Cellular Partnership (ii) Northern Lights Cellular Partnership (iii) Great River Cellular Partnership (iv) Cellular Five Partnership (v) Heartland Cellular Partnership 10.6(b) Assignment and Assumption Agreements by and between the Registrant and each partnership [ii] 10.7 Roaming Agreement with CMS of St. Cloud [ii] *10.8 1995 Stock Compensation Plan as amended to date *10.9 Stock Option Plan for Nonemployee Directors, as amended to date *10.10(a) Employment Agreement with Richard P. Ekstrand effective December 1, 1995 [ii] *10.10(b) Amendment to Employment Agreement with Mr. Ekstrand effective December 18, 1996 *10.11(a) Employment Agreement with Scott G. Donlea effective December 1, 1995 *10.11(b) Amendment to Employment Agreement with Mr. Donlea effective December 18, 1996 11 Statement Re Computation of Per Share Earnings 16 Letter from former accountants [ii] 21 Subsidiaries of Registrant 23 Consent of Independent Public Accountants *Indicates management contract or compensatory plan or agreement required to be filed as a exhibit to this Form. [i] Filed as exhibit to Report on Form 8-K dated December 23, 1996 and incorporated herein by reference. [ii] Filed as exhibit to Registration Statement on Form S-1 (Sec. No. 33-80189) filed December 8, 1995 and incorporated herein by reference. [iii] Filed as exhibit to Report on Form 10-Q for the quarter ended June 30, 1996 and incorporated herein by reference. 39 EX-10.8 2 EX-10.8 1995 STOCK COMPENSATION PLAN RURAL CELLULAR CORPORATION 1995 STOCK COMPENSATION PLAN (AS AMENDED THROUGH DECEMBER 18, 1996) TABLE OF CONTENTS ITEM DESCRIPTION PAGE SECTION 1 Purpose; Definitions......................................... 1 SECTION 2 Administration............................................... 3 SECTION 3 Stock Subject to Plan........................................ 4 SECTION 4 Eligibility.................................................. 5 SECTION 5 Stock Options................................................ 5 SECTION 6 Stock Appreciation Rights.................................... 8 SECTION 7 Other Stock-Based Awards..................................... 10 SECTION 8 Change in Control Provisions................................. 11 SECTION 9 Amendments and Termination................................... 13 SECTION 10 Unfunded Status of Plan...................................... 14 SECTION 11 General Provisions........................................... 14 SECTION 12 Effective Date of Plan....................................... 16 SECTION 13 Term of Plan................................................. 16 RURAL CELLULAR CORPORATION 1995 STOCK COMPENSATION PLAN (AS AMENDED THROUGH DECEMBER 18, 1996) 1. Purpose; Definitions. The purpose of the Rural Cellular Corporation 1995 Stock Compensation Plan (the "Plan") is to enable Rural Cellular Corporation (the "Company"), and its Parents, Subsidiaries, and Affiliates, to attract, retain, and reward employees and to strengthen the mutuality of interests between such employees and the Company's shareholders, by offering such employees stock options and/or other equity-based incentives. In addition to definitions that may be contained elsewhere in this Plan, for purposes of the Plan, the following terms shall be defined as set forth below: (a) "Affiliate" means any entity other than the Company and its Parents and Subsidiaries that is designated by the Board as a participating employer under the Plan, provided that the Company directly or indirectly owns at least 20% of the combined voting power of all classes of stock of such entity or at least 20% of the ownership interests in such entity. (b) "Award" means any Option, Stock Appreciation Right, or Other Stock-Based Award, or any other right, interest, or option relating to Stock or other securities of the Company granted pursuant to the provisions of this Plan. (c) "Award Agreement" means any written agreement, contract or other instrument or document evidencing any Award granted by the Committee hereunder and signed by both the Company and the Participant. (d) "Board" means the Board of Directors of the Company. (e) "Code" means the Internal Revenue Code of 1986, as amended from time to time, and any successor thereto. (f) "Committee" means the Committee referred to in Section 2 of the Plan. If at any time no Committee shall be in office, then the functions of the Committee specified in the Plan shall be exercised by the Board. Where the Board has retained administrative authority with respect to the Plan, references herein to the "Committee" shall refer to the Board. (g) "Company" means Rural Cellular Corporation, a corporation organized under the laws of the State of Minnesota, or any successor corporation. (h) "Disability" means disability as determined under procedures established by the Committee for purposes of this Plan or, as applied to Incentive Stock Options, as defined in Section 22(e)(3) of the Code. (i) [deleted] (j) "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time. (k) "Fair Market Value" means as of any given date, unless otherwise determined by the Committee in good faith, the closing bid price of the Stock as reported on The Nasdaq Small-Cap Market or, if the Stock is then traded on The Nasdaq National Market or a national or regional securities exchange, the closing price of the Stock on The Nasdaq National Market or such exchange. (l) "Incentive Stock Option" means any Stock Option intended to be and designated as an "Incentive Stock Option" within the meaning of Section 422 of the Code. (m) "Nonqualified Stock Option" means any Stock Option that is not an Incentive Stock Option. (n) "Other Stock-Based Award" means an Award under Section 7 below that is valued in whole or in part by reference to, or is otherwise based on, Stock. (o) "Parent" means any corporation (other than the Company) in an unbroken chain of corporations ending with the Company if, at the time of granting of an Award, each of the corporations other than the Company owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in the chain. (p) "Participant" means any person who is selected by the Committee to receive an Award under the Plan. (q) "Plan" means this Rural Cellular Corporation 1995 Stock Compensation Plan, as hereafter amended from time to time. (r) "Stock" means the Class A Common Stock, $.01 par value per share, one vote per share, of the Company. -2- (s) "Stock Appreciation Right" or "SAR" means the right to receive a payment in cash or Stock as determined by the Committee. (t) "Stock Option" or "Option" means any option to purchase shares of Stock granted pursuant to Section 5 below. (u) "Subsidiary" means any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company if, at the time of the granting of an Award, each of the corporations other than the last corporation in the unbroken chain owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in the chain. In addition, the term "Change in Control" shall have the meaning set forth in Section 8(b) below. 2. Administration. The Plan shall be administered by a Committee of not fewer than two members of the Board, who shall be appointed by the Board and serve at the pleasure of the Board. The functions of the Committee specified in the Plan shall be exercised by the Board, if and to the extent that no Committee exists that has the authority to so administer the Plan, or to the extent that the Board retains authority to administer the Plan under specified circumstances. As to the selection of and grants of Awards to persons who are not subject to Sections 16(a) and 16(b) of the Exchange Act, the Committee may delegate any or all of its responsibilities to members of the Company's administration. The grants of Awards and determination of the terms thereof to persons who are subject to Sections 16(a) and 16(b) of the Exchange Act shall be made in a manner that satisfies the requirements of Rule 16b-3 under the Exchange Act, or any successor rule. The Committee shall have full power and authority, consistent with the provisions of the Plan and subject to such orders or resolutions not inconsistent with the provisions of the Plan as may be adopted by the Board: (a) to select the employees of the Company and any Parent, Subsidiary, or Affiliate to whom Awards may from time to time be granted hereunder; (b) to determine the type or types of Awards to be granted to employees hereunder; (c) to determine the number of shares of Stock to be covered by each Award granted hereunder: -3- (d) to determine the terms and conditions, not inconsistent with the terms of the Plan, of any Award granted hereunder; (e) to determine whether, to what extent, and under what circumstances an Award may be settled in cash, Stock or other property or canceled or suspended; (f) to determine whether, to what extent, and under what circumstances cash, Stock, and other property and other amounts payable with respect to an Award shall be deferred either automatically or at the election of the Participant; (g) to interpret and administer the Plan and any instrument or agreement entered into thereunder; (h) to establish such rules and regulations and appoint such agents as it shall deem appropriate for proper administration of the Plan; and (i) to make any other determination and take any other action that the Committee deems necessary or desirable for administration of the Plan. Members of the Board and of the Committee acting under the Plan shall be fully protected in relying in good faith upon the advice of counsel and shall incur no liability except for gross negligence or willful misconduct in the performance of their duties. Decisions of the Committee shall be made in the Committee's sole discretion and shall be final, conclusive, and binding on all persons, including the Company, any Participant, any shareholder, and any employee of the Company or any Parent, Subsidiary, or Affiliate. 3. Stock Subject to Plan. The total number of shares of Stock reserved and available for distribution under the Plan shall be 890,000 shares of Stock. Such shares may consist, in whole or in part, of authorized and unissued shares or treasury shares. Subject to the possible adjustments described in the last paragraph of this Section 3, the total number of shares of Stock reserved and authorized for issuance upon exercise of Incentive Stock Options shall be 890,000. To the extent that such shares are not used for Incentive Stock Options, they shall be available for other Awards to be granted under the Plan. If any shares of Stock subject to an Award are not issued to a Participant because an Option or SAR is not exercised or an Award is otherwise forfeited or any such Award otherwise terminates without a payment being made to the Participant in the -4- form of Stock, such shares shall again be available for distribution in connection with future Awards under the Plan. In the event of any merger, reorganization, consolidation, recapitalization, Stock dividend, Stock split, or other change in corporate structure affecting the Stock, such substitution or adjustment shall be made in the aggregate number of shares reserved for issuance under the Plan, in the number and option price of shares subject to outstanding Options granted under the Plan, and in the number of shares subject to other outstanding Awards granted under the Plan as may be determined to be appropriate by the Board, in its sole discretion, provided that the number of shares subject to any Award shall always be a whole number. Any such adjusted option price shall also be used to determine the amount payable by the Company upon the exercise of any Stock Appreciation Right associated with any Stock Option. 4. Eligibility. Officers, management, or highly compensated employees of the Company and any Subsidiary, Parent, or Affiliate are eligible to be granted Awards under the Plan. The Committee shall have the exclusive authority to determine what constitutes management or a "highly compensated employee" and in making such a determination shall take into consideration guidelines established by the Department of Labor and court decisions as to what constitutes a "select group of management or highly compensated employees." 5. Stock Options. Stock Options may be granted alone, in addition to, or in tandem with other Awards granted under the Plan. Any Stock Option granted under the Plan shall be in such form as the Committee may from time to time approve. Stock Options granted under the Plan may be of two types: (i) Incentive Stock Options and (ii) Nonqualified Stock Options. Options may be issued with or without Stock Appreciation Rights. Options granted under the Plan shall be subject to the following terms and conditions and shall contain such additional terms and conditions, not inconsistent with the terms of the Plan, as the Committee shall deem desirable: (a) EXERCISE PRICE. Except as provided in Section 5(i), the exercise price per share of Stock purchasable under a Stock Option shall be determined by the Committee at the time of grant but shall be not less than 85% of the Fair Market Value of the Stock on the date of grant. (b) OPTION TERM. Except as provided in Section 5(i) hereof, the term of each Stock Option shall be fixed by the Committee. -5- (c) EXERCISABILITY. Stock Options shall be exercisable at such time or times and subject to such terms and conditions as shall be determined by the Committee at or after grant; provided, however, that, except as provided in Sections 5(f), (g), and (h) and Section 8, unless otherwise determined by the Committee at or after grant, no Stock Option shall be exercisable prior to the first anniversary date of the granting of the Option. If the Committee provides, in its sole discretion, that any Stock Option is exercisable only in installments, the Committee may waive such installment exercise provisions at any time at or after grant in whole or in part, based on such factors as the Committee shall determine, in its sole discretion. (d) METHOD OF EXERCISE. Subject to whatever installment exercise provisions apply under Section 5(c), Stock Options may be exercised in whole or in part at any time during the option period. Payment of the exercise price may be made by check, note (if approved by the Board), or such other instrument or method as the Committee may accept. If so provided in the related Award Agreement, payment in full or in part may also be made by delivery of Stock owned by the optionee for at least six months prior to the exercise of the Option (based on the Fair Market Value of the Stock on the date the Option is exercised, as determined by the Committee). Payment of the exercise price may be made through exercise of either Tandem SARs or Freestanding SARs held by the optionee. No shares of Stock shall be issued until full payment therefor has been made. An optionee shall generally have the rights to dividends or other rights of a shareholder with respect to shares subject to the Option after the optionee has given written notice of exercise, has paid in full for such Stock, and, if requested, has given the representation described in Section 11(a). (e) NONTRANSFERABILITY OF OPTIONS. Subject to Section 5(i) hereof, unless otherwise provided in the related Award Agreement, no Stock Option shall be transferable by the optionee otherwise than by will or by the laws of descent and distribution or pursuant to a qualified domestic relations order as defined by the Code or Title I of the Employee Retirement Income Security Act, or the rules and regulations thereunder, and all Stock Options shall be exercisable during the optionee's lifetime only by the optionee. (f) TERMINATION BY DEATH. Subject to Section 5(i), if an optionee's employment by the Company or any Subsidiary, Parent, or Affiliate terminates by reason of death, any Stock Option held by such optionee may thereafter be exercised, to the extent such Option was exercisable at the time of death or on such accelerated basis as the Committee may determine at or after grant (or as may be determined in accordance with procedures established by the Committee), by the -6- Committee), legal representative of the optionee's estate or by any person who acquired the Option by will or the laws of descent and distribution, for a period of one year (or such other period as the Committee may specify at grant) from the date of such death or until the expiration of the stated term of such Stock Option, whichever period is the shorter. (g) TERMINATION BY REASON OF DISABILITY. Subject to Section 5(i), if an optionee's employment by the Company or any Subsidiary, Parent, or Affiliate terminates by reason of Disability, any Stock Option held by such optionee may thereafter be exercised by the optionee, to the extent it was exercisable at the time of termination or on such accelerated basis as the Committee may determine at or after grant (or as may be determined in accordance with procedures established by the Committee), until the expiration of the stated term of such Stock Option (unless otherwise specified by the Committee at the time of grant); provided, however, that, if the optionee dies prior to such expiration (or within such other period as the Committee shall specify at grant), any unexercised Stock Option held by such optionee shall thereafter be exercisable to the extent to which it was exercisable at the time of death for a period of one year from the date of such death or until the expiration of the stated term of such Stock Option, whichever period is the shorter. (h) OTHER TERMINATION. Subject to Section 5(i), unless otherwise determined by the Committee (or pursuant to procedures established by the Committee) at or after grant, if an optionee's employment by the Company or any Subsidiary, Parent, or Affiliate terminates for any reason other than death or Disability, the Stock Option shall be exercisable, to the extent otherwise then exercisable, for the lesser of three months from the date of termination of employment or the balance of such Stock Option's term. (i) INCENTIVE STOCK OPTIONS. Anything in the Plan to the contrary notwithstanding, no term of this Plan relating to Incentive Stock Options shall be interpreted, amended, or altered, nor shall any discretion or authority granted under the Plan be exercised, so as to disqualify the Plan under Section 422 of the Code or, without the consent of the optionee(s) affected, to disqualify any Incentive Stock Option under such Section 422. To the extent required for "incentive stock option" status under Section 422 of the Code (taking into account applicable Internal Revenue Service regulations and pronouncements and court decisions), the Plan shall be deemed to provide: (i) that Incentive Stock Options may be granted only to employees of the Company or any Parent or Subsidiary of the Company; -7- (ii) that the exercise price of any Incentive Stock Option shall not be less than 100% of the Fair Market Value of the Stock as of the date of grant (110% for an optionee who owns stock possessing more than 10% of the voting power of all classes of stock of the Company or of a Parent or Subsidiary); (iii) that the maximum term of exercise for any Incentive Stock Option shall not exceed ten years (five years in the case of an optionee who owns stock possessing more than 10% of the voting power of all classes of stock of the Company or of a Parent or Subsidiary); and (iv) that Incentive Stock Options shall not be transferable by the optionee otherwise than by will or the laws of descent and distribution and shall be exercisable, during the optionee's lifetime, only by the optionee. To the extent permitted under Section 422 of the Code or applicable regulations thereunder or any applicable Internal Revenue Service pronouncements: (i) if a Participant's employment is terminated by reason of death or Disability and the portion of any Incentive Stock Option that becomes exercisable during the post-termination period specified in Section 5(f) or (g) hereof exceeds the $100,000 limitation contained in Section 422(d) of the Code, such excess shall be treated as a Nonqualified Stock Option; and (ii) if the exercise of an Incentive Stock Option is accelerated by reason of a Change in Control, any portion of such Option that exceeds the $100,000 limitation contained in Section 422(d) of the Code shall be treated as a Nonqualified Stock Option. (j) NO TANDEM OPTIONS. Options consisting of both an Incentive Stock Option and a Nonqualified Stock Option shall not be granted under the Plan. 6. Stock Appreciation Rights. (a) GRANT AND EXERCISE. Stock Appreciation Rights may be granted either alone ("Freestanding SAR") or in addition to other Awards granted under the Plan and may, but need not, relate to all or part of any Stock Option granted under the Plan ("Tandem SAR"). In the case of a Nonqualified Stock Option, a Tandem SAR may be granted either at or after the time of the grant of such Stock Option. In the case of an Incentive Stock Option, a Tandem SAR may be granted only at the time of the grant of such Stock Option. -8- A Tandem SAR shall terminate and no longer be exercisable upon the termination or exercise of the related Stock Option, subject to such provisions as the Committee may specify at grant where a Tandem SAR is granted with respect to less than the full number of shares covered by a related Stock Option. Stock Options relating to exercised Tandem SARs shall no longer be exercisable to the extent that the related Tandem SARs have been exercised. A Stock Appreciation Right may be exercised, subject to Section 6(b), in accordance with the procedures established by the Committee for such purpose and as set forth in the related Award Agreement. Upon such exercise, the optionee shall be entitled to receive an amount determined in the manner prescribed in Section 6(b). (b) TERMS AND CONDITIONS. Stock Appreciation Rights shall be subject to such terms and conditions, not inconsistent with the provisions of the Plan, as shall be determined from time to time by the Committee, including the following: (i) The exercise price of a Tandem SAR shall be the exercise price of the related Option. The exercise price of a Freestanding SAR shall be not less than 100% of the Fair Market Value of the Stock on the date of grant of the Freestanding SAR. Notwithstanding the foregoing, the Committee may unilaterally limit the appreciation in value of Stock attributable to an SAR at any time prior to its exercise. (ii) Stock Appreciation Rights shall be exercisable only at such time or times and to the extent provided in the related Award Agreement; provided, however, that the exercise provisions of an SAR granted in tandem with an Incentive Stock Option shall be the same as the related Option. (iii) Upon the exercise of a Stock Appreciation Right, the holder shall be entitled to receive an amount in cash or shares of Stock equal in value to the excess of the Fair Market Value of one share of Stock on the date of exercise, or such other date as the Committee shall specify in the Award Agreement, over the exercise price per share specified in the related Award Agreement multiplied by the number of shares in respect of which the Stock Appreciation Right shall have been exercised, with the Committee having the right to determine the form of payment. When payment is to be made in Stock, the number of shares to be paid shall be calculated on the basis of the Fair Market Value of the Stock on the date of exercise. -9- (iv) Unless otherwise provided in the related Award Agreement, Stock Appreciation Rights shall not be transferable except under the laws of descent and distribution or pursuant to a qualified domestic relations order as defined by the Code or Title I of the Employee Retirement Income Security Act, or the rules thereunder, and shall be exercisable during the lifetime of the Participant only by the Participant. (v) Upon the exercise of a Stock Appreciation Right, any related Stock Option or part thereof to which such Stock Appreciation Right is related shall be deemed to have been exercised for the purpose of the limitation set forth in Section 3 of the Plan on the number of shares of Stock to be issued under the Plan. 7. Other Stock-Based Awards. (a) ADMINISTRATION. Other Awards of Stock or that are valued in whole or in part by reference to, or are otherwise based on, Stock ("Other Stock-Based Awards"), including, without limitation, performance shares, convertible preferred stock, convertible debentures, or exchangeable securities, may be granted either alone or in addition to or in tandem with Stock Options or Stock Appreciation Rights granted under the Plan. Subject to the provisions of the Plan, the Committee shall have authority to determine the persons to whom and the time or times at which such Awards shall be made, the number of shares of Stock to be awarded pursuant to such Awards, and all other conditions of the Awards. The Committee may also provide for the grant of Stock upon the completion of a specified performance period. The provisions of Other Stock-Based Awards need not be the same with respect to each recipient. (b) TERMS AND CONDITIONS. Unless otherwise provided in the related Award Agreement, Stock subject to Awards made under this Section 7 may not be sold, assigned, transferred, pledged, or otherwise encumbered prior to the date on which the Stock is issued or, if later, the date on which any applicable restriction, performance, or deferral period lapses. The Participant shall be entitled to receive, currently or on a deferred basis, interest or dividends or interest or dividend equivalents with respect to the Stock covered by the Award, as determined at the time of the Award by the Committee, in its sole discretion, and the Committee may provide that such amounts (if any) shall be deemed to have been reinvested in additional Stock or otherwise reinvested. -10- Any Award under Section 7 and any Stock covered by any such Award shall vest or be forfeited to the extent so provided in the Award Agreement, as determined by the Committee, in its sole discretion. In the event of the Participant's retirement, Disability, or death, or in cases of special circumstances, the Committee may, in its sole discretion, waive in whole or in part any or all of the remaining limitations imposed with respect to any or all of an Award under this Section 7. Each Award under this Section 7 shall be confirmed by, and subject to the terms of, an Award Agreement or other instrument entered into by the Company and the Participant. Stock (including securities convertible into Stock) issued on a bonus basis under this Section 7 may be issued for no cash consideration. The purchase price of any Stock (including securities convertible into Stock) subject to a purchase right awarded under this Section 7 shall be at least 85% of the Fair Market Value of the Stock on the date of grant. 8. Change in Control Provisions. (a) IMPACT OF EVENT. In the event of a "Change in Control" as defined in Section 8(b), any Award granted under this Plan shall become fully exercisable and vested. (b) DEFINITION OF "CHANGE IN CONTROL." For purposes of Section 8(a), a "Change in Control" means the happening of any of the following: (i) A majority of the directors of the Company shall be persons other than persons (A) For whose election proxies shall have been solicited by the Board, or (B) Who are then serving as directors appointed by the Board to fill vacancies on the Board caused by death or resignation (but not by removal) or to fill newly-created directorships, (ii) 30% or more of the outstanding voting stock of the Company is acquired or beneficially owned (as defined in Rule 13d-3 under the Exchange Act or any successor rule thereto) by any person (other than the Company or a subsidiary of the Company) or group of persons acting in concert (other than the acquisition and beneficial -11- ownership by a parent corporation or its wholly-owned subsidiaries, as long as they remain wholly-owned subsidiaries, of 100% of the outstanding voting stock of the Company as a result of a merger which complies with paragraph (iii)(A)(2) hereof in all respects), or (iii) The shareholders of the Company approve a definitive agreement or plan to (A) Merge or consolidate the Company with or into another corporation other than (1) a merger or consolidation with a subsidiary of the Company or (2) a merger in which (a) the Company is the surviving corporation, (b) no outstanding voting stock of the Company (other than fractional shares) held by shareholders immediately prior to the merger is converted into cash, securities, or other property (except (i) voting stock of a parent corporation owning directly, or indirectly through wholly owned subsidiaries, both beneficially and of record 100% of the voting stock of the Company immediately after the merger and (ii) cash upon the exercise by holders of voting stock of the Company of statutory dissenters' rights), (c) the persons who were the beneficial owners, respectively, of the outstanding common stock and outstanding voting stock of the Company immediately prior to such merger beneficially own, directly or indirectly, immediately after the merger, more than 70% of, respectively, the then outstanding common stock and the then outstanding voting stock of the surviving corporation or its parent corporation, and (d) if voting stock of the parent corporation is exchanged for voting stock of the Company in the merger, all holders of any class or -12- series of voting stock of the Company immediately prior to the merger have the right to receive substantially the same per share consideration in exchange for their voting stock of the Company as all other holders of such class or series, (B) exchange, pursuant to a statutory exchange of shares of voting stock of the Company held by shareholders of the Company immediately prior to the exchange, shares of one or more classes or series of voting stock of the Company for cash, securities, or other property, (C) sell or otherwise dispose of all or substantially all of the assets of the Company (in one transaction or a series of transactions), or (D) liquidate or dissolve the Company. 9. Amendments and Termination. The Board may amend, alter, discontinue, or terminate the Plan, or any portion thereof, but no amendment, alteration, or discontinuation shall be made which would impair the vested rights of a Participant under any Award theretofore granted without the Participant's consent or which, without the approval of the Company's shareholders, would: (a) except as expressly provided in this Plan, increase the total number of shares reserved for the purpose of the Plan; (b) authorize an increase in the total number of shares reserved for issuance upon exercise of Incentive Stock Options; (c) decrease the option price of any Incentive Stock Option to less than 100% of the Fair Market Value on the date of grant; (d) permit the issuance of Stock prior to payment in full therefor; (e) change the employees or class of employees eligible to participate in the Plan; or (f) extend the maximum option period under Section 5(i) of the Plan. The Committee may amend the terms of any Award theretofore granted, prospectively or retroactively, but, subject to Section 3 above, no such amendment shall -13- impair the vested rights of any holder without the holder's consent. The Committee may also substitute new Stock Options for previously granted Stock Options (on a one-for-one or other basis), including previously granted Stock Options having higher option exercise prices. Subject to the above provisions, the Board shall have broad authority to amend the Plan to take into account changes in applicable securities and tax laws and accounting rules, as well as other developments. 10. Unfunded Status of Plan. The Plan is intended to constitute an "unfunded" plan for incentive and deferred compensation. With respect to any payments not yet made to a Participant by the Company, nothing contained herein shall give any such Participant any rights that are greater than those of a general creditor of the Company. In its sole discretion, the Committee may authorize the creation of trusts or other arrangements to meet the obligations created under the Plan to deliver Stock or payments in lieu of or with respect to Awards hereunder; provided, however, that, unless the Committee otherwise determines with the consent of the affected Participant, the existence of such trusts or other arrangements is consistent with the "unfunded" status of the Plan. 11. General Provisions. (a) The Committee may require each person purchasing shares pursuant to a Stock Option or receiving shares pursuant to any other Award under the Plan to represent to and agree with the Company in writing that the Participant is acquiring the shares without a view to distribution thereof. The certificates for such shares may include any legend which the Committee deems appropriate to reflect any restrictions on transfer. All certificates for shares of Stock or other securities delivered under the Plan shall be subject to such stop transfer orders and other restrictions as the Committee may deem advisable under the rules, regulations, and other requirements of the Securities and Exchange Commission, any over-the-counter market on which the Stock is quoted, any stock exchange upon which the Stock is then listed, and any applicable federal or state securities law, and the Committee may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions. (b) The Committee may at any time offer to buy out for a payment in cash or Stock an Award previously granted, based on such terms and conditions as the Committee shall establish and communicate to the Participant at the time that such offer is made. -14- (c) Nothing contained in this Plan shall prevent the Board from adopting other or additional compensation arrangements, subject to shareholder approval if such approval is required; and such arrangements may be either generally applicable or applicable only in specific cases. (d) Neither the adoption of this Plan nor the grant of any Award hereunder shall confer upon any employee of the Company or any Subsidiary, Parent, or Affiliate any right to continued employment with the Company or a Subsidiary, Parent, or Affiliate, as the case may be, or interfere in any way with the right of the Company or a Subsidiary, Parent, or Affiliate to terminate the employment of any of its employees at any time. (e) No later than the date as of which an amount first becomes includable in the gross income of the Participant for federal income tax purposes with respect to any Award under the Plan, the Participant shall pay to the Company, or make arrangements satisfactory to the Committee regarding the payment of, any federal, state, or local taxes of any kind required by law to be withheld with respect to such amount. The obligations of the Company under the Plan shall be conditional on such payment or arrangements, and the Company and any Subsidiary, Parent, or Affiliate shall, to the extent permitted by law, have the right to deduct any such taxes from any payment of any kind otherwise due to the Participant. If so provided in the related Award Agreement, a Participant may authorize the withholding of shares of Stock otherwise deliverable upon exercise of an Option or the grant or vesting of an Award to satisfy any tax obligations arising from such exercise, grant, or vesting. (f) The actual or deemed reinvestment of dividends or dividend equivalents in additional Stock at the time of any dividend payment shall only be permissible if sufficient shares of Stock are available under Section 3 for such reinvestment (taking into account then outstanding Stock Options and other Plan Awards). (g) To the extent that federal laws (such as the Code, the Exchange Act, or the Employee Retirement Income Security Act of 1974) do not otherwise control, this Plan and all Awards made and actions taken hereunder shall be governed by and construed in accordance with the laws of the State of Minnesota. (h) Unless otherwise provided in the related Award Agreement, no rights granted hereunder may be assigned, transferred, pledged, or hypothecated (whether by operation of law or otherwise) or be subject to execution, attachment, or similar process, and any attempted assignment, transfer, pledge, hypothecation, or other disposition or levy of attachment or similar process upon any such right will be null and void and without effect. -15- (i) If any term, provision, or portion of this Plan or any Award granted hereunder shall be deemed unenforceable or in violation of applicable law, such term, provision, or portion of the Plan or the Award shall be deemed severable from all other terms, provisions, or portions of this Plan or the Award or any other Awards granted hereunder, which shall otherwise continue in full force and effect. 12. Effective Date of Plan. The Plan shall be effective as of September 30, 1995, subject to the approval of the Plan by a majority of the votes cast by the holders of the Company's Common Stock at the annual shareholders' meeting next following adoption of the Plan. Any grants made under the Plan prior to such approval shall be effective when made (unless otherwise specified by the Committee at the time of grant), but shall be conditioned on, and subject to, such approval of the Plan by such shareholders. 13. Term of Plan. No Incentive Stock Option shall be granted pursuant to the Plan on or after the tenth anniversary of the date of adoption of the Plan, but Incentive Stock Options granted prior to such tenth anniversary may extend beyond that date. All other Awards may be granted at any time and for any period unless otherwise provided by the Plan. ------------------------------------ Approved and adopted by the Board of Directors of Rural Cellular Corporation as of August 23, 1995, and approved by the shareholders on September 15, 1995. The number of shares originally reserved for this Plan has been adjusted to reflect a Stock split approved by the Board of Directors on November 28, 1995. This Plan has been restated to reflect: (i) an amendment adopted by the Board of Directors effective March 21, 1996, deleting Section 6(b)(vi); (ii) amendments adopted by the Board of Directors effective October 18, 1996, to comply with changes in Rule 16b-3 under the Securities Exchange Act of 1934; and (iii) an increase in the number of shares authorized to be issued under the Plan adopted by the Board of Directors effective December 18, 1996 (subject to the approval of the Company's shareholders at the 1997 annual meeting). -16- EX-10.9 3 EX-10.9 STOCK OPT. PLAN FOR NONEMPLOYEE DIRECTORS RURAL CELLULAR CORPORATION STOCK OPTION PLAN FOR NONEMPLOYEE DIRECTORS (AS AMENDED THROUGH MARCH 20, 1997) 1. PURPOSE. This Stock Option Plan (the "Plan") for RURAL CELLULAR CORPORATION, a Minnesota corporation (the "Company"), is intended to advance the interests of the Company by providing members of the Board of Directors, who are responsible for the direction of the Company, with additional incentive to promote the success of the business, to increase their proprietary interest in the success of the Company, and to attract, reward and retain them as directors of the Company. These goals will be effectuated through the granting of nonqualified options to purchase Common Stock of the Company. 2. DEFINITIONS. In addition to definitions that may be contained elsewhere herein, for purposes of this Plan, the following terms shall be defined as set forth below: (a) "Affiliate" means any entity other than the Company and its Parents and Subsidiaries that has been designated by the Board of Directors or a relevant committee to be a participating employer under any stock option plan in which employees of the Company are eligible to participate, providing that the Company directly or indirectly owns at least twenty percent (20%) of the combined voting power of all classes of stock of such entity or at least twenty percent (20%) of the ownership interest in such entity. (b) "Board" means the Board of Directors of the Company. (c) "Code" means the Internal Revenue Code of 1986, as amended from time to time, and any successor thereto. (d) "Committee" means the Committee referred to in Section 3 of the Plan. (e) "Disability" means disability as determined under procedures established by the Board for purposes of this Plan or as defined in Section 22(e)(3) of the Code. (f) [deleted] (g) "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time. (h) "Fair Market Value" means as of any given date, unless otherwise determined by the Board in good faith, the closing bid price of the Stock as reported on The Nasdaq Small-Cap Market or, if the Stock is then traded on The Nasdaq National Market or on a national or regional securities exchange, the closing price of the Stock on The Nasdaq National Market or such exchange. (i) "Option Agreement" means any written agreement, contract, or other instrument or document evidencing any Option granted hereunder and signed by both the Company and the Participant. (j) "Parent" means any corporation (other than the Company) in an unbroken chain of corporations ending with the Company if, at the time of granting of an Option, each of the corporations other than the Company owns stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in the chain. (k) "Participant" means any person entitled to participate in this Plan as set forth in Section 4 hereof. (l) "Stock" means the Class A Common Stock, $.01 par value per share, of the Company. (m) "Stock Option" or "Option" means any option to purchase shares of Stock granted pursuant to Section 5 below. (n) "Subsidiary" means any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company if, at the time of the granting of an Option, each of the corporations other than the last corporation in the unbroken chain owns stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in the chain. 3. ADMINISTRATION. The Plan shall be administered by the Board, which, in its discretion, may delegate some or all of its authority hereunder to a committee consisting of two or more directors of the Company appointed by the Board. The Members of such Committee shall meet the qualifications set forth in Rule 16b-3 under the Exchange Act, as it may be amended from time to time. Grants of Common Stock under the Plan shall be made automatically as provided in Section 5. However, the Board shall have full authority to interpret the Plan, to promulgate such rules and regulations with respect to the Plan as it deems desirable and to make all other determinations necessary or appropriate for the administration of the Plan, and such determinations shall be final and binding upon all persons having an interest in the Plan. 4. ELIGIBILITY. Options will be granted only to persons who at the time of the grant are directors of the Company and who are not otherwise employees of the -2- Company or any Parent, Subsidiary, or Affiliate of the Company ("Nonemployee Director" or "Nonemployee Directors"). 5. OPTIONS. (a) ANNUAL GRANT. Each year, on the first business day following the annual meeting of the Company's shareholders, each person then serving as a Nonemployee Director of the Company, whether elected at the immediately preceding meeting or continuing to serve a term yet to be completed, shall be granted an Option to purchase 5,250 shares of Stock. Except as otherwise may be provided herein, each Option (i) shall be subject to all of the terms of the Plan, (ii) shall be granted for a term of six years, and (iii) shall vest and become fully exercisable on the date of the next annual shareholders meeting or, if earlier, one year from the date of the grant; provided, in each instance, that the Participant has continuously served as a Nonemployee Director of the Company through such date. (b) SPECIAL GRANTS. (i) In the event that a Nonemployee Director is initially appointed or elected at any time other than an annual shareholders' meeting, such Nonemployee Director shall be granted an option to purchase 5,250 shares of Stock if appointed within six months of the previous annual meeting. (ii) Each Nonemployee Director holding office immediately after the annual shareholders meeting held in 1996 but who is not elected at that meeting shall be granted an Option to purchase 5,250 shares of Stock if such Nonemployee Director is serving a term which will expire in 1997 or an Option to purchase 10,500 shares if such Nonemployee Director is serving a term which will expire in 1998. (iii) Each Option granted pursuant to Section 5(b)(i) hereof shall vest and become fully exercisable on the date of the next following annual shareholders meeting, provided that the Participant has continuously served as a Nonemployee Director of the Company through such date, and shall expire on the fifth anniversary of the date of such shareholders' meeting. Each Option granted pursuant to Section 5(b)(ii) hereof shall vest and become fully exercisable in annual installments of 5,250 shares each on the date of the annual shareholders' meeting, commencing with the first annual meeting following the date of grant; provided, in each instance, that the Participant has continuously served as a Nonemployee Director of the Company through such date. Options for 5,250 shares shall expire on the fourth anniversary of the date of grant; -3- Options for 10,500 shares shall expire on the fifth anniversary of the date of grant, and Options for 15,750 shares shall expire on the sixth anniversary of the date of grant. In all other respects, Options granted under this Section 5(b) shall be subject to all other terms and provisions of the Plan. (c) EXERCISE PRICE. The exercise price per share of Stock purchasable under any Option shall be not less than 100% of the Fair Market Value of the Stock on the date of grant. (d) METHOD OF EXERCISE. Stock Options may be exercised in whole or in part any time during the term of the Option. Payment of the exercise price shall be made by (i) cash or certified bank check, (ii) delivery of shares of Stock that the Participant has owned for at least six months prior to the date of exercise, or (iii) any combination of the foregoing. For purposes of this paragraph, shares of Stock that are delivered in payment of the exercise price shall be valued at their Fair Market Value as of the date of the exercise of the Option. The Company's obligation to deliver shares upon the exercise of Options shall be subject to any applicable federal, state, and local tax withholding requirements. A Participant may elect to satisfy any tax obligation triggered by the exercise of an Option by the withholding of shares otherwise deliverable upon such exercise. (e) RESTRICTIONS ON TRANSFER OF OPTION. Except as may otherwise be provided in the related Option Agreement, which provision shall have been approved in advance by the Board, each Option granted under this Plan shall be transferable only by will or the laws of descent and distribution or pursuant to a qualified domestic relations order as defined by the Code or Title I of the Employee Retirement Income Security Act ("ERISA"), or the rules thereunder. Except as permitted by the preceding sentence, no Option granted under the Plan or any of the rights and privileges thereby conferred shall be transferred, assigned, pledged, or hypothecated in any way (whether by operation of law or otherwise), and no such option, right, or privilege shall be subject to execution, attachment, or similar process. Except as may otherwise be provided in the related Option Agreement, which provision shall have been approved in advance by the Board, an Option may be exercised during the Participant's lifetime only by the Participant or his or her guardian or legal representative. 6. SHARES OF STOCK SUBJECT TO THE PLAN. There shall be reserved and available for issuance upon the exercise of Options granted from time to time under the Plan an aggregate of 210,000 shares of Stock. Such shares may consist, in whole or in part, of authorized but unissued shares of Stock or issued shares that have been reacquired by the Company. If any shares subject to an Option are not issued because the Option is not exercised, such shares shall again be available for distribution in connection with future Options. -4- In the event of any merger, reorganization, consolidation, recapitalization, Stock dividend, Stock split, or other change in corporate structure affecting the Stock, such substitution or adjustment shall be made in the aggregate number of shares reserved for issuance under the Plan and in the number and option price of shares subject to outstanding options granted under the Plan as may be determined to be appropriate by the Board, in its sole discretion, provided that the number of shares subject to any Option shall always be a whole number. 7. DEATH OR DISABILITY OF PARTICIPANT. (a) TERMINATION BY DEATH. If a Participant's service to the Company terminates by reason of death, any Stock Option held by such Participant will immediately become exercisable as set forth in Section 7(c) and may thereafter be exercised by the legal representative of the Participant's estate or by any person who acquired the Option by will or the laws of descent and distribution for a period of one year from the date of such death or until the expiration of the stated term of such Stock Option whichever period is the shorter. (b) TERMINATION BY REASON OF DISABILITY. If a Participant's service to the Company terminates by reason of Disability, any Stock Option held by such Participant shall immediately become exercisable as set forth in Section 7(c) and may thereafter be exercised by the Participant until the expiration of the stated term of such Stock Option; provided, however, that, if the Participant dies prior to the expiration of the Option, any unexercised Stock Option held by such Participant shall thereafter be exercisable to the extent to which it was exercisable at the time of death for a period of one year from the date of such death or until the expiration of the stated term of such Stock Option, whichever period is the shorter. (c) ACCELERATION OF EXERCISABILITY. In the event a Participant's service to the Company is terminated as described in Section 7(a) or 7(b), any Stock Option held by such Participant for the purchase of 5,250 shares shall become immediately exercisable in full, and any Stock Option held by such Participant for the purchase of more than 5,250 shares shall become immediately exercisable as to 5,250 shares if the Option was granted less than one year prior to the termination event, as to 10,500 shares if the Option was granted more than one year but less than two years prior to the termination event, and as to 15,750 shares if the Option was granted more than two years prior to the termination event. 8. RESTRICTIONS ON TRANSFER OF STOCK. Unless a registration statement under the Securities Act of 1933 is in effect with respect to Stock to be purchased upon exercise of Options to be granted under the Plan, the Company may require that the Participant represent to and agree with the Company in writing that he or she is acquir- -5- ing such shares of Stock for the purpose of investment and with no present intention to transfer, sell, or otherwise dispose of such shares of Stock. Further, in the absence of such registration, no shares of Stock acquired pursuant to exercise of an Option may be transferred unless, in the opinion of counsel to the Company, such transfer is in compliance with applicable securities laws, and each certificate representing any shares of Stock issued to a Participant hereunder shall have endorsed thereon an appropriate legend referring to the restrictions against transfer. 9. AMENDMENT OF THE PLAN. The Board of Directors may suspend or terminate the Plan or any portion thereof at any time, and the Board of Directors may amend the Plan from time to time as may be deemed to be in the best interests of the Company; provided, however, that no such amendment, alteration or discontinuation shall be made (a) that would impair the rights of a Nonemployee Director with respect to Options theretofore awarded, without such person's consent, or (b) without the approval of the stockholders (i) if such approval is necessary to comply with any legal, tax, or regulatory requirement, including any approval requirement that is a prerequisite for exemptive relief from Section 16(b) of the Exchange Act, or (ii) to increase the maximum number of shares of Stock subject to this Plan, increase the maximum number of shares issuable to any Nonemployee Director under this Plan, or change the definition of persons eligible to receive Options under this Plan. 10. APPLICABILITY OF PLAN TO OUTSTANDING STOCK OPTIONS. This Plan shall not affect the terms and conditions of any stock options currently outstanding to any director of the Company, nor shall it affect any of the rights of any director to whom such a stock option was granted. 11. EFFECTIVE DATE OF PLAN. This Plan shall become effective on September 30, 1995, subject to approval by the shareholders of the Company within twelve months of the date of adoption by the Board of Directors. 12. CHANGE IN CONTROL PROVISIONS. (a) IMPACT OF EVENT. In the event of a "Change in Control" as defined in Section 12(b) all Options granted hereunder shall become fully exercisable and vested. (b) DEFINITION OF "CHANGE IN CONTROL." For purposes of Section 12(a), a "Change in Control" means the happening of any of the following: (i) A majority of the directors of the Company shall be persons other than persons (A) For whose election proxies shall have been solicited by the Board, or -6- (B) Who are then serving as directors appointed by the Board to fill vacancies on the Board caused by death or resignation (but not by removal) or to fill newly-created directorships, (ii) 30% or more of the outstanding voting stock of the Company is acquired or beneficially owned (as defined in Rule 13d-3 under the Exchange Act or any successor rule thereto) by any person (other than the Company or a subsidiary of the Company) or group of persons acting in concert (other than the acquisition and beneficial ownership by a parent corporation or its wholly-owned subsidiaries, as long as they remain wholly-owned subsidiaries, of 100% of the outstanding voting stock of the Company as a result of a merger which complies with paragraph (iii)(A)(2) hereof in all respects), or (iii) The shareholders of the Company approve a definitive agreement or plan to (A) Merge or consolidate the Company with or into another corporation other than (1) a merger or consolidation with a subsidiary of the Company or (2) a merger in which (a) the Company is the surviving corporation, (b) no outstanding voting stock of the Company (other than fractional shares) held by shareholders immediately prior to the merger is converted into cash, securities, or other property (except (i) voting stock of a parent corporation owning directly, or indirectly through wholly owned subsidiaries, both beneficially and of record 100% of the voting stock of the Company immediately after the merger and (ii) cash upon the exercise by holders of voting stock of the Company of statutory dissenters' rights), (c) the persons who were the beneficial owners, respectively, of the outstanding common stock and outstanding voting stock of the Company immediately prior to such merger beneficially own, directly or indirectly, immedi- -7- ately after the merger, more than 70% of, respectively, the then outstanding common stock and the then outstanding voting stock of the surviving corporation or its parent corporation, and (d) if voting stock of the parent corporation is exchanged for voting stock of the Company in the merger, all holders of any class or series of voting stock of the Company immediately prior to the merger have the right to receive substantially the same per share consideration in exchange for their voting stock of the Company as all other holders of such class or series, (B) exchange, pursuant to a statutory exchange of shares of voting stock of the Company held by shareholders of the Company immediately prior to the exchange, shares of one or more classes or series of voting stock of the Company for cash, securities, or other property, (C) sell or otherwise dispose of all or substantially all of the assets of the Company (in one transaction or a series of transactions), or (D) liquidate or dissolve the Company. 13. NONEXCLUSIVITY OF THE PLAN. The adoption of this Plan shall not be construed as limiting the power of the Board of Directors to adopt such other incentive arrangements as it may deem desirable, including, without limitation, the granting of stock options otherwise than under this Plan, and such arrangements may be either generally applicable or applicable only in specific cases. 14. MISCELLANEOUS. (a) GOVERNING LAW. This Plan shall be governed by and construed in accordance with the laws of the State of Minnesota, and all terms shall be interpreted and construed so that there shall not be committed any violation of applicable state or federal securities laws. (b) NO ADDITIONAL RIGHTS OF SERVICE. Participation in or eligibility for participation in the Plan does not grant any person any right of service as a director, and the Company retains the right to terminate service of any director pursuant to Company's Articles, Bylaws, and applicable law. -8- _____________________________ APPROVED and adopted by the Board of Directors of RURAL CELLULAR CORPORATION as of August 23, 1995, and approved by the shareholders on September 15, 1995. The number of shares originally reserved for this Plan has been adjusted to reflect a Stock split approved by the Board of Directors on November 28, 1995. This Plan has been restated to include: (i) an amendment to Section 5(b) adopted by the Board of Directors effective November 28, 1995, which was approved by the shareholders at the 1996 annual meeting held on May 23, 1996; (ii) amendments adopted by the Board of Directors effective October 18, 1996, to conform to changes in Rule 16b-3 under the Securities Exchange Act of 1934; and (iii) amendments to Sections 5(a), 5(b)(i) and (iii) and 7(c) adopted by the Board of Directors effective March 20, 1997. -9- EX-10.10(B) 4 10.10(B) AMEND. TO EMPLOYMENT AMENDMENT AMENDMENT TO EMPLOYMENT AGREEMENT DATED DECEMBER 1, 1995 BY AND BETWEEN RURAL CELLULAR CORPORATION AND RICHARD P. EKSTRAND THIS AMENDMENT entered into this 18th day of December, 1996, by and between Rural Cellular Corporation ("RCC" or "Company") and Richard P. Ekstrand (the "Employee"). WHEREAS, RCC and the Employee entered into a written Employment Agreement on December 1, 1995; WHEREAS, under the current provisions in the Employment Agreement, the Employee's employment term ends December 31, 1998; WHEREAS, pursuant to Sections 5 and 14 of the Employment Agreement, RCC and the Employee desire to extend the term of the Employee's Employment Agreement by one year; NOW, THEREFORE, it is AGREED as follows: 1. The Employee's term of employment, as stated in Section 5 of the Employment Agreement, is hereby extended by one year, so that said term now ends on December 31, 1999. 2. All other terms, conditions and provisions of the Employment Agreement remain in full force and effect. RURAL CELLULAR CORPORATION /s/ Don C. Swenson --------------------------------- By: Don C. Swenson Secretary /s/ Richard P. Eckstrand --------------------------------- Richard P. Eckstrand EX-10.11(A) 5 10.11(A) EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT THIS AGREEMENT entered into this 1st day of December, 1995 ("Effective Date"), by and between Rural Cellular Corporation ("RCC" or "Company") and Scott Donlea (the "Employee"). WHEREAS, the Employee has heretofore been employed by RCC in the position described in the job description attached as Exhibit A and is experienced in the business of RCC; and WHEREAS, the parties desire by this writing to set forth the continuing employment relationship of RCC and the Employee. NOW, THEREFORE, it is AGREED as follows: 1. EMPLOYMENT. The Employee is employed in the capacity of Vice President of Sales and Marketing for RCC as described in the attached Exhibit A and as are customarily performed by persons situated in a similar executive capacity. The Employee shall also promote, by entertainment or otherwise, as and to the extent permitted by law, the business of RCC. The Employee's other duties shall be such as the President/CEO, or his designee, may from time to time reasonably direct. The Board of Directors may change Employee's reporting relationship at any time. 2. BASE COMPENSATION. RCC agrees to pay the Employee during the term of this Agreement a salary which shall be at the 1995 rate for December 1995 and continue at the rate of $84,100 per annum beginning January 1, 1996, payable not less frequently than every two weeks; provided, that the rate of such salary shall be reviewed by the Board of Directors not less often than annually, and Employee shall be entitled to receive an increase at such percentage or in such an amount, if any, as the Board of Directors in its sole discretion may decide at such time. 3. DISCRETIONARY AND INCENTIVE BONUS. The Employee shall be entitled to participate in an equitable manner with all other senior management employees of RCC in discretionary and incentive bonuses, including, but not limited to stock option and restricted stock awards and other cash and non-cash compensation plans that may be authorized and declared by the Board of Directors to its senior management employees from time to time. 4. OTHER BENEFITS. (a) PARTICIPATION IN RETIREMENT AND MEDICAL PLANS. The Employee shall be entitled to participate in any plan of RCC relating to compensation, profit sharing, or other retirement benefits and medical coverage or reimbursement plans as RCC may adopt for the benefit of its employees, (b) EMPLOYEE BENEFITS; EXPENSES. The Employee shall be eligible to participate in any fringe benefits which may be or may become applicable to RCC's senior management employees, including by example, participation in any stock option or incentive plans adopted by the Board of Directors, and any other benefits adopted by the Board of Directors. RCC shall reimburse Employee for all reasonable out-of-pocket expenses which Employee shall incur in connection with his service for RCC which are documented with RCC's policies as set forth from time to time. 5. TERM. The term of employment of Employee under this Agreement shall be for the period commencing on the Effective Date and ending December 31, 1998. Additionally, the term of employment under this Agreement may be extended for one or more additional one year periods beyond the then effective expiration date upon a determination and resolution of the Board of Directors, in its sole discretion, that the performance of the Employee has met the requirements and standards of the Board in the current term, and that the term of such Agreement shall be extended for an additional one year term and the acceptance by Employee of such extended term. 6. LOYALTY; NONCOMPETITION. (a) The Employee shall devote his full time and attention to the performance of his employment under this Agreement. During the term of Employee's employment under this Agreement, the Employee shall not engage in any business or activity contrary to the business affairs or interests of RCC. (b) Nothing contained in this Paragraph 6 shall be deemed to prevent or limit the right of Employee to invest in the capital stock or other securities of any business dissimilar from that of RCC, or, solely as a passive or minority investor, in any business. 7. STANDARDS. The Employee shall perform his duties under this Agreement in accordance with such reasonable standards expected of employees with comparable positions in comparable organizations and as may be established from time to time by thePresident/CEO. 8. VACATION AND SICK LEAVE. At such reasonable times as RCC shall in its sole discretion permit, the Employee shall be entitled, without loss of pay, to absent himself voluntarily from the performance under this Agreement, with all such voluntary absences to count as vacation time; provided that: (a) The Employee shall be entitled to annual vacation leave in accordance with the policies as are periodically established by the Board of Directors for senior management of RCC but in no event less than three calendar weeks per calendar year. -2- (b) The Employee shall take at least five consecutive business days of vacation in each calendar year. (c) The Employee shall not be entitled to receive any additional compensation from RCC on account of his failure to take vacation leave and Employee shall not be entitled to accumulate unused vacation from one fiscal year to the next, except in either case to the extent authorized by the Board of Directors for senior management employees of RCC. (d) In addition to the aforesaid paid vacations, the Employee shall be entitled without loss of pay, to absent himself voluntarily from the performance of his employment with RCC for such additional periods of time and for such valid and legitimate reasons as the Board of Directors in its discretion may determine. Further, the Board of Directors shall be entitled to grant to the Employee a leave or leaves of absence with or without pay at such time or times and upon such terms and conditions as the Board of Directors in its discretion may determine. (e) In addition, the Employee shall be entitled to an annual sick leave benefit as established by the Board of Directors for senior management employees of RCC. In the event that any sick leave benefit shall not have been used during any year, such leave shall accrue to subsequent years only to the extent authorized by the Board of Directors for employees of RCC. (f) The Employee is encouraged to participate in related industry organizations and activities provided that the assumption of any significant responsibilities for such outside activities or organizational participation shall be approved in advance by the President/CEO. 9. TERMINATION AND TERMINATION PAY. The Employee's employment under this Agreement shall be terminated upon any of the following occurrences: (a) The death of the Employee during the term of this Agreement, in which event the Employee's estate shall be entitled to receive the compensation due the Employee through the last day of the calendar month in which Employee's death shall have occurred, plus all accrued but unused vacation for such calendar year, and PRO RATA payment of all bonuses or incentive payments earned or to be awarded for such calendar year. (b) The Board of Directors may terminate the Employee's employment at any time, but any termination by the Board of Directors other than termination for Just Cause, as defined below, shall not prejudice the Employee's right to compensation or other benefits under the Agreement. The Employee shall have no right to receive compensation or other benefits for any period after termination for Just Cause. Termination for "Just Cause" shall include termination because of the Employee's personal dishonesty, incompetence, -3- willful misconduct, breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule or regulation (other than traffic violations or similar offenses) or final cease-and-desist order, or material breach of any provision of the Agreement. (c) Except as provided pursuant to Section 11 herein, in the event Employee's employment under this Agreement is terminated by the Board of Directors without Just Cause, RCC shall be obligated to continue to pay the Employee the salary provided pursuant to Section 2 herein, up to the date of termination of the term (including any extension of the term pursuant to Section 5 above) of this Agreement. Notwithstanding the foregoing, in no event shall payments to be made in accordance with this Section 9(c) be for a period of less than 12 months following the date of termination of employment. (d) The voluntary termination by the Employee during the term of this Agreement with the delivery of no less than 60 days written notice to the Board of Directors (other than pursuant to Section 11(b)) in which case the Employee shall be entitled to receive only the compensation, vested rights, and all employee benefits up to the date of such termination except as specifically provided below. 10. DISABILITY. If the Employee shall become disabled or incapacitated to the extent that he is unable to perform his duties hereunder, by reason of medically determinable physical or mental impairment, as determined by a doctor engaged by the Board of Directors, Employee shall nevertheless continue to receive the compensation and benefits provided under the terms of this Agreement as follows: 100% of such compensation and benefits for a period of six (6) months, but not exceeding the remaining term of the Agreement, and 65% thereafter for the remainder of the term of the Agreement. Such benefits noted herein shall be reduced by any benefits otherwise provided to the Employee during such period under the provisions of disability insurance coverage in effect for RCC employees. Thereafter, Employee shall be eligible to receive benefits provided by RCC under the provisions of disability insurance coverage in effect for RCC employees. Upon returning to active full-time employment, the Employee's full compensation as set forth in this Agreement shall be reinstated as of the date of commencement of such activities. In the event that the Employee returns to active employment on other than a full-time basis, then his compensation (as set forth in Paragraph 2 of this Agreement) shall be reduced in proportion to the time spent in said employment, or as shall otherwise be agreed to by the parties. 11. CHANGE IN CONTROL. (a) Notwithstanding any provision herein to the contrary, in the event of the involuntary termination of Employee's employment under this Agreement, absent Just Cause, in connection with, or within twelve (12) months after, any change in control of RCC, Employee shall be paid an amount equal to the -4- product of 2.99 times the Employee's "base amount" as defined in Section 280G(b)(3) of the Internal Revenue Code of 1986, as amended (the "Code") and regulations promulgated thereunder. Said sum shall be paid, at the option of Employee, either in one (1) lump sum within thirty (30) days of such termination discounted to the present value of such payment using as the discount rate the "prime rate" as published in the WALL STREET JOURNAL EASTERN EDITION as of the date of such payment, or in periodic payments over the next 36 months or the remaining term of this Agreement whichever is less, as if Employee's employment had not been terminated, and such payments shall be in lieu of any other future payments which the Employee would be otherwise entitled to receive under Section 9 of this Agreement. Notwithstanding the forgoing, all sums payable hereunder shall be reduced in such manner and to such extent so that no such payments made hereunder when aggregated with all other payments to be made to the Employee by RCC shall be deemed an "excess parachute payment" in accordance with Section 280G of the Code, or any successor provision, and be subject to the excise tax provided at Section 4999(a) of the Code. The term "change in control" shall be defined as set forth in the 1995 Stock Compensation Plan, which is incorporated herein by reference. (b) Notwithstanding any other provision of this Agreement to the contrary, Employee may voluntarily terminate his employment under this Agreement within twelve (12) months following a change in control of RCC, and Employee shall thereupon be entitled to receive the payment described in Section 11(a) of this Agreement, upon the occurrence, or within ninety (90) days thereafter, of any of the following events, which have not been consented to in advance by the Employee in writing: (i) if Employee would be required to move his personal residence or perform his principal executive functions more than fifty miles from the Employee's primary office immediately prior to the change in control; (ii) if in the organizational structure of RCC Employee would be required to report to a person or persons other than the Chief Executive Officer; (iii) if RCC should fail to maintain Employee's base compensation in effect as of the date of the Change in Control and the existing material fringe benefit, stock option, performance incentive and retirement plans; (iv) if Employee would be assigned duties and responsibilities other than those normally associated with his position as referenced at Section 1, herein; or (v) if Employee's responsibilities or authority have in any way been materially diminished or reduced. 12. NON-COMPETITION AGREEMENT. (a) TERM. During the term of the Agreement and for the period ending one (1) year after the voluntary or involuntary termination of this Agreement, Employee agrees that he will not, without RCC's prior written consent, directly or indirectly, within the service areas served by RCC at the time of termination, lend his credit, advice or assistance, or engage in any activity or act in any manner, including but not limited to, as an individual, owner, sole proprietor, founder, associate, promoter, partner, joint venturer, -5- shareholder other than as a less than five percent (5%) shareholder of a publicly traded corporation, officer, director, trustee, manager, employer, employee, licensor, licensee, licensor, licensee, principal, agent, salesman, broker, representative, consultant, advisor, investor or otherwise, for the purpose of establishing, operating or managing any business or entity that is engaged in activities competitive with the business of the Company as carried on as of the date of termination. (b) NON-SOLICITATION AGREEMENT. As used in this Agreement, the term "Person" means any individual, corporation, joint venture, general or limited partnership, association or other entity. During the period of one (1) year from and after the date of termination, Employee agrees that he will not, whether for his own account or for the account of any other Person, directly or indirectly interfere with the Company's relationship with or endeavor to divert or entice away from the Company any Person who or which at any time during the term of Employee's employment by RCC is or was an employee or customer of or in the habit of dealing with RCC. (c) REASONABLENESS OF COVENANTS. Employee acknowledges and agrees that the geographic scope and period of duration of the restrictive covenants contained in this Agreement are both fair and reasonable and that the interests sought to be protected by the Company are legitimate business interests entitled to be protected. (d) INJUNCTIVE RELIEF; ATTORNEYS' FEES. The parties agree that the remedy of damages at law for the breach by Employee of any of the covenants contained in this Section 12 is an inadequate remedy. In recognition of the irreparable harm that a violation by Employee of any of the covenants, agreements or obligations arising under this Agreement would cause RCC, Employee agrees that in addition to any other remedies or relief afforded by law, an injunction against an actual or threatened violation or violations may be issued against him and every other Person concerned thereby, it being the understanding of the parties that both damages and an injunction shall be proper modes of relief and are not to be considered alternative remedies. In the event of any such an actual or threatened violation, Employee agrees to pay the costs, expenses and reasonable attorneys' fees incurred by the Company in pursuing any of its rights with respect to such actual or threatened violation, in addition to the actual damages sustained by the Company as a result thereof. (e) COMPENSATION. In the event that Employee's employment has terminated and Employee is not entitled to receive payment under Sections 10 or 11 of this Agreement, to compensate Employee for the restrictive covenants contained in this Agreement, RCC agrees to pay Employee the sum of Sixty Thousand and 00/100 Dollars ($60,000.00). One-half of this amount is payable in equal monthly payments commencing on the last day of the month following termination and continuing thereafter on the last day of each and every month -6- until the end of the period stated in Section 12(a) and one-half at the end of the period stated in Section 12(a). In the event that Employee shall breach any of his covenants, agreements or obligations arising under this Agreement, RCC shall have the right to discontinue making the payments to Employee provided for herein unless and until Employee has cured any such existing breaches. (f) RCC may waive the restrictions on employee imposed in Section 12. In the event of such waiver, RCC shall not be obligated to make the payments set forth in Section 12(e) provided that, in the event of a voluntary termination by Employee, RCC shall give notice of such waiver to Employee within twenty (20) days of the receipt of the notice of termination by Employee. 13. SUCCESSORS AND ASSIGNS. (a) This Agreement shall inure to the benefit of and be binding upon any corporation or other successor of RCC which shall acquire, directly or indirectly, by merger, consolidation, purchase or otherwise, all or substantially all of the assets or stock of RCC. (b) Since RCC is contracting for the unique and personal skills of the Employee, the Employee shall be precluded from assigning or delegating his rights or duties hereunder without first obtaining the written consent of RCC. 14. AMENDMENTS. No amendments or additions to this Agreement shall be binding upon the parties hereto unless made in writing and signed by both parties, except as herein otherwise specifically provided. 15. APPLICABLE LAW. This Agreement shall be governed by all respects whether as to validity, construction, capacity, performance or otherwise, by the laws of the State of Minnesota, except to the extent that Federal law shall be deemed to apply. 16. SEVERABILITY. The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof. 17. ARBITRATION. Any controversy or claim arising out of or relating to this Agreement, or the breach thereof, shall be settled by arbitration in accordance with the rules then in effect of the district office of the American Arbitration Association ("AAA") nearest to the home office of RCC, and judgment upon the award rendered may be entered in any court having jurisdiction thereof, except to the extent that the parties may otherwise reach a mutual settlement of such issue. RCC shall incur the cost of all fees and expenses associated with filing a request for arbitration with the AAA, whether such filing is made on behalf of RCC or the Employee, and the costs and administrative fees associated with employing the arbitrator and related administrative -7- expenses assessed by the AAA. If the parties cannot mutually agree on an arbitrator, each party shall select an arbitrator and those two arbitrators shall select a third arbitrator and the third arbitrator shall conduct the arbitration. Otherwise, each party shall pay its own costs and expenses, including reasonable attorneys' fees, arising from such dispute, proceedings or actions, notwithstanding the ultimate outcome thereof, upon delivery of a final judgment or settlement of the dispute. 18. ENTIRE AGREEMENT. This Agreement, together with any understanding or modifications thereof as agreed to in writing by the parties, shall constitute the entire agreement between the parties hereto, and shall supersede all prior understandings in writing or otherwise between the parties. RURAL CELLULAR CORPORATION ATTEST: /s/ Richard P. Ekstrand ----------------------------------- By: Richard P. Ekstrand President/Chief Executive Officer - ----------------------------------- Secretary WITNESS: /s/ Nancy A. Gilbertson /s/ Scott Donlea - ----------------------------------- ----------------------------------- Scott Donlea -8- EX-10.11(B) 6 AMEND. TO EMPLOYMENT AGREEMENT DATED 12-1-95 AMENDMENT TO EMPLOYMENT AGREEMENT DATED DECEMBER 1, 1995 BY AND BETWEEN RURAL CELLULAR CORPORATION AND SCOTT DONLEA THIS AMENDMENT entered into this 18th day of December 1996, by and between Rural Cellular Corporation ("RCC" or "Company") and Scott Donlea (the "Employee"). WHEREAS, RCC and the Employee entered into a written Employment Agreement on December 1, 1995; WHEREAS, under the current provisions in the Employment Agreement, the Employee's employment term ends December 31, 1998; WHEREAS, pursuant to Sections 5 and 14 of the Employment Agreement, RCC and the Employee desire to extend the term of the Employee's Employment Agreement by one year; NOW, THEREFORE, it is AGREED as follows: 1. The Employee's term of employment, as stated in Section 5 of the Employment Agreement, is hereby extended by one year, so that said term now ends on December 31, 1999. 2. All other terms, conditions and provisions of the Employment Agreement remain in full force and effect. RURAL CELLULAR CORPORATION /s/ Richard P. Eckstrand ------------------------------- By: Richard P. Eckstrand President/Chief Executive Officer /s/ Scott Donlea ------------------------------- Scott Donlea EX-11 7 STATEMENT RE COMPUTATION OF PER SHARE EARNINGS EXHIBIT 11 RURAL CELLULAR CORPORATION AND SUBSIDIARIES STATEMENT RE COMPUTATION OF PER SHARE EARNINGS YEARS ENDED DECEMBER 31, --------------------------------------- 1996 1995 1994 ----------- ---------- ---------- NET INCOME $ 3,476,934 $ 789,847 $ 610,334 ----------- ---------- ---------- ----------- ---------- ---------- WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: Common shares outstanding 5,983,420 5,983,420 5,261,012 Weighted average common shares issued during the period 2,525,488 - 261,087 ----------- ---------- ---------- 8,508,908 5,983,420 5,522,099 ----------- ---------- ---------- ----------- ---------- ---------- NET INCOME PER COMMON SHARE $ .41 $ .13 $ .11 ----------- ---------- ---------- ----------- ---------- ---------- EX-21 8 SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT The Registrant has three wholly-owned subsidiaries, RCC Network, Inc., RCC Paging, Inc. and RCC Wireless Company, all of which are incorporated in the State of Minnesota. In addition, the Registrant holds a 51% interest in Wireless Alliance, LLC, a Minnesota limited liability company. EX-23 9 IND PUBLIC ACCT EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports included in this Annual Report on Form 10-K, into Rural Cellular Corporation's previously filed Registration Statements on Form S-8 (File Numbers 333-10815 and 333-10817). ARTHUR ANDERSEN LLP Minneapolis, Minnesota March 25, 1997 EX-27 10 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS. 12-MOS DEC-31-1996 DEC-31-1996 237,499 0 6,626,637 303,000 1,309,862 8,855,095 55,431,631 13,496,134 60,590,359 19,427,538 0 0 0 88,533 34,907,819 60,590,359 927,128 30,460,343 1,374,980 8,106,110 18,629,681 484,733 280,146 3,676,934 200,000 3,476,934 0 0 0 3,476,934 .41 .41
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