EX-99 4 c79848exv99.txt EX-99 INDEPENDENT AUDITORS' REPORT INDEPENDENT AUDITORS' REPORT Shareholders and Board of Directors Rural Cellular Corporation and Subsidiaries Alexandria, Minnesota We have audited the accompanying consolidated balance sheets of Rural Cellular Corporation and Subsidiaries (the Company) as of December 31, 2001 and 2002, and the related consolidated statements of operations, shareholders' (deficit) equity, and cash flows for each of the two years in the period ended December 31, 2002. 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. The financial statements of the Company as of December 31, 2000 and for the year then ended were audited by other auditors who have ceased operations. Those auditors expressed an unqualified opinion on those financial statements in their report dated February 1, 2002, prior to the disclosures and reclassifications related to goodwill and the extraordinary loss as discussed in Note 3 and Note 13, respectively. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform our audits 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, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2001 and 2002, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 5, effective January 1, 2001, the Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities (an amendment of SFAS No. 133). As discussed in Note 3 to the consolidated financial statements, the Company changed its method of accounting for goodwill and licenses in 2002. As discussed in Note 13, effective January 1, 2003, the Company adopted the provisions of SFAS No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections. As discussed above, the consolidated financial statements of the Company as of December 31, 2000 and for the year then ended were audited by other auditors who have ceased operations. As described in Note 3, these financial statements have been revised to include the transitional disclosures required by SFAS No. 142, Goodwill and Other Intangible Assets, which was adopted by the Company as of January 1, 2002. Our audit procedures with respect to the disclosures in Note 3 with respect to 2000 included (i) agreeing the previously reported net loss to the previously issued financial statements and the adjustments to reported net loss representing amortization expense recognized in this period related to goodwill and licenses that are no longer being amortized as a result of initially applying SFAS No. 142 to the Company's underlying records obtained from management, and (ii) testing the mathematical accuracy of the reconciliation of adjusted net loss to reported net loss and the related earnings-per-share amounts. Also, as discussed in Note 13, the financial statements have been revised to reflect the reclassification requirements of SFAS No. 145. Our audit procedures with respect to the 2000 consolidated statement of operations reclassification were to add the amount previously reported as an extraordinary item to the interest expense amount and test the mathematical accuracy of the 2000 consolidated statement of operations. In our opinion, the disclosures for 2000 in Note 3 and the reclassification of the extraordinary loss to interest expense for 2000 are appropriate. However, we F-14 were not engaged to audit, review, or apply any procedures to the 2000 consolidated financial statements of the Company other than with respect to such disclosures and, accordingly, we do not express an opinion or any other form of assurance on the 2000 consolidated financial statements taken as a whole. DELOITTE & TOUCHE LLP Minneapolis, Minnesota February 7, 2003, except Note 13, as to which the date is April 23, 2003. F-15 THIS IS A COPY OF A PREVIOUSLY ISSUED REPORT. IN ACCORDANCE WITH THE SECURITIES AND EXCHANGE COMMISSION'S AMENDMENT OF RULE 2-02 OF REGULATION S-X, THE FOLLOWING REPORT IS A COPY OF A REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN LLP, OUR FORMER INDEPENDENT PUBLIC ACCOUNTANTS, WHO HAVE CEASED OPERATIONS. 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, 2000 and 2001, and the related consolidated statements of operations, shareholders' (deficit) equity and cash flows for each of the three years in the period ended December 31, 2001. 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 auditing standards generally accepted in the United States. 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, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States. As explained in Note 5 to the financial statements, effective January 1, 2001 the Company adopted the provisions of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." ARTHUR ANDERSEN LLP Minneapolis, Minnesota, February 1, 2002 F-16 RURAL CELLULAR CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, ----------------------- 2002 2001 ---------- ---------- (IN THOUSANDS) ASSETS CURRENT ASSETS: Cash and cash equivalents................................. $ 53,788 $ 1,995 Accounts receivable, less allowance for doubtful accounts of $3,096 and $4,016................................... 46,442 45,279 Inventories............................................... 6,624 6,617 Other current assets...................................... 3,217 2,408 ---------- ---------- Total current assets................................... 110,071 56,299 ---------- ---------- PROPERTY AND EQUIPMENT, less accumulated depreciation of $172,629 and $137,776..................................... 240,536 244,980 ---------- ---------- LICENSES AND OTHER ASSETS: Licenses, less accumulated amortization of $50,409 and $50,409................................................ 618,576 1,030,624 Goodwill, less accumulated amortization of $32,336 and $32,493................................................ 369,829 361,184 Customer lists, less accumulated amortization of $66,282 and $45,730............................................ 92,748 113,299 Deferred debt issuance costs, less accumulated amortization of $11,427 and $8,306..................... 25,176 22,549 Other assets, less accumulated amortization of $1,432 and $1,230................................................. 6,042 7,844 ---------- ---------- Total licenses and other assets........................ 1,112,371 1,535,500 ---------- ---------- $1,462,978 $1,836,779 ========== ==========
The accompanying notes are an integral part of these consolidated financial statements. F-17 RURAL CELLULAR CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY
AS OF DECEMBER 31, ------------------------- 2002 2001 ----------- ----------- (IN THOUSANDS, EXCEPT PER SHARE DATA) CURRENT LIABILITIES: Accounts payable.......................................... $ 41,633 $ 35,167 Current portion of long-term debt......................... 79,047 189 Advance billings and customer deposits.................... 10,447 9,315 Accrued interest.......................................... 18,476 13,033 Dividends payable......................................... 6,412 5,710 Other accrued expenses.................................... 9,552 11,158 ---------- ---------- Total current liabilities.............................. 165,567 74,572 LONG-TERM LIABILITIES....................................... 1,211,026 1,286,301 ---------- ---------- Total liabilities...................................... 1,376,593 1,360,873 ---------- ---------- COMMITMENTS AND CONTINGENCIES (Note 9) REDEEMABLE PREFERRED STOCK.................................. 569,500 509,736 SHAREHOLDERS' DEFICIT: Class A common stock; $.01 par value; 200,000 shares authorized, 11,229 and 11,176 issued................... 112 112 Class B common stock; $.01 par value; 10,000 shares authorized, 693 and 728 issued......................... 7 7 Additional paid-in capital................................ 192,294 191,964 Accumulated deficit....................................... (669,508) (213,050) Accumulated other comprehensive loss...................... (6,020) (12,863) ---------- ---------- Total shareholders' deficit............................ (483,115) (33,830) ---------- ---------- $1,462,978 $1,836,779 ========== ==========
The accompanying notes are an integral part of these consolidated financial statements. F-18 RURAL CELLULAR CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, -------------------------------------- 2002 2001 2000 ----------- ----------- ---------- (IN THOUSANDS, EXCEPT PER SHARE DATA) REVENUE: Service................................................... $ 315,012 $ 305,988 $238,556 Roaming................................................... 122,703 116,541 98,693 Equipment................................................. 20,442 18,627 18,848 --------- --------- -------- Total revenue.......................................... 458,157 441,156 356,097 --------- --------- -------- OPERATING EXPENSES: Network costs, excluding depreciation and amortization.... 97,200 101,509 85,988 Cost of equipment sales................................... 29,184 28,415 34,711 Selling, general and administrative....................... 114,264 117,855 95,034 Depreciation and amortization............................. 82,497 112,577 91,078 --------- --------- -------- Total operating expenses............................... 323,145 360,356 306,811 --------- --------- -------- OPERATING INCOME............................................ 135,012 80,800 49,286 --------- --------- -------- OTHER INCOME (EXPENSE): Interest expense.......................................... (114,478) (130,432) (90,764) Interest and dividend income.............................. 562 1,172 2,249 Other..................................................... 66 (752) (24) --------- --------- -------- Other expense, net..................................... (113,850) (130,012) (88,539) --------- --------- -------- INCOME (LOSS) BEFORE INCOME TAXES AND CUMULATIVE CHANGE IN ACCOUNTING PRINCIPLE...................................... 21,162 (49,212) (39,253) INCOME TAX PROVISION........................................ -- -- -- --------- --------- -------- INCOME (LOSS) BEFORE CUMULATIVE CHANGE IN ACCOUNTING PRINCIPLE................................................. 21,162 (49,212) (39,253) CUMULATIVE CHANGE IN ACCOUNTING PRINCIPLE................... (417,064) 1,621 -- --------- --------- -------- NET LOSS.................................................... (395,902) (47,591) (39,253) PREFERRED STOCK DIVIDEND.................................... (60,556) (54,545) (44,081) --------- --------- -------- NET LOSS APPLICABLE TO COMMON SHARES........................ $(456,458) $(102,136) $(83,334) ========= ========= ======== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING, BASIC AND DILUTED................................................... 11,920 11,865 11,510 ========= ========= ======== NET LOSS APPLICABLE TO COMMON SHARES BEFORE CUMULATIVE CHANGE IN ACCOUNTING PRINCIPLE............................ $ (3.30) $ (8.74) $ (7.24) CUMULATIVE CHANGE IN ACCOUNTING PRINCIPLE................... (34.99) 0.13 -- --------- --------- -------- NET LOSS PER BASIC AND DILUTED SHARE........................ $ (38.29) $ (8.61) $ (7.24) ========= ========= ========
The accompanying notes are an integral part of these consolidated financial statements. F-19 RURAL CELLULAR CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' (DEFICIT) EQUITY
CLASS A CLASS A CLASS B CLASS B ACCUMULATED COMMON COMMON COMMON COMMON ADDITIONAL OTHER STOCK STOCK STOCK STOCK PAID-IN ACCUMULATED COMPREHENSIVE SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT LOSS ------- ------- ------- ------- ---------- ----------- ------------- (IN THOUSANDS) BALANCE, December 31, 1999... 8,090 $ 81 1,032 $10 $ 36,916 $ (27,580) $ -- Conversion of common stock to Class T preferred stock.................... (43) -- (105) (1) (7,539) -- -- Issuance of common stock, net...................... 2,749 27 -- -- 160,409 -- -- Conversion of Class B common stock to Class A common stock............. 145 1 (145) (1) -- -- -- Stock issued through employee stock purchase plan..................... 38 -- -- -- 375 -- -- Stock options exercised.... 55 1 -- -- 590 -- -- COMPONENTS OF COMPREHENSIVE LOSS Net loss applicable to common shares and total comprehensive loss....... -- -- -- -- -- (83,334) -- ------ ---- ----- --- -------- --------- -------- BALANCE, December 31, 2000... 11,034 110 782 8 190,751 (110,914) -- Conversion of Class B common stock to Class A common stock............. 54 1 (54) (1) -- -- -- Stock issued through employee stock purchase plan..................... 25 -- -- -- 620 -- -- Stock options exercised.... 63 1 -- -- 593 -- -- COMPONENTS OF COMPREHENSIVE LOSS Net loss applicable to common shares.......... -- -- -- -- -- (102,136) -- Cumulative effect of SFAS No. 133 at January 1, 2001................... -- -- -- -- -- -- (5,526) Current year effect of SFAS No. 133........... -- -- -- -- -- -- (7,337) Total comprehensive loss... -- -- -- -- -- -- -- ------ ---- ----- --- -------- --------- -------- BALANCE, December 31, 2001... 11,176 112 728 7 191,964 (213,050) (12,863) ====== ==== ===== === ======== ========= ======== Conversion of Class B common stock to Class A common stock............. 35 0 (35) 0 -- -- -- Stock issued through employee stock purchase plan..................... 17 0 -- 0 317 -- -- Stock options exercised.... 1 0 -- 0 13 -- -- COMPONENTS OF COMPREHENSIVE LOSS Net loss applicable to common shares.......... -- -- -- -- -- (456,458) -- Current year effect of SFAS No. 133........... -- -- -- -- -- -- 6,843 Total comprehensive loss... -- -- -- -- -- -- -- ------ ---- ----- --- -------- --------- -------- BALANCE, December 31, 2002... 11,229 $112 693 $ 7 $192,294 $(669,508) $ (6,020) ====== ==== ===== === ======== ========= ======== SHAREHOLDERS' COMPREHENSIVE (DEFICIT) EQUITY LOSS ---------------- ------------- (IN THOUSANDS) BALANCE, December 31, 1999... $ 9,427 $ -- Conversion of common stock to Class T preferred stock.................... (7,540) -- Issuance of common stock, net...................... 160,436 -- Conversion of Class B common stock to Class A common stock............. -- -- Stock issued through employee stock purchase plan..................... 375 -- Stock options exercised.... 591 -- COMPONENTS OF COMPREHENSIVE LOSS Net loss applicable to common shares and total comprehensive loss....... (83,334) (83,334) --------- ========= BALANCE, December 31, 2000... 79,955 -- Conversion of Class B common stock to Class A common stock............. -- -- Stock issued through employee stock purchase plan..................... 620 -- Stock options exercised.... 594 -- COMPONENTS OF COMPREHENSIVE LOSS Net loss applicable to common shares.......... (102,136) (102,136) Cumulative effect of SFAS No. 133 at January 1, 2001................... (5,526) (5,526) Current year effect of SFAS No. 133........... (7,337) (7,337) Total comprehensive loss... -- (114,999) --------- ========= BALANCE, December 31, 2001... (33,830) ========= Conversion of Class B common stock to Class A common stock............. -- -- Stock issued through employee stock purchase plan..................... 317 -- Stock options exercised.... 13 -- COMPONENTS OF COMPREHENSIVE LOSS Net loss applicable to common shares.......... (456,458) (456,458) Current year effect of SFAS No. 133........... 6,843 6,843 Total comprehensive loss... $(449,615) --------- ========= BALANCE, December 31, 2002... $(483,115) =========
The accompanying notes are an integral part of these consolidated financial statements. F-20 RURAL CELLULAR CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, ----------------------------------- 2002 2001 2000 --------- --------- ----------- (IN THOUSANDS) OPERATING ACTIVITIES: Net loss................................................ $(395,902) $ (47,591) $ (39,253) Adjustments to reconcile to net cash provided by operating activities: Depreciation and amortization........................ 82,497 112,577 91,078 Early extinguishment of debt......................... 3,319 -- 925 Adjustments of interest rate derivatives to fair market value....................................... 15,104 16,425 -- Cumulative change in accounting principle............ 417,064 (1,621) -- Other................................................ 3,209 1,964 1,421 Change in other operating elements: Accounts receivable................................ (475) 849 (14,071) Inventories........................................ (7) 292 145 Other current assets............................... (809) 605 192 Accounts payable................................... 6,466 (7,786) 25,297 Advance billings and customer deposits............. 1,112 1,199 1,721 Other accrued liabilities.......................... 6,744 (1,410) 14,717 --------- --------- ----------- Net cash provided by operating activities....... 138,322 75,503 82,172 --------- --------- ----------- INVESTING ACTIVITIES: Purchases of property and equipment..................... (59,835) (45,979) (54,832) Proceeds from sale of property and equipment............ 462 -- -- Purchases of wireless properties, net of cash acquired............................................. -- (178,566) (1,232,692) Proceeds from sale of other long-lived assets........... 650 48,929 -- Pending acquisition costs............................... -- -- (10,000) Other................................................... 37 1,080 (1,763) --------- --------- ----------- Net cash used in investing activities........... (58,686) (174,536) (1,299,287) --------- --------- ----------- FINANCING ACTIVITIES: Proceeds from issuance of common stock related to employee stock purchase plan and stock options....... 331 1,214 966 Proceeds from offering of common stock, net............. -- -- 160,436 Proceeds from issuance of preferred securities, net..... -- -- 263,394 Proceeds from issuance of long-term debt................ 362,550 349,344 1,104,948 Repayments of long-term debt............................ (380,402) (256,089) (299,350) Proceeds from swaption.................................. -- 8,720 -- Proceeds from interest rate swap transactions........... -- -- 6,550 Payments of debt issuance costs......................... (10,322) (4,366) (18,909) --------- --------- ----------- Net cash (used in) provided by financing activities.................................... (27,843) 98,823 1,218,035 --------- --------- ----------- NET INCREASE (DECREASE) IN CASH........................... 51,793 (210) 920 CASH AND CASH EQUIVALENTS, at beginning of year........... 1,995 2,205 1,285 --------- --------- ----------- CASH AND CASH EQUIVALENTS, at end of year................. $ 53,788 $ 1,995 $ 2,205 ========= ========= ===========
The accompanying notes are an integral part of these consolidated financial statements. F-21 RURAL CELLULAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 2001, AND 2002 1. ORGANIZATION AND NATURE OF BUSINESS Rural Cellular Corporation and its subsidiaries (the "Company" or "RCC"), a Minnesota corporation, provide wireless communication services in portions of the Midwest, South, Northeast and Northwest areas of the United States. The Company operates its cellular and paging systems under licenses granted by the Federal Communications Commission ("FCC"). The Company's operations are subject to the applicable rules and regulations of the FCC. At December 31, 2002, the Company had negative working capital of $(55.5) million and a shareholders' deficit of $(483.1) million. Beginning in 2003, the Company's cash requirements will increase each year, due in part to scheduled principal payments under its credit facility and payment of cash dividends on its preferred stock. The Company currently pays dividends on its senior and junior exchangeable preferred stock by issuing additional shares of exchangeable preferred stock. Beginning August 15, 2003, for the Company's senior exchangeable preferred stock, and beginning May 15, 2005, for its junior exchangeable preferred stock, dividends are to be paid in cash. In addition, the Company may need substantial cash resources to upgrade its networks to 2.5G and 3.0G technologies starting in 2003. 2. STRATEGIC HISTORY RCC was founded in 1991 through the combination of five partnerships holding different cellular licenses in Minnesota. Since then, it has completed the following acquisitions (the "Acquisitions"): - In May 1997, the Company acquired wireless operations and licenses covering portions of Maine for approximately $85.7 million. - In July 1998, the Company acquired wireless operations and licenses covering all of Vermont and portions of Massachusetts, New Hampshire, and New York for approximately $262.5 million. - In August 1998, the Company acquired wireless operations and a license in western Maine for approximately $7.5 million. - In February 1999, the Company acquired wireless operations and a license in South Dakota for approximately $11.9 million. - In April 2000, the Company acquired wireless operations and licenses covering portions of Alabama, Kansas, Mississippi, Oregon, and Washington for approximately $1.265 billion. - In January 2001, the Company acquired wireless operations and licenses in the Portsmouth, New Hampshire service area for approximately $194.3 million. In the acquisition, the Company also acquired an ILEC business of the seller. The Company sold the ILEC business in October 2001 for approximately $35.5 million. ACCOUNTING TREATMENT The purchase prices for the Acquisitions were allocated to the net assets based on their estimated fair values and the excess was allocated to licenses and goodwill. The Acquisitions were accounted for under the purchase method of accounting; accordingly, operating results for each acquired business have been included from the date of acquisition. F-22 RURAL CELLULAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES REVENUE RECOGNITION The Company's revenue primarily consists of service, roaming, and equipment revenue, each of which is described below: - Service revenue includes monthly access charges, charges for airtime used in excess of the time included in the service package purchased, activation fees, long distance charges derived from calls placed by customers as well as cellular and paging equipment lease revenue. Also included are charges for such features as voicemail, call waiting, and call forwarding. Service revenue also includes incollect revenue, which consists of charges to the Company's customers when they use their wireless phones in other wireless markets. The Company does not charge installation or connection fees. - Roaming revenue includes outcollect revenue. Roaming revenue and incollect cost information is provided to RCC primarily through a third party centralized clearinghouse. From the clearinghouse the Company receives settlement data each month. Management bases its accrual of roaming revenue and incollect expense on these clearinghouse reports. RCC follows this method since reasonably dependable estimates of roaming revenue and incollect cost can be made. - Equipment revenue includes sales of cellular and paging equipment and accessories and network equipment reselling. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation -- Transition and Disclosure, an Amendment of FASB Statement No. 123." SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for employee stock-based compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosure in annual and interim financial statements about the method of accounting used by the issuer for stock-based compensation and its effect on the issuer's reported results. The disclosure provisions of SFAS No. 148 are included in Note 7 of these Notes to Consolidated Financial Statements. The Company applies the principles of APB Opinion No. 25 and related interpretations in accounting for its stock-based compensation plans. In November 2002, the Emerging Issues Task Force ("EITF") reached consensus on EITF No. 00-21, "Accounting for Revenue Arrangements with Multiple Deliverables." This consensus requires that revenue arrangements with multiple deliverables be divided into separate units of accounting if the deliverables in the arrangement meet specific criteria. In addition, arrangement consideration must be allocated among the separate units of accounting based on their relative fair values, with certain limitations. The sale of wireless service with an accompanying handset constitutes a revenue arrangement with multiple deliverables. We will be required to adopt the provisions of this consensus for revenue arrangements entered into after June 30, 2003. We are currently evaluating whether we will elect to report the change in accounting as a cumulative-effect adjustment or to apply it on a prospective basis. Additionally, we are currently assessing the impact of this consensus on our results of operations, financial position, and cash flows. In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 clarifies the requirements for a guarantor's accounting for and disclosure of certain issued and outstanding guarantees. The initial recognition and initial measurement provisions of FIN 45 are applicable to guarantees issued or modified after December 31, 2002. The disclosure requirements of FIN 45 are effective for financial statements for interim or annual periods ending after December 15, 2002. F-23 RURAL CELLULAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 supersedes previous accounting guidance, principally EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Examples of costs covered by SFAS No. 146 include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operation, plant closing, or other exit or disposal activity. The Company will adopt SFAS No. 146 prospectively for exit or disposal activities initiated after December 31, 2002. In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS No. 145 requires that gains and losses from the extinguishments of debt be classified as extraordinary items only if they meet the criteria in Accounting Principles Board Opinion No. 30 ("Opinion No. 30"). SFAS No. 145 is effective for RCC for periods beginning January 1, 2003. Upon the adoption of SFAS No. 145, RCC will reclassify prior period statements of operations to conform to the presentation required by SFAS No. 145. Under SFAS No. 145, the Company will report gains and losses on extinguishments of debt in interest expense. In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 144 develops a single accounting model for long-lived assets to be disposed of, whether previously held and used or newly acquired. RCC adopted this statement on January 1, 2002. There was no impact to the Company's financial statements. In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 provides accounting and reporting standards for costs associated with the retirement of long-lived assets. It requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. When the liability is initially recorded, the entity capitalizes the cost by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value, and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement. The Company has determined this new accounting standard will not affect its results of operations, financial position and cash flows. The Company was required to implement this standard effective January 1, 2003. In accordance with guidance set forth in SFAS No. 142, "Goodwill and Other Intangible Assets," the Company evaluates its goodwill and indefinite lived intangible assets for impairment at least annually and more frequently when indicators of impairment exist. Effective with the adoption of SFAS No. 142, RCC is no longer amortizing goodwill or indefinite lived assets. Additionally, the Company has reassessed the useful lives of previously recognized intangible assets (primarily customer lists and FCC licenses). The Company reassessed the useful life of its customer lists and determined its current policy continues to be appropriate. A significant portion of the Company's intangible assets consists of licenses that provide its wireless operations with the exclusive right to utilize certain radio frequency spectrum to provide cellular communication services. While licenses are issued for only a fixed time, generally ten years, such licenses are subject to renewal by the FCC. Renewals of licenses have occurred routinely and at nominal cost. Moreover, the Company has determined that there are currently no legal, regulatory, contractual, competitive, economic or other factors that limit the useful life of the Company's wireless licenses. As a result, licenses will be treated as an indefinite-lived intangible asset under the provisions of SFAS No. 142 and will not be amortized but rather will be tested for impairment. The Company will reevaluate the useful life determination for licenses each quarter to determine whether events and circumstances continue to support an indefinite useful life. F-24 RURAL CELLULAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Upon adoption of SFAS No. 142, the Company completed an impairment test for both its goodwill and licenses and determined that there were impairments of $5.0 million and $412.0 million, respectively. RCC used a fair value approach, using primarily discounted cash flows, to complete the transitional impairment tests. In accordance with SFAS No. 142, the impairment charges are recorded in RCC's consolidated financial statements for the first quarter of 2002. On a prospective basis, RCC is required to test both goodwill and other indefinite-lived intangible assets, including licenses, for impairment on an annual basis (October 1) using a fair value approach. Additionally, goodwill must be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of the entity below its carrying value. These events or circumstances would include a significant change in the business climate, including a significant sustained decline in an entity's market value, regulatory requirements, operating performance indicators, competition, sale or disposition of a significant portion of the business, or other factors. Other indefinite-lived intangible assets must be tested between annual tests if events or changes in circumstances indicate that the asset might be impaired. RCC performed its annual impairment test for both goodwill and licensing costs during the fourth quarter of 2002, using methodologies consistent with those applied for its transitional impairment tests performed as of January 1, 2002. No further impairment was recognized as a result of this testing. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of RCC and its wholly-owned subsidiaries and its majority owned joint venture, Wireless Alliance, LLC ("Wireless Alliance"). All significant intercompany balances and transactions have been eliminated. 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 LOSS PER COMMON SHARE Basic EPS is computed by dividing net loss by the weighted average number of shares outstanding during the year. Diluted EPS is computed by including dilutive common stock equivalents with the basic weighted average shares outstanding. Potential common shares of 1,266,422, 1,588,734, and 1,908,084 related to the Company's outstanding stock options were excluded from the computation of diluted loss per share for the years ended December 31, 2000, 2001 and 2002, respectively, as inclusion of these shares would have been antidilutive. CASH EQUIVALENTS The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. INVENTORIES Inventories consist of cellular telephone equipment, pagers, and accessories and are stated at the lower of cost, determined using the average cost method, or market. PROPERTY AND EQUIPMENT Property and equipment are recorded at cost. Additions, improvements, or major renewals are capitalized, while expenditures that do not enhance or extend the asset's useful life are charged to operating expenses as F-25 RURAL CELLULAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) incurred. Depreciation is computed using the straight-line method based on the estimated useful life of the asset. The components of property and equipment and the useful lives of the Company's assets are as follows as of December 31:
2002 2001 USEFUL LIVES --------- --------- ------------ (IN THOUSANDS) Land.............................................. $ 7,204 $ 7,021 N/A Building and towers............................... 93,335 89,113 15-39 Years Equipment......................................... 255,370 225,098 2-10 Years Leased handset equipment.......................... 24,082 31,998 19 Months Furniture and fixtures............................ 22,305 22,401 3-10 Years Assets under construction......................... 10,869 7,125 N/A --------- --------- 413,165 382,756 Less -- accumulated depreciation.................. (172,629) (137,776) --------- --------- Property and equipment -- net..................... $ 240,536 $ 244,980 ========= =========
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. During the years ended December 31, 2002 and 2001, as a component of assets under construction, the Company capitalized $1.1 million and $1.7 million, respectively, in salaries of the Company's engineering employees. The Company did not capitalize interest cost in 2002 or 2001. At December 31, 2002, accumulated depreciation on handset equipment was approximately $15.3 million as compared to $18.6 million at December 31, 2001. Handset equipment depreciation expense for the year ended December 31, 2002 was $15.8 million as compared to $8.5 million in 2001. The gross carrying value of handset equipment disposals in 2002 was $21.2 million as compared to $5.9 million in 2001. Total depreciation expense for the years ended December 31, 2002, 2001 and 2000 was $61.5 million, $49.3 million, and $43.8 million, respectively. LICENSES AND OTHER INTANGIBLE ASSETS Licenses consist of the value assigned to paging licenses, Wireless Alliance personal communications services ("PCS") licenses, other PCS licenses, local multipoint distribution service ("LMDS") licenses, and cellular licenses acquired through acquisitions or otherwise. Other intangibles, resulting primarily from acquisitions, include the value assigned to customer lists and goodwill. Amortization is computed using the straight-line method based on the estimated useful life of the asset (see discussion of "Recently Issued Accounting Pronouncements"). F-26 RURAL CELLULAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The components of licenses and other intangible assets are as follows as of December 31:
2002 2001 -------------------------------------- -------------------------------------- GROSS NET GROSS NET CARRYING ACCUMULATED CARRYING CARRYING ACCUMULATED CARRYING VALUE AMORTIZATION VALUE VALUE AMORTIZATION VALUE ---------- ------------ ---------- ---------- ------------ ---------- (IN THOUSANDS) LICENSES............. $ 668,985 $ (50,409) $ 618,576 $1,081,033 $ (50,409) $1,030,624 OTHER INTANGIBLE ASSETS: Goodwill........... 402,165 (32,336) 369,829 393,677 (32,493) 361,184 Customer lists..... 159,030 (66,282) 92,748 159,029 (45,730) 113,299 ---------- --------- ---------- ---------- --------- ---------- Total........... $1,230,180 $(149,027) $1,081,153 $1,633,739 $(128,632) $1,505,107 ========== ========= ========== ========== ========= ==========
The effect of the adoption of SFAS No. 142 on the reported net loss and basic and diluted loss per share for all periods presented in the accompanying statements of operations is as follows:
(BEFORE CUMULATIVE CHANGE IN ACCOUNTING PRINCIPLE AND INCLUDING THE EFFECT OF PREFERRED STOCK DIVIDENDS) ---------------------------------- FOR YEARS ENDED DECEMBER 31, (AS REPORTED) ---------------------------------- -------------------------------- 2002 2001 2000 2002 2001 2000 --------- ---------- --------- --------- --------- -------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net loss applicable to common shares............ $(39,394) $(103,757) $(83,334) $(456,458) $(102,136) $(83,334) Add back: goodwill amortization.......... -- 16,690 12,531 -- 16,690 12,531 Add back: license amortization.......... -- 26,512 19,499 -- 26,512 19,499 -------- --------- -------- --------- --------- -------- Adjusted net loss applicable to common shares................ $(39,394) $ (60,555) $(51,304) $(456,458) $ (58,934) $(51,304) ======== ========= ======== ========= ========= ======== Weighted average common shares outstanding, basic and diluted..... 11,920 11,865 11,510 11,920 11,865 11,510 Basic and diluted loss per share: Net loss per basic and diluted share......... $ (3.30) $ (8.74) $ (7.24) $ (38.29) $ (8.61) $ (7.24) Add back: goodwill amortization.......... -- 1.41 1.09 -- 1.41 1.09 Add back: license amortization.......... -- 2.23 1.69 -- 2.23 1.69 -------- --------- -------- --------- --------- -------- Adjusted loss per share (basic and diluted)... $ (3.30) $ (5.10) $ (4.46) $ (38.29) $ (4.97) $ (4.46) ======== ========= ======== ========= ========= ========
Licenses, goodwill and customer list amortization expense was approximately $20.6 million, $62.8 million and $46.8 million for the years ended December 31, 2002, December 31, 2001 and December 31, 2000, respectively. It is estimated to be approximately $20.6 million in each of 2003 through 2006, and $10.4 million in 2007. F-27 RURAL CELLULAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The changes in carrying amount of goodwill and licenses for the year ended December 31, 2002 are as follows (in thousands):
GOODWILL LICENSES TOTAL -------- ---------- ---------- Balance as of December 31, 2001................... $361,184 $1,030,624 $1,391,808 Goodwill reclassification....................... 13,661 -- 13,661 Impairment charges under SFAS No. 142........... (5,016) (412,048) (417,064) -------- ---------- ---------- Balance as of December 31, 2002................... $369,829 $ 618,576 $ 988,405 ======== ========== ==========
DEFERRED DEBT ISSUANCE COSTS Deferred debt issuance costs relate to the credit facility and the senior subordinated notes (see Note 4). These costs are being amortized over the respective instruments' terms. OTHER ASSETS Other assets primarily consist of costs related to Wireless Alliance spectrum relocation costs, restricted investments and investments in unconsolidated affiliates. Restricted investments represent the Company's investments in the stock of CoBank 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. Investments in unconsolidated affiliates are accounted for using the equity method and represent the Company's ownership interests in Cellular 2000, Inc. Cellular 2000, Inc. is an entity organized to own the Cellular 2000 trade name and the related trademark. Other assets also include the fair market value of an interest rate instrument ("Flooridor"), which was entered into during 2000 and terminates in 2003 (see Note 5). BUSINESS AND CREDIT CONCENTRATIONS RCC operates in one business segment, the operation of wireless communication systems in the United States. During 2002, no single customer accounted for more than 10% of our total revenue or accounts receivable other than AT&T Wireless, which accounted for 10.2% of our total revenue. During 2001 and 2000, no single customer accounted for more than 10% of our total revenue. LONG-LIVED ASSETS Effective January 1, 2002, the Company adopted SFAS No. 144 for assessing the impairment of amortizable intangible assets and other long-lived assets. Under SFAS No. 144, if the sum of the expected future cash flows (undiscounted and without interest charges) were less than the carrying amount of the amortizable intangible assets and/or other long-lived assets, the Company would recognize an impairment loss. The Company would measure any impairment based on a projected cash flow method using a discounted rate determined by management to be commensurate with the risk inherent in its current business model. USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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 revenue and expenses during the reported periods. Ultimate results could differ from those estimates. F-28 RURAL CELLULAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) RECLASSIFICATIONS Certain reclassifications have been made to prior year's consolidated financial statements in order to conform to the 2002 presentations. Such reclassifications had no effect on total shareholders' deficit, net loss applicable to common shares or loss per share as previously reported. COMPREHENSIVE LOSS The Company follows the provisions of SFAS No. 130, "Reporting Comprehensive Income," which established standards for reporting and display of comprehensive income and its components. Comprehensive income (loss) reflects the change in equity of a business enterprise during a period from transactions and other events and circumstances from nonowner sources. For the Company, comprehensive loss represents net losses and the deferred gains on derivative instruments. In accordance with SFAS No. 130, the Company has chosen to disclose comprehensive loss in the accompanying consolidated statement of shareholders' (deficit) equity. 4. LONG-TERM LIABILITIES The Company had the following long-term liabilities outstanding as of December 31 (in thousands):
2002 2001 ---------- ---------- Credit facility (net of current portion of $35,959): Revolver.................................................. $ 16,142 $ 159,800 Term Loan A (terminates 04/03/2008)....................... 316,540 426,508 Term Loan B (terminates, 10/03/2008)...................... 185,223 225,101 Term Loan C (terminates, 04/03/2009)...................... 185,223 225,101 Term Loan D (terminates, 10/03/2009)...................... 54,766 75,000 ---------- ---------- 757,894 1,111,510 9 3/4% Senior Subordinated Notes............................ 300,000 -- 9 5/8% Senior Subordinated Notes............................ 125,000 125,000 Derivative financial instruments............................ 12,158 42,949 Deferred tax liability...................................... 15,651 -- Other....................................................... 323 6,842 ---------- ---------- Long-term liabilities..................................... $1,211,026 $1,286,301 ========== ==========
CREDIT FACILITY Advances under the credit facility bear interest at the London Interbank Offering Rate ("LIBOR") plus an applicable margin based on the Company's ratio of indebtedness to annualized operating cash flow as of the end of the most recently completed fiscal quarter. As of December 31, 2002, the effective rate of interest on the credit facility, excluding the impact of hedge agreements, was 4.53%. A commitment fee not to exceed 0.50% on the unused portion of the credit facility is payable quarterly. Borrowings under the credit facility are secured by a pledge of all the assets of the Company, excluding its ownership in the stock of Cellular 2000, Inc. and its 70% ownership in Wireless Alliance, LLC. At December 31, 2002, the Company had $258.9 million available under its credit facility. Future availability under the revolver will be determined quarterly based on our leverage ratios as described by the credit facility agreement. F-29 RURAL CELLULAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The credit facility is subject to various covenants, including the ratio of senior indebtedness to annualized operating cash flow, the ratio of total indebtedness to annualized operating cash flow, and the ratio of annualized operating cash flow to interest expense. Mandatory commitment reductions are required upon any material sale of assets. In January 2002 and March 2001, the Company obtained amendments and waivers of certain of the financial covenants in the credit facility. As of December 31, 2002, the Company was in compliance with all covenants. DEFERRED GAIN ON HEDGE AND SWAP AGREEMENTS In May 2000, the Company settled swaps it had entered into in August 1998 with a total notional amount of $165 million, resulting in a gain of approximately $3.1 million. In July 2000, the Company settled swaps it had entered into in February 1999 with a total notional amount of $250 million, resulting in a gain of approximately $4.3 million. In accordance with SFAS No. 133, effective January 1, 2001, gains not accreted from these transactions were reclassified into other comprehensive loss within the equity section of the balance sheet. These gains are being accreted into income over the original terms of the settled swaps. 9 5/8% SENIOR SUBORDINATED NOTES In 1998, the Company issued $125 million principal amount of 9 5/8% Senior Subordinated Notes due 2008. Interest on the Senior Subordinated Notes is payable semi-annually on May 15 and November 15. The Senior Subordinated Notes will mature on May 15, 2008, and are redeemable, in whole or in part, at the option of the Company, at any time on or after May 15, 2003. 9 3/4% SENIOR SUBORDINATED NOTES In 2002, the Company issued $300 million principal amount of 9 3/4% senior subordinated notes due 2010. Interest on the 9 3/4% senior subordinated notes is payable semi-annually on January 15 and July 15. The 9 3/4% senior subordinated notes will mature on January 15, 2010, and are redeemable, in whole or in part, at the option of the Company, at any time on or after January 16, 2006. CURRENT PORTION OF LONG-TERM DEBT As of December 31, 2002, the Company's current portion of long-term debt included the following:
AMOUNT -------------- (IN THOUSANDS) Credit facility............................................. $35,959 Financial Instruments Swaption(1)............................................... 30,072 Other financial instruments............................... 6,326 Purchase option agreement(2)................................ 6,500 Other....................................................... 190 ------- Total $79,047 =======
--------------- (1) The Company anticipates that the counterparty will exercise the optional early termination provision of the Swaption requiring RCC to pay the counterparty the negative fair market value of the swaption on May 15, 2003. (2) In conjunction with an acquisition, the Company became party to a purchase option agreement whereby it may acquire certain cell sites in the future for $6.5 million. The option expired February 28, 2003 at which time the Company exercised the option. At December 31, 2002, the option was included in current F-30 RURAL CELLULAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) liabilities. The Company assumed an agreement to utilize the assets covered by the option for the period prior to exercising the option. The ongoing payments pursuant to this agreement have been reflected as interest expense in the accompanying consolidated statements of operations. Maturities of the credit facility, 9 5/8% Senior Subordinated Notes, 9 3/4% Senior Subordinated Notes and early termination of the Swaption are as follows;
9 5/8% SENIOR 9 3/4% SENIOR TERMINATION CREDIT SUBORDINATED SUBORDINATED OF YEAR FACILITY NOTES NOTES SWAPTION(1) TOTAL ---- -------- ------------- ------------- ----------- ---------- (IN THOUSANDS) 2003...................... $ 35,959 $ -- $ -- $30,072 $ 66,031 2004...................... 61,043 -- -- -- 61,043 2005...................... 71,958 -- -- -- 71,958 2006...................... 87,240 -- -- -- 87,240 2007...................... 91,605 -- -- -- 91,605 Thereafter................ 446,048 125,000 300,000 -- 871,048 -------- -------- -------- ------- ---------- Total................ $793,853 $125,000 $300,000 $30,072 $1,248,925 ======== ======== ======== ======= ==========
--------------- (1) The Company anticipates that the counterparty will exercise the optional early termination provision of the Swaption, requiring RCC to pay the counterparty the negative fair market of the swaption on May 15, 2003. 5. FINANCIAL INSTRUMENTS SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" (as amended by SFAS No. 137 and No. 138), requires that an entity determine the fair value of all derivatives and recognize them as either assets or liabilities on the balance sheet. The changes in fair value of the derivative are booked based on the intended use of the derivative, the ability to meet hedge designation criteria and the degree of effectiveness measured at each period end. The Company uses derivative financial instruments to reduce its exposure to adverse fluctuations in interest rates, to meet bank covenants, and to reduce borrowing rates. RCC is not a party to leveraged derivatives and does not hold or issue financial instruments for speculative purposes. INTEREST RATE MANAGEMENT The Company is required under the terms of its credit facility ($793.9 million) to mitigate the risk of rising interest rates on at least 50% of the principal amount of the loans outstanding for an average period of three years from the date of the hedge agreements. At year end, RCC held interest rate swap and collar agreements, with a notional amount of $409.0 million, to reduce the risk of rising interest rates on variable rate debt. The swaps and collars are designated and documented as cash flow hedges and are tested for effectiveness quarterly. These derivatives are recorded on the balance sheet at fair value and the effective gains (losses) are accumulated in other comprehensive income ("OCI"). Values in OCI are reclassified to interest expense when the hedged variable rate interest payment is recognized in earnings. Overperformance of the swap identified during effectiveness testing is recognized immediately in interest expense, along with the collar's time value, which is excluded from testing. The Company entered into its reverse swaps ($135.0 million notional) and purchased a flooridor ($252.0 million notional) to reduce the effective borrowing rates associated with the credit facility and the fixed rate 9 3/4% Senior Subordinated Notes in a declining interest rate environment. These instruments, in F-31 RURAL CELLULAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) addition to the swaption, do not qualify for SFAS No. 133 cash flow or fair value hedge accounting treatment, and as such, the entire change in fair value of these instruments is reflected in interest expense each period. RCC's derivative instruments and valuations are set forth in the table below. The fair values are based on quoted market prices or, if quoted market prices are not available, estimates using present value and other valuation techniques except for Class M and Class T convertible preferred stock.
ESTIMATED CARRYING VALUE FAIR MARKET VALUE --------------------------- --------------------------- NOTIONAL DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, AMOUNT 2002 2001 2002 2001 -------- ------------ ------------ ------------ ------------ (DOLLARS IN THOUSANDS) FINANCIAL ASSETS Interest rate flooridors (i) : Fleet Bank (terminates May 12, 2003).... $252,000 $ 631 $ 1,699 $ 631 $ 1,699 -------- ---------- ---------- ---------- ---------- Total financial assets............. $252,000 $ 631 $ 1,699 $ 631 $ 1,699 ======== ========== ========== ========== ========== FINANCIAL LIABILITIES Credit facility........................... $ -- $ 793,853 $1,111,510 $ 689,064 $ 987,145 9 5/8% senior subordinated notes.......... -- 125,000 125,000 81,250 127,031 9 3/4% senior subordinated notes.......... -- 300,000 -- 195,000 -- 11 3/8% senior exchangeable preferred stock................................... -- 240,882 215,373 57,812 187,375 12 1/4% junior exchangeable preferred stock................................... -- 195,035 172,901 42,908 145,237 Class M convertible preferred stock (ii).................................... -- 110,000 110,000 110,000 110,000 Class T convertible preferred stock (ii).................................... -- 7,541 7,541 7,541 7,541 -------- ---------- ---------- ---------- ---------- -- 1,772,311 1,742,325 1,183,575 1,564,329 Derivative financial instruments Interest rate swap agreements: TD Securities (terminates May 16, 2005)................................. 84,000 9,010 5,854 9,010 5,854 PNC Bank (terminates May 16, 2003)...... 42,000 975 2,703 975 2,703 Union Bank (unwound January 17, 2002)... -- -- 5,387 -- 5,387 Fleet Bank (unwound January 14, 2002)... -- -- 2,791 -- 2,791 Reverse swap agreements: Fleet Bank (terminates January 15, 2010)................................. 75,000 1,832 -- 1,832 -- Dresdner Bank (terminates January 15, 2010)................................. 60,039 1,316 -- 1,316 -- Interest rate collar agreements: PNC Bank (terminates May 25, 2003)...... 47,000 966 2,025 966 2,025 Fleet Bank (unwound January 14, 2002)... -- -- 3,553 -- 3,553 Union Bank (terminates June 5, 2003).... 96,000 1,622 2,961 1,622 2,961 PNC Bank (terminates June 6, 2003)...... 94,000 1,827 3,301 1,827 3,301 Union Bank (terminates June 5, 2003).... 46,000 936 1,746 936 1,746 Swaption (iii): TD Securities (terminates May 15, 2003)................................. 131,016 30,072 12,628 30,072 12,628 -------- ---------- ---------- ---------- ---------- 675,055 48,556 42,949 48,556 42,949 Other long-term liabilities............... -- 323 6,842 323 6,842 -------- ---------- ---------- ---------- ---------- Total financial liabilities........ $675,055 $1,821,190 $1,792,116 $1,232,454 $1,614,120 ======== ========== ========== ========== ==========
F-32 RURAL CELLULAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) --------------- (i) The financial instrument does not qualify for hedge accounting treatment under SFAS No. 133 and, as such, is recorded in the balance sheet at fair value with related changes in fair value included in the statement of operations. (ii) The financial instrument is not actively traded and, therefore, the estimated fair market value is stated at the carrying value. (iii)Rural Cellular Corporation has $125 million in subordinated debt that was issued in May 1998 and matures in May 2008. The $8.7 million value of an embedded call option within the subordinated debt was monetized in March 2001, resulting in a swaption. The swaption does not qualify for hedge accounting treatment under SFAS No. 133 and as such is recorded in the balance sheet at fair value with related changes in fair value included in the statement of operations. Because LIBOR rates have declined subsequent to the inception of the Company's swaps and collars, their respective market valuations have decreased. Therefore, as required by SFAS No. 133, this decline in market valuation is reflected in the financial statements by an increase in the derivative financial instrument liabilities together with adjustments to interest expense and accumulated other comprehensive loss. The following table sets forth these adjustments for 2002:
PRIOR TO SFAS NO. SFAS NO. 133 AS 133 ADJUSTMENT ADJUSTMENT REPORTED ----------------- ------------ -------- (IN THOUSANDS) Statement of Operations Data: Interest expense............................... $99,374 $15,104 $114,478
SFAS NO. 133 ADJUSTMENT FOR AS REPORTED AT YEAR ENDED AS REPORTED AT DECEMBER 31, 2001 DECEMBER 31, 2002 DECEMBER 31, 2002 ----------------- ----------------- ----------------- Balance Sheet Data: ASSETS: Derivative financial instruments included in other assets........ $ 1,699 $(1,068) $ 631 LIABILITIES: Derivative financial instruments included in current portion of long term debt and long-term liabilities..................... $ 42,949 $ 5,607 $48,556 SHAREHOLDERS' (DEFICIT) EQUITY: Accumulated other comprehensive loss............................ $(12,863) $ 6,843 $(6,020)
F-33 RURAL CELLULAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 6. REDEEMABLE PREFERRED STOCK The Company has issued the following preferred stock with liquidation preferences of $1,000 per share:
OTHER NUMBER CONVERSION FEATURES, OF SHARES SHARES DISTRIBUTED DIVIDEND PRICE TO RIGHTS, ISSUED AS DIVIDENDS ACCRUED DIVIDENDS REDEMPTION RATE PER COMMON PREFERENCES EXCLUDING THROUGH AT DECEMBER 31, DATE ANNUM STOCK AND POWERS DIVIDENDS DECEMBER 31, 2002 2002 ---------- -------- ---------- ----------- --------- ------------------ ----------------- (IN THOUSANDS) Senior Exchangeable Preferred Stock........ 05/15/2010 11.375% -- Non-Voting 150,000 90,882 $ 3,426 Junior Exchangeable Preferred Stock........ 02/15/2011 12.250% -- Non-Voting 140,000 55,035 2,986 Class M Voting Convertible Preferred Stock.................. 04/03/2012 8.000% $53.000 Voting 110,000 -- 26,711 Class T Convertible Preferred Stock........ 04/03/2020 4.000% $50.631 Non-Voting 7,541 -- 829 ------- ------- ------- Total................ 407,541 145,917 $33,952 ======= ======= =======
Preferred security balance sheet reconciliation (in thousands):
AS OF DECEMBER 31, 2002 ------------ Preferred securities originally issued...................... $407,541 Preferred dividends issued.................................. 145,917 Accrued long-term preferred security dividends (Class M and Class T).................................................. 27,540 Unamortized issuance costs.................................. (11,498) -------- Net preferred securities.................................. $569,500 ========
Dividends on the Senior Exchangeable Preferred Stock are cumulative, payable quarterly, and may be paid, at the Company's option, on any dividend payment date occurring on or before May 15, 2003, either in cash or by the issuance of additional shares of Senior Exchangeable Preferred Stock having an aggregate liquidation preference equal to the amount of such dividends. Dividends on the Junior Exchangeable Preferred Stock are cumulative, are payable quarterly, and may be paid, at the Company's option, on any dividend payment date occurring on or before February 15, 2005, either in cash or by the issuance of additional shares of Junior Exchangeable Preferred Stock having an aggregate liquidation preference equal to the amount of such dividends. The Senior and Junior Exchangeable Preferred Stock are non-voting, except as otherwise required by law and as provided in the certificates of designation. The certificates of designation provide that upon the accumulation of accrued and unpaid dividends, if any, on the outstanding Senior or Junior Exchangeable Preferred Stock in an amount equal to six full quarterly dividends (whether or not consecutive), the holders of a majority of the outstanding shares of the affected Exchangeable Preferred Stock, voting as a class, will be entitled to elect the lesser of two directors and that number of directors constituting 25% of the members of the board of directors. Dividends on the Class M Preferred Stock are compounded, accrue at 8% per annum, and are payable upon redemption or upon liquidation of the Company. The Class M preferred stock is convertible into the Company's Class A common stock at $53.00 per share subject to certain adjustments. Dividends are not payable if the shares are converted. The holders of the Class M preferred stock are entitled to vote on all matters submitted to the holders of the common stock on an as-converted basis. F-34 RURAL CELLULAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) In order to comply with the FCC rules regarding cross-ownership of cellular licensees within a given market, the Company issued 7,541 shares of Class T Convertible Preferred Stock to Telephone & Data Systems, Inc. ("TDS") in exchange for 43,000 shares of Class A common stock and 105,940 shares of Class B common stock owned by TDS. TDS or the Company can convert the Class T preferred stock into the original number of shares of Class A or Class B common stock in the future if ownership by TDS of the Common Stock would then be permissible under FCC rules. Dividends on the Class T preferred stock are cumulative, have a fixed coupon rate of 4% per annum, and are payable in April 2020. Dividends are not payable if the shares are converted. The Senior Exchangeable Preferred Stock is senior to the Junior Exchangeable Preferred Stock, Class M Convertible Preferred Stock, Class T Convertible Preferred Stock, and common stock of RCC with respect to dividend rights and rights on liquidation, winding-up, and dissolution of RCC. The Junior Exchangeable Preferred Stock is junior to the Senior Exchangeable Preferred Stock and Class T Convertible Preferred Stock and senior to the Class M Convertible Preferred Stock and common stock with respect to dividend rights and rights on liquidation, winding-up, and dissolution of RCC. Shares of the Senior and Junior Exchangeable Preferred Stock and Class T Convertible Preferred Stock are non-voting, except as otherwise required by law and as provided in their respective Certificates of Designation. We are required to redeem the Senior Exchangeable Preferred Stock, Junior Exchangeable Preferred Stock, Class M Convertible Preferred Stock, and Class T Convertible Preferred Stock at 100% of their total liquidation preference plus accumulated and unpaid dividends at their respective redemption dates. 7. SHAREHOLDERS' (DEFICIT) EQUITY AUTHORIZED SHARES The Company has 300,000,000 shares of authorized capital stock consisting of 200,000,000 shares of Class A common stock, 10,000,000 shares of Class B common stock and 90,000,000 undesignated shares. COMMON STOCK RIGHTS Holders of Class A common stock are entitled to one vote for each share owned while holders of Class B common stock 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. All issued Class B common shares may also be converted into an equivalent number of Class A common shares upon the affirmative vote of not less than 66 2/3% of the then issued Class B common shares. Further, Class B common shares are automatically converted to an equal number of Class A common shares if they are transferred to anyone who is not an affiliate of the transferring shareholder. On April 30, 1999 RCC adopted rights plans for its Class A common stock and Class B common stock. The rights plans give each holder of Class A common stock the right to purchase 1/100th of a newly authorized preferred share that is essentially equivalent to one share of Class A common stock and each holder of Class B common stock the right to purchase 1/100th of a newly authorized preferred share, essentially equivalent to one share of Class B common stock. The exercise price for both the Class A rights and the Class B rights is $120 per right. The rights become exercisable by existing shareholders only following the acquisition by a buyer, without prior approval of the Company's board of directors, of 15% or more of the outstanding Common Stock, Class A and Class B, or following the announcement of a tender offer for 15% of the outstanding Common Stock. If a person acquires 15% or more of the Company's Common Stock, each right (except those held by the acquiring person) will entitle the holder to purchase shares of the Company's Class A or Class B common stock, as appropriate, having a market value of twice the right's exercise price, or, in effect, at a 50% discount from the then current market value. If the Company were acquired in a merger or similar F-35 RURAL CELLULAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) transaction after a person acquires 15% of the Company's outstanding Common Stock, without prior approval of the board of directors, each right would entitle the holder (other than the acquirer) to purchase shares of the acquiring company having a market value of twice the exercise price of the right, or, in effect, at a discount of 50%. Until the acquisition by any person of 15% or more of the Company's Common Stock, the rights can be redeemed by the board of directors for $.001 per right. STOCK COMPENSATION PLANS The stock compensation plan (the "Plan") for employees authorizes the issuance of up to 2,400,000 shares of Class A common stock in the form of stock options, stock appreciation rights or other stock-based awards. The Plan provides that the exercise price of any option shall not be less than 85% of the fair market value of the Class A common stock as of the date of the grant (100% in the case of incentive stock options). Options and other awards granted under the Plan vest and become exercisable as determined by the Board of Directors or a stock option committee. The stock option plan for nonemployee directors authorizes the issuance of up to 400,000 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 one year following the date of grant and expire five years thereafter. Under the employee stock purchase plan, employees who satisfy certain length of service and other criteria are permitted to purchase shares of Class A common stock at 85% of the fair market value of the Class A common stock on January 1 or December 31 of each year, whichever is lower. In February 2003, RCC's Board of Directors adopted an amendment to increase the number of shares reserved under the plan to 750,000. This amendment was approved at the Company's 2003 Annual Meeting of Shareholders. The following table summarizes option plan activity through December 31, 2002:
EMPLOYEE NONEMPLOYEE STOCK STOCK DIRECTORS COMPENSATION PURCHASE PLAN PLAN PLAN ----------- ------------ -------- Options initially authorized under plan........... 210,000 1,400,000 250,000 Additional options authorized through plan amendment.................................... 190,000 1,000,000 -- Options granted................................. (267,750) (2,506,606) (249,961) Options cancelled............................... 47,250 437,700 -- -------- ---------- -------- Options remaining to be issued at December 31, 2002............................................ 179,500 331,094 39 ======== ========== ========
F-36 RURAL CELLULAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Options outstanding for employees and nonemployees as of December 31, 2002 have exercise prices ranging between $3.18 and $79.25. Information related to stock options is as follows:
2002 2001 2000 -------------------- -------------------- -------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE --------- -------- --------- -------- --------- -------- Outstanding, beginning of period........................ 1,588,734 $26.78 1,266,422 $25.80 1,046,547 $12.36 Granted....................... 503,550 4.43 477,006 30.68 299,950 70.86 Exercised..................... (1,450) 8.99 (70,844) 11.05 (55,375) 10.92 Cancelled..................... (182,750) 63.23 (83,850) 46.90 (24,700) 40.66 --------- --------- --------- Outstanding, end of period...... 1,908,084 17.40 1,588,734 26.78 1,266,422 25.80 ========= ========= ========= Exercisable, end of period...... 1,015,784 19.12 700,781 18.33 488,052 12.28 ========= ========= ========= Weighted average fair value of options granted............... $ 3.85 $24.67 $55.94 ====== ====== ======
The following table summarizes certain information concerning currently outstanding and exercisable options:
WEIGHTED AVERAGE WEIGHTED WEIGHTED REMAINING AVERAGE AVERAGE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE EXERCISE PRICE RANGE OUTSTANDING LIFE PRICE EXERCISABLE PRICE -------------------- ----------- ----------- -------- ----------- -------- $ 0.00 - $ 9.99................. 807,653 5 $ 5.67 369,453 $ 8.40 $10.00 - $19.99................. 503,275 6 $13.60 374,575 $13.84 $20.00 - $29.99................. 303,600 8 $26.90 59,000 $27.38 $30.00 - $39.99................. 180,106 8 $35.23 138,326 $34.45 $40.00 - $49.99................. 20,000 7 $43.25 12,000 $43.25 $50.00 - $59.99................. 20,300 7 $53.60 11,120 $54.52 $60.00 - $69.99................. 36,750 7 $68.25 36,750 $68.25 $70.00 - $80.00................. 36,400 7 $76.97 14,560 $76.97 --------- --------- $ 0.00 - $80.00................. 1,908,084 7 $17.40 1,015,784 $19.12
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 F-37 RURAL CELLULAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) determined consistent with SFAS No. 148 and SFAS No. 123, the Company's results of operations and net loss per share would have been adjusted to the following pro forma amounts:
YEARS ENDED DECEMBER 31, ----------------------------------------- 2002 2001 2000 ------------ ------------ ----------- (IN THOUSANDS, EXCEPT FOR PER SHARE DATA) Net loss applicable to common shares: As reported....................................... $(456,458) $(102,136) $(83,334) Fair value compensation expense................... (5,290) (5,741) (2,276) --------- --------- -------- Pro forma......................................... $(461,748) $(107,877) $(85,610) ========= ========= ======== Net loss per basic and diluted share: As reported....................................... $ (38.29) $ (8.61) $ (7.24) Fair value compensation expense................... (0.45) (0.48) (0.20) --------- --------- -------- Pro forma......................................... $ (38.74) $ (9.09) $ (7.44) ========= ========= ========
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 assumptions used for grants in 2002, 2001 and 2000: expected volatility of 88.0%, 67.71% and 63.47%, respectively; risk-free interest rates of 4.25% in 2002, 7.25% in 2001 and 8.25% in 2000; expected life of 10 years and no expected dividend yield. The per share weighted average fair value of options granted in 2002, 2001 and 2000 was $3.85, $24.67 and $55.94 per share, respectively. 8. INCOME TAXES The income tax effect of the items that create deferred income tax assets and liabilities are as follows (In thousands):
DECEMBER 31, -------------------- 2002 2001 --------- -------- Deferred income tax assets: Operating loss carryforwards.............................. $ 93,040 $ 73,487 Tax credit carryforwards.................................. -- 85 Temporary differences: Allowance for doubtful accounts........................ 1,036 1,467 Derivatives............................................ 18,212 15,675 Intangible assets...................................... 52,946 -- Other.................................................. 2,317 3,265 Valuation allowance....................................... (158,245) (33,915) --------- -------- Total deferred income tax assets....................... 9,306 60,064 Deferred income tax liabilities: Depreciation.............................................. (23,312) (20,555) Intangible assets......................................... -- (37,545) Other..................................................... (1,645) (1,964) --------- -------- Net deferred income tax liability...................... $ (15,651) $ -- ========= ========
As of December 31, 2002, the Company had tax operating loss carryforwards of approximately $244.8 million available to offset future income tax liabilities. These carryforwards expire in the years 2006 F-38 RURAL CELLULAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) through 2022. Internal Revenue Code Section 382 contains provisions that 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. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management has considered the scheduled reversal of deferred tax liabilities, the limitations under Internal Revenue Code Section 382 following a change in ownership and tax planning strategies in making this assessment. Based upon the assessment, management has established a valuation allowance for net deferred income tax assets currently not expected to be realized. 9. COMMITMENTS AND CONTINGENCIES EMPLOYMENT AGREEMENTS The Company has employment agreements with certain executive officers with terms of 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 a change in control of the Company, as defined in the agreements. The maximum contingent liability under these agreements was $6.9 million at December 31, 2002. LEGAL AND REGULATORY MATTERS Securities Claims. The Company and certain of its officers have been named as defendants in the following actions: - Noormohammed Gurwala v. Rural Cellular Corporation, Richard P. Ekstrand, Wesley E. Schultz and David J. Del Zoppo, filed on December 24, 2002 in U.S. District Court for the District of Minnesota. - Roderick B. Brown v. Rural Cellular Corporation, Richard P. Ekstrand and Wesley E. Schultz, filed on January 13, 2003 in U.S. District Court for the District of Minnesota. - Christian Diaz v. Rural Cellular Corporation, Richard P. Ekstrand, Wesley E. Schultz and David J. Del Zoppo, filed on February 4, 2003 in U.S. District Court for the District of Minnesota. - Kenneth Ketter v. Rural Cellular Corporation, Richard P. Ekstrand, Wesley E. Schultz and David J. Del Zoppo, filed on February 14, 2003 in U.S. District Court for the District of Minnesota. The plaintiffs in the Gurwala action, the Diaz action, and the Ketter action seek to represent a class consisting of all persons (except defendants) who purchased the common stock of RCC in the market during the time period from January 6, 2002 through November 13, 2002. The plaintiff in the Brown action seeks to represent a class consisting of all persons (except defendants) who purchased any publicly-traded securities of RCC during the time period from May 2001 through November 12, 2002. In all four actions, plaintiffs allege that RCC's publicly-announced financial results misstated the actual performance because the Company had inappropriately accounted for certain transactions. Plaintiffs further allege that, as a result, the market price of RCC securities was artificially inflated during the respective class periods. Plaintiffs allege that defendants are liable under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. Plaintiffs seek compensatory damages in an unspecified amount, plus their attorneys' fees, and costs. The procedures of the Private Securities Litigation Reform Act ("PSLRA") apply to these cases. Pursuant to those procedures, the court will consolidate the actions and appoint lead plaintiffs and lead counsel. The lead plaintiffs will then file a consolidated amended complaint. The parties have agreed that no response to the complaints listed above will be due, but that the defendants will respond to a consolidated F-39 RURAL CELLULAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) amended complaint. Under the PSLRA, discovery is stayed until a motion to dismiss is denied or defendants file an answer to the consolidated amended complaint. The defendants are beneficiaries of directors' and officers' liability insurance, which includes coverage for securities claims, subject to certain exclusions. The carriers have been notified of these actions, but have not provided a formal position on coverage. The Company anticipates that additional cases with similar allegations may be filed. Derivative Action. The following is a purported derivative action brought against all of RCC's directors and against Rural Cellular Corporation, as a nominal defendant. - Hiene Junge v. Richard P. Ekstrand, Wesley E. Schultz, Ann K. Newhall, Jeffrey S. Gilbert, Marvin C. Nicolai, George M. Revering, Don C. Swenson, George W. Wikstrom, Paul J. Finnegan, and John Hunt; and Rural Cellular Corporation as nominal defendant, commenced on or about February 20, 2003 in Douglas County District Court, Alexandria, Minnesota. The plaintiff is a shareholder of RCC and claims to bring suit on behalf of RCC. No pre-lawsuit demand to investigate the allegations or bring the action was made on the board of directors. The plaintiff alleges that the directors breached their fiduciary duties to RCC, or abused their control, or grossly mismanaged the company, or wasted company assets, by allowing or causing RCC to improperly account for certain transactions in its financial statements during the time period from May 2001 through November 12, 2002. The plaintiff further alleges that the improper accounting eventually led to the commencement of federal securities class actions (described above) against the company, which allegedly will cause RCC to expend significant sums of money. The plaintiff seeks compensatory damages against the directors in an unspecified amount, plus his attorneys' fees and costs. Other Claims. The Company is involved from time to time in other routine legal matters and other claims incidental to its business. The Company believes that the resolution of such routine matters and other incidental claims, taking into account established reserves and insurance, will not have a material adverse impact on its consolidated financial position or results of operations. LEASES The Company leases office space and real estate under non-cancelable operating leases. Future minimum payments under these leases as of December 31, 2002 are as follows:
YEAR AMOUNT ---- -------------- (IN THOUSANDS) 2003........................................................ $ 8,310 2004........................................................ 6,633 2005........................................................ 4,954 2006........................................................ 3,059 2007........................................................ 1,610 Thereafter.................................................. 4,742 ------- Total..................................................... $29,308 =======
Under the terms of the lease agreements, the Company also is responsible for certain operating expenses and taxes. Total rent expense of $9.7 million, $8.3 million and $5.8 million was charged to operations for the years ended December 31, 2002, 2001 and 2000, respectively. F-40 RURAL CELLULAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) OFF-BALANCE SHEET FINANCINGS AND LIABILITIES Other than lease commitments, legal contingencies incurred in the normal course of business, and employment contracts for key employees, the Company does not have any off-balance sheet financing arrangements or liabilities. The Company does not have any majority-owned subsidiaries or any interests in, or relationships with, any material special-purpose entities that are not included in the consolidated financial statements. 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, 2002, 2001 and 2000 were $570,000, $728,000 and $662,000, respectively. The percentages the Company matches under the savings portion of the plan and contributes under the profit-sharing portion of the plan are determined annually by the Company's Board of Directors. 11. SUPPLEMENTAL CASH FLOW INFORMATION
YEARS ENDED DECEMBER 31, ---------------------------- 2002 2001 2000 ------- -------- ------- (IN THOUSANDS) CASH PAID FOR: Interest............................................. $86,775 $116,961 $76,640 NONCASH FINANCING TRANSACTIONS: Preferred stock dividends............................ $60,556 $ 54,545 $44,081
12. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
2002 QUARTER ENDED 2001 QUARTER ENDED --------------------------------------------------- -------------------- MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, --------- -------- ------------- ------------ --------- -------- Revenue: Service................. $ 74,313 $ 79,273 $ 81,828 $ 79,598 $ 70,036 $ 80,151 Roaming................. 26,162 33,855 35,400 27,286 23,215 28,350 Equipment............... 3,279 4,564 7,098 5,501 5,133 4,545 -------- -------- -------- -------- --------- -------- Total revenue......... $103,754 $117,692 $124,326 $112,385 $ 98,384 $113,046 Operating income.......... $ 31,425 $ 38,178 $ 38,627 $ 26,782 $ 15,833 $ 23,534 Net income (loss) before cumulative change in accounting principle.... $ (707) $ 11,303 $ 10,236 $ 330 $ (21,271) $ (7,075) Net income (loss)......... $(417,771) $ 11,303 $ 10,236 $ 330 $ (19,650) $ (7,075) Net loss applicable to common shares........... $(432,312) $ (3,629) $ (5,098) $(15,419) $ (32,813) $(20,505) Net loss per share applicable to common shares before cumulative change in accounting principle............... $ (1.28) $ (0.30) $ (0.43) $ (1.29) $ (2.91) $ (1.73) Net loss per basic and diluted share........... $ (36.27) $ (0.30) $ (0.43) $ (1.29) $ (2.77) $ (1.73) 2001 QUARTER ENDED ---------------------------- SEPTEMBER 30, DECEMBER 31, ------------- ------------ Revenue: Service................. $ 80,234 $ 75,567 Roaming................. 38,106 26,870 Equipment............... 4,842 4,107 -------- -------- Total revenue......... $123,182 $106,544 Operating income.......... $ 27,971 $ 13,462 Net income (loss) before cumulative change in accounting principle.... $(12,310) $ (8,556) Net income (loss)......... $(12,310) $ (8,556) Net loss applicable to common shares........... $(26,101) $(22,717) Net loss per share applicable to common shares before cumulative change in accounting principle............... $ (2.20) $ (1.91) Net loss per basic and diluted share........... $ (2.20) $ (1.91)
F-41 RURAL CELLULAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 13. SUBSEQUENT EVENT: Effective January 1, 2003, the Company adopted the provisions of SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13 and Technical Corrections." These provisions require the Company to reclassify extraordinary losses from the early extinguishment of debt to interest expense in the consolidated statements of operations. Amounts reclassified were $3,319 and $925 in 2002 and 2000, respectively. F-42