** **

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-K**

 

**(Mark One)**

 

| **ý** | **ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  for the fiscal year ended December 31, 2001.**

  |
|------------|-------------------------------------------------------------------------------------------------------------------------------------------------|

 

 

| **o** | **TRANSITION REPORT PURSUANT TO SECTION  13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934****for the transition period  from               TO               .** |
|-------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

** **

 

**Commission FileNumber 0-27416**

 

**RURALCELLULAR CORPORATION**

*(Exact name of registrant as specified in its charter)*

 

| **Minnesota**                                                                                                                 |   | **41-1693295**                         |
|-------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------|
| *(State or other jurisdiction of incorporation or organization)*                                                              |   | *(I.R.S. Employer Identification No.)* |
|                                                                                                                          |
| **3905 Dakota Street SW  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**                                                                            |
| **Series A Preferred Share Purchase Rights**                                                                                  |
| **(Title of class)**                                                                                                          |

 

Indicate bycheck mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. **ý** YES   NO  **o**

 

Indicate bycheck mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the bestof registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or any amendment tothis Form 10-K.  **o**

 

Aggregatevalue of shares of common stock held by nonaffiliates of the registrant basedupon the closing price on The Nasdaq National Market on March 20, 2002 (onlyshares held by directors, officers and their affiliates, and holders of morethan 5% of Class A or Class B stock are excluded):  $39,879,220

 

Number of shares of common stock outstanding as of the close ofbusiness on March 20, 2002:

 

Class A   11,193,622

Class B        727,416

**Documentsincorporated by reference:**

Portions of the definitive Proxy Statementrelating to the 2002 Annual Meeting of Shareholders to be held on May 16, 2002at 10:00 AM CT, at the Holiday Inn of Alexandria (“Proxy Statement”) areincorporated by reference into Part III of this report.

** **

 

 

**TABLE OF CONTENTS**

 
| PART I     |                                                                                        |
|------------|---------------------------------------------------------------------------------------------|
|       |                                                                                        |
| ITEM 1.    | BUSINESS                                                                                    |
| ITEM 2.    | PROPERTIES                                                                                  |
| ITEM 3.    | LEGAL PROCEEDINGS                                                                           |
| ITEM  4.   | SUBMISSION  OF MATTERS TO A VOTE OF SECURITY HOLDERS                                        |
|       |                                                                                        |
| PART II    |                                                                                        |
|       |
| ITEM  5.   | MARKET  FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS                 |
| ITEM 6.    | SELECTED FINANCIAL DATA                                                                     |
| ITEM  7.   | MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
| ITEM  7A.  | QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                 |
| ITEM  8.   | FINANCIAL  STATEMENTS AND SUPPLEMENTARY DATA                                                |
| ITEM  9.   | CHANGES  IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE       |
|       |                                                                                        |
| PART III   |                                                                                        |
|       |
| ITEM  10.  | DIRECTORS  AND EXECUTIVE OFFICERS OF THE REGISTRANT                                         |
| ITEM 11.   | EXECUTIVE COMPENSATION                                                                      |
| ITEM  12.  | SECURITY  OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT                             |
| ITEM  13.  | CERTAIN  RELATIONSHIPS AND RELATED TRANSACTIONS                                             |
|       |                                                                                        |
| PART IV    |                                                                                        |
| ITEM 14.   | EXHIBITS, FINANCIAL STATEMENT  SCHEDULES, AND REPORTS ON FORM 8-K                           |
|       |                                                                                        |
| SIGNATURES |

 

 

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**PART I**

** **

**ITEM1.               BUSINESS**

** **

*References in this Form 10-K to “RuralCellular,” “RCC,” “we,” “our,” and “us” refer to Rural Cellular Corporation andits subsidiaries as a combined entity, except where it is clear that thoseterms mean only the parent company.*

 

***Forward-Looking Information***

 

This Form 10-K includes “forward–lookingstatements” within the meaning of Section 27A of the Securities Act andSection 21E of the Securities Exchange Act. All statements regarding usand our expected financial position, business, and financing plans are forward–lookingstatements. Forward–looking statements can be identified by, among otherthings, the use of forward–looking terminology such as “believes,”“expects,” “may,” “will,” “should,” “seeks,” “pro forma,” “anticipates,”“intends,” or the negative or other variations of any such term or comparableterminology, or by discussions of strategy or intentions. Although we believethat the expectations reflected in such forward–looking statements arereasonable, our expectations may prove not to be correct. A number of factorscould cause our actual results, performance, and achievements or industryresults to be materially different from any future results, performance, orachievements expressed or implied by such forward–looking statements.These factors include, but are not limited to:

 

**•     **the competitive environment in the wireless andtelecommunications industries and in the markets we serve, including thequality and pricing of comparable wireless communications services offered byour competitors;

**•     **economic conditions in our geographic markets andin general;

**•     **demographic changes;

•      ourability to attract and retain qualified personnel;

•      ourability to meet the obligations of our indebtedness;

•      ourability to meet our schedule for buildout of our wireless network;

•      ourbusiness plan and our strategy for implementing our plan;

•      themarket acceptance of the technology we use;

•      ourcapital expenditures and funding requirements, including our ability to accesssufficient capital to meet operating and financing needs;

•      theavailability of adequate quantities of system infrastructure and customerequipment and components to meet our service deployment and marketing plans andcustomer demand;

•      ourability to achieve and maintain market penetration and average customer revenuelevels sufficient to provide financial viability;

•      ourability to integrate the operations of any businesses we acquire;

•      ourability to scale our billing, collection, customer care, and similarback-office operations to keep pace with customer growth and increased systemusage rates;

•      futurelegislation or regulatory actions relating to specialized mobile radioservices, other wireless communications services, or telecommunicationsservices generally;

•       other risks anduncertainties described from time to time in our reports filed with theSecurities and Exchange Commission; and

•      otherfactors described in this report including, without limitation, under “Factorsthat may affect our performance.”

 

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In addition, such forward–lookingstatements are necessarily dependent upon assumptions, estimates, and data thatmay be incorrect or imprecise and involve known and unknown risks,uncertainties, and other factors. Accordingly, forward–looking statementsincluded in this report do not purport to be predictions of future events orcircumstances and may not be realized. All subsequent written and oral forward–lookingstatements attributable to us or persons acting on our behalf are expresslyqualified in their entirety by the foregoing cautionary statements. Given theseuncertainties, you are cautioned not to place undue reliance on such forward–lookingstatements. We disclaim any obligation to update any such factors or toannounce publicly the results of any revisions to any of the forward–lookingstatements contained in this report to reflect future events or developments.

 

***Factorsthat may affect our performance***

 

**Our future operatingresults could fluctuate significantly.**

 

We believe that our future operating resultsand cash flows may fluctuate due to many factors, some of which are outside ourcontrol. These factors include the following:

 

•      increasedcosts we may incur in connection with the build out of our networks and thefurther development, expansion, and upgrading of our wireless systems;

•      fluctuationsin the demand for our services and equipment and wireless services generally;

•      increased competition, including pricecompetition, which has led to declining average monthly local service revenuesper customer for us and our competitors;

•      changes in our roaming revenues andexpenses due to renegotiation of our roaming agreements and the development ofneighboring or competing networks;

•      changes in the regulatory environment;

•      the cost and availability of equipmentcomponents;

•      changes in travel trends; and

•      changes in general economic conditionsthat may affect, among other things, demand for our services and thecreditworthiness of our customers.

 

We incurred net losses applicable to common shares of approximately $87.6million, $83.3 million and $11.1 million in the years ended December 31, 2001,2000 and 1999, respectively. Losses are likely to be significant for the nextseveral years as we seek to increase our customer base in existing markets. Wemay not generate profits in the short term or at all. If we fail to achieveprofitability, that failure could have a negative effect on the market value ofour common stock.

 

**Our stock price has been and may continue tobe volatile.**

 

The trading price of our Class A common stock has been and is likely tocontinue to be highly volatile and could be subject to wide fluctuations inresponse to factors such as:

 

•      actual or anticipated variations inquarterly operating results;

•      changesin financial estimates and recommendations by securities analysts;

•      conditionsor trends in the wireless communications industry;

•      changesin the economic performance and/or market valuation of other wirelesscommunications companies;

•      ourannouncement of significant acquisitions, strategic partnerships, jointventures or capital commitments;

•      additionsor departures of key personnel; and

•      otherevents or factors, many of which are beyond our control.

 

In addition, the stock market in general, andThe Nasdaq National Market in particular, has experienced extreme price andvolume fluctuations that have oftenbeen unrelated or disproportionate to the operating performance of companieswith securities listed on these exchanges and quotation systems. These broadmarket and industry factors may materially and adversely affect the marketprice of the Class A common stock, regardless of our actual operatingperformance. In the past, following periods of volatility in the market priceof listed companies’ securities, securities class-action litigation has oftenbeen instituted against these companies. This kind of litigation, if instituted against us, could result insubstantial costs and a diversion of management's attention and resources,which would materially and adversely affect our business, financial conditionand operating results.

 

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**We may not be able tointegrate acquired wireless communications providers successfully, which couldadversely affect our financial performance.**

 

A significant component of our growth hasbeen through acquisition of other regional wireless providers. Our ability toimplement our growth strategy depends, in part, on our success in integratingour recently acquired wireless communications businesses as well as any we mightacquire in the future. This may impose strains on our management and financialresources. Some of the challenges we have faced and will face in integratingacquired wireless communications services businesses include integratingoperations and technology, billing systems, and customer service practices withour existing networks, all of which may have an adverse effect on the qualityof service, customer satisfaction, and retention in the regions in whichintegration is taking place. The pursuit and integration of acquired wirelesscommunications providers may require substantial attention from our managementand will limit the amount of time they can devote to managing our combinedoperations. We cannot guarantee that we will be able to successfully integratenewly acquired wireless communications providers into our business model. If wefail to do so, if we fail to manage our growth, or if we encounter unexpecteddifficulties during expansion and integration, it would have a negative impacton the performance of our newly acquired businesses as well as on our businessas a whole.

 

**A significant portion of our revenues is fromroaming. Based on industry trends, out collect roaming yield has been decliningover the last few years and is expected to decline in the future. As a result,future operating results could be adversely affected if increases in roamingminutes do not offset anticipated decreases in roaming yield.**

 

Our roaming agreements are short to mediumterm, including some which are terminable with 30 days’ written notice, and maybe terminated prior to expiration upon breach of any of the material terms.When these agreements expire or are terminated, we may be unable to renegotiatethese roaming agreements or to obtain roaming agreements with other wirelessproviders upon acceptable terms. Failure to obtain acceptable roamingagreements could lead to a substantial decline in our revenues and income.

 

In addition, changes in the networkfootprints of our competitors and of our roaming partners could have a materialadverse effect on the terms of our roaming agreements and on our out collectrevenues and incollect expenses. For example, if a roaming partner from whom wederive a significant amount of revenue in one of our service areas were to buildits own network in that service area, our out collect revenues derived from ourroaming relationship with that partner in that area might decrease or evencease altogether, and our leverage in negotiating favorable incollect rates inthat partner’s network areas could decrease as well.

 

A substantial portion of our roaming revenuesis derived from agreements with two national wireless providers, AT&TWireless and Verizon Wireless. Changes in their operations or a significantdecline in the number of their customers could adversely affect our business.For the year ended December 31, 2001, AT&T Wireless accounted forapproximately 50%, and Verizon Wireless accounted for approximately 20%, of ourtotal roaming minutes.

 

**Our roaming revenues are subject to someeffects of seasonality, and as a result, our overall revenue and operatingincome are also subject to seasonal fluctuations.**

 

In 1999, 2000, and 2001, a substantial amountof our revenues was derived from roaming charges incurred by other wirelessproviders for use of our network by their customers who had traveled within ourservice areas. Our service areas include a number of resort destinations thatcontribute to our roaming revenues. As a result, our roaming revenues increaseduring vacation periods, introducing a measure of seasonality to our revenuesand operating income. See “Management’s Discussion and Analysis of FinancialCondition and Results of Operations— Seasonality.”

 

 

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**We have a significant amount of debt andpreferred stock, which may limit our ability to meet our debt service anddividend obligations, to borrow additional money, or to survive a downturn inour business.**

 

 

As of December 31, 2001, we had approximately$1.290 billion of long term consolidated debt, approximately $505.8 milliontotal liquidation preference of preferred stock, and consolidated shareholders’deficit of approximately $37.0 million. Of the $505.8 million of preferredstock, $388.3 million can be exchanged, at our option, subject to compliancewith certain leverage ratios under our credit facility and the indenturesrelated to our senior subordinated notes, for senior subordinated indebtedness.

 

The current levels of our debt could haveimportant consequences, including the following:

 

**•     **we must use a substantial portion of our cashflows from operations to make principal and interest payments on our debt andpay cash dividends on our preferred stock, thereby reducing funds that wouldotherwise be available to us for working capital, capital expenditures, futurebusiness opportunities, the payment of cash dividends on our common stock, andother purposes;

**•     **we may not be able to obtain additional financingfor working capital, capital expenditures, and other purposes on termsfavorable to us or at all;

**•     **borrowings under our bank credit facilities areat variable interest rates, making us vulnerable to increases in interestrates;

**•     **we may have more debt than many of ourcompetitors, which may place us at a competitive disadvantage; and

•      we mayhave limited flexibility to react to changes in our business.

 

We may incur additional debt in the future tofund the expansion and maintenance of our business.  If we do so, the related risks could intensify.

 

**The restrictivecovenants in our existing debt and preferred stock instruments and agreementsmay limit our ability to operate our business.**

 

The instruments governing our debt, including ourcredit facility, the indentures governing our senior subordinated notes, and thecertificates of designation governing our preferred stock, impose significantoperating and financial restrictions on us. These restrictions significantlylimit, among other things, our ability and the ability of our subsidiaries to:

 

•      incuradditional debt;

•      paydividends;

•      repayjunior debt prior to stated maturities;

•      allowthe imposition of dividend restrictions on certain subsidiaries;

•      sellassets;

•      makeinvestments;

•      engagein transactions with shareholders and affiliates;

•      createliens; and

•      engagein some types of mergers or acquisitions.

 

Our credit facility requires us to maintainspecified financial ratios. Substantially all our assets are subject to lienssecuring our credit facility. These restrictions could limit our ability toobtain future financing, make needed capital expenditures, withstand a downturnin our business, or otherwise conduct necessary corporateactivities. Our failure to comply with these restrictions could lead to adefault under the terms of the relevant debt or a violation of the terms of thepreferred stock even though we are able to meet debt service and dividendobligations.

 

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If there were an event of default under ourcredit facility or other debt, the holders of the affected debt could elect todeclare all of that debt to be due and payable which, in turn, could cause allof our other debt to become due and payable. We and oursubsidiaries might not have sufficient funds available, and we might be unableto obtain sufficient funds from alternative sources, to make these payments.Even if we can obtain additional financing, the terms might not be favorable tous. If the amounts outstanding under our credit facility were accelerated andwe could not obtain sufficient funds to satisfy our obligations, our lenderscould proceed against our assets and the stock and assets of our subsidiaries.As a result, any event of default could have a material adverse effect on ourbusiness and financial condition.

 

**We expect to require substantial amounts ofcapital in the future. Ourability to generate the capital required to meet our obligations and tomaintain and develop our systems depends on many factors beyond our control.**

 

We have required, and will continue torequire, substantial capital to maintain, upgrade, and develop our wirelesssystems and those we may acquire. We had capital expenditures of $46.0 millionduring the year ended December 31, 2001. We have budgeted capital expendituresfor fiscal 2002 of approximately $75 million, including maintenance of ourexisting infrastructure, enhancing coverage in covered service areas, andmeeting the build out requirements for our PCS licenses. We may also requireadditional financing for future acquisitions, to refinance our debt at itsfinal maturities, and to meet mandatory redemption provisions on our preferredstock. Our sources of additional capital may include public and private equityand debt financings, including vendor financing. The extent of the additionalfinancing that we may require will depend on the success of our operations. Theavailability of additional financing is dependent on conditions in the capitalmarkets. We may not be able to obtain additional financing on terms acceptableto us and within the limitations contained in the instruments governing ourdebt and our preferred stock, or any future financing arrangements. If wecannot raise sufficient funds to meet our planned growth or debt and preferredstock repayment obligations, including upon a change of control, we may delayor abandon some or all of our planned development or seek to sell assets toraise additional funds, either of which could materially limit our ability tocompete.

 

**We operate in a very competitive businessenvironment, which can adversely affect our business and operations.Competitors who offer more services than we do may attract our targetedcustomers.**

 

The wireless communications industry ishighly competitive. Many of our competitors and potential competitors havesubstantially greater financial, personnel, technical, marketing, and otherresources than we do, as well as other competitive advantages. Some competitorsmay market services we do not offer, such as cable television, internet access,landline local exchange, or long distance services, which may make theirservices more attractive to customers. Competition for customers is basedprincipally upon services and features offered, system coverage, technicalquality of wireless systems, price, customer service, capacity, and strength ofdistribution channels.

 

In each of our markets we compete withseveral other wireless licensees. To a lesser extent, we also compete in manyof our service areas with dispatch and conventional mobile telephone companies,satellite telephone service providers, resellers of wireless services, pagingcompanies, and landline telephone service providers. We expect this competitionto increase in the future, and we may not be able to compete successfully.

 

**We will likely incur operating costs due tounauthorized use of our network.**

 

As do most companies in the wirelessindustry, we will likely incur costs associated with the unauthorized use ofour network, including administrative and capital costs associated withdetecting, monitoring, and reducing the incidence of fraud. Fraud impactsinterconnection costs, capacity costs, administrative costs, fraud preventioncosts, and payments to other carriers for unbillable fraudulent roaming.

 

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**Our business could bematerially and adversely affected by our failure to anticipate and react tofrequent and significant technological changes.**

 

Thetelecommunications industry is subject to rapid and significant changes intechnology that are

evidencedby:

 

•       the increasing pace ofdigital upgrades to existing analog wireless systems;

•       evolving industrystandards;

•       the availability of newradio frequency spectrum allocations for wireless services;

•       ongoing improvements inthe capacity and quality of digital technology;

•       shorter development cyclesfor new products and enhancements;

•       developments in emergingwireless transmission technologies; and

•       changes in end-userrequirements and preferences.

 

We may be required to select in advance onetechnology over another. At the time we make our selection, it may beimpossible to predict accurately which technology may prove to be the mosteconomic, efficient, or capable of attracting customer usage. Consequently, itis possible that we may select a technology that does not achieve widespreadcommercial success and, as a result, our business, results of operations andfinancial condition could be materially and adversely affected. Moreover, oneor more of the technologies that we currently utilize may become inferior orobsolete at some time in the future.

 

**The success of our operations depends uponthe management skills and experience of our executive team.**

 

We believe that our future success willdepend in large part on our continued ability to attract and retain highlyqualified technical and management personnel. We believe that there is, andwill continue to be, intense competition for qualified personnel in thewireless communications industry, and we cannot assure you that we will besuccessful in retaining our key personnel or in attracting and retaining otherhighly qualified technical and management personnel. We do not currentlymaintain key-man life insurance on any of our executives or other employees.

 

**Our business is subject to extensivegovernment regulation. The applicable legislation and regulations, and changesto them, could adversely affect our business by increasing our expenses. We mayalso be unable to obtain regulatory approvals necessary to operate ourbusiness. Any failure to obtain these approvals could negatively affect ourresults of operations.**

 

The Federal Communications Commission (the“FCC”) regulates many aspects of our business, including the licensing,construction, interconnection, operation, acquisition, and sale of our wirelesssystems, as well as the number of wireless licenses permitted in each of ourmarkets. State and local regulatory authorities also, to a lesser extent,regulate aspects of our business and services. In addition, the FederalAviation Administration regulates aspects of construction, marking, andlighting of communications towers on which we depend for the placement of ourwireless transmitters. Changes in legislation and regulations governingwireless activities and wireless carriers, our failure to comply with applicableregulations, or our loss of or failure to obtain any license or licensed areacould have a material adverse effect on our operations. In addition, someaspects of the Communications Act of 1934, as amended, place additional burdensupon us or subject us to increased competition and increase our costs of doingbusiness.

 

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The FCC and state authorities areincreasingly looking to the wireless industry to fund various initiatives,including federal and state universal service programs, telephone numberadministration, services to the hearing-impaired, and emergency 911networks. In addition, many states have imposed significant taxes on providersin the wireless industry and have adopted or are considering adoption ofregulatory requirements on customer billing and other matters. Theseinitiatives are imposing increased costs on us and other wireless carriers andmay otherwise adversely affect our business. For example, the FCC has mandatedthat wireless providers supply the geographic coordinates of a customer’slocation, either by means of network-based or handset-based technologies, topublic safety dispatch agencies. This rule will impose significant costs on usand could lead us to increase subsidies on handsets to offset the increasedcosts of handset-based technologies. There can be no assurance that we will beable to meet the FCC’s 911 requirements or that we will not be subject to finesby the FCC in connection with our failure to comply with these requirements.

 

Each of our wireless licenses is subject torenewal upon expiration of its current ten-year term. Grants of wirelesslicense renewals are based upon FCC rules establishing a presumption in favorof licensees that have complied with their regulatoryobligations during the ten-year license period. However, we cannot assure youthat the FCC will grant us any future renewal applications or that ourapplications will be free from challenge. In addition, FCC rules requirewireless licensees to meet buildout requirements with respect to particularlicenses, and failure to comply with these and other requirements in a givenlicensed area could result in revocation or forfeiture of our license for thatarea or the imposition of fines by the FCC.

 

**We are subject to certain limitations onforeign ownership and transfers of control.**

 

The Communications Act of 1934, as amended,and related regulations prohibit the holding of a common carrier license by acorporation if more than 20% of the licensee’s capital stock, or more than 25%of the capital stock of the licensee’s controlling company, is owned directlyor beneficially by non-U.S. citizens. For this purpose, capital stock includesall equity interests, including our Class A and Class B common stock and ourpreferred stock. Absent FCC approval of foreign ownership exceeding theselimits, failure to comply with these requirements may result in a FCC orderrequiring divestiture of foreign ownership. In addition, fines or denial ofrenewal or revocation of the license is possible. The Communications Act of1934 and related regulations also require prior approval of changes in controlof entities holding common carrier licenses. Our Articles of Incorporationpermit us to redeem our common stock where necessary to preserve our licenses,and we could be required to expend substantial amounts to comply with theownership restrictions. Also, these regulations limit our ability to raise newcapital from foreign persons or to sell assets to foreign persons.

** **

**Equipment failure andnatural disasters may adversely affect our operations.**

 

A major equipment failure or a naturaldisaster affecting any of our central switching offices, microwave links, orcell sites could have a material adverse effect on our operations. Ourinability to operate any portion of our wireless system for an extended timeperiod could result in a loss of customers or impair our ability to attract newcustomers, which would have a material adverse effect on our business, resultsof operations, and financial condition. Although we have not experienced amajor equipment failure and we believe that we have purchased insurancesufficient to cover potential losses, we may not be adequately insured againstsuch an event.

 

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**If wireless handsets are perceived to posehealth and safety risks, we may be subject to new regulations, and demand forour services may decrease.**

 

Media reports have suggested that certainradio frequency emissions from wireless handsets may be linked to varioushealth concerns, including cancer, and may interfere with various electronicmedical devices, including hearing aids and pacemakers. Concerns over radiofrequency emissions may have the effect of discouraging the use of wirelesshandsets, which would decrease demand for our services. In recent years, theFCC and foreign regulatory agencies have updated the guidelines and methodsthey use for evaluating radio frequency emissions from radio equipment,including wireless handsets. There also are some safety risks associated withthe use of wireless handsets while driving. Legislation has been proposed inthe United States Congress and many state and local legislative bodies torestrict or prohibit the use of wireless phones while driving motor vehicles.Similar laws have been enacted in other countries and, to date, the State ofNew York and a small number of localities in the United States have passedrestrictive laws. Concerns over these safety risks and the effect of any legislationthat may be adopted in response to these risks could limit our ability tomarket and sell our wireless services. Additionally, litigation relating toillness, accidents, deaths, or serious bodily injuries allegedly incurred as aresult of wireless phone use could result in damage awards and adversepublicity.

 

**We have shareholders who could exercisesignificant influence onmanagement.**

 

The holders of our Class M convertiblepreferred stock currently are able to elect two members to our board of directorsand can vote, on an as-converted basis, 2,075,471 shares of our Class A commonstock, which represented as of March 20, 2002 approximately 10.1% of the votingpower of our common stock. If these holders were to disagree with decisions made bymanagement or the board of directors about our plans or operations, they mightbe able to bring significant pressure to change such plans or operations.

 

**Antitakeoverprovisions could adversely affect the price of our Class A common stock.**

 

Some of the following provisions of our Articles of Incorporation,Amended and Restated Bylaws and Minnesota law could delay or prevent a changeof control or a change in management that holders of Class A common stock mayconsider beneficial:

 

•       provisions for aclassified board of directors;

•       provisions for advancenotice for director nominations and shareholder proposals;

•       provisions allowingholders of our class B common stock 10 votes per share as compared to one voteper share for our class A common stock;

•       provisions forsupermajority votes to approve mergers or amend specified provisions of theArticles and Bylaws; and

•       statutory limits regardingshare acquisitions and business combinations.

 

We also have adopted a sharerights plan under which the exercise of preferred stock purchase rightsattached to each share of common stock could result in substantial dilution toany person or group acquiring 15% or more of our stock without approval fromour board of directors.

 

In addition, the documents governing our indebtedness containlimitations on our ability to enter into a change of control transaction. Underthese documents, the occurrence of achange of control transaction, in some cases after notice and grace periods,would constitute an event of default permitting acceleration of theindebtedness.

 

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**Weare subject to limitations on our ability to pay cash dividends on andrepurchase or otherwise satisfy our obligations under our senior exchangeablepreferred stock and junior exchangeable preferred stock. As a result, if we donot satisfy these obligations, we may be in default under our existing debt,and the holders of these series of preferred stock may have the right to electdirectors to our board of directors.**

 

Our ability to pay cash dividends and to redeem the senior exchangeablepreferred stock and junior exchangeable preferred stock or repurchase theexchange debentures when required is substantially restricted under variouscovenants contained in documents governing our outstanding preferred stock andour debt. In addition, under Minnesota law, we can pay dividends on or redeemour capital stock, including the senior exchangeable preferred stock and thejunior exchangeable preferred stock, only if our board of directors determinesthat we will be able to pay our debts in the ordinary course of business afterpaying the dividends or completing the redemption. We cannot predict what thevalue of our assets or the amount of our liabilities will be in the future. Accordingly,we cannot assure you that we will be able to:

 

•       pay cash dividends on thesenior exchangeable preferred stock or junior exchangeable preferred stock;

•       redeem the seniorexchangeable preferred stock or junior exchangeable preferred stock in the eventof a change of control or otherwise; or

•       exchange the seniorexchangeable preferred stock or the junior exchangeable preferred stock forexchange debentures.

 

If we fail to comply with the terms of the senior exchangeablepreferred stock or the junior exchangeable preferred stock, the holders ofthese series of stock will each have the right to elect directors to our board.In addition, the failure to comply could constitute an event of default underour existing debt. As a result, the lenders of this debt could acceleratepayment of all amounts owing under the debt.

 

***(a)           General Development of Business***

 

We are a wireless communications serviceprovider in the United States, focusing on rural markets. Our network covered atotal population of approximately 5.9 million and served approximately633,000 voice customers, excluding wholesale customers, as of December 31,2001. We believe that rural markets provide strong growth opportunities becausethese markets typically have lower current penetration rates and lesscompetition for customers than markets in larger metropolitan areas. Inaddition, our rural markets generally contain a number of vacation destinationsand significant highway miles. For these reasons, and because of the distancebetween population centers, many potential customers spend substantial timetraveling through our service areas, resulting in higher roaming revenues thanin urban markets.

 

The following chart summarizes our existing wireless systems as ofDecember 31, 2001:

 
| **Regions**       |   | **Percentage  Ownership** |   | **Total  Licensed  POPS(1)** |   | **Marketed  POPs(1)** |   | **Voice   Customers (2)** |   | **Penetration  % (2)** |   | **Square   Miles** |   | **States**          |   |
|-------------------|--------|---------------------------|--------|------------------------------|--------|-----------------------|--------|---------------------------|--------|------------------------|--------|--------------------|--------|---------------------|--------|
| Cellular:         |   |                      |   |                         |   |                  |   |                      |   |                   |   |               |   |                |   |
| Midwest           |   | 100                       | %      | 1,019,000                    |   | 731,000               |   | 101,933                   |   | 13.9                   |   | 45,000             |   | MN, SD              |   |
| Northeast         |   | 100                       | %      | 3,175,000                    |   | 2,037,000             |   | 236,442                   |   | 11.6                   |   | 46,000             |   | MA, ME, NH,  NY, VT |   |
| South             |   | 100                       | %      | 1,474,000                    |   | 1,474,000             |   | 118,594                   |   | 8.0                    |   | 71,000             |   | AL, KS, MS          |   |
| Northwest         |   | 100                       | %      | 919,000                      |   | 919,000               |   | 161,383                   |   | 17.6                   |   | 81,000             |   | OR, WA              |   |
| Cellular Total    |   |                      |   | 6,587,000                    |   | 5,161,000             |   | 618,352                   |   | 12.0                   |   | 243,000            |   |                |   |
|              |   |                      |   |                         |   |                  |   |                      |   |                   |   |               |   |                |   |
| PCS:              |   |                      |   |                         |   |                  |   |                      |   |                   |   |               |   |                |   |
| Wireless Alliance |   | 70                        | %      | 732,000                      |   | 732,000               |   | 14,417                    |   | 2.0                    |   | 19,000             |   | MN, ND, SD,  WI     |   |
| Total             |   |                      |   | 7,319,000                    |   | 5,893,000             |   | 632,769                   |   | 10.7                   |   | 262,000            |   |                |   |

 

----

(1) Updated to reflect2000 U.S. Census Bureau data.

 

(2) Penetrationrepresents the ratio of wireless voice customers at the end of the period tomarketed POPs. Customer numbers exclude paging and long distance customers.

 

11

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Within each of our four regions, we operatethrough the development of a local presence in the communities we serve, whichwe believe enhances our competitive position and allows us to tailor ourproducts and services to meet our customers’ specific needs. Where appropriate,we leverage our service programs and operating practices across our variousmarkets.

 

We have invested capital and resources toenhance the quality of our networks, expand our geographic footprint, andbroaden our service offerings. As a result of our network investments, webelieve our customers receive a high level of both regional and local wirelesscoverage, minimal call blocking and dropped calls, seamless call delivery andhand-off, and access to digital services. Our digital offerings are availablein all of our markets and include caller identification, short messageservices, and numeric paging, as well as other ancillary services such asvoicemail and call waiting. As of December 31, 2001, approximately 62% ofour wireless customers were using digital handsets whose digital features canbe utilized in approximately 90% of our service areas.

 

***(b)           FinancialInformation about Segments***

 

Our business consists of one segment, the operation of wireless communication systems in the United States.

 

***(c)           Descriptionof Business/Service Areas***

 

**Marketing of Products and Services**

 

We have developed our marketing strategy on a market-by-market basisand offer service plan options to our customers tailored to address theirspecific needs and to encourage cellular usage. Most service plans have a fixed monthly access fee, which includes aspecified number of minutes, and incremental fees for enhanced services. As aresult of our focus on marketing strategies as well as the upgrade of our networksto digital capability, we are able to offer our customers a wide array ofservices on an individual or bundled basis. We believe these services stimulatedemand for wireless usage and increase customer loyalty. These services includethe following:

 

**•**      *Caller ID* — Allows a customer to see thephone number and name of the calling party before answering the call or afternot answering a call.

**•**      *Short Message Service* — Allows a customerto receive and send text messages or content messages.

**•**      *Numeric Paging* — Allows calling parties toleave a phone number rather than a voice message.

**•**      *Visual Message Notification* — Allows acustomer to know that a text or voice message has been received by displayingan icon on the customer’s phone.

**•**      *Group Ring* — Allows a customer to havemultiple phones ring simultaneously when a single cellular phone number iscalled.

**•**      *Add-A-Line* — Allows an additional phone tobe included on a single account for a flat fee, permitting a customer to sharethe service plan minutes.

**•**      *Voicemail* — Allows a customer to receiveand retrieve voicemail.

**•**      *Regional Personal Toll-Free Number* —Provides a customer with a regional personal toll-free number, which encouragescustomers to distribute their cellular numbers and keep their telephones turnedon to accept incoming calls.

**•**      *Nationwide Calling Option* — Allows acustomer to pay a flat fee for all long distance calls made from our serviceareas.

**•**      *Phone Service* — Allows customers theoption to lease handsets for a nominal monthly charge. This service reducescustomers’ concerns regarding equipment obsolescence and enables us to bettercompete with our competitors’ free handset offers.

**•**      *Paging Services* — Marketed both throughour own system, covering northern Minnesota and eastern North Dakota, and as areseller of paging services covering most of our other service areas.  We market our paging services as part of ourbundled service offerings.

**•**      *Voice Activated Dialing* — Marketed toprovide unique speech recognition services to wireless customers. Theseservices, which include voice activated dialing, require no extra equipment forthe customer to buy or install and overlays on their existing wireless serviceas a voice alternative to touchtone.

 

12

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In addition to tailoring our service plans based on features andminutes of use, we also offer our customers regional calling plans and roamingpackages that allow our customers to pay home usage rates while traveling within specified regional zones, bothwithin and outside of our cellular service areas. We have also establishedpreferred roaming contracts and developed system integration with adjacentcellular carriers, which permit our customers to receive automatic calldelivery, call forwarding, toll-free access to voicemail, call hand-off, andreduced roaming rates nationwide.

 

Roaming is an integral component of our service offerings. We havestructured our roaming agreements to enable us to provide expanded networkaccess to our customers both regionally and nationally and provide roamingrates based upon factors such as network coverage, feature functionality, andnumber of customers.  A substantial portion of our roaming revenue isderived from agreements with two national wireless providers, AT&T Wirelessand Verizon Wireless. For the year ended December 31, 2001, AT&T Wirelessaccounted for approximately 50%, and Verizon Wireless accounted forapproximately 20%, of our total roaming minutes.  Under our agreements with AT&T Wireless, Verizon Wireless andother roaming partners, the roaming yield per minute RCC receives fromoutcollect calling minutes in addition to the cost per minute RCC pays for ourcustomers incollect activity, decline over time.

 

The following table lists our consolidatedhistorical quarterly roaming yield per minute and incollect cost per minute:

 
|                                                       |   | **1st Qtr** |   | **2nd Qtr** |   | **3rd Qtr** |   | **4th Qtr** |   | **Annual  Average** |   |
|------------------------------------------------------------|--------|-------------|--------|-------------|--------|-------------|--------|-------------|--------|---------------------|--------|
| Approximate  Outcollect Yield Per Minute  (including toll) |   |        |   |        |   |        |   |        |   |                |   |
| 2000                                                       |   | $0.52       |   | $0.49       |   | $0.49       |   | $0.45       |   | $0.49               |   |
| 2001                                                       |   | $0.38       |   | $0.36       |   | $0.36       |   | $0.29       |   | $0.34               |   |
|                                                       |   |        |   |        |   |        |   |        |   |                |   |
| Approximate Incollect Cost Per Minute                      |   |        |   |        |   |        |   |        |   |                |   |
| 2000                                                       |   | $0.42       |   | $0.40       |   | $0.40       |   | $0.38       |   | $0.40               |   |
| 2001                                                       |   | $0.30       |   | $0.26       |   | $0.24       |   | $0.22       |   | $0.25               |   |

 

We also have agreements with the North American Cellular Network, whichis one of the largest wireless telephone network systems in the world, linkingcellular operators throughout the United States and Canada and enablingcustomers to use their cellular phones to place and receive calls in theseareas as easily as they do in their home areas. Through North American CellularNetwork, customers are able to receive calls automatically without the use ofcomplicated roaming codes as they roam in more than 5,000 cities and towns inthe United States and Canada. In addition, North American Cellular Networkenables special services such as call forwarding and call waiting toautomatically follow customers as they travel.

** **

13

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**Distribution and Sales**

 

We market our wireless products and servicesthrough direct sales distribution channels, which include company owned retailstores and account executives.We also utilize indirect sales distribution channels, including independentsales agents. All distribution channels are managed on a regional basis. Webelieve that our decentralized sales distribution strategy contributes to ourservice offering success because our regions are able to tailor theirrespective programs to meet the needs of each local market.

 

Our distribution channels include thefollowing:

 

•      directsales through:

 

•        retailstores and kiosks that we operate and staff with our employees. As of December31, 2001, we had 84 stores, primarily located in our more densely populatedmarkets. In addition, we had eight stand–alone kiosks. Our retaillocations help us establish our presence and promote retail customer sales andservice; and

 

•      account executives who are our employees and focuson business and major account sales and service; and

 

•      indirectsales through independent sales agents. Our independent sales agents areestablished businesses in their communities and may include retail electronicsstores, farm implement dealers, automobile dealers, automobile parts suppliers,college and university bookstores, video and music stores, and local telephonecompanies. Most of the agents sell our services in conjunction with theirprincipal business. We provide cellular, digital, and paging equipment to theagents for sale or rent to customers, and the agents market our servicesutilizing a cooperative advertising program.

 

Each region is responsible for recruiting,training, and supporting sales personnel for each distribution channel. Thetraining and support providedto sales personnel is extensive and continuous.

 

**Customer Service**

 

To provide consistently superiorcustomer service in our service centers, we have implemented sophisticatedlocal monitoring and control systems and maintain customer service departmentsconsisting of highly trained personnel who are aware of the needs of thecustomers in our local markets. Our customer service centers are located inAlexandria, Minnesota; Bangor, Maine; Enterprise, Alabama; and Bend, Oregon.Our customer service centers in the Northeast and Midwest region can be accessed24 hours a day, 365 days a year, and are capable of handling bothroutine and complex technical questions. We believe that having customerservice centers located in or near our regional clusters provides a significantcompetitive advantage because it reinforces the local nature of our product andallows the customer service representatives to offer more customized service asa result of their inherent local knowledge. The customer service centers arealso responsible for processing new service orders and service changes forexisting customers and maintaining customer records. Our customer servicecenters maintain a quality control process that monitors call centerperformance and balances customer service center resources to match call centerload levels.

 

Customers are contacted periodically andoffered additional calling features such as voicemail, call waiting, and callforwarding and are recommendedthe best service pricing plan for that customer’s usage levels. We believethese contact programs enhance customer loyalty, maintain high retention rates,and increase sales of additional features that increase customer airtime usageand generate customer referrals.

 

14

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**Service Marks**

 

The following table summarizes the brandnames we use to market our services in our different regions.

 
| **Region**    |   | **Wireless Voice**                                  |   | **Paging**                                               |   | **Long Distance**                                   |   |
|---------------|--------|-----------------------------------------------------|--------|----------------------------------------------------------|--------|-----------------------------------------------------|--------|
| **Northeast** |   | UNICEL®, CELLULARONE®, StarCellular® |   | UNICEL Paging Service®, PAGING by CELLULARONE® |   | LONG DISTANCE by CELLULARONE®, SimplyOne® |   |
| **Midwest**   |   | CELLULAR 2000®, UNICEL®                   |   | KEYPAGE®                                            |   | N/A                                                 |   |
| **Northwest** |   | CELLULARONE®                                   |   | N/A                                                      |   | N/A                                                 |   |
| **South**     |   | CELLULARONE®                                   |   | N/ A                                                     |   | N/A                                                 |   |

 

We own the UNICEL®, StarCellular®, andSimplyOne® marks.  The CELLULAR 2000®name and related marks are owned by Cellular 2000, Inc., of which wecurrently own a 50% interest. The only business of Cellular 2000, Inc. isthe licensing of its service mark to its shareholders. We do not pay anylicense fees for the use of the CELLULAR 2000® mark.  The CELLULARONE® mark is owned by Cellular One Group, and we usethe CELLULARONE® service mark pursuant to licensing agreements with CellularOne Group.

 

**Network Operations**

 

***Cellular***

 

We develop and build our wireless serviceareas in response to customer demand by adding channels to existing cell sitesand by building new cell sites to increase coverage and capacity. Whereappropriate, we also upgrade acquired properties to enable us to providesimilar quality service over our entire network. We expect to continue our wirelesssystem expansion where necessary to add and retain customers, enhance customerusage on our systems, and increase roaming traffic. We also enhance our systemsthrough scalable network equipment, cell site splitting, cell sitesectorization, and digital upgrades of our systems. In addition to the customerquality aspects, these enhancements generally provide improved network systemperformance and efficiency of operations.

 

Our cellular network consisted of 622 cellsites as of December 31, 2001. We will continue to develop our wireless serviceareas by building new cell sites in locations that increase capacity andimprove coverage. In 2001 we added 18 sites through the acquisition of SacoRiver while adding an additional 12 sites through lease or construction. Weplan to lease and purchase additional cell sites during 2002. The additionalcell sites will further expand capacity and will allow customers to use lower–poweredor hand-held portable telephones throughout our service areas and network.

 

We currently rely on TDMA as the primarydigital standard for our wireless systems. With TDMA technology our customers’phones have digital compatibility with other wireless systems using TDMAservice. Further, the built-in intelligence of digital handsets allows us tomanage our incollect costs.

 

***Wireless Alliance***

 

At December 31, 2001, Wireless Alliance had62 cell sites. Wireless Alliance has a global system for mobile technology–basedpersonal communications services network, or “GSM.” Wireless Alliance utilizesVoiceStream Wireless Corporation’s switch.

 

15

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***Other Licenses***

 

Currently we own, but have not yet developed operating plans for,several additional wireless licensed properties. These wireless licensesinclude both local multi-point distribution system and personal communicationsservices spectrum.

 

**•     **Our localmulti-point distribution system licensed properties cover approximately 2.6million POPs and either overlap or are adjacent to our cellular systems. Wecurrently plan to use a portion of the local multi-point distribution systemlicenses for testing new products, services and systems. We will then conductmarket research on these products and services to determine whether tointroduce them in our existing markets**.**

** **

**•     **In 1999 weacquired a PCS BTA license for a market adjacent to our Midwest region thatcovers 288,000 POPs. During the fourth quarter of 2001, we began the TDMAbuildout of this service area.

** **

**•     **As part of theJanuary 2001 acquisition of Saco River, we acquired PCS licenses covering 1.1million POPs in Portland, Maine and Manchester, New Hampshire.

 

16

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Information regarding RCC’sservice areas and licenses is set forth in the following tables.

 

**Built Out VoiceLicense Summary**

 
|                                             |   | **%  Ownership** |   | **Marketed  POPs** |   | **License**            |   | **Spectrum** |   | **Date of   Acquisition** |   |
|--------------------------------------------------|--------|------------------|--------|--------------------|--------|------------------------|--------|--------------|--------|---------------------------|--------|
| **Cellular**                                     |   |             |   |               |   |                   |   |         |   |                      |   |
| Midwest:                                         |   |             |   |               |   |                   |   |         |   |                      |   |
| Minnesota RSA 1                                  |   | 100              | %      | 50,000             |   | Cellular — B side |   | 25 MHz       |   | 04/01/91                  |   |
| Minnesota RSA 2                                  |   | 100              | %      | 65,000             |   | Cellular — B side |   | 25 MHz       |   | 04/01/91                  |   |
| Minnesota RSA 3                                  |   | 100              | %      | 58,000             |   | Cellular — B side |   | 25 MHz       |   | 04/01/91                  |   |
| Minnesota RSA 5                                  |   | 100              | %      | 215,000            |   | Cellular — B side |   | 25 MHz       |   | 04/01/91                  |   |
| Minnesota RSA 6                                  |   | 100              | %      | 274,000            |   | Cellular — B side |   | 25 MHz       |   | 04/01/91                  |   |
| South Dakota RSA 4                               |   | 100              | %      | 69,000             |   | Cellular — B side |   | 25 MHz       |   | 02/01/99                  |   |
| Total Midwest                                    |   |             |   | 731,000            |   |                   |   |         |   |                      |   |
|                                             |   |             |   |               |   |                   |   |         |   |                      |   |
| Northeast:                                       |   |             |   |               |   |                   |   |         |   |                      |   |
| Maine, Bangor MSA                                |   | 100              | %      | 145,000            |   | Cellular — B side |   | 25 MHz       |   | 05/01/97                  |   |
| Maine, RSA 1                                     |   | 100              | %      | 84,000             |   | Cellular — B side |   | 25 MHz       |   | 07/31/98                  |   |
| Maine, RSA 2                                     |   | 100              | %      | 142,000            |   | Cellular — B side |   | 25 MHz       |   | 05/01/97                  |   |
| Maine, RSA 3                                     |   | 100              | %      | 227,000            |   | Cellular — B side |   | 25 MHz       |   | 05/01/97                  |   |
| Massachusetts RSA 1                              |   | 100              | %      | 72,000             |   | Cellular — A side |   | 25 MHz       |   | 07/01/98                  |   |
| New Hampshire, Portsmouth  MSA              |   | 100              | %      | 299,000            |   | Cellular — B side |   | 25 MHz       |   | 01/01/01                  |   |
| New Hampshire RSA 1                              |   | 100              | %      | 229,000            |   | Cellular — A side |   | 25 MHz       |   | 07/01/98                  |   |
| New York RSA 2                                   |   | 100              | %      | 230,000            |   | Cellular — A side |   | 25 MHz       |   | 07/01/98                  |   |
| Vermont, Burlington MSA                          |   | 100              | %      | 154,000            |   | Cellular — A side |   | 25 MHz       |   | 07/01/98                  |   |
| Vermont RSA 1                                    |   | 100              | %      | 217,000            |   | Cellular — A side |   | 25 MHz       |   | 07/01/98                  |   |
| Vermont RSA 2                                    |   | 100              | %      | 238,000            |   | Cellular — A side |   | 25 MHz       |   | 07/01/98                  |   |
| Total Northeast                                  |   |             |   | 2,037,000          |   |                   |   |         |   |                      |   |
| South:                                           |   |             |   |               |   |                   |   |         |   |                      |   |
| Alabama RSA 3                                    |   | 100              | %      | 136,000            |   | Cellular — A side |   | 25 MHz       |   | 04/01/00                  |   |
| Alabama RSA 4                                    |   | 100              | %      | 145,000            |   | Cellular — A side |   | 25 MHz       |   | 04/01/00                  |   |
| Alabama RSA 5                                    |   | 100              | %      | 221,000            |   | Cellular — A side |   | 25 MHz       |   | 04/01/00                  |   |
| Alabama RSA 7                                    |   | 100              | %      | 172,000            |   | Cellular — A side |   | 25 MHz       |   | 04/01/00                  |   |
| Kansas RSA 1                                     |   | 100              | %      | 27,000             |   | Cellular — A side |   | 25 MHz       |   | 04/01/00                  |   |
| Kansas RSA 2                                     |   | 100              | %      | 30,000             |   | Cellular — A side |   | 25 MHz       |   | 04/01/00                  |   |
| Kansas RSA 6                                     |   | 100              | %      | 19,000             |   | Cellular — A side |   | 25 MHz       |   | 04/01/00                  |   |
| Kansas RSA 7                                     |   | 100              | %      | 81,000             |   | Cellular — A side |   | 25 MHz       |   | 04/01/00                  |   |
| Kansas RSA 11                                    |   | 100              | %      | 94,000             |   | Cellular — A side |   | 25 MHz       |   | 04/01/00                  |   |
| Kansas RSA 12                                    |   | 100              | %      | 47,000             |   | Cellular — A side |   | 25 MHz       |   | 04/01/00                  |   |
| Kansas RSA 13                                    |   | 100              | %      | 28,000             |   | Cellular — A side |   | 25 MHz       |   | 04/01/00                  |   |
| Mississippi RSA 1                                |   | 100              | %      | 183,000            |   | Cellular — A side |   | 25 MHz       |   | 04/01/00                  |   |
| Mississippi RSA 3                                |   | 100              | %      | 160,000            |   | Cellular — A side |   | 25 MHz       |   | 04/01/00                  |   |
| Mississippi RSA 4                                |   | 100              | %      | 131,000            |   | Cellular — A side |   | 25 MHz       |   | 04/01/00                  |   |
| Total South                                      |   |             |   | 1,474,000          |   |                   |   |         |   |                      |   |
| Northwest:                                       |   |             |   |               |   |                   |   |         |   |                      |   |
| Oregon RSA 3                                     |   | 100              | %      | 159,000            |   | Cellular — A side |   | 25 MHz       |   | 04/01/00                  |   |
| Oregon RSA 4                                     |   | 100              | %      | 226,000            |   | Cellular — A side |   | 25 MHz       |   | 04/01/00                  |   |
| Oregon RSA 6                                     |   | 100              | %      | 213,000            |   | Cellular — A side |   | 25 MHz       |   | 04/01/00                  |   |
| Washington RSA 2                                 |   | 100              | %      | 139,000            |   | Cellular — A side |   | 25 MHz       |   | 04/01/00                  |   |
| Washington RSA 3                                 |   | 100              | %      | 59,000             |   | Cellular — A side |   | 25 MHz       |   | 04/01/00                  |   |
| Washington RSA 8                                 |   | 100              | %      | 123,000            |   | Cellular — A side |   | 25 MHz       |   | 04/01/00                  |   |
| Total Northwest                                  |   |             |   | 919,000            |   |                   |   |         |   |                      |   |
| Total Cellular                                   |   |             |   | 5,161,000          |   |                   |   |         |   |                      |   |
| **Wireless Alliance (PCS)**                      |   |             |   |               |   |                   |   |         |   |                      |   |
| Duluth, Minnesota/Superior,  Wisconsin  BTA 119  |   | 70               | %      | 279,000            |   | PCS — B Block     |   | 20 MHz       |   | 04/10/97                  |   |
| Fargo, North Dakota/Moorhead,  Minnesota BTA 166 |   | 70               | %      | 183,000            |   | PCS — B Block     |   | 20 MHz       |   | 04/10/97                  |   |
| Grand Forks, North Dakota  BTA 166               |   | 70               | %      | 98,000             |   | PCS — B Block     |   | 20 MHz       |   | 04/10/97                  |   |
| Sioux Falls, South Dakota  BTA 422               |   | 70               | %      | 172,000            |   | PCS — B Block     |   | 20 MHz       |   | 11/06/97                  |   |
| Total PCS                                        |   |             |   | 732,000            |   |                   |   |         |   |                      |   |
| Total                                            |   |             |   | 5,893,000          |   |                   |   |         |   |                      |   |

 

17

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**Unbuilt Voice LicenseSummary**

** **
|                                      |   | **%   Ownership** |   | **POPs**  |   | **License**        |   | **Spectrum** |   | **Date of   Acquisition** | ** ** |
|-------------------------------------------|--------|-------------------|--------|-----------|--------|--------------------|--------|--------------|--------|---------------------------|------------|
| Midwest                                   |   |              |   |      |   |               |   |         |   |                      |       |
| St. Cloud, MN BTA 391                     |   | 100               | %      | 288,000   |   | PCS — C Block |   | 30 MHz       |   | 07/01/99                  |       |
| Northeast                                 |   |              |   |      |   |               |   |         |   |                      |       |
| Manchester & Nashua, NH  BTA 274 |   | 100               | %      | 617,000   |   | PCS — F Block |   | 10 MHz       |   | 01/01/01                  |       |
| Portland, ME BTA 357                      |   | 100               | %      | 521,000   |   | PCS — F Block |   | 10 MHz       |   | 01/01/01                  |       |
|                                      |   |              |   | 1,426,000 |   |               |   |         |   |                      |       |

 

**Local MultipointDistribution Service (“LMDS”) License Summary**

 
| **Market**                                |   | **%  Ownership** |   |   | **Call Sign** |   | **Spectrum** |   | **Date of   Acquisition** | ** ** |
|-------------------------------------------|--------|------------------|--------|--------|---------------|--------|--------------|--------|---------------------------|------------|
| Brainerd, MN BTA 054-A                    |   | 100              | %      |   | WPOK 264      |   | 27.5 GHz     |   | 08/09/99                  |       |
| Burlington, VT BTA 063-A                  |   | 100              | %      |   | WPOK 265      |   | 27.5 GHz     |   | 08/09/99                  |       |
| Duluth, MN BTA 119-A                      |   | 100              | %      |   | WPOK 266      |   | 27.5 GHz     |   | 08/09/99                  |       |
| Eau Claire, WI BTA 123-A                  |   | 100              | %      |   | WPOK 267      |   | 27.5 GHz     |   | 08/09/99                  |       |
| Fergus Falls, MN BTA 142-B                |   | 100              | %      |   | WPOK 274      |   | 31.3 GHz     |   | 08/09/99                  |       |
| Glens Falls, NY BTA 164-A                 |   | 100              | %      |   | WPOK 268      |   | 27.5 GHz     |   | 08/09/99                  |       |
| Keene, NH BTA 227-A                       |   | 100              | %      |   | WPOK 269      |   | 27.5 GHz     |   | 08/09/99                  |       |
| La Crosse,WI-Winona, MN BTA 234-A         |   | 100              | %      |   | WPOK 270      |   | 27.5 GHz     |   | 08/09/99                  |       |
| Lebanon-Claremont, NH BTA 249-A           |   | 100              | %      |   | WPOK 271      |   | 27.5 GHz     |   | 08/09/99                  |       |
| Mankato-Fairmont, MN BTA 277-B            |   | 100              | %      |   | WPOK 275      |   | 31.3 GHz     |   | 08/09/99                  |       |
| Plattsburgh, NY BTA 352-A                 |   | 100              | %      |   | WPOK 272      |   | 27.5 GHz     |   | 08/09/99                  |       |
| Rochester-Austin-Albert Lea, MN BTA 378-B |   | 100              | %      |   | WPOK 276      |   | 31.3 GHz     |   | 08/09/99                  |       |
| Rutland-Bennington, VT BTA 388-A          |   | 100              | %      |   | WPOK 273      |   | 27.5 GHz     |   | 08/09/99                  |       |

 

Source: Updated toreflect 2000 U.S. Census Bureau data.

 

***Suppliers andEquipment Partners***

 

We do not manufacture any customer or network equipment. The highdegree of compatibility among different manufacturers’ models of handsets andnetwork facilities equipment allows us to design, supply, and operate oursystems without being dependent upon a single source of equipment. We currentlypurchase handsets primarily from Motorola, Inc., Ericsson, Inc. and NokiaTelecommunications, Inc. We currently purchase network equipment from NorthernTelecom, Inc., Lucent Technologies Inc., Harris, Inc., NokiaTelecommunications, Inc., Alcatel, Erickson, Inc. and Motorola, Inc.

 

18

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**Competition**

 

We compete against several wireless carriersin each of our markets and also compete with a number of enhanced specializedmobile radio service providers. We compete for customers based on numerous factors, including wireless system coverage andquality, service value equation (minutes and features over price), local marketpresence, digital voice and features, customer service, distribution strength,and name brand recognition. Some competitors also market other services, such aslong distance, landline local exchange, and internet access service, with theirwireless telecommunication service offerings. Many of our competitors have beenoperating for a number of years, currently serve a substantial customer base,and have significantly greater financial, personnel, technical, marketing,sales, and distribution resources than we do.

 

The following table lists our competitors ona market-by-market basis:

 
| **Region**                                                            |   | **Cellular Competition**                                         |       | **PCS / ESMR  Competition**                                                    |       |
|-----------------------------------------------------------------------|--------|------------------------------------------------------------------|------------|--------------------------------------------------------------------------------|------------|
| **Cellular**                                                          |   |                                                             | ** ** |                                                                           | ** ** |
| **Midwest:**                                                          |   |                                                             | ** ** |                                                                           | ** ** |
| Minnesota RSA 1 and 2                                                 |   | Western  Wireless Corporation                                    |       | Cellular  Mobile Systems of St. Cloud (“CMS”)                        |       |
| Minnesota RSA 3, 5 and 6                                              |   | American  Cellular Corporation                                   |       | WirelessNorth,  L.L.C., CMS, Nextel Communications, Inc., VoiceStream Wireless |       |
| South Dakota  RSA 4                                              |   | Western  Wireless Corporation                                    |       | Sprint PCS                                                                     |       |
| **Northeast:**                                                        |   |                                                             |       |                                                                           |       |
| Maine, Bangor MSA, RSA 1, 2 and 3                                     |   | United  States Cellular Corporation                              |       | N/A                                                                            |       |
| New Hampshire, Portsmouth MSA                                         |   | AT&T  Wireless                                               |       | Sprint PCS,  Nextel Communications, Inc., VoiceStream Wireless                 |       |
| Massachusetts RSA 1                                                   |   | Cingular  Wireless                                               |       | N/A                                                                            |       |
| New Hampshire  RSA 1                                             |   | United  States Cellular Corporation                              |       | N/A                                                                            |       |
| New York RSA 2                                                        |   | Verizon  Communications                                          |       | N/A                                                                            |       |
| Vermont, Burlington MSA, RSA 1                                        |   | Verizon  Communications                                          |       | N/A                                                                            |       |
| Vermont RSA 2                                                         |   | United  States Cellular Corporation                              |       | N/A                                                                            |       |
| **South:**                                                            |   |                                                             |       |                                                                           |       |
| Alabama RSA 3                                                         |   | Cingular  Wireless                                               |       | VoiceStream Wireless                                                           |       |
| Alabama RSA 4                                                         |   | ALLTEL  Corporation                                              |       | VoiceStream  Wireless, Pine Belt Wireless                                      |       |
| Alabama RSA 5                                                         |   | ALLTEL  Corporation, Cingular Wireless, Public Service Telephone |       | VoiceStream  Wireless, Nextel Communications, Inc.                             |       |
| Alabama RSA 7                                                         |   | ALLTEL  Corporation                                              |       | VoiceStream  Wireless, Sprint PCS Group                                        |       |
| Kansas RSA 1, 2, 6, 7, 12 and 13                                      |   | ALLTEL  Corporation                                              |       | Westlink  Communications (1,2,6,7,12)                                          |       |
| Kansas RSA 11                                                         |   | ALLTEL  Corporation                                              |       | PanHandle Telecommunications Systems, Inc.                                     |       |
| Mississippi RSA 1 and 4                                               |   | Cingular  Wireless, Cellular Telepak, Inc.                       |       | VoiceStream  Wireless, Telecorp PCS, Inc.                                      |       |
| Mississippi RSA 3                                                     |   | Cellular  Telepak, Inc                                           |       | VoiceStream  Wireless, Telecorp PCS, Inc.                                      |       |
| **Northwest:**                                                        |   |                                                             |       |                                                                           |       |
| Oregon RSA 3                                                          |   | United  States Cellular Corporation, AT&T Wireless           |       | Sprint PCS,  Qwest, Nextel Communications, Inc.                                |       |
| Oregon RSA 4                                                          |   | Verizon  Communications, AT&T Wireless                       |       | VoiceStream  Wireless, Sprint PCS, Qwest, Nextel Communications, Inc.          |       |
| Oregon RSA 6                                                          |   | United  States Cellular Corporation                              |       | Sprint PCS,  Nextel Communications, Inc., VoiceStream Wireless Corporation     |       |
| Washington RSA 2 and 3                                                |   | Verizon  Communications                                          |       | Sprint PCS,  VoiceStream Wireless Corporation                                  |       |
| Washington RSA 8                                                      |   | Inland  Cellular, AT&T Wireless                              |       | Sprint PCS, Qwest                                                              |       |
| **PCS — Wireless Alliance:**                                     |   |                                                             |       |                                                                           |       |
| Duluth, Minnesota / Superior, Wisconsin                               |   | Verizon  Communications, Dobson Communications                   |       | WirelessNorth,  L.L.C., Sprint PCS, Nextel Communications, Inc.                |       |
| Fargo, North Dakota / Moorhead, Minnesota;  Grand Forks, North Dakota |   | Western  Wireless Corporation, Verizon Communications            |       | WirelessNorth,  L.L.C., Sprint PCS, Nextel Communications, Inc.                |       |
| Sioux Falls, South Dakota                                             |   | Western  Wireless Corporation, Verizon Communications.           |       | Sprint PCS,  Nextel Communications, Inc                                        |       |

 

 

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The telecommunications industry isexperiencing significant technological changes, as evidenced by the increasingpace of improvements in the capacity and quality of digital technology, shortercycles for new products and enhancements, and changes in consumer preferencesand expectations. Accordingly, with the entry of new competitors and thedevelopment of new technologies, products, and services, competition in thewireless telecommunications industry has been dynamic and intense.

 

In the future, we expect to face increasedcompetition from entities holding licenses for PCS spectrum not yet operatingin our markets. We believe that PCS networks will continue to be focusedprimarily in urban areas due to capital and population coverage requirements.The FCC has issued licenses for both narrowband and broadband PCS, and sixbroadband licenses were issued in each of our cellular service areas. NarrowbandPCS typically provides advanced paging and messaging services. Broadband PCSconsists of wireless two-way telecommunications services for voice, data, andother transmissions employing digital micro–cellular technology. Manybroadband PCS providers compete with existing wireless systems. Under FCCrules, license holders are allowed to disaggregate the spectrum covered bytheir license. Accordingly, we may face competition from additional providersof PCS if the FCC approves a disaggregation of spectrum for any license for PCSin one of our service areas. In addition, the Omnibus Budget Reconciliation Actof 1993 required, among other things, the allocation to commercial use of aportion of 200 MHz of the spectrum currently reserved for government use. Someportion of this spectrum may be used to create new land-mobile services or toexpand existing land-mobile services. Further, the FCC has auctioned orannounced plans to auction licenses in the 39 GHz spectrum and 700 MHz spectrumthat may be used for wireless communications that would compete with ourservices.

 

Specialized mobile radio and other privateradio systems, such as those generally used by local dispatch, fleet services,and other communications services that have the technical capability to handlemobile telephone calls, including interconnection to the landline telephonenetwork, may provide competition in some markets. In addition, enhancedspecialized mobile radio systems may compete with our wireless services byproviding high quality digital communication technology, lower rates, enhancedprivacy, and additional features such as paging, particularly in metropolitanareas.

 

We also compete to a lesser extent withresellers, landline telephone service providers, fixed wireless services, andsatellite–based telecommunications systems. The FCC requires all wirelesslicensees to provide service to “resellers.” A reseller provides wirelessservices to customers but does not hold a FCC license and might not ownfacilities. Instead, the reseller buys blocks of wireless telephone numbers andcapacity from a licensed carrier and resells service through its owndistribution network to the public. Thus, a reseller is both a customer of awireless licensee’s service and also a competitor of that licensee. Severalsmall resellers currently operate in our systems.

 

We anticipate that market prices for wirelesscommunications service and equipment will continue to decline in the futurebased upon increased competition and cost reductions. Our ability to competesuccessfully is dependent, in part, on our ability to anticipate and respond tovarious competitive factors affecting the industry. Our marketing and salesorganization includes a group that carefully monitors and analyzes competitiveproducts and service offerings, changes in consumer preferences, changes indemographic trends and economic conditions, and pricing strategies bycompetitors that could adversely affect our operations or present strategicopportunities.

 

We believe that we are strategically positionedto compete with other communications technologies that now exist and withwireless resellers. Continuing technological advances in telecommunications andFCC policies that encourage the development of new spectrum–basedtechnologies make it difficult, however, to predict the extent of futurecompetition.

 

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**Legislation andRegulation**

 

***Overview***

 

Our business issubject to varying degrees offederal, state and local regulation. The FCC has jurisdiction over allfacilities of, and services offered by, telecommunications common carriers suchas us, to the extent those facilities are used to provide, originate, orterminate interstate or international communications. The Communications Act of1934, as amended (the ‘‘Communications Act’’), preempts state and localregulation of the entry of, or the rates charged by, any provider of commercialmobile radio service (“CMRS”), which includes our cellular service andbroadband personal communications service. Otherwise, state and localregulatory commissions retain jurisdiction over most of the same facilities andservices to the extent they are used to originate or terminate intrastatecommunications and with respect to zoning and similar matters. In addition,many of the regulations issued by these regulatory bodies may be subject tojudicial review, the result of which review we are unable to predict.

 

*The following summary of regulatorydevelopments and legislation does not purport to describe all present andproposed federal, state, and local regulation and legislation affecting the*telecommunications*industry. Manyexisting federal and state laws and regulations are currently the subject ofjudicial proceedings, legislative hearings, and administrative proposals thatcould change, in varying degrees, the manner in which this industry operates.Neither the outcome of these proceedings nor their impact upon thetelecommunications industry or us can be predicted at this time.*

 

***Federal Regulation***

 

We must comply with the applicablerequirements of the Communications Act, which was amended by theTelecommunications Act of 1996 (the ‘‘1996 Act’’) and other legislation. The1996 Act effected plenary changes in regulation at both the federal and statelevels that affect virtually every segment of the telecommunications industry.The stated purpose of the 1996 Act is to promote competition in all areas oftelecommunications and to reduce unnecessary regulation to the greatest extentpossible.

 

The 1996 Act greatly expands the FCC’sinterconnection requirements for incumbent local exchange carriers byrequiring them to:

 

•      provide physical co-location;

•      unbundle and provide access to componentsof their local service networks to other providers of local service; and

•      establish wholesale rates for the servicesthey offer at retail.

 

The 1996Act also requires all local exchange carriers to:

 

•      establish number portability;

•      establish dialing parity; and

•      provide nondiscriminatory access totelephone poles, ducts, conduits, and rights-of-way.

 

In addition, the 1996 Act requires localexchange carriers to compensate telecommunications carriersfor traffic originated by the local exchange carriers and terminated on theother carriers’ networks; these arrangements are reciprocal, thus requiring theinterconnecting carriers to compensate the local exchange carriers for callsoriginated by the interconnecting carriers and terminated on the local exchangecarriers’ network. The 1996 Act requires all telecommunications carriers,including us, to provide interconnection upon reasonable request.

 

Local exchange carriers are required tonegotiate in good faith with carriers, such as us, requesting any of the abovearrangements. If a requesting carrier and the local exchange carrier cannotreach an agreement within the prescribed time, either carrier may requestbinding arbitration by the appropriate state commission. Where an 

 

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agreement cannot be reached,carriers remain subject to the interconnection obligations established by theFCC and state telecommunications regulatory commissions.

 

The FCC is charged with establishing nationalguidelines to implement the 1996 Act. The FCC has established detailed rulesregarding rates and terms for interconnection between telecommunications carriersand local exchange carriers and regarding the implementation of dialing parity.In addition, in July 2000, the FCC adopted an order denying requests formandatory interconnection between resellers’ switches and CMRS providers’networks and declining to impose general interconnection obligations betweensuch networks. Negotiated interconnection agreements are subject to stateapproval and various rules of the FCC, some of which are subject to pendingregulatory proceedings or court review. The states’ regulatory commissions mustconsider applications for approval of interconnection agreements in a mannerconsistent with the terms of the Communications Act. The FCC’s rules as well asthe state arbitration proceedings will directly impact the nature and cost ofthe facilities necessary for interconnection of our wireless systems withlocal, national, and international telecommunications networks. The agreementswill determine the nature and amount of revenues we can receive for terminatingcalls originating on the networks of local exchange and othertelecommunications carriers and how much we pay for having calls that weoriginate terminated on the local exchange carriers’ networks.

 

The FCC also regulates the construction,operation, and acquisition of wireless systems in the United States. CMRSproviders operate under licenses granted by the FCC within a specified marketarea. These licenses are usually auctioned by the FCC afterbeing allocated in specified frequencies and being made subject to specific FCCrules. The unavailability of licenses in desired frequency ranges, as well asthe high cost of acquiring such licenses, may hinder our ability to modifyexisting facilities and secure authorization for additional facilities. Inparticular, the FCC recently conducted an auction of common carrier paginglicenses for use of particular frequencies in designated geographic areas. Wedid not purchase paging licenses in that auction, meaning that we cannot nowapply to enlarge the areas served by our paging systems unless we purchaserights to do so from the appropriate geographic area license holder orparticipate in a future FCC auction.

 

FCC licenses are generally transferable,subject to specified limitations prescribed by the Communications Act and theFCC. The FCC’s prior approval is required for the assignment or transfer ofcontrol of a license for a wireless system. Before we can complete any suchpurchase or sale, we must file appropriate applications with the FCC, and thepublic is by law granted a period of time, typically 30 days, to oppose orcomment on them. In addition, the FCC has established transfer disclosurerequirements that require licensees who assign or transfer control of a licenseacquired through an auction within the first three years of their license termsto file associated sale contracts, option agreements, management agreements, orother documents disclosing the total consideration that the licensee wouldreceive in return for the transfer or assignment of its license.Non-controlling minority interests in an entity that holds a FCC licensegenerally may be bought or sold without FCC approval, subject to the FCC’sspectrum aggregation limits and FCC notification.

 

Near the conclusion of the generally ten-yearterm of a CMRS license, licensees must file applications for renewal oflicenses 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 therenewal would not serve the public interest, convenience, or necessity. The FCCalso may revoke a license prior to the end of its term in extraordinarycircumstances. In addition, at license renewal time, other parties may filecompeting applications for the authorization. The FCC has adopted specificstandards stating renewal expectancy will be awarded to a CMRS licensee thathas provided substantial service during its license term and has substantiallycomplied with applicable FCC rules and policies and the Communications Act. Ifthe FCC awards the CMRS licensee a renewal expectancy, its license renewalapplication generally is granted and the competing applications are dismissed.

 

Although we are unaware of any circumstancesthat would prevent the approval of any future renewal application, no assurancecan be given that the FCC will renew any of our licenses. Moreover, althoughrevocation and involuntary modification of licenses are extraordinary measures,the FCC has the authority to restrict the operation of a licensed facility orrevoke or modify licenses. None of our licenses has ever been revoked orinvoluntarily modified.

 

 

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We are required by the FCC’s rules toconstruct facilities covered by certain licenses and to offer services to acertain percentage of the population covered by those licenses within specifiedperiods, based on the date of the grant of the licenses. OurPCS licenses are subject to forfeiture by the FCC, as are all similar licensesheld by other companies, if these buildout requirements are not satisfied in atimely manner. We are in the process of building out PCS systems under twolicenses which require a certification of sufficient construction by April 28,2002 if a forfeiture of license is to be avoided. Those licenses are for 10 MHzof PCS spectrum in the Manchester-Nashua-Concord, New Hampshire Basic TradingArea and the Portland-Brunswick, Maine Basic Trading Area. We have reason tobelieve that our construction will progress at a pace that allows for timelycertifications to the FCC of full compliance with the construction requirement;however, if construction progress is delayed we will request a temporary waiverof the applicable FCC rule as to one or both affected PCS licenses, and anextension of time to satisfy the requirement. There is a risk that our  request(s) in that instance will be deniedor that they will be granted in part but for an insufficient time to allow usto complete the necessary construction, in which case the license(s) will beforfeited. There is much to be accomplished to meet the deadline forconstruction under both licenses, including at least one or more of thefollowing:

 

•      lease, acquire, or otherwise obtain rightsto use the necessary antenna sites;

•      obtain zoning variances or other localgovernmental or third-party approvals or permits for network construction;

•      complete the radio frequency design,including cell site design, frequency planning, and network optimization; and

•      expand and maintain customer care, networkmanagement, billing, and other financial and management systems.

 

These events may not occur within the timeframes we anticipate or that the FCC requires, at the cost we estimate, or atall. In addition, problems in vendor equipment availability, technicalresources, or system performance could delay the launch of new or expandedoperations, or result in increased costs. We intend to rely in part on theservices of various companies that are experienced in design and buildout ofwireless networks in order to accomplish our buildout schedule. However, we maynot be able to obtain satisfactory contractors on economically attractive termsor ensure that our contractors will perform as we expect.

 

CMRS providers also must satisfy a variety ofFCC requirements relating to technical and reporting matters, includingcoordination of proposed frequency usage with adjacent systems in orderto avoid electrical interference between adjacent systems. The FCC alsorequires licensees to secure FCC consent to system modifications in specifiedinstances.

 

CMRS systems are subject to Federal AviationAdministration regulations respecting the location, marking, lighting, andconstruction of transmitter towers and antennas and may be subject to regulationunder the National Environmental Policy Act and the environmental regulations and registration requirements of the FCC. The FCC has alsoadopted guidelines and methods for evaluating radio frequency emissions fromradio equipment. We believe that all wireless devices we currently provide toour customers, and all towers that we own or occupy, comply with thesestandards.

 

The 1996 Act mandates that telecommunicationscarriers contribute to the federal Universal Service Fund, the purpose of whichis to ensure that basic telephone services are available andaffordable for all citizens. The Universal Service Fund is intended to promoteaccess to communications services in high cost areas and for low incomepersons, schools, libraries, and rural health care providers. We also arerequired to contribute to state universal service funds. The federal UniversalService Fund is administered jointly by the FCC, the fund administrator, andstate regulatory authorities, some of which are still in the process ofestablishing their administrative rules. Because we are permitted to collectthe required contribution amounts from our customers, we expect that ourobligation to contribute to the Universal Service Fund will have a minimalfinancial impact on us.

 

We also are required to contribute annuallyto the Telecommunications Relay Service Fund and the North American NumberingPlan Administration Fund, Local Number Portability, and to remit regulatoryfees to the 

 

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FCC with respect to our operations. We do notexpect that these contribution obligations will have amaterial financial impact on us.

 

Cellular and broadband CMRS providers alsomust comply with the FCC’s rules regarding emergency 911 service. There is astaged process for the required deployment of enhanced 911 services, referredto by the FCC as Phase I and Phase II. Under Phase I, cellular and broadbandCMRS providers were required as of April 1, 1998, or within six months of arequest from the designated Public Safety Answering Point (“PSAP”),whichever is later, to provide, if available to the serving carrier, thetelephone number of the originator of a 911 call and to provide to thedesignated PSAP the location of the cell site or base station receiving a 911call from any mobile handset accessing their systems through the use ofAutomatic Number Identification and Pseudo-Automatic Number Identification. Wecomply with Phase I requirements as they are applicable to us. Under Phase II,cellular and broadband CMRS providers must provide to the designated PSAP thelocation of all wireless 911 callers, by longitude and latitude, in conformancewith particular accuracy requirements. To comply, licensees may elect eithernetwork-based or mobile radio handset based location technologies andthereafter meet, according to a phased-in schedule, the enhanced 911 servicestandards stated in the FCC’s rules. We notified the FCC of our intention toutilize network-based location technologies to provide Phase II enhanced 911service. Accordingly, we are subject to requirements of the FCC that requirethat we provide Phase II enhanced 911 service to at least 50% of each of ourcellular and PCS areas or to 50% of the population in each service area as ofOctober 1, 2001, or within six months of a valid PSAP request for our provisionof Phase II service in a particular area, whichever is later. We have receivedrequests from PSAPs for deployment of Phase II enhanced 911 service that relateto all areas in the states of Minnesota and Vermont where we provide cellularor PCS services. It is questionable that either request would be deemed validaccording to FCC guidelines for the evaluation of such requests, so as totrigger our deployment obligations under Phase II. We have submitted to the FCCa petition for temporary waiver and extension of time to deploy Phase IIenhanced 911 service in the State of Minnesota, citing technological hindrancesto immediate implementation. We may find it necessary to submit similar petitionsto the FCC relating to the State of Vermont and other geographical areas wherewe provide service if the authorized PSAPs in those areas present validrequests for Phase II enhanced 911 service. While we have reason to believe thepending petition and any subsequent petitions will be granted, at least in partto provide some additional time before compliance is required, we have noassurance that they will be granted, or that we will not be subject to one ormore enforcement orders or fines by the FCC in connection with our failure tocomply with Phase II enhanced 911 requirements. In November 1999, the FCCdetermined that a cost recovery mechanism no longer has to be in place before acarrier is obligated to provide enhanced 911 services. The implementation ofenhanced 911 obligations may have a financial impact on us. We are not yet ableto predict the extent of that impact.

 

Cellular and PCS providers are required toprovide number portability, which enables customers to change providers andservices without changing their telephone number. Based upon financial andtechnological considerations and the current level of competition in themarketplace, several parties have requested that the FCC forbear from requiringbroadband CMRS carriers to implement service provider number portability untilPCS carriers have completed their five-year buildout requirements. By November24, 2002, CMRS providers must be able to offer number portability withoutimpairment of quality, reliability, or convenience when switching serviceproviders, including the ability to support roaming throughout their networks.The FCC has solicited further comment on the appropriate cost recovery methodsregarding long-term number portability. To date, the FCC has not generally extendedthis deadline. Although the failure to comply with this obligation could resultin a fine or revocation of our licenses, we are not yet able to predict whetherwe will be able to comply with the number portability requirements prior to theexisting deadline.

 

PCS licensees must comply with microwaverelocation rules. For a period of up to ten years after the grant of a PCSlicense (subject to extension), a PCS licensee will be required to sharespectrum with existing licensees that operate specified fixed microwave systemswithin a PCS licensee’s markets. To secure a sufficient amount of unencumberedspectrum to offer our PCS efficiently, we may need to negotiate agreements torelocate many of these existing licensees. In places where relocation isnecessary to permit offering of our PCS, any delay in the relocation of theselicensees may adversely affect our ability to commence timely commercialoperation of our PCS services. In an effort to balance the competing interestsof existing microwave users and newly authorized PCS licensees, the FCC hasadopted a transition plan to relocate these microwave operators to otherspectrum 

 

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blocks and a cost sharing plan so that if therelocation of an incumbent benefits more than one PCS licensee, the benefitingPCS licensees will share the costs of the relocation. We believe that we are incompliance with applicable spectrum relocation requirements enacted by the FCC.

 

Telecommunications carriers also are subjectto the Communications Assistance for Law Enforcement Act, also known as the‘‘Wiretap Act,’’ which is under the purview of the Department of Justice. TheWiretap Act requires carriers to have a specific number of open ports availablefor law enforcement personnel with the appropriate legal authority to performwiretaps on each carrier’s network. Full implementation of the Wiretap Act’sassistance capability requirements was previously required by June 30, 2000.

 

However, because the FCC found that there wasa lack of equipment available to meet these requirements, it accepted petitionsfor a two-year extension of this deadline on a carrier-by-carrier basis. Wesubmitted such a petition and were granted a two-year extension, until June 30,2002, to comply with the Wiretap Act’s assistance capability requirements.Additional requirements have been adopted to require cellular and PCS licenseesto accommodate interception of digital packet mode telecommunications. We willbecome obligated to comply with these requirements only if and when we commenceto offer services that make use of digital packet mode technology. If we arenot able to comply with the Wiretap Act prior to the applicable deadlines, wecould be fined up to $10,000 per day. We are not yet able to predict whether wewill be able to comply with the Wiretap Act requirements prior to the currentdeadlines.

 

For most of our facilities, we use lead-acidbatteries as back-up power sources. As a result, we are subject to annualreporting requirements under the Community Right-To-Know Act. In addition, wemay be subject to other environmental controls or liabilities due to failure tocomply with reporting requirements or emissions or contamination regulations inconnection with facilities we own or operate or have previously owned oroperated. Although we are not aware of any material liabilities of this type,we cannot assure you that none will arise in the future.

 

On November 8, 2001, the FCC adopted arevision of its rules that impose spectrum aggregation limits and that limitownership interests in both cellular carriers where such carriers haveoverlapping cellular geographic service areas. Specifically, the FCC decided toraise its spectrum aggregation limit in the Metropolitan Statistical Areas from45 MHz to 55 MHz. That change became effective on or about February 13, 2002.The limit remains 55 MHz in the Rural Service Areas. On January 2, 2003, thespectrum cap is scheduled to be eliminated completely in favor of acase-by-case review of spectrum transactions. The FCC also lifted entirely, asof approximately February 13, 2002, its cellular cross-interest rule as itapplies to ownership interests in cellular carriers in the MetropolitanStatistical Areas, but it left in place indefinitely its cellular cross-interestrule as it applies to ownership interests in cellular carriers in the RuralService Areas, subject to requests for waivers to be considered on acase-by-case basis. We believe that we are in compliance with both the currentand the newly adopted spectrum aggregation limits and with the cellularcross-interest rule.

 

The FCC has adopted rules to govern customerbilling by all telecommunications carriers. It adopted additional detailedbilling rules for landline telecommunications service providers and isconsidering whether to extend these rules to CMRS providers, which could add tothe cost of our billing process as we modify our systems to conform to any newrequirements. The FCC has also adopted rules that determine the obligations oftelecommunications carriers to make their services accessible to individualswith disabilities. The rules require wireless and other providers to offerequipment and services that are accessible to and useable by persons withdisabilities. While the rules exempt telecommunications carriers from meetinggeneral disability access requirements if these results are not readilyachievable, it is not clear how the FCC will construe this exemption.Accordingly, the rules may require us to make material changes to our network, productline, or services at our expense.

 

In August 2000, the FCC addressed the extentto which the Communications Act limits plaintiffs in class action lawsuitsagainst CMRS providers to recover damages and obtain other remedies based onalleged violations of state consumer protection statutes and common law. Itruled that the Communications Act did not preempt state rate regulation as amatter of law, but that whether a specific damage award is prohibited woulddepend on the facts of a particular case. This ruling might promote the filingof additional class actions against the industry and increase the potential fordamages awards by courts.

 

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The FCC rules currently require licensees inbroadband PCS, cellular, and most specialized mobile radio services to providea manual roaming service upon reasonable request to any customer whose handsetis capable of accessing their systems. A proceeding has been initiated by theFCC to consider whether the manual roaming service obligation should cease asof some date and be replaced with a requirement that subject carriers provideautomatic roaming on a non-discriminatory basis. With automatic roaming,customer calls can be processed and completed without interruption, whereaswith manual roaming the serving carrier will not complete a call unless thecustomer provides call billing information. Automatic roaming currently isavailable only where the serving carrier has a roaming agreement with thecustomer’s home carrier.

 

The FCC has opened a proceeding to consideractions it could take to remove unnecessary regulatory barriers to thedevelopment of more robust secondary markets in radio spectrum usage rights.The proceeding includes an examination of how leasing of spectrum usage rightsby wireless licensees could be accomplished in a manner that promotes theefficient utilization of spectrum. The FCC indicated that it will reviewimpediments to leasing of spectrum that are related to current policies basedupon its past interpretation of transfer of control issues.

 

The FCC adopted in December 2000 a Notice ofProposed Rule Making to explore the possible use of frequency bands below 3 GHzto support the introduction of new advanced wireless services, including thirdgeneration as well as future generations of wireless systems. In the proceedingthe FCC identified spectrum in five frequency bands below 3 GHz that are notcurrently used for cellular, broadband PCS, or specialized mobile radioservices but which could be made available for advanced wireless services.

 

The FCC announced that it plans to conduct anauction beginning June 19, 2002 to license spectrum for  commercial wireless services on spectrumcurrently used for analog television broadcast service on TV channels 52-59(the “Lower 700 MHz band) and TV channels 60-69 (the “Upper 700 MHzband”).  Broadcasters licensed in eitherthe Lower 700 MHz band or the Upper 700 MHz band are encouraged initially, andultimately will be required by the FCC absent a waiver of applicable rules, toterminate analog broadcast operations in these bands and make the spectrumavailable to the auction winners for commercial wireless services.  Spectrum acquired by successful bidders inthe upcoming auction is not subject to the FCC’s spectrum aggregation limit of55 MHz, which limit is scheduled to be eliminated in any event as of January 2,2003.

 

***Limitation on Foreign Ownership***

 

Ownership of our capital stock by non-U.S.citizens is subject to limitations under the Communications Act and FCCregulations. Under existing law, no more than 20% of an FCC licensee’s capitalstock may be directly owned or voted by non-U.S. citizens or theirrepresentatives, by a foreign government or its representatives, or by aforeign corporation. If an FCC licensee is controlled by another entity, up to25% of that entity’s capital stock may be owned or voted by non-U.S. citizensor their representatives, by a foreign government or its representatives, or bya foreign corporation. Indirect foreign ownership above the 25% level may beallowed should the FCC find such higher levels not inconsistent with the publicinterest.

 

***State and Local Regulation***

 

We are also subject to regulation by stateand local governments. The extent of this regulation varies from state tostate. The Communications Act preempts state and local regulation of the entryof or the rates charged by any CMRS provider, subject to the ability of a stateto petition the FCC for authority to regulate rates due to local marketconditions. The states in which we operate our systems do not currentlyregulate the rates for any CMRS, but could petition the FCC for authority inthe future. The siting and construction of CMRS transmitter towers, antennas,and equipment shelters are often subject to state or local zoning, land use,and other regulation.

 

We are subject to state and localenvironmental legislation and regulations, including land use and relatedpermitting legislation and regulation. We believe that we are currentlycomplying with these laws and regulations, but we cannot assure you that we maynot violate them in the future.

 

 

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***Consumer Safety Concerns***

 

Media reports have suggested that radiofrequency emissions may be linked to various health concerns, including cancer,and that they interfere with various medical devices, including hearing aidsand pacemakers. Wireless operators such as us may be subject to potentiallitigation relating to these health concerns. Class action lawsuits assertingproducts liability, breach of warranty, and other claims have in fact beenfiled against other carriers. The complaints seek damages for personal injuriesand the costs of headsets for wireless phone users as well as injunctiverelief. Such litigation would have a material adverse effect on our results ofoperations.

 

Another source of potential litigationresults from accidents, death, and bodily injuries attributable to use ofwireless phones while driving motor vehicles. Such litigation, as well as lawsprohibiting or restricting use of wireless phones while driving, could have amaterial adverse effect on our results of operations. On June 28, 2001, NewYork State enacted a law prohibiting the use of handheld wireless phones whiledriving other than through the use of hands-free equipment. To date, a smallnumber of communities in the United States have also passed restrictive localordinances. These laws or, if passed, other laws could have a material adverseeffect on our results of operations by causing customer usage to decline.

 

**Employees and Sales Agents**

 

As of March 1, 2002, we had 1,030 employees, including 452 in sales andmarketing, 280 in customer service, 157 in network and systems operations, 92in administration and 49 in finance and accounting. Approximately 41 of ouremployees were part-time. None of our employees is represented by a labororganization, and we believe we have excellent relations with our employees. Inaddition, we utilize approximately 470 independent sales agents. WirelessAlliance has no full-time or part-time employees but operates utilizing ouremployees.

 

**ITEM 2.               PROPERTIES**

 

Our corporate facilities include the following:

 

|                   |   | **Address**                                           |   | **Leased/  Owned** |   | **Square  Feet** |   |
|------------------------|--------|-------------------------------------------------------|--------|--------------------|--------|------------------|--------|
| **Midwest:**           |   |                                                  |   |               |   |             |   |
| Principal Corporate HQ |   | 3905 Dakota  Street SW  Alexandria, Minnesota         |   | Owned              |   | 50,000           |   |
|                   |   |                                                  |   |               |   |             |   |
| **Northeast:**         |   |                                                  |   |               |   |             |   |
| Regional Office        |   | 1100  Mountain View Drive  Colchester, Vermont        |   | Leased             |   | 23,579           |   |
| Regional HQ            |   | 6 Telcom  Drive   Bangor, Maine                       |   | Owned              |   | 36,250           |   |
| Regional Office        |   | 323 North  Street   Saco, Maine                       |   | Owned              |   | 4,000            |   |
|                   |   |                                                  |   |               |   |             |   |
| **Northwest:**         |   |                                                  |   |               |   |             |   |
| Regional HQ            |   | 600 SW Columbia,  Suite  1100  Bend, Oregon           |   | Leased             |   | 10,932           |   |
|                   |   |                                                  |   |               |   |             |   |
| **South:**             |   |                                                  |   |               |   |             |   |
| Regional HQ            |   | 621 Boll Weevil Circle, Suite 2   Enterprise, Alabama |   | Leased             |   | 18,000           |   |

 

27

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As of December 31, 2001, ournetwork consisted of the following cell sites:

 

| Midwest            |   | 122 |   |
|--------------------|--------|-----|--------|
| Wireless  Alliance |   | 62  |   |
| Northeast          |   | 198 |   |
| Northwest          |   | 154 |   |
| South              |   | 148 |   |
| Total              |   | 684 |   |

 

Our leased sites consist of either land leases, tower leases, or both. Weown all the equipment within the leased sites. The leases covering leased siteshave various expiration dates and are with numerous lessors. These leases generally have renewal optionsthat we would anticipate exercising. Due to our network design, loss of aleased location would not have a material impact on the operations of aregion’s business.

 

We do not have any material outstanding environmental issues with respect to any of our properties.

 

We have 92 retail locations, of which almostall are leased. The leases covering these locations have various expirationdates. We believe that the loss of any one of these retail sites would not have a material impact on our business as we wouldlikely be able to obtain substantially equivalent alternative space.

 

**ITEM3.               LEGAL PROCEEDINGS**

 

We are a party to routine filings and customary regulatory proceedingswith the Federal Communications Commission and state regulatory agencies from timeto time. Also, we are involved in legal proceedings from time to time relatingto claims arising out of our operations in the normal course of business. Thereare no pending legal proceedings to which we are a party or of which any of ourproperty is subject which, if adversely decided, would have a material effecton our business or financial condition.

 

**ITEM4.               SUBMISSION OF MATTERS TOA VOTE OF SECURITY HOLDERS**

 

No matters were submitted to a vote of security holders during thefourth quarter of the fiscal year covered by this report.

** **

**EXECUTIVE OFFICERS OFTHE REGISTRANT**

The following table sets forthcertain information with regard to each of our executive officers:

 
| ***Name***          |   | ***Age*** |   | ***Position***                                                 |   |
|---------------------|--------|-----------|--------|----------------------------------------------------------------|--------|
| Richard P. Ekstrand |   | 52        |   | President, Chief Executive Officer and Director                |   |
|                |   |      |   |                                                           |   |
| Wesley E. Schultz   |   | 45        |   | Executive Vice President, Chief Financial Officer and Director |   |
|                |   |      |   |                                                           |   |
| Ann K. Newhall      |   | 51        |   | Executive Vice President, Chief Operating Officer and Director |   |
|                |   |      |   |                                                           |   |
| David J. Del Zoppo  |   | 46        |   | Vice President, Finance and Accounting                         |   |
|                |   |      |   |                                                           |   |
| Scott G. Donlea     |   | 42        |   | Vice President of Market Development                           |   |

 

 

28

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***RichardP. Ekstrand***hasserved as our President, Chief Executive Officer, and a director since 1990. InJune 2001, he was named chairman of the Cellular Telecommunications InternetAssociation (CTIA) Board of Directors. Mr. Ekstrand has previously served asChairman of the Board of Directorsof the CTIA Wireless Foundation. He also was a founding director of the RuralCellular Association and served as a director until 2000. In addition, he ispast President of the Minnesota Telephone Association, the Association ofMinnesota Telephone Utilities, and the Minnesota TelecommunicationsAssociation. Mr. Ekstrand is the sole shareholder, president, and a director ofNorth Holdings, Inc. (formerly Lowry Telephone Co., Inc.), which is ashareholder of Rural Cellular. From 1994 through 2000, Mr. Ekstrand had servedas vice president and a director of Lowry Telephone Co., Inc. North Holdings,Inc. is a member of Lowry Telephone Company, LLC, of which Mr. Ekstrand is thetreasurer and a member of the board of governors.

 

***WesleyE. Schultz***joinedus in May 1996 as Vice President of Finance and Chief Financial Officer. In August1999, he was appointed a director and in October 1999, he was appointed SeniorVice President and Chief Financial Officer and Assistant Secretary.  In August 2000, he was appointed ExecutiveVice President and Chief Financial Officer. Prior to joining us, Mr. Schultzhad served as acting Chief Financial Officer of Spanlink Communications, Inc.since February 1996. Mr. Schultz is a certified public accountant and servedfor three years as an auditor with Deloitte and Touche, LLP.

 

***AnnK. Newhall***joinedus as Senior Vice President and General Counsel in February 1999 and wasappointed a director in August 1999. In February 2000, she was appointedSecretary, and in August 2000, she was appointed Executive Vice President andChief Operating Officer. Prior to joining us, Ms. Newhall was a shareholderattorney with Moss & Barnett, A Professional Association, most recentlyserving as President and a director of the firm. Ms. Newhall received her J.D.from the University of Minnesota Law School*, cum laude,* in 1977.

 

***DavidJ. Del Zoppo***joinedus in May 1997 as Controller. In July 1998, Mr. Del Zoppo was promoted to VicePresident, and in October 1999 he was named Vice President, Finance andAccounting. Prior to joining us, Mr. Del Zoppo served as a Vice President ofOperations with Business Records Corporation from January 1988 to May 1997 andas Divisional Controller from 1986 to 1988. Mr. Del Zoppo is a certified publicaccountant and served for four years as an auditor with KPMG Peat Marwick.

 

***ScottG. Donlea***servedas our Vice President of Sales and Marketing beginning in August 1995 and onJune 17, 1999, was appointed Vice President, Market Development. Mr. Donlea joined us in 1992 as Manager of Market Operations. Mr.Donlea currently serves as Chairperson of the Rural Cellular Association’sbusiness and marketing committee.

 

29

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**PART II**

 

**ITEM5.  MARKET FOR REGISTRANT’S COMMON EQUITYAND RELATED STOCKHOLDER MATTERS**

** **

Our Class A Common Stock trades on The Nasdaq National Market under thesymbol RCCC.  The following tableindicates the high and low sales price for each quarter of the 2001 and 2000fiscal years.

 

|           |   | **High** |   | **Low** |   |
|----------------|--------|----------|--------|---------|--------|
| **2000**       |   |     |   |    |   |
| First Quarter  |   | $        | 94.00  |    | $      | 42.75 |   |
| Second Quarter |   | $        | 82.25  |    | $      | 56.00 |   |
| Third Quarter  |   | $        | 80.69  |    | $      | 46.50 |   |
| Fourth Quarter |   | $        | 66.87  |    | $      | 25.06 |   |
| **2001**       |   |     |   |    |   |
| First Quarter  |   | $        | 52.61  |    | $      | 25.25 |   |
| Second Quarter |   | $        | 49.42  |    | $      | 22.31 |   |
| Third Quarter  |   | $        | 47.00  |    | $      | 17.19 |   |
| Fourth Quarter |   | $        | 30.03  |    | $      | 19.01 |   |

 

Our Class B Common Stock is not publicly traded.

 

As of March 20, 2002, there were approximately 104 holders of record ofour Class A Common Stock and approximately 21 holders of record of our Class BCommon Stock.

 

***Dividend Policy***

 

RCC has never paid dividends onits Common Stock.  We currently intendto retain all future earnings, if any, for the operation and expansion of ourbusiness and do not expect to pay any cash dividends on our Common Stock in theforeseeable future. Further, the terms of our credit facility, seniorsubordinated notes, and exchangable preferred stock limit our ability to paydividends on our Common Stock.

 

30

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**ITEM6                SELECTED FINANCIAL DATA**

** **

The following tables set forthcertain of our consolidated financial and operating data as of and for each ofthe five years in the period ended December 31, 2001. We derived the selectedfinancial data for each of the five years ended December 31 from ourconsolidated financial statements, which have been audited by Arthur Andersen LLP.

 

The data set forth below shouldbe read in conjunction with “Management’s Discussion and Analysis of FinancialCondition and Results of Operations” and the consolidated financial statementsand accompanying notes included elsewhere in this Form 10-K. 

 
|                                                                                        |   | **Years ended December 31,**                                  |        |
|---------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------|-------------|
|                                                                                        |   | **2001**                                                      |        | **2000** |   | **1999** |   | **1998** |   | **1997** | ** ** |
|                                                                                        |   | **(In thousands, except per share and other operating data)** |        |
| **Statement of Operations Data:**                                                           |   |                                                          | ** **  |   | ** ** |   | ** ** |   | ** ** |   | ** ** |
| Revenues:                                                                                   |   |                                                          | ** **  |   |   |   |   |   |   |   |   |
| Service                                                                                     |   | **$**                                                         | **305,988** | ** ** | $ | 238,556 |   | $ | 125,361 |   | $ | 90,997 |   | $ | 52,456 |   |
| Roaming                                                                                     |   | **116,541**                                                   | ** **  | 98,693 |   | 43,081 |   | 19,821 |   | 9,622 |   |
| Equipment                                                                                   |   | **18,627**                                                    | ** **  | 18,848 |   | 7,299 |   | 2,700 |   | 1,020 |   |
| Total revenues                                                                              |   | **441,156**                                                   | ** **  | 356,097 |   | 175,741 |   | 113,518 |   | 63,098 |   |
| Operating expenses:                                                                         |   |                                                          | ** **  |   |   |   |   |   |   |   |   |
| Network costs                                                                               |   | **101,509**                                                   | ** **  | 85,988 |   | 38,549 |   | 33,863 |   | 20,773 |   |
| Cost of equipment sales                                                                     |   | **28,415**                                                    | ** **  | 34,711 |   | 10,951 |   | 5,968 |   | 2,807 |   |
| Selling, general and administrative                                                         |   | **117,855**                                                   | ** **  | 95,034 |   | 54,753 |   | 39,156 |   | 25,225 |   |
| Depreciation and amortization                                                               |   | **112,577**                                                   | ** **  | 91,078 |   | 41,277 |   | 26,532 |   | 12,458 |   |
| Total operating expenses                                                                    |   | **360,356**                                                   | ** **  | 306,811 |   | 145,530 |   | 105,519 |   | 61,263 |   |
| Operating income                                                                            |   | **80,800**                                                    | ** **  | 49,286 |   | 30,211 |   | 7,999 |   | 1,835 |   |
| Other income (expense):                                                                     |   |                                                          | ** **  |   |   |   |   |   |   |   |   |
| Interest expense                                                                            |   | **(115,272**                                                  | **)**       | (89,839 | ) | (27,116 | ) | (19,060 | ) | (6,065 | ) |
| Interest and dividend income                                                                |   | **1,172**                                                     | ** **  | 2,249 |   | 467 |   | 1,461 |   | 232 |   |
| Minority interest                                                                           |   | **-**                                                         | ** **  | - |   | 1,663 |   | 4,553 |   | 3,082 |   |
| Other                                                                                       |   | **(752**                                                      | **)**       | (24 | ) | (338 | ) | (535 | ) | (350 | ) |
| Other expense, net                                                                          |   | **(114,852**                                                  | **)**       | (87,614 | ) | (25,324 | ) | (13,581 | ) | (3,101 | ) |
| Income (loss) before income taxes,  cumulative effect adjustment and extraordinary item     |   | **(34,052**                                                   | **)**       | (38,328 | ) | 4,887 |   | (5,582 | ) | (1,266 | ) |
| Income tax provision                                                                        |   | **-**                                                         | ** **  | - |   | 37 |   | - |   | - |   |
| Net income (loss) before extraordinary item  and cumulative effect adjustment               |   | **(34,052**                                                   | **)**       | (38,328 | ) | 4,850 |   | (5,582 | ) | (1,266 | ) |
| Extraordinary item — early extinguishment  of debt                                     |   | **-**                                                         | ** **  | (925 | ) | - |   | (1,042 | ) | - |   |
| Net income (loss) before cumulative effect  adjustment                                      |   | **(34,052**                                                   | **)**       | (39,253 | ) | 4,850 |   | (6,624 | ) | (1,266 | ) |
| Cumulative effect adjustment                                                                |   | **137**                                                       | ** **  | - |   | - |   | - |   | - |   |
| Net income (loss)                                                                           |   | **(33,915**                                                   | **)**       | (39,253 | ) | 4,850 |   | (6,624 | ) | (1,266 | ) |
| Preferred stock dividend                                                                    |   | **(53,644**                                                   | **)**       | (44,081 | ) | (15,912 | ) | (9,090 | ) | - |   |
| Net loss applicable to common shares                                                        |   | **$**                                                         | **(87,559** | **)** | $ | (83,334 | ) | $ | (11,062 | ) | $ | (15,714 | ) | $ | (1,266 | ) |
| Basic and diluted weighted average common  shares outstanding                               |   | **11,865**                                                    | ** **  | 11,510 |   | 9,047 |   | 8,916 |   | 8,853 |   |
|                                                                                        |   |                                                          | ** **  |   |   |   |   |   |   |   |   |
| Net loss applicable to common shares before  extraordinary and cumulative effect adjustment |   | **$**                                                         | **(7.39**   | **)** | $ | (7.16 | ) | $ | (1.22 | ) | $ | (1.64 | ) | $ | (0.14 | ) |
| Extraordinary item                                                                          |   | **-**                                                         | ** **  | (0.08 | ) | - |   | (0.12 | ) | - |   |
| Cumulative effect adjustment                                                                |   | **.01**                                                       | ** **  | - |   | - |   | - |   | - |   |
| Net loss per basic and diluted share                                                        |   | **$**                                                         | **(7.38**   | **)** | $ | (7.24 | ) | $ | (1.22 | ) | $ | (1.76 | ) | $ | (0.14 | ) |
| EBITDA(1)                                                                                   |   | **$**                                                         | **193,377** | ** ** | $ | 140,364 |   | $ | 71,488 |   | $ | 34,531 |   | $ | 14,293 |   |

 

----

(1)          EBITDA isthe sum of earnings before interest, taxes, depreciation and amortization andis utilized as a performance measure within the wireless industry. EBITDA isnot intended to be a performance measure that should be regarded as analternative for other performance measures and should not be considered inisolation. EBITDA is not a measure of financial performance under generallyaccepted accounting principles and does not reflect all expenses of doingbusiness (e.g., interest expense, preferred stock dividends, depreciation).Accordingly, EBITDA should not be considered as having greater significancethan or as an alternative to net income or operating income as an indicator ofoperating performance or to cash flows as a measure of liquidity. Also, as calculatedabove, EBITDA may not be directly comparable to similarly titled measuresreported by other companies.

 

31

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|                                      |   | **December  31,** |        |
|-------------------------------------------|--------|-------------------|-------------|
|                                      |   | **2001**          |        | **2000** |   | **1999** |   | **1998** |   | **1997** | ** ** |
| **Balance Sheet Data:**                   |   |              |        |   |   |   |   |   |   |   |   |
| Working capital (deficit)                 |   | **$**             | **(18,273** | **)** | $ | (23,578 | ) | $ | (5,887 | ) | $ | (9,538 | ) | $ | 514 |   |
| Net property and equipment                |   | **244,980**       |        | 234,490 |   | 130,651 |   | 131,714 |   | 77,920 |   |
| Total assets                              |   | **1,836,779**     |        | 1,771,796 |   | 526,278 |   | 480,524 |   | 181,588 |   |
| Total long-term liabilities               |   | **1,290,338**     |        | 1,157,472 |   | 339,742 |   | 298,851 |   | 128,000 |   |
| Total shareholders’ (deficit) equity |   | **(36,967**       | **)**       | 79,955 |   | 9,427 |   | 19,279 |   | 33,731 |   |
|                                           |        |                   |             |  |  |  |  |  |  |  |  |  |  |  |  |  |

** **
| **Other Operating Data:**                |   | **December  31,** |       |
|------------------------------------------|--------|-------------------|------------|
|                                     |   | **2001**          |       | **2000** |   | **1999** |   | **1998** |   | **1997** | ** ** |
| Customers:                               |   |              | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |
| Voice:                                   |   |              | ** ** |   |   |   |   |   |   |   |   |
| Postpaid Cellular                        |   | **585,097**       | ** ** | 515,425 |   | 227,619 |   | 186,892 |   | 84,600 |   |
| Prepaid Cellular                         |   | **33,255**        | ** ** | 20,832 |   | 2,494 |   | 296 |   | - |   |
| Wireless Alliance                        |   | **14,417**        | ** ** | 15,865 |   | 15,658 |   | 16,208 |   | 17,167 |   |
| Wholesale                                |   | **29,139**        | ** ** | 12,727 |   | - |   | - |   | - |   |
| Paging                                   |   | **9,740**         | ** ** | 12,214 |   | 12,476 |   | 11,254 |   | 9,312 |   |
| Total customers                          |   | **671,648**       | ** ** | 577,063 |   | 258,247 |   | 214,650 |   | 111,079 |   |
|                                     |   |              | ** ** |   |   |   |   |   |   |   |   |
| Marketed POPs (1)                        |   | **5,893,000**     | ** ** | 5,443,000 |   | 3,118,000 |   | 3,049,000 |   | 1,939,000 |   |
|                                     |   |              | ** ** |   |   |   |   |   |   |   |   |
| Penetration (2)                          |   | **10.7**          | **%**      | 10.1 | % | 7.9 | % | 6.7 | % | 5.2 | % |
|                                     |   |              | ** ** |   |   |   |   |   |   |   |   |
| Retention (3)                            |   | **97.8**          | **%**      | 98.2 | % | 98.3 | % | 98.3 | % | 98.4 | % |
|                                     |   |              | ** ** |   |   |   |   |   |   |   |   |
| Average monthly revenue per customer (4) |   | **$**             | **59**     | ** ** | $ | 61 |   | $ | 54 |   | $ | 55 |   | $ | 56 |   |
|                                     |   |              | ** ** |   |   |   |   |   |   |   |   |
| Acquisition cost per customer (5)        |   | **$**             | **287**    | ** ** | $ | 358 |   | $ | 365 |   | $ | 395 |   | $ | 358 |   |
|                                     |   |              | ** ** |   |   |   |   |   |   |   |   |
| Cell sites /  Base stations              |   | **684**           | ** ** | 654 |   | 328 |   | 286 |   | 121 |   |

 

----

(1)             For 2001,updated to reflect 2000 U.S. Census Bureau Official Statistics.   For years 1997 through 2000, updated toreflect July 1, 1997, 1990 U.S. Census Bureau Official Statistics.

 

(2)             Represents the ratio of wireless voice customersat the end of the period to marketed POPs.

 

(3)             Determined for each period by dividing totalpostpaid wireless voice customers discontinuing service during such period bythe average postpaid wireless voice customers for such period (customers at thebeginning of the period plus customers at the end of the period, divided bytwo), dividing that result by the number of months in the period, andsubtracting such result from one.

 

(4)             Determined for each period by dividing the sum ofaccess, airtime, roaming, long distance, features, connection, disconnection,and other revenues for such period by the monthly average postpaid wirelessvoice customers for such period (customers at the beginning of the period pluscustomers at the end of the period, divided by two), and dividing that resultby the number of months in such period.

 

(5)             Determined for each period by dividing sellingand marketing expenses, net costs of equipment sales, and depreciation ofrental telephone equipment by thegross postpaid wireless voice customers added during such period.

 

32

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**ITEM7.****                                  MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

**INTRODUCTION**

 

We have materially expanded our business since 1996 through a seriesof acquisitions, increasing the population to whom we market our services from636,000 to 5.9 million, covering the Midwest, Northeast, South, andNorthwest regions. Through each major acquisition, we doubled the number of ourcustomers. As of December 31, 2001, we provided wireless voice services toapproximately 633,000 customers, excluding wholesale customers.

 

Ourprincipal operating objective is to increase revenues and achieve profitabilitythrough the development of new markets and increased penetration in existingmarkets. We believe that we can achieve this objective because our ruralmarkets provide growth opportunities due to their lower current penetration ratesand reduced competition for customers as compared to wireless systems locatedin larger metropolitan areas.

 

Ourrevenues primarily consist ofservice, roaming, and equipment revenues, each of which is described below:

 

•      **Service**revenues include monthly access charges, charges for airtime used in excess ofthe time included in the service package purchased, activation fees, longdistance charges derived from calls placed by customers as well as wireless andpaging equipment lease revenues. Also included are activation fees and chargesfor such features as voicemail, call waiting, and call forwarding. Servicerevenues also include incollect revenues, which are the charges to ourcustomers when they use their wireless phones in other wireless markets. We donot charge installation or connection fees.

 

•      **Roaming**revenues include only outcollect revenues, which we receive when other wirelessproviders’ customers use our network.

 

•      **Equipment**revenues include sales of wireless and paging equipment, accessory sales tocustomers, and network equipment reselling.

 

Our operating expenses include network costs, cost of equipmentsales, selling, general and administrative expenses, and depreciation andamortization, each of which is described below:

 

**•**      **Network costs** include switching andtransport expenses and expenses associated with the maintenance and operationof our wireless network facilities, as well as charges from other serviceproviders for resold minutes and the expense associated with incollect revenues.

 

**•**      **Cost of equipment sales** includes costsassociated with telephone equipment and accessories sold to customers. Inrecent years, we and other wireless providers have increased the use ofdiscounts on phone equipment as competition between service providers hasintensified. As a result, we have incurred, and expect to continue to incur,losses on equipment sales and increased marketing and selling costs per grossadditional customer. We expect to continue these discounts and promotionsbecause we believe they will result in increases in the number of our wirelesscustomers and, consequently, increased service revenues. Cost of equipmentsales does not include depreciation and amortization or the cost of handsetsleased to customers, which is capitalized and depreciated over the 19-24 monthperiod of the lease.

 

**•**      **Selling, general and administrative**expenses include salaries, benefits, and operating expenses such as marketing,commissions, customer support, accounting, administration, and billing.

 

33

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•      **Depreciationand amortization** represents the costs associated with thedepreciation of our fixed assets and the amortization of our intangible assets,primarily wireless license acquisition costs, goodwill, and customer lists.Depreciation and amortization also includes the depreciation of the capitalizedcost of handsets leased to customers over a 19-24 month lease period. Ourdepreciation and amortization expense reflects our acquisition activities andthe buildout and upgrade of our network.

 

In addition to the operating expenses discussed above, wealso incur other expense, primarily interest expense related to financing.

 

•      **Interestexpense** primarily results from borrowings under the credit facilityand the senior subordinated notes, the proceeds of which were used to financeacquisitions and further develop our wireless network. Also contributing tointerest expense are adjustments reflecting the change in fair market value ofderivatives not qualifying for hedge accounting.

 

Preferred stock dividends are related to our issuances ofpreferred securities in 1998 and 2000 in conjunction with our acquisitionactivity.

 

**CriticalAccounting Policies**

 

***RoamingRevenue Reclassification***

 

We generate revenue from chargesto our customers when they use their cellular phones in other wirelessproviders’ markets (“Incollect Revenue”). Until April 2000, RCC includedIncollect Revenue in the roaming revenue line item in our statement ofoperations. Expense associated with Incollect Revenue, charged by third-partywireless providers, was also included in roaming revenue on a net basis. RCCused this method because, historically, we have passed through to our customersmost of the costs related to Incollect Revenue. However, the wireless industry,including RCC, has increasingly been using pricing plans that include flat ratepricing and larger home service areas. Under these types of plans, amountscharged to us by other wireless providers may not necessarily be passed throughto our customers.

 

In April 2000, RCC adopted apolicy to include the associated expense from our incollect activity in networkcost rather than reducing roaming revenue and to include Incollect Revenue asservice revenue rather than increasing roaming revenue.  Roaming revenue includes only the revenuefrom other wireless providers’ customers who use RCC’s network (“OutcollectRevenue”). Prior periods have been restated to conform to this newpresentation.  This change inpresentation has no impact on operating income.

 

***Recently Issued Accounting Pronouncements***

 

In July 2001, the FinancialAccounting Standards Board (“FASB”) issued Statements of Financial AccountingStandards No. 141, “Business Combinations” (“SFAS No. 141”) and No. 142,“Goodwill and Other Intangible Assets” (“SFAS No. 142”).  SFAS No. 141 requires all businesscombinations initiated after June 30, 2001 to be accounted for using thepurchase method.  Under SFAS No. 142,goodwill and intangible assets with indefinite lives are no longer amortizedbut are reviewed annually, or more frequently if impairment indicators arise,for impairment.  Separable intangibleassets that are not deemed to have indefinite lives will continue to beamortized over their useful lives but with no maximum life.  The amortization provisions of SFAS No. 142apply to goodwill and intangible assets acquired after June 30, 2001.  With respect to goodwill and intangibleassets acquired prior to July 1, 2001, RCC is required to adopt SFAS No. 142effective January 1, 2002.  Goodwillamortization of $14.5 million and $10.5 million is included in the accompanyingcondensed consolidated statements of operations for the years ended December31, 2001 and 2000.  Effective January 1,2002, amortization of goodwill will not be included in our statements ofoperations. Had SFAS No. 142 not become effective, goodwill amortization for2002 would have been approximately $16.7 million.

 

34

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In October 2001, the FASBissued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-LivedAssets”(“SFAS No. 144”). SFAS No. 144 supersedes SFAS 121, “Accounting for theImpairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of”(“SFAS No. 121”). SFAS No. 144 primarily addresses significant issues relatingto the implementation of SFAS No. 121 and develops a single accounting modelfor long-lived assets to be disposed of, whether previously held and used ornewly acquired. The provisions of SFAS No. 144 will be effective for fiscalyears beginning after December 15, 2001. Management is currently evaluating theimpact the implementation of this statement will have on our financial positionor results of operations.

 

***Principles of Consolidation***

 

The consolidated financial statementsinclude the accounts of RCC and our wholly-owned subsidiaries and our majorityowned joint venture, Wireless Alliance, LLC (“Wireless Alliance”)*.*All significant intercompany balances and transactions have been eliminated.

 

***IncomeTaxes***

 

We follow the liability methodof accounting for income taxes, and deferred income taxes are based on theestimated future tax effects of differences between the financial statement andtax bases of assets and liabilities based on enacted tax laws.

 

***NetIncome (Loss) Per Common Share***

 

Basic EPS is computed bydividing net income (loss) by the weighted average number of shares outstandingduring the year. Diluted EPS is computed by including dilutive common stockequivalents with the basic weighted average shares outstanding.   Potential common shares of 1,588,734,1,266,422 and 1,046,547 related to our outstanding stock options were excludedfrom the computation of diluted loss per share for the years ended December 31,2001, 2000 and 1999, respectively, as inclusion of these shares would have beenantidilutive.

 

**Strategic History**

 

We werefounded in 1991 through thecombination of five partnerships holding different cellular licenses inMinnesota. Since then, we have completed the following acquisitions:

 

**•**      InMay 1997, we acquired wireless operations and licenses covering portionsof Maine for approximately $85.7 million.

 

**•**      InJuly 1998, we acquired wireless operations and licenses covering all ofVermont and portions of Massachusetts, New Hampshire, and New York for approximately$262.5 million.

 

**•**      InAugust 1998, we acquired wireless operations and a license in westernMaine for approximately $7.5 million.

 

**•**      InFebruary 1999, we acquired wireless operations and a license in SouthDakota for approximately $11.9 million.

 

**•**      InApril 2000, in the Triton Cellular acquisition, we acquired wirelessoperations and licenses covering portions of Alabama, Kansas, Mississippi,Oregon, and Washington for approximately $1.265 billion.

 

**•**      InJanuary 2001, in the Saco River acquisition, we acquired wirelessoperations and licenses in the Portsmouth, New Hampshire service areas forapproximately $194.0 million. In the acquisition, we also acquired theILEC business of Saco River. We sold the Saco River ILEC in October 2001for 

35

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approximately$35.7 million in cash and used the net proceeds to repay indebtednessunder the credit facility.

 

All ofthese acqisitions were accounted for as purchases and were included in ourhistorical financial statements from their respective dates of acquisition. As a result of our acquisitions, we do notbelieve our historical financial condition and results of operations arenecessarily indicative nor should they be relied upon as an indicator of futureperformance.

 

36

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**RESULTS OF OPERATIONS**

 

The following table presentscertain consolidated statement of operations data as a percentage of totalrevenues as well as other operating data for the periods indicated.

** **
|                                                                                         |   | **Years  ended December 31,** |   |
|----------------------------------------------------------------------------------------------|--------|-------------------------------|--------|
|                                                                                         |   | **2001**                      |   | **2000** |   | **1999** | ** ** |
| REVENUES:                                                                                    |   |                          |   |   |   |   |   |
| Service                                                                                      |   | 69.4                          | %      | 67.0 | % | 71.3 | % |
| Roaming                                                                                      |   | 26.4                          |   | 27.7 |   | 24.5 |   |
| Equipment                                                                                    |   | 4.2                           |   | 5.3 |   | 4.2 |   |
| Total revenues                                                                               |   | 100.0                         |   | 100.0 |   | 100.0 |   |
| OPERATING EXPENSES:                                                                          |   |                          |   |   |   |   |   |
| Network costs                                                                                |   | 23.0                          |   | 24.1 |   | 21.9 |   |
| Cost of equipment sales                                                                      |   | 6.4                           |   | 9.7 |   | 6.2 |   |
| Selling, general and  administrative                                                         |   | 26.7                          |   | 26.7 |   | 31.2 |   |
| Depreciation and amortization                                                                |   | 25.5                          |   | 25.6 |   | 23.5 |   |
| Total operating expenses                                                                     |   | 81.6                          |   | 86.1 |   | 82.8 |   |
| OPERATING  INCOME                                                                       |   | 18.4                          |   | 13.9 |   | 17.2 |   |
| OTHER INCOME (EXPENSE):                                                                      |   |                          |   |   |   |   |   |
| Interest expense                                                                             |   | (26.1                         | )      | (25.2 | ) | (15.4 | ) |
| Interest and dividend income                                                                 |   | 0.3                           |   | 0.6 |   | 0.3 |   |
| Minority interest                                                                            |   | –                        |   | – |   | 0.9 |   |
| Other                                                                                        |   | (0.2                          | )      | 0.0 |   | (0.2 | ) |
| Other expense, net                                                                           |   | (26.0                         | )      | (24.6 | ) | (14.4 | ) |
| INCOME (LOSS)  BEFORE INCOME TAX, EXTRAORDINARY ITEM, AND  CUMULATIVE EFFECT ADJUSTMENT |   | (7.6                          | )      | (10.7 | ) | 2.8 |   |
| INCOME TAX PROVISION                                                                         |   | –                        |   | – |   | 0.0 |   |
| INCOME (LOSS) BEFORE  EXTRAORDINARY ITEM AND CUMULATIVE EFFECT ADJUSTMENT                    |   | (7.6                          | )      | (10.7 | ) | 2.8 |   |
| EXTRAORDINARY ITEM-EARLY  EXTINGUISHMENT OF DEBT                                             |   | –                        |   | (0.3 | ) | – |   |
| NET INCOME (LOSS) BEFORE  CUMULATIVE EFFECT ADJUSTMENT                                       |   | (7.6                          | )      | (11.0 | ) | 2.8 |   |
| CUMULATIVE EFFECT ADJUSTMENT                                                                 |   | 0.0                           |   | – |   | – |   |
| NET  INCOME (LOSS)                                                                      |   | (7.6                          | )      | (11.0 | ) | 2.8 |   |
| PREFERRED STOCK DIVIDEND                                                                     |   | (12.2                         | )      | (12.4 | ) | (9.1 | ) |
| NET  LOSS APPLICABLE TO COMMON SHARES                                                   |   | (19.8                         | %)     | (23.4 | %) | (6.3 | %) |
| EBITDA (1)                                                                                   |   | 43.8                          | %      | 39.4 | % | 40.7 | % |

 

----

(1)          EBITDA isthe sum of earnings before interest, taxes, depreciation and amortization andis utilized as a performance measure within the wireless industry. EBITDA isnot intended to be a performance measure that should be regarded as analternative for other performance measures and should not be considered inisolation. EBITDA is not a measure of financial performance under generallyaccepted accounting principles and does not reflect all expenses of doingbusiness (e.g., interest expense, preferred stock dividends, depreciation).Accordingly, EBITDA should not be considered as having greater significancethan or as an alternative to net income or operating income as an indicator ofoperating performance or to cash flows as a measure of liquidity. Also, ascalculated above, EBITDA may not be directly comparable to similarly titledmeasures reported by other companies.

 

37

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**Years Ended December 31, 2001 and 2000**

 

***Revenues***

 

***ServiceRevenues.*** Consolidated service revenues for 2001increased 28.3% to $306.0 million from $238.6 million in 2000. The revenuegrowth reflects the additional revenue resulting from the acquisitions ofTriton Cellular in April 2000 and Saco River in January 2001 together with additional customers addedthrough increased penetration in existing markets. We expect service revenuesto increase in the future primarily as a result of further anticipatedindustry-wide growth in customers and expansion of coverage.

 

***RoamingRevenues.*** Reflecting the acquisition of TritonCellular and Saco River together with increases in outcollect roaming minutes,consolidated roaming revenues for 2001 increased 18.1% to $116.5 million from$98.7 million in 2000. Roaming minutes in existing markets have increased inpart due to the activation of additional cell sites and increased industry-widewireless usage. Partially offsetting the revenue increase during 2001 was thedecrease in outcollect roaming yield per minute. Including toll, outcollectroaming yield decreased to $0.34 in 2001 as compared to $0.49 in 2000. AT&T Wireless and Verizon account forapproximately 70% of our outcollectminutes.  We expect increases inoutcollect minute volumes to continue offsetting declines in roamingyield per minute, resulting in moderate roaming revenue growth in 2002 ascompared to 2001.

 

***EquipmentRevenues.*** Consolidated equipment revenues for 2001decreased 1.2% to $18.6 million from $18.8 million in 2000. The decrease inequipment revenue reflects the additional equipment revenue from the TritonCellular and Saco River acquisitions offset by reductions in equipment margin, network equipment reselling andan increase in phone service leasing. We expect continued usage of our phone leasing program in 2002 resultingin similar levels of equipment revenue in 2002 as compared to 2001.

 

***Operating Expenses***

 

***NetworkCosts.*** Primarily reflecting the additional networkcosts from the acquisition of Triton Cellular and Saco River and increases in incollect minutes, consolidated networkcosts for 2001 increased 18.1% over 2000 to $101.5 million as compared to $86.0million in 2000. Also contributing to this increase was the cost relating togreater incollect activity resulting from service plans with expanded localservice areas. Offsetting the increase in incollect minutes was a decline inper minute cost in 2001 to $0.25 from $0.40 in 2000.  Total incollect cost was $48.9 million in 2001 as compared to$48.6 million in 2000. As a percentage of total revenues, consolidated networkcosts for 2001 decreased to 23.0% from 24.1% in 2000. We expect a moderateincrease in incollect cost in 2002 as compared to 2001 due to increases in incollectminutes partially offset with declines in anticipated incollect cost perminute.

 

***Costof Equipment Sales.*** Cost of equipment sales for2001 decreased 18.1% to $28.4 million as compared to $34.7 million in 2000. Asa percentage of revenue, cost of equipment sales for 2001 decreased to 6.4% ascompared to 9.7% in 2000. Contributing to the decrease in cost of equipmentsales was a greater emphasis on our phone service leasing plans during 2001under which the cost of handsets iscapitalized rather than expensed as cost of equipment sold. The initial cost ofthese capitalized handsets is not included in acquisition cost per customer(“ACPC”), contributing to the decrease in 2001 as compared to 2000. Thecapitalized cost of the handset is depreciated over a period of 19-24 months. During 2001, we capitalized approximately $20.1million in phone service handsets. Because we anticipate a decline in customer migration to digitalhandsets, partially offset by a decline in the use of leased phone serviceprograms, cost of equipment is expected to decline moderately in 2002 ascompared to 2001.

 

***Selling,General and Administrative.*** Selling, general andadministrative (“SG&A”) expenses for 2001 increased 24.0% over 2000 to$117.9 million from $95.0 million. The increase in SG&A expenses primarilyreflects RCC’s ownership of Triton Cellular and Saco River operations in 2001. Also contributing tothe increase in SG&A expense was an increase in the provision for doubtfulaccounts to $13.9 million in 2001 as compared to $5.1 million in 2000. SG&Aexpenses, as a percentage of sales, was 26.7% in 2001 and 2000. We believe ourprovision for doubtful accounts will decline in 2002 as compared to 2001resulting in SG&A declining moderately as a percentage of revenue in 2002.

 

38

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***Depreciationand Amortization.*** Depreciation and amortization expense for 2001 increased 23.6% over 2000to $112.6 million from $91.1 million. The increase reflects added amortizationfrom the intangible assets acquired from Saco River and depreciationattributable to Saco River’s existing property, plant and equipment.  Also contributing to added depreciationexpense during 2001 was $46.0 million of capital expenditures during the yearended December 31, 2001.

 

With respect to goodwill andintangible assets acquired prior to July 1, 2001, we are required to adopt SFASNo. 142 effective January 1, 2002. Goodwill amortization of $14.5 million and $10.5 million is included inthe accompanying condensed consolidated statements of operations for the yearsended December 31, 2001 and 2000,respectively.  Effective January 1,2002, amortization of goodwill will not be included in the statements ofoperations. Had SFAS No. 142 not become effective, goodwill amortization for2002 would have been approximately $16.7 million.

*** ***

***OtherIncome (Expense)***

 

***InterestExpense.*** Interest expense for 2001 increased 28.3%to $115.3 million as compared to $89.8 million in 2000. The increase primarilyreflects increased borrowings under the credit facility to complete theacquisitions of Triton Cellular and Saco River. Contributing to the increase ininterest expense was a net $1.3 million noncash charge reflecting the change infair market valuation of derivatives not qualifying for hedge accountingtogether with $11.6 million in additional interest expense resulting from thederivatives.

 

***PreferredStock Dividends***

* *

Preferred stock dividends in2001 increased 21.7% to $53.6 million as compared to $44.1 million in 2000. Theincrease primarily resulted from the issuances of junior and seniorexchangeable preferred stock in February 2000, Class T preferred stock in March2000, and Class M preferred stock in April 2000.

 

Also contributing to theincrease in preferred stock dividends is our practice of paying dividends byissuing additional shares of exchangeable preferred stock rather than in cash,thereby increasing the basis for subsequent dividend distributions.  Throughout 2001, RCC issued 22,817 and19,618 shares of senior and junior exchangeable preferred stock, respectively.RCC distributed 6,124 and 5,295 shares of senior and junior exchangeablepreferred stock, respectively, in payment of dividends on February 15, 2002**.**

 

**Years Ended December31, 2000 and 1999**

 

***Revenues***

 

***Service Revenues.***Service revenues for 2000 increased 90.3% to$238.6 million from $125.4 million in 1999. This growth reflects the additionalrevenues resulting from the Triton Cellular acquisition combined withadditional net prepaid and postpaid customers added through increasedpenetration in existing markets.

 

***Roaming Revenues.***Reflecting the acquisition of Triton Cellular inApril 2000 combined with increases in outcollect roaming minutes, consolidatedroaming revenues for 2000 increased 129.1% to $98.7 million from $43.1 millionin 1999. Roaming minutes in existing markets increased in part due to theactivation of additional cell sites and increased industry-wide wireless usageresulting from the popularity of single-rate calling plans. Partiallyoffsetting the increase in roaming minutes of use during 2000 was the decreasein roaming yield per minute, including toll, to $0.49 as compared to $0.68 in1999.

 

***Equipment Revenues.***Equipment revenues for 2000 increased 158.2% to$18.8 million from $7.3 million in the prior year. This growth reflects ourownership of Triton Cellular for nine months in 2000 as well as increases indirect phone sales programs.

 

39

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***Operating Expenses***

 

***Network Costs.***Primarily reflecting the additional network costsresulting from the acquisition of Triton Cellular, our consolidated networkcosts for 2000 increased 123.1% to $86.0 million from $38.5 million in 1999. Asa percentage of total revenues, consolidated network costs for 2000 increasedto 24.1% from 21.9% in 1999. Certainservice plans in the newly acquired Triton regions, which had extendedfootprints for their customers, incurred higher than expected increases inincollect minutes, thereby contributing to the increase in network costs as apercentage of total revenues.

 

***Cost of Equipment Sales.***Reflecting additional equipment costs resultingfrom the acquisition of Triton Cellular, cost of equipment sales for 2000increased 217.0% over 1999 to $34.7 million. As a percentage of revenues, costof equipment sales increased to 9.7% as compared to 6.2% in 1999. Contributingto the increase in cost of equipmentsales, as a percentage of revenues, were handset costs resulting from themigration of existing customers from analog service to digital service andgreater emphasis on the purchase of digital phones rather than leasing them.

 

***Selling, General and Administrative.***Selling, general and administrative expenses for2000 increased 73.6% over 1999 to $95.0 million. The increase in selling, generaland administrative expenses primarily reflects our ownership of Triton Cellularoperations for the last three quarters of 2000. The increase also reflectshigher costs related to more aggressive promotional activity during 2000 ascompared to 1999. Reflecting efficiencies resulting from the acquisition of Triton Cellular, selling, general and administrativeexpenses, as a percentage of revenues for 2000, decreased to 26.7% from 31.2%in 1999.

 

***Depreciation and Amortization.***Depreciation and amortization expense for 2000increased 120.7% over 1999 to $91.1 million from $41.3 million. The increasereflects added amortization relating to the intangible assets acquired fromTriton Cellular, additional depreciation attributable to Triton’s property, plantand equipment, and the depreciationrelated to $54.8 million of capital expenditures during 2000.

 

***Other Income (Expense)***

 

***Interest Expense.***Interest expense for 2000 increased 231.3% to$89.8 million as compared to $27.1 million in 1999. The increase primarilyreflects increased borrowing under the credit facility to complete the acquisition of Triton Cellular.

 

***Interest and Dividend Income.***Interest and dividend income for 2000 increasedto $2.2 million, as compared to $467,000 during 1999. This increase primarilyreflects interest earned by our interest bearing restricted escrow accounts andother cash balances funded through increased borrowings and proceeds from thesale of common and preferred stock.

 

***Preferred Stock Dividends.***Preferred stock dividends in 2000 increased177.0% to $44.1 million as compared to $15.9 million in 1999. The increaseprimarily resulted from the issuances of junior and senior exchangeablepreferred stock in February 2000, Class T preferred stock in March 2000, andClass M preferred stock in April 2000. Dividends on the senior and juniorexchangeable preferred stock were paid through the issuance of additionalshares of exchangeable preferred stock. During 2000, we issued as dividends19,707 and 13,283 shares of senior and junior exchangeable preferred stock,respectively.

 

40

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**Liquidityand Capital Resources**

** **

Ourprimary liquidity requirements are for working capital, capital expenditures,debt service, acquisitions, and customer growth. In past years, we have metthese requirements through cash flow from operations, sales of  common and preferred stock, borrowings underour credit facility, and issuance of senior subordinated notes. As of December31, 2001, we had a credit facility with a consortium of lenders providing up to$275.0 million in revolving loans and $986.7 million in term loans. As ofDecember 31, 2001, $1.112 billion was outstanding under the credit facility.

 

Ourcredit facility contains certain financial covenants that, among other things,limit our ability to incur indebtedness, make investments, create or permitliens, make capital expenditures, make guarantees and pay dividends. Our creditfacility also requires the use of derivatives to manage interest rate risk.(See Item 7A for further discussion.) On December 14, 2000 and March 31, 2001we obtained amendments and waivers of certain of the financial covenants in thecredit facility. As of December 31, 2001, we were in compliance with allcovenants and had $115.2 million available for borrowing.

 

On January 16, 2002, we issued$300 million aggregate principal amount of 9 3⁄4% senior subordinated notes due2010. The net proceeds from the sale were used to pay down borrowings under ourcredit facility.  The credit facilityhad $262.9 million available after the pay down of the credit facility.  Inconnection with the offering of the notes, we amended the terms of our creditfacility to:

 

•      permitus to issue the notes,

•      allowus to repay a portion of the term loans and revolving loans without reducingour borrowing availability under the revolver,

•      changethe total leverage ratio, ratio of annualized operating cash flow to interestexpense, and pro forma debt ratio to reflect the offering and to provide uswith greater flexibility,

•      decreasethe permitted senior leverage ratio,

**•     **make some technical changes to the restricted payment covenant and thedescription of permitted indebtedness, and

•      expandthe kinds of events that would trigger the change of control default and

•      removea requirement to sell some of our assets.

 

Over thenext twelve months, we expect to be able to meet our working capital, capitalexpenditures, and debt service requirements and achieve customer growth usingcash flow from operations and borrowings under our credit facility. If we makean acquisition, we may need to finance such acquisition with additional debt orequity capital from either the bank markets or the capital markets. Over thelonger term, our ability to meet our liquidity requirements will depend on ourfuture operating performance and other factors, many of which are outside ofour control.

 

For the year ended December 31,2001, we paid interest on our 9 5/8% senior subordinated notes and our creditfacility of $12.0 million and $104.9 million, respectively, with cash fromoperations. In 2002, we expect to fund our cash interest payments on the9 5/8% senior subordinated notes, 9 3⁄4% senior subordinated notes, and thecredit facility with cash from operations.

 

Wecurrently pay dividends on our senior and junior exchangeable preferred stockby issuing additional shares of exchangeable preferred stock. Beginning in May2003, we will be required to pay cash dividends on our senior exchangeablepreferred stock, and beginning in February 2005, we will be required to paycash dividends on our junior exchangeable preferred stock. We anticipate thatthe annual senior and junior exchangeable preferred stock dividends will beapproximately $62 million.

41

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Capitalexpenditures for 2001 were approximately $46.0 million. These purchases reflectthe continued expansion of our existing wireless coverage, leasing of handsetsto certain customer groups, and upgrading of existing cell sites and switchingequipment. We have budgeted capital expenditures for fiscal 2002 ofapproximately $75 million. Capital expenditures in 2002 will include themaintenance of our existing infrastructure, enhancing coverage in our serviceareas, and meeting the buildout requirement for our PCS licenses.

 

Net cashprovided by operating activities was $75.5 million for the year ended December31, 2001. Adjustments to the $33.9 million net loss to reconcile to net cashprovided by operating activities included $112.6 million in depreciation andamortization, a $849,000 decrease in accounts receivable, a $7.8 milliondecrease in accounts payable, and a $1.4 million decrease in other accruedexpenses.

 

Net cashused in investing activities for the year ended December 31, 2001 was $174.5million. The principal use of cash was the January 2001 acquisition of SacoRiver Telegraph and Telephone partially offset by the sale of the Saco RiverILEC in October 2001.  Also contributingto cash used in investing activities was $46.0 million in purchases of propertyand equipment.

 

Net cashprovided by financing activities was $98.8 million for the year ended December31, 2001, consisting primarily of $349.3 million from the issuance of long-termdebt, partially offset by $256.1 million in repayments of long-term debt. Inaddition, we received $8.7 million in proceeds from entering into a swaptioncontract and paid $4.4 million in debt issuance costs.

 

**OtherMatters**

** **

***Inflation***

*** ***

The impact of inflation on our operations has not been significant.

*** ***

***Seasonality***

*** ***

We experience seasonalfluctuations in revenues and operating income. Our average monthly roamingrevenue per cellular customer increases during the second and third calendarquarters. This increase reflects greater usage by our roaming customers whotravel in our cellular service area for weekend and vacation recreation or workin seasonal industries. Because our cellular service area includes manyseasonal recreational areas, we expect that roaming revenues will continue tofluctuate seasonally more than service revenues.

 

42

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Certain unaudited quarterlyresults for 2001 and 2000 are set forth below (In thousands, except per sharedata and  average monthly revenue percustomer):

 

|                                  |   | **2001 Quarter  Ended** |    |
|---------------------------------------|--------|-------------------------|---------|
|                                  |   | **Mar 31**              |    | **Jun 30** |   | **Sep 30** |   | **Dec 31** |   |
| Revenues:                             |   |                    |    |   |   |   |   |   |   |
| Service                               |   | $                       | 70,036  |   | $ | 80,151 |   | $ | 80,234 |   | $ | 75,567 |   |
| Roaming                               |   | 23,215                  |    | 28,350 |   | 38,106 |   | 26,870 |   |
| Equipment                             |   | 5,133                   |    | 4,545 |   | 4,842 |   | 4,107 |   |
| Total Revenues                        |   | 98,384                  |    | 113,046 |   | 123,182 |   | 106,544 |   |
|                                  |   |                    |    |   |   |   |   |   |   |
| Operating  income                     |   | 15,833                  |    | 23,534 |   | 27,971 |   | 13,462 |   |
| Net loss  applicable to common shares |   | $                       | (28,257 | ) | $ | (21,630 | ) | $ | (14,830 | ) | $ | (22,842 | ) |
| Basic and  diluted loss per share     |   | $                       | (2.39   | ) | $ | (1.82 | ) | $ | (1.25 | ) | $ | (1.92 | ) |
| EBITDA (1)                            |   | $                       | 42,731  |   | $ | 51,223 |   | $ | 56,814 |   | $ | 42,609 |   |
| Average  monthly revenue per customer |   | $                       | 54      |   | $ | 60 |   | $ | 65 |   | $ | 56 |   |

 

|                                  |   | **2000  Quarter Ended** |   |
|---------------------------------------|--------|-------------------------|--------|
|                                  |   | **Mar 31**              |   | **Jun 30** |   | **Sep 30** |   | **Dec 31** |   |
| Revenues:                             |   |                    |   |   |   |   |   |   |   |
| Service                               |   | $                       | 33,594 |   | $ | 66,608 |   | $ | 69,936 |   | $ | 68,418 |   |
| Roaming                               |   | 10,310                  |   | 27,138 |   | 35,409 |   | 25,836 |   |
| Equipment                             |   | 2,725                   |   | 6,011 |   | 4,800 |   | 5,312 |   |
| Total Revenues                        |   | 46,629                  |   | 99,757 |   | 110,145 |   | 99,566 |   |
|                                  |   |                    |   |   |   |   |   |   |   |
| Operating  income                     |   | 4,321                   |   | 14,390 |   | 22,238 |   | 8,337 |   |
| Net loss  applicable to common shares |   | $                       | (6,020 | ) | $ | (26,418 | ) | $ | (19,243 | ) | $ | (31,653 | ) |
| Basic and  diluted net loss per share |   | $                       | (0.57  | ) | $ | (2.24 | ) | $ | (1.63 | ) | $ | (2.68 | ) |
| EBITDA (1)                            |   | $                       | 15,521 |   | $ | 40,185 |   | $ | 48,925 |   | $ | 35,733 |   |
| Average  monthly revenue per customer |   | $                       | 57     |   | $ | 62 |   | $ | 66 |   | $ | 59 |   |

 

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(1)   EBITDA is the sum of earnings before interest, taxes,depreciation and amortization and is utilized as a performance measure withinthe wireless industry. EBITDA is not intended to be a performance measure thatshould be regarded as an alternative for other performance measures and shouldnot be considered in isolation. EBITDA is not a measure of financialperformance under generally accepted accounting principles and does not reflectall expenses of doing business (e.g., interest expense, preferred stock dividends,depreciation). Accordingly, EBITDA should not be considered as having greatersignificance than or as an alternative to net income or operating income as anindicator of operating performance or to cash flows as a measure of liquidity.Also, as calculated above, EBITDA may not be directly comparable to similarlytitled measures reported by other companies.

 

 

43

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**ITEM 7A.               QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

We haveused senior subordinated notes and bank credit facilities to finance, in part,our acquisition activities, capital requirements, and operations. Theseon-balance sheet financial instruments, to the extent they provide for variablerates of interest, expose us to interest rate risk, with the primary interestrate risk exposure resulting from changes in LIBOR or the prime rate, which weuse to determine the interest rates that are applicable to borrowings under ourbank credit facilities.  We usederivative financial instruments to manage interest expense.

 

RCC's financialinstruments are as follows:

 
|                                           |   |                            |      | **Interest  rate range** |   | **Carrying  value**        |   | **Estimated  fair market value** |      |
|------------------------------------------------|--------|---------------------------------|-----------|--------------------------|--------|----------------------------|--------|----------------------------------|-----------|
|                                           |   | **Notional  amount**            |      | **(Not to  exceed)**     |   | **(Not to be  less than)** |   | **December  31, 2001**           |      | **December  31, 2000** |   | **December  31, 2001** |   | **December  31, 2000** |   |
|                                           |   | **(****Dollars in  thousands)** |      |
|                                           |   |                            |      |                     |   |                       |   |                             |      |   |   |   |   |   |   |
| **Financial  assets**                          |   |                            |      |                     |   |                       |   |                             |      |   |   |   |   |   |   |
| Cash                                           |   | $                               | —    |                     | — |                       | — |                             | $         | 1,995 |   | $ | 2,205 |   | $ | 1,995 |   | $ | 2,205 |   |
| (*) Interest rate flooridor **:**              |   |                            |      |                     |   |                       |   |                             |      |   |   |   |   |   |   |
| Fleet Bank (terminates May 12, 2003)           |   | 252,000                         |      | —                   |   | —                     |   | 1,699                            |      | — |   | 1,699 |   | 2,640 |   |
| Accounts receivable, net                       |   | —                          |      | —                   |   | —                     |   | 45,279                           |      | 43,324 |   | 45,279 |   | 43,324 |   |
| Total financial assets                         |   | $                               | 252,000   |                     |   |                       |   |                             | $         | 48,973 |   | $ | 45,529 |   | $ | 48,973 |   | $ | 48,169 |   |
|                                           |   |                            |      |                     |   |                       |   |                             |      |   |   |   |   |   |   |
| **Financial liabilities**                      |   |                            |      |                     |   |                       |   |                             |      |   |   |   |   |   |   |
| Credit facility                                |   | —                          |      | —                   |   | —                     |   | $                                | 1,111,510 |   | $ | 1,018,350 |   | $ | 987,145 |   | $ | 993,899 |   |
| 9 5/8% Senior subordinated notes               |   | —                          |      | —                   |   | —                     |   | 125,000                          |      | 125,000 |   | 127,031 |   | 116,875 |   |
| 11 3/8% Senior exchangeable preferred stock    |   | —                          |      | —                   |   | —                     |   | 215,373                          |      | 172,817 |   | 187,375 |   | 141,710 |   |
| 12 1⁄4% Junior exchangeable preferred stock |   | —                          |      | —                   |   | —                     |   | 172,901                          |      | 159,618 |   | 145,237 |   | 131,094 |   |
|                                           |   | —                          |      | —                   |   | —                     |   | 1,624,784                        |      | 1,475,785 |   | 1,446,788 |   | 1,383,578 |   |
| Derivative financial instruments               |   |                            |      |                     |   |                       |   |                             |      |   |   |   |   |   |   |
| Interest rate swap agreements:                 |   |                            |      |                     |   |                       |   |                             |      |   |   |   |   |   |   |
| TD Securities (terminates May 16, 2003)        |   | 84,000                          |      | 6.632                    | %      | 6.632                      | %      | 6,095                            |      | — |   | 6,095 |   | 3,500 |   |
| PNC Bank (terminates May 16, 2003)             |   | 42,000                          |      | 7.609                    | %      | 7.609                      | %      | 3,016                            |      | — |   | 3,016 |   | 1,756 |   |
| Union Bank (terminates May 16, 2003)           |   | 84,000                          |      | 7.591                    | %      | 7.591                      | %      | 6,153                            |      | — |   | 6,153 |   | 3,577 |   |
| Fleet Bank (terminates May 16, 2003)           |   | 42,000                          |      | 6.530                    | %      | 6.530                      | %      | 2,924                            |      | — |   | 2,924 |   | 1,767 |   |
| Interest rate collar agreements:               |   |                            |      |                     |   |                       |   |                             |      |   |   |   |   |   |   |
| PNC Bank (terminates May 25, 2003)             |   | 47,000                          |      | 9.000                    | %      | 6.510                      | %      | 2,597                            |      | — |   | 2,597 |   | 916 |   |
| Fleet Bank (terminates May 25, 2003)           |   | 94,000                          |      | 9.000                    | %      | 5.810                      | %      | 4,654                            |      | — |   | 4,654 |   | 916 |   |
| Union Bank (terminates June 5, 2003)           |   | 96,000                          |      | 9.000                    | %      | 5.480                      | %      | 3,779                            |      | — |   | 3,779 |   | 1,341 |   |
| PNC Bank (terminates June 6, 2003)             |   | 94,000                          |      | 9.000                    | %      | 5.860                      | %      | 4,287                            |      | — |   | 4,287 |   | 1,093 |   |
| Union Bank (terminates June 5, 2003)           |   | 46,000                          |      | 9.000                    | %      | 6.100                      | %      | 2,231                            |      | — |   | 2,231 |   | — |   |
| (**) Swaption**:**                             |   |                            |      |                     |   |                       |   |                             |      |   |   |   |   |   |   |
| TD Securities (terminates March 15, 2008)      |   | 131,016                         |      | —                   |   | —                     |   | 11,249                           |      | — |   | 11,249 |   | — |   |
|                                           |   | 760,016                         |      |                     |   |                       |   | 46,985                           |      | — |   | 46,985 |   | 14,866 |   |
| Other financial instruments                    |   | —                          |      | —                   |   | —                     |   | —                           |      | 7,374 |   |   |   | 7,374 |   |
| Other long-term liabilities                    |   | —                          |      | —                   |   | —                     |   | 6,843                            |      | 6,748 |   | 6,843 |   | 6,748 |   |
| Total financial liabilities                    |   | $                               | 1,012,016 |                     |   |                       |   |                             | $         | 1,678,612 |   | $ | 1,489,907 |   | $ | 1,500,616 |   | $ | 1,412,566 |   |

 

----

(*) During 2000, we enteredinto an interest rate instrument (“Flooridor”). The Flooridor does not qualifyfor hedge accounting treatment under SFAS No. 133 and as such is recorded inthe balance sheet at fair value.  Therelated changes in fair value are included in our statement of operations.

 

(**)Rural Cellular Corporation has $125 million in subordinated debt that wasissued in May 1998 and matures in May 2008.  The $8.7 million value of an embedded calloption within the subordinated debt was monetized in March 2001 resulting in aswaption.  The swaption qualifies forhedge accounting treatment under SFAS 133.

 

AtDecember 31, 2001, we had debt totaling $1.112 billion under our credit facility.We have interest rate swap and collar agreements covering debt with a notionalamount of $629.0 million to effectively change the interest on the underlyingdebt from a variable rate to a fixed rate for the term of the agreements. Aftergiving effect to these instruments, approximately 61% of our debt wasessentially fixed rate debt at December 31, 2001. For fixed rate debt, interestrate changes impact the fair market value of the instrument but do not impactour earnings or cash flows.

 

44

----

 

Conversely,for variable rate debt, interest rate changes generally do not impact the fairmarket value of the instrument but do impact our future earnings and cashflows, assuming other factors are held constant.

 

At thesame time we entered into swap agreements with a total notional amount of$252.0 million, we also entered into two ‘‘flooridors’’ with an equivalenttotal notional amount in order to further manage our interest expense. We paidthe counterparty $1.2 million to enter into the flooridors. Under theflooridors, if, as of a quarterly reference date, LIBOR is less than 7.35% butgreater than 6.85%, the counterparty is required to make a quarterly payment tous equal to the difference between LIBOR and 7.35% on the notional amount of$252.0 million. If, as of a quarterly reference date, LIBOR is less than 6.85%,the counterparty is required to make a quarterly payment to us equal to 0.50%on the total notional amount. If LIBOR is equal to or greater than 7.35%,neither party is required to make a payment. The flooridors terminate on May12, 2003. As of December 31, 2001, we recorded the flooridors at their fairmarket value as a $1.7 million asset.

 

Ourexisting 9 5/8% senior subordinated notes mature in 2008. They are redeemableat our option for a premium after May 15, 2003. Under some conditions, it couldbecome economically desirable for us to redeem the notes. In order to monetizethe value of the option to redeem those notes, we entered into a ‘‘swaption’’with respect to the notes. The counterparty purchased the swaption from us onMarch 1, 2001 for $8.7 million. Under the swaption, the counterparty has theright, but not the obligation, to receive a quarterly payment based on a rateof 9.625% per annum on the $131.0 million notional amount of the swaption inreturn for a quarterly payment based on LIBOR plus 1.50% per annum on thatnotional amount. This right is first exercisable on March 13, 2003. Theswaption terminates on March 15, 2008. As of December 31, 2001 the swaption onour balance sheet at fair market value carried a $11.2 million liability.

 

Had wenot entered into the interest rate swaps, collars, swaptions, and flooridors,and holding other variables constant, such as debt levels, a one percentagepoint increase in interest rates, net of the effect of derivatives, would havedecreased net loss and increased cash flows for the year ended December 31,2001 by approximately $2.8 million.

 

See notes 5 and 12 of ourconsolidated financial statements for additional information regardingfinancial instrument activity.

 

45

----

 

**ITEM 8.                  FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA**

 

See Consolidated FinancialStatements and Notes thereto commencing on Page F-1.

 

**ITEM 9.                  CHANGESIN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND**

**FINANCIALDISCLOSURE**

None.

 

46

----

 

**PARTIII**

 

**ITEM 10.               DIRECTORSAND EXECUTIVE OFFICERS OF THE REGISTRANT**

 

Information regarding directorsof Rural Cellular is set forth in the Proxy Statement under the heading“Election of Directors” and is incorporated herein by reference.  The information regarding our executiveofficers is contained in Part I of this Form 10-K.

 

**ITEM11.               EXECUTIVE COMPENSATION**

 

Information required by thisitem is set forth in the Proxy Statement under the headings “Election ofDirectors” and “Executive Compensation” and is incorporated herein byreference.

 

**ITEM12.               SECURITY OWNERSHIP OFCERTAIN BENEFICIAL OWNERS AND                                MANAGEMENT**

 

Information required by thisitem is set forth in the Proxy Statement under the heading “Common StockOwnership” and is incorporated herein by reference.

 

**ITEM 13.               CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS**

 

Information required by this itemis set forth in the Proxy Statement under the heading “Certain Transactions”and is incorporated herein by reference.

 

47

----

 

**PARTIV**

** **

**ITEM 14.****               EXHIBITS,FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 10-K**

 
| **(a)** | **(1)**                                                                                                                                  | **Consolidated Financial Statements**                                                                                                                                                   | Page Number In this Form 10-K |   |
|---------|------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-------------------------------|--------|
|    |                                                                                                                                     |                                                                                                                                                                                    |                          |   |
|    |                                                                                                                                     | Report of  Independent Public Accountants                                                                                                                                               | F-1                           |   |
|    |                                                                                                                                     |                                                                                                                                                                                    |                          |   |
|    |                                                                                                                                     | Consolidated  Balance Sheets as of December 31, 2001 and 2000                                                                                                                           | F-2                           |   |
|    |                                                                                                                                     |                                                                                                                                                                                    |                          |   |
|    |                                                                                                                                     | Consolidated  Statements of Operations for the Years Ended  December 31, 2001, 2000 and 1999                                                                                            | F-4                           |   |
|    |                                                                                                                                     |                                                                                                                                                                                    |                          |   |
|    |                                                                                                                                     | Consolidated  Statements of Shareholders’ Equity for the Years  Ended December 31, 2001, 2000 and 1999                                                                             | F-5                           |   |
|    |                                                                                                                                     |                                                                                                                                                                                    |                          |   |
|    |                                                                                                                                     | Consolidated  Statements of Cash Flows for the Years   Ended December 31, 2001, 2000 and 1999                                                                                           | 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 74.                                                                                                                                                          |                          |   |
|    |                                                                                                                                     |                                                                                                                                                                                    |                          |   |
| **(b)** | **Reports on Form 8-K**                                                                                                                  |                                                                                                                                                                                    |
|    |                                                                                                                                     |                                                                                                                                                                                    |
|    | A Report on  Form 8-K dated November 6, 2001, reporting under Items 7  and 9, was filed during the three months ended December 31, 2001. |                                                                                                                                                                                    |                          |
|    |                                                                                                                                     |                                                                                                                                                                                    |
| **(c)** | **Exhibits**                                                                                                                             |                                                                                                                                                                                    |
|    |                                                                                                                                     |                                                                                                                                                                                    |
|    | See Exhibit  Index on page 74.                                                                                                           |                                                                                                                                                                                    |                          |
|    |                                                                                                                                     |                                                                                                                                                                                    |                          |
| **(d)** | **Financial Statement Schedules**                                                                                                        |                                                                                                                                                                                    |                          |
|    |                                                                                                                                     |                                                                                                                                                                                    |                          |   |
|    | See Item 14  (a) (2), above.                                                                                                             |                                                                                                                                                                                    |                          |
|    |                                                                                                                                     |                                                                                                                                                                                    |                          |

 

48

----

 

**SIGNATURES**

 

Pursuant to the requirements ofSection 13 or 15(d) of the Securities Exchange Act of 1934, the registrant hasduly 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  22, 2002 |                                    |

 

Pursuant to the requirements ofthe Securities Exchange Act of 1934, this Report has been signed by thefollowing persons in the capacities and on the date indicated.

 
| **Signature**               |                                                                  | **Title**       |   | **Date** |   |
|-----------------------------|-----------------------------------------------------------------------|-----------------|--------|----------|--------|
|                        |                                                                  |            |
| /s/ Richard  P. Ekstrand    | President  and                                                        | March 22,  2002 |
| Richard P.  Ekstrand        | Chief  Executive Officer  (Principal Executive Officer)  and Director |            |
|                        |                                                                  |            |
| /s/ Wesley  E. Schultz      | Executive  Vice President,                                            | March 22,  2002 |
| Wesley E.  Schultz          | Chief  Financial Officer and Director                                 |            |
|                        |                                                                  |            |
| /s/ Ann K.  Newhall         | Executive Vice  President,                                            | March 22,  2002 |
| Ann K.  Newhall             | Chief  Operating Officer and Director                                 |            |
|                        |                                                                  |            |
| /s/ David J.  Del Zoppo     | Vice  President, Finance and Accounting                               | March 22,  2002 |
|  David J. Del Zoppo    | (Principal  Accounting Officer)                                       |            |
|                        |                                                                  |            |
| /s/ George  W. Wikstrom     | Director                                                              | March 22,  2002 |
| George W.  Wikstrom         |                                                                  |            |
|                        |                                                                  |            |
| /s/ Don C.  Swenson         | Director                                                              | March 22,  2002 |
| Don C.  Swenson             |                                                                  |            |
|                        |                                                                  |            |
| /s/ Jeffrey  S. Gilbert     | Director                                                              | March 22,  2002 |
| Jeffrey S.  Gilbert         |                                                                  |            |
|                        |                                                                  |            |
| /s/ Marvin  C. Nicolai      | Director                                                              | March 22,  2002 |
| Marvin C.  Nicolai          |                                                                  |            |
|                        |                                                                  |            |
| /s/ George  M. Revering     | Director                                                              | March 22,  2002 |
| George M.  Revering         |                                                                  |            |
|                        |                                                                  |            |
| /s/ John  Hunt              | Director                                                              | March 22,  2002 |
| John Hunt                   |                                                                  |            |
|                        |                                                                  |            |
| /s/ Paul  J.  Finnegan | Director                                                              | March 22,  2002 |
| Paul J.  Finnegan           |                                                                  |            |

 

49

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**Report of independent public accountants**

 

To Rural Cellular Corporation:

 

We have audited theaccompanying consolidated balance sheets of Rural Cellular Corporation (aMinnesota corporation) and subsidiaries as of December 31, 2001 and 2000, andthe related consolidated statements of operations, shareholders’ (deficit)equity and cash flows for each of the three years in the period ended December31, 2001.  These financial statementsare the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financialstatements based on our audits.

 

We conducted our audits inaccordance with auditing standards generally accepted in the UnitedStates.  Those standards require that weplan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement.  An audit includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements.  An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statementpresentation.  We believe that ouraudits provide a reasonable basis for our opinion.

 

In our opinion, the financialstatements referred to above present fairly, in all material respects, thefinancial position of Rural Cellular Corporation and subsidiaries as ofDecember 31, 2001 and 2000, and the results of their operations and their cashflows for each of the three years in the period ended December 31, 2001 inconformity with accounting principles generally accepted in the United States.

 

As explained in Note 5 to thefinancial statements, effective January 1, 2001 the Company adopted theprovisions of SFAS No. 133 “Accounting for Derivative Instruments and HedgingActivities.”

 

Arthur Andersen LLP

 

Minneapolis, Minnesota,

February 1, 2002

 

 

F-1

----

 

**RURAL CELLULARCORPORATION AND SUBSIDIARIES**

**CONSOLIDATED BALANCESHEETS**

**As of December 31,**

**(In thousands)**

 

**ASSETS**

 
|                                                                                          |   | **2001**      |          | **2000**  |   |
|-----------------------------------------------------------------------------------------------|--------|---------------|---------------|-----------|--------|
| CURRENT  ASSETS:                                                                              |   |          |          |      |   |
| Cash                                                                                          |   | **$**         | **1,995**     |      | $      | 2,205 |   |
| Accounts receivable, less allowance of  $4,016 and $2,385                                     |   | **45,279**    |          | 43,324    |   |
| Inventories                                                                                   |   | **6,617**     |          | 6,753     |   |
| Other current assets                                                                          |   | **2,408**     |          | 2,618     |   |
| Total current assets                                                                          |   | **56,299**    |          | 54,900    |   |
| PROPERTY AND EQUIPMENT, less accumulated  depreciation of $137,776  and $93,446               |   | **244,980**   |          | 234,490   |   |
| LICENSES AND OTHER ASSETS:                                                                    |   |          |          |      |   |
| Licenses and other intangible assets, less  accumulated amortization of  $128,633 and $66,574 |   | **1,505,107** |          | 1,442,806 |   |
| Deferred debt issuance costs, less  accumulated amortization of $8,306 and  $5,163            |   | **22,549**    |          | 22,331    |   |
| Restricted funds in escrow                                                                    |   | **—**    |          | 10,000    |   |
| Other assets, less accumulated amortization  of $1,230 and $908                               |   | **7,844**     |          | 7,269     |   |
| Total licenses and other assets                                                               |   | **1,535,500** |          | 1,482,406 |   |
|                                                                                          |   | **$**         | **1,836,779** |      | $      | 1,771,796 |   |

 

The accompanying notes are an integral part of these consolidatedbalance sheets.

 

F-2

----

 

**RURAL CELLULARCORPORATION AND SUBSIDIARIES**

**CONSOLIDATED BALANCESHEETS**

**As of December 31,**

**(In thousands)**

 

**LIABILITIES ANDSHAREHOLDERS’ (DEFICIT) EQUITY**

** **
|                                                                                        |   | **2001**      |          | **2000**  |   |
|---------------------------------------------------------------------------------------------|--------|---------------|---------------|-----------|--------|
| CURRENT  LIABILITIES:                                                                       |   |          |          |      |   |
| Accounts payable                                                                            |   | **$**         | **35,356**    |      | $      | 41,545 |   |
| Advance billings and customer deposits                                                      |   | **9,315**     |          | 7,563     |   |
| Accrued interest                                                                            |   | **13,033**    |          | 15,724    |   |
| Dividends payable                                                                           |   | **5,710**     |          | 5,085     |   |
| Other accrued expenses                                                                      |   | **11,158**    |          | 8,561     |   |
| Total current liabilities                                                                   |   | **74,572**    |          | 78,478    |   |
| LONG-TERM  LIABILITIES                                                                      |   | **1,290,338** |          | 1,157,472 |   |
| Total liabilities                                                                           |   | **1,364,910** |          | 1,235,950 |   |
|                                                                                        |   |          |          |      |   |
| COMMITMENTS  AND CONTINGENCIES (Note 9)                                                     |   |          |          |      |   |
|                                                                                        |   |          |          |      |   |
| PREFERRED  SECURITIES                                                                       |   | **508,836**   |          | 455,891   |   |
| SHAREHOLDERS’  (DEFICIT)  EQUITY:                                                 |   |          |          |      |   |
| Class A common stock; $.01 par value;  200,000 shares authorized,  11,176 and 11,034 issued |   | **112**       |          | 110       |   |
| Class B common stock; $.01 par value;  10,000 shares authorized,  728 and 782 issued        |   | **7**         |          | 8         |   |
| Additional paid-in capital                                                                  |   | **191,964**   |          | 190,751   |   |
| Accumulated deficit                                                                         |   | **(198,473**  | )             | (110,914  | )      |
| Accumulated other comprehensive loss                                                        |   | **(30,577**   | )             | —    |   |
| Total shareholders’  (deficit) equity                                             |   | **(36,967**   | )             | 79,955    |   |
|                                                                                        |   | **$**         | **1,836,779** |      | $      | 1,771,796 |   |

 

The accompanying notes are an integral part of these consolidatedbalance sheets.

 

F-3

----

 

**RURAL CELLULARCORPORATION AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**FOR THE YEARS ENDEDDECEMBER 31,**

**(In thousands, exceptper share data)**

 
|                                                                                             |   | **2001**     |        | **2000** |   | **1999** |   |
|--------------------------------------------------------------------------------------------------|--------|--------------|-------------|----------|--------|----------|--------|
| REVENUES:                                                                                        |   |         |        |     |   |     |   |
| Service                                                                                          |   | **$**        | **305,988** |     | $      | 238,556  |   | $ | 125,361 |   |
| Roaming                                                                                          |   | **116,541**  |        | 98,693   |   | 43,081   |   |
| Equipment                                                                                        |   | **18,627**   |        | 18,848   |   | 7,299    |   |
| Total revenues                                                                                   |   | **441,156**  |        | 356,097  |   | 175,741  |   |
|                                                                                             |   |         |        |     |   |     |   |
| OPERATING  EXPENSES:                                                                             |   |         |        |     |   |     |   |
| Network costs                                                                                    |   | **101,509**  |        | 85,988   |   | 38,549   |   |
| Cost of equipment sales                                                                          |   | **28,415**   |        | 34,711   |   | 10,951   |   |
| Selling, general and administrative                                                              |   | **117,855**  |        | 95,034   |   | 54,753   |   |
| Depreciation and amortization                                                                    |   | **112,577**  |        | 91,078   |   | 41,277   |   |
| Total operating expenses                                                                         |   | **360,356**  |        | 306,811  |   | 145,530  |   |
| OPERATING  INCOME                                                                                |   | **80,800**   |        | 49,286   |   | 30,211   |   |
|                                                                                             |   |         |        |     |   |     |   |
| OTHER INCOME  (EXPENSE):                                                                         |   |         |        |     |   |     |   |
| Interest expense                                                                                 |   | **(115,272** | )           | (89,839  | )      | (27,116  | )      |
| Interest and dividend income                                                                     |   | **1,172**    |        | 2,249    |   | 467      |   |
| Other                                                                                            |   | **(752**     | )           | (24      | )      | 1,325    |   |
| Other expense, net                                                                               |   | **(114,852** | )           | (87,614  | )      | (25,324  | )      |
| INCOME (LOSS) BEFORE INCOME TAX, CUMULATIVE  EFFECT ADJUSTMENT AND EXTRAORDINARY ITEM            |   | **(34,052**  | )           | (38,328  | )      | 4,887    |   |
| INCOME TAX PROVISION                                                                             |   | **—**   |        | —   |   | 37       |   |
| INCOME (LOSS) BEFORE CUMMULATIVE EFFECT  ADJUSTMENT AND EXTRAORDINARY ITEM                       |   | **(34,052**  | )           | (38,328  | )      | 4,850    |   |
| EXTRAORDINARY ITEM — EARLY EXTINGUISHMENT  OF DEBT                                          |   | **—**   |        | (925     | )      | —   |   |
| INCOME (LOSS) BEFORE CUMULATIVE EFFECT  ADJUSTMENT                                               |   | **(34,052**  | )           | (39,253  | )      | 4,850    |   |
| CUMULATIVE EFFECT ADJUSTMENT                                                                     |   | **137**      |        | —   |   | —   |   |
| NET INCOME (LOSS)                                                                                |   | **(33,915**  | )           | (39,253  | )      | 4,850    |   |
| PREFERRED STOCK DIVIDEND                                                                         |   | **(53,644**  | )           | (44,081  | )      | (15,912  | )      |
|                                                                                             |   |         |        |     |   |     |   |
| NET LOSS APPLICABLE TO COMMON SHARES                                                             |   | **$**        | **(87,559** | )        | $      | (83,334  | )      | $ | (11,062 | ) |
|                                                                                             |   |         |        |     |   |     |   |
| WEIGHTED AVERAGE COMMON SHARES OUTSTANDING,  BASIC AND DILUTED                                   |   | **11,865**   |        | 11,510   |   | 9,047    |   |
|                                                                                             |   |         |        |     |   |     |   |
| NET LOSS APPLICABLE TO COMMON SHARES BEFORE  EXTRAORDINARY ITEM AND CUMULATIVE EFFECT ADJUSTMENT |   | **$**        | **(7.39**   | )        | $      | (7.16    | )      | $ | (1.22 | ) |
| EXTRAORDINARY  ITEM                                                                              |   | **—**   |        | (0.08    | )      | —   |   |
| CUMULATIVE  EFFECT ADJUSTMENT                                                                    |   | **.01**      |        | —   |   | —   |   |
| NET LOSS PER  BASIC AND DILUTED SHARE                                                            |   | **$**        | **(7.38**   | )        | $      | (7.24    | )      | $ | (1.22 | ) |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

F-4

----

 

**RURAL CELLULARCORPORATION AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF SHAREHOLDERS’ (DEFICIT) EQUITY**

**FOR THE YEARS ENDEDDECEMBER 31, 2001, 2000 AND 1999**

**(In thousands)**

** **
|                                                        |   | **Class A**      |   | **Class B**      |   |       |   |       |   |                            |   |                     |    |                                     |   |
|-------------------------------------------------------------|--------|------------------|--------|------------------|--------|------------|--------|------------|--------|---------------------------------|--------|--------------------------|---------|------------------------------------------|--------|
|                                                        |   | **Common Stock** |   | **Common Stock** |   |       |   |       |   |                            |   |                     |    |                                     |   |
|                                                        |   | **Shares**       |   | **Amount**       |   | **Shares** |   | **Amount** |   | **Additional  Paid-In Capital** |   | **Accumulated  Deficit** |    | **Accumulated  Other ComprehensiveLoss** |   | **Share  holders' (Deficit) equity** |   | **Comprehensive  Loss** |   |
| BALANCE,  December 31, 1998                                 |   | 7,780            |   | $                | 78     |       | 1,203  |       | $      | 12                              |   | $                        | 35,707  |                                     | $      | (16,518 | ) | $ | — |   | $ | 19,279 |   | — |   |
|                                                        |   |             |   |             |   |       |   |       |   |                            |   |                     |    |                                     |   |   |   |   |   |
| Conversion of Class B  common stock to Class A common stock |   | 171              |   | 2                |   | (171       | )      | (2         | )      | —                          |   | —                   |    | —                                   |   | — |   | — |   |
| Stock issued through employee stock  purchase plan          |   | 17               |   | —           |   | —     |   | —     |   | 151                             |   | —                   |    | —                                   |   | 151 |   | — |   |
| Stock options exercised                                     |   | 122              |   | 1                |   | —     |   | —     |   | 1,058                           |   | —                   |    | —                                   |   | 1,059 |   | — |   |
| COMPONENTS OF COMPREHENSIVE LOSS                            |   |             |   |             |   |       |   |       |   |                            |   |                     |    |                                     |   |   |   |   |   |
| Net loss applicable to common shares                        |   | —           |   | —           |   | —     |   | —     |   | —                          |   | (11,062                  | )       | —                                   |   | (11,062 | ) | (11,062 | )  |
| BALANCE,   December 31, 1999                                |   | 8,090            |   | 81               |   | 1,032      |   | 10         |   | 36,916                          |   | (27,580                  | )       | —                                   |   | 9,427 |   | — |   |
| Conversion of common stock to  Class T preferred stock      |   | (43              | )      | —           |   | (105       | )      | (1         | )      | (7,539                          | )      | —                   |    | —                                   |   | (7,540 | ) | — |   |
| Issuance of common stock, net                               |   | 2,749            |   | 27               |   | —     |   | —     |   | 160,409                         |   | —                   |    | —                                   |   | 160,436 |   | — |   |
| Conversion of Class B common stock to Class A  common stock |   | 145              |   | 1                |   | (145       | )      | (1         | )      | —                          |   | —                   |    | —                                   |   | — |   | — |   |
| Stock issued through employee stock purchase plan           |   | 38               |   | —           |   | —     |   | —     |   | 375                             |   | —                   |    | —                                   |   | 375 |   | — |   |
| Stock options exercised                                     |   | 55               |   | 1                |   | —     |   | —     |   | 590                             |   | —                   |    | —                                   |   | 591 |   | — |   |
| COMPONENTS OF COMPREHENSIVE  LOSS                           |   |             |   |             |   |       |   |       |   |                            |   |                     |    |                                     |   |   |   |   |   |
| Net loss applicable to common shares                        |   | —           |   | —           |   | —     |   | —     |   | —                          |   | (83,334                  | )       | —                                   |   | (83,334 | ) | (83,334 | )  |
| BALANCE, December 31, 2000                                  |   | 11,034           |   | 110              |   | 782        |   | 8          |   | 190,751                         |   | (110,914                 | )       | —                                   |   | 79,955 |   | — |   |
| Conversion of Class B common stock to Class A  common stock |   | 54               |   | 1                |   | (54        | )      | (1         | )      | —                          |   | —                   |    | —                                   |   | — |   | — |   |
| Stock issued through employee stock purchase plan           |   | 25               |   | —           |   | —     |   | —     |   | 620                             |   | —                   |    | —                                   |   | 620 |   | — |   |
| Stock options exercised                                     |   | 63               |   | 1                |   | —     |   | —     |   | 593                             |   | —                   |    | —                                   |   | 594 |   | — |   |
| COMPONENTS OF COMPREHENSIVE  LOSS                           |   |             |   |             |   |       |   |       |   |                            |   |                     |    |                                     |   |   |   |   |   |
| Net loss applicable to common shares                        |   | —           |   | —           |   | —     |   | —     |   | —                          |   | (87,559                  | )       | —                                   |   | (87,559 | ) | (87,559 | ) |
| Cumulative effect of SFAS No. 133 at January 1, 2001        |   | —           |   | —           |   | —     |   | —     |   | —                          |   | —                   |    | (5,917                                   | )      | (5,917 | ) | (5,917 | ) |
| Current year effect of SFAS No. 133                         |   | —           |   | —           |   | —     |   | —     |   | —                          |   | —                   |    | (24,660                                  | )      | (24,660 | ) | (24,660 | ) |
| Total comprehensive loss                                    |   | —           |   | —           |   | —     |   | —     |   | —                          |   | —                   |    | —                                   |   | — |   | (118,136 | ) |
| BALANCE,   December 31, 2001                                |   | 11,176           |   | $                | 112    |       | 728    |       | $      | 7                               |   | $                        | 191,964 |                                     | $      | (198,473 | ) | $ | (30,577 | ) | $ | (36,967 | ) |   |   |
|                                                             |        |                  |        |                  |        |            |        |            |        |                                 |        |                          |         |                                          |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

F-5

----

 

**RURAL CELLULARCORPORATION AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**FOR THE YEARS ENDEDDECEMBER 31,**

**(In thousands)**

** **
|                                                                                               |   | **2001**     |        | **2000**   |   | **1999** |   |
|----------------------------------------------------------------------------------------------------|--------|--------------|-------------|------------|--------|----------|--------|
| OPERATING  ACTIVITIES:                                                                             |   |         |        |       |   |     |   |
| Net income (loss)                                                                                  |   | **$**        | **(33,915** | **)**      | $      | (39,253  | )      | $ | 4,850 |   |
| Adjustments to reconcile to net cash  provided by operating activities:                            |   |         |        |       |   |     |   |
| Depreciation and amortization                                                                      |   | **112,577**  |        | 91,078     |   | 41,277   |   |
| Extraordinary item — early extinguishment  of debt                                            |   | **—**   |        | 925        |   | —   |   |
| Equity in losses of unconsolidated  affiliates                                                     |   | **2**        |        | 2          |   | 3        |   |
| Change in financial instrument valuation                                                           |   | **1,263**    |        | —     |   | —   |   |
| Other                                                                                              |   | **1,827**    |        | 1,419      |   | (618     | )      |
| Change in other operating elements:                                                                |   |         |        |       |   |     |   |
| Accounts receivable                                                                                |   | **849**      |        | (14,071    | )      | (3,365   | )      |
| Inventories                                                                                        |   | **292**      |        | 145        |   | (2,098   | )      |
| Other current assets                                                                               |   | **605**      |        | 192        |   | 187      |   |
| Accounts payable                                                                                   |   | **(7,786**   | **)**       | 25,297     |   | (181     | )      |
| Advance billings and customer deposits                                                             |   | **1,199**    |        | 1,721      |   | 34       |   |
| Other accrued expenses                                                                             |   | **(1,410**   | **)**       | 14,717     |   | 323      |   |
| Net cash provided by operating activities                                                          |   | **75,503**   |        | 82,172     |   | 40,412   |   |
| INVESTING  ACTIVITIES:                                                                             |   |         |        |       |   |     |   |
| Purchases of property and equipment, net                                                           |   | **(45,979**  | **)**       | (54,832    | )      | (26,287  | )      |
| Purchases of wireless properties                                                                   |   | **(178,566** | **)**       | (1,232,692 | )      | (11,465  | )      |
| Proceeds from sale of properties                                                                   |   | **48,929**   |        | —     |   | —   |   |
| Pending acquisition costs                                                                          |   | **—**   |        | (10,000    | )      | (36,360  | )      |
| Purchases of FCC Licenses                                                                          |   | **—**   |        | —     |   | (8,656   | )      |
| Other                                                                                              |   | **1,080**    |        | (1,763     | )      | 19       |   |
| Net cash used in investing activities                                                              |   | **(174,536** | **)**       | (1,299,287 | )      | (82,749  | )      |
| FINANCING  ACTIVITIES:                                                                             |   |         |        |       |   |     |   |
| Proceeds from issuance of common stock  related to  employee stock purchase plan and stock options |   | **1,214**    |        | 966        |   | 1,210    |   |
| 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                                                           |   | **349,344**  |        | 1,104,948  |   | 67,000   |   |
| Repayments of long-term debt                                                                       |   | **(256,089** | **)**       | (299,350   | )      | (27,000  | )      |
| Proceeds from swaption                                                                             |   | **8,720**    |        | —     |   | —   |   |
| Proceeds from interest rate swap  transactions                                                     |   | **—**   |        | 6,550      |   | 982      |   |
| Payments of debt issuance costs                                                                    |   | **(4,366**   | **)**       | (18,909    | )      | (632     | )      |
| Net cash provided by financing activities                                                          |   | **98,823**   |        | 1,218,035  |   | 41,560   |   |
| NET INCREASE  (DECREASE)  IN CASH                                                             |   | **(210**     | **)**       | 920        |   | (777     | )      |
| CASH, at  beginning of year                                                                        |   | **2,205**    |        | 1,285      |   | 2,062    |   |
| CASH, at end  of year                                                                              |   | **$**        | **1,995**   |       | $      | 2,205    |   | $ | 1,285 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

F-6

----

 

**1. Organization and Nature of Business:**

 

Rural Cellular Corporation andits subsidiaries (the “Company” or “RCC”), a Minnesota corporation, providewireless communication services in portions of the Midwest, South, Northeastand Northwest areas of the United States. The Company operates its cellular andpaging systems under licenses granted by the Federal Communications Commission(“FCC”). The Company’s operations are subject to the applicable rules andregulations of the FCC.

 

RCC’s cash requirements willbegin to increase starting in 2003 and in future years due in part to therequired amortization of the Company’s credit facility and the requireddistribution of preferred stock cash dividends.  In addition, as the wireless industry upgrades its existingnetworks to 2.5G and 3.0G technologies, the Company may also deploy substantialcash resources toward the upgrade of its networks starting in 2003.

 

AtDecember 31, 2001, the Company had negative working capital of $(18.3) millionand a shareholders' deficit of $(37.0) million.  If the Company fails to achieve the required level of anticipatedcustomer and revenue growth, it may not be able to fund its capitalrequirements and operations under its current 2002 budget.

 

**2. Strategic History:**

 

RCC wasfounded in 1991 through the combination of five partnerships holding differentcellular licenses in Minnesota. Since then, it has completed the followingacquisitions (the “Acquisitions”):

 

**•          **In May 1997, RCC acquired wireless operations and licenses coveringportions of Maine for approximately $85.7 million.

 

•           InJuly 1998, RCC acquired wireless operations and licenses covering all ofVermont and portions of Massachusetts, New Hampshire, and New York forapproximately $262.5 million.

 

•           InAugust 1998, RCC acquired wireless operations and a license in westernMaine for approximately $7.5 million.

 

•           InFebruary 1999, RCC acquired wireless operations and a license in SouthDakota for approximately $11.9 million.

 

•           InApril 2000, in the Triton Cellular acquisition, RCC acquired wirelessoperations and licenses covering portions of Alabama, Kansas, Mississippi,Oregon, and Washington for approximately $1.265 billion.

 

•           InJanuary 2001, in the Saco River acquisition, RCC acquired wirelessoperations and licenses in the Portsmouth, New Hampshire service areas forapproximately $194.0 million. In the acquisition, RCC also acquired theILEC business of Saco River. RCC sold the Saco River ILEC in October 2001for approximately $35.7 million in cash and used the net proceeds to repayindebtedness under the credit facility.

 

***Accounting Treatment***

 

The purchase prices for theAcquisitions were allocated to the net assets based on their estimated fairvalues and the excess was allocated to licenses, customer lists and goodwill.The Acquisitions were accounted for under the purchase method of accounting;accordingly, operating results have been included from the date of acquisition.

 

F-7

----

 

 

**RURAL CELLULARCORPORATION**

**NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS**

**DECEMBER 31,2001 and2000**

 

The following unaudited proforma information presents the consolidated results of operations as if theacquisitions of Triton Cellular and Saco River, excluding Saco River’s ILEC,had occurred as of January 1, 2000. This summary is not necessarily indicativeof what the results of operations of the Company and Triton Cellular and SacoRiver would have been if they had been a single entity during such period, nordoes it purport to represent results of operations for any future periods.

 
|                                                                  | **Years ended  December 31,** |
|-----------------------------------------------------------------------|-------------------------------|
|                                                                  |                          | **2001** |   | **% of Rev** |   | **2000** |   | **% of Rev** |   |
|                                                                  |                          | **(in  thousands except per share)** |   |
| REVENUES:                                                             |                          |   | ** ** |   | ** ** |   |   |   |   |
| Service                                                               |                          | **$** | **305,988** | ** ** | **69.4** | **%** | $ | 278,127 |   | 65.7 | % |
| Roaming                                                               |                          | **116,541** | ** ** | **26.4** | ** ** | 123,938 |   | 29.2 |   |
| Equipment                                                             |                          | **18,627** | ** ** | **4.2** | ** ** | 21,703 |   | 5.1 |   |
| Total revenues                                                        |                          | **441,156** | ** ** | **100.0** | ** ** | 423,768 |   | 100.0 |   |
| OPERATING EXPENSES:                                                   |                          |   | ** ** |   | ** ** |   |   |   |   |
| Network costs                                                         |                          | **101,509** | ** ** | **23.0** | ** ** | 103,165 |   | 24.3 |   |
| Cost of equipment sales                                               |                          | **28,415** | ** ** | **6.4** | ** ** | 39,627 |   | 9.4 |   |
| Selling, general and administrative                                   |                          | **117,855** | ** ** | **26.7** | ** ** | 112,606 |   | 26.6 |   |
| Depreciation and amortization                                         |                          | **112,577** | ** ** | **25.5** | ** ** | 110,699 |   | 26.1 |   |
| Total operating expenses                                              |                          | **360,356** | ** ** | **81.6** | ** ** | 366,097 |   | 86.4 |   |
| OPERATING INCOME                                                      |                          | **80,800** | ** ** | **18.4** | ** ** | 57,671 |   | 13.6 |   |
| Net loss  before extraordinary item and  cumulative effect adjustment |                          | **(34,052** | **)** | **(7.7** | **)** | (63,387 | ) | (15.0 | ) |
| Net loss applicable to common shares                                  |                          | **$** | **(87,559** | **)** | **(19.9%** | **)** | $ | (111,634 | ) | (26.3% | ) |
| Weighted average common shares outstanding                            |                          | **11,865** | ** ** |   |   | 11,510 | ** ** |   | ** ** |
| Net loss per basic and diluted common share                           |                          | **$** | **(7.38** | **)** |   |   | $ | (9.70 | ) |   | ** ** |

 

**3.  Summaryof Significant Accounting Policies:**

 

***RoamingRevenue Reclassification***

 

Rural Cellular Corporationgenerates revenue from charges to its customers when they use their cellularphones in other wireless providers’ markets (“Incollect Revenue”). Until April2000, RCC included Incollect Revenue in the roaming revenue line item in itsstatement of operations. Expense associated with Incollect Revenue, charged bythird-party wireless providers, was also included in roaming revenue on a netbasis. RCC used this method because, historically, it has passed through to itscustomers most of the costs related to Incollect Revenue. However, the wirelessindustry, including RCC, has increasingly been using pricing plans that includeflat rate pricing and larger home service areas. Under these types of plans,amounts charged to RCC by other wireless providers may not necessarily bepassed through to its customers.

 

In April 2000, RCC adopted apolicy to include the associated expense from its incollect activity in networkcost rather than reducing roaming revenue and to include Incollect Revenue asservice revenue rather than increasing roaming revenue.  Roaming revenue includes only the revenuefrom other wireless providers’ customers who use RCC’s network (“OutcollectRevenue”). Prior periods have been restated to conform to this newpresentation.  This change inpresentation has no impact on operating income.

 

F-8

----

 

***Recently Issued Accounting Pronouncements***

 

In July 2001, the FinancialAccounting Standards Board (“FASB”) issued Statements of Financial AccountingStandards No. 141, “Business Combinations” (“SFAS No. 141”) and No. 142,“Goodwill and Other Intangible Assets” (“SFAS No. 142”).  SFAS No. 141 requires all businesscombinations initiated after June 30, 2001 to be accounted for using thepurchase method.  Under SFAS No. 142,goodwill and intangible assets with indefinite lives are no longer amortizedbut are reviewed annually, or more frequently if impairment indicators arise,for impairment.  Separable intangibleassets that are not deemed to have indefinite lives will continue to beamortized over their useful lives but with no maximum life.  The amortization provisions of SFAS No. 142apply to goodwill and intangible assets acquired after June 30, 2001.  With respect to goodwill and intangibleassets acquired prior to July 1, 2001, the Company is required to adopt SFASNo. 142 effective January 1, 2002. Goodwill amortization of $14.5 million and $10.5 million is included inthe accompanying condensed consolidated statements of operations for the yearsended December 31, 2001 and 2000. Effective January 1, 2002, amortization of goodwill will not be includedin the Company’s statements of operations. Had SFAS No. 142 not becomeeffective, goodwill amortization for 2002 would have been approximately $16.7million.

 

In October 2001, the FASBissued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-LivedAssets”(“SFAS No. 144”). SFAS No. 144 supersedes SFAS 121, “Accounting for theImpairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of”(“SFAS No. 121”). SFAS No. 144 primarily addresses significant issues relatingto the implementation of SFAS No. 121 and develops a single accounting modelfor long-lived assets to be disposed of, whether previously held and used ornewly acquired. The provisions of SFAS No. 144 will be effective for fiscalyears beginning after December 15, 2001. Management is currently evaluating theimpact the implementation of this statement will have on the Company’sfinancial position or results of operations.

 

***Principles of Consolidation***

 

The consolidated financialstatements include the accounts of RCC and its wholly-owned subsidiaries andits majority owned joint venture, Wireless Alliance, LLC (“Wireless Alliance”)*.*All significant intercompany balances and transactions have been eliminated.

 

***RevenueRecognition***

 

The Company’s revenuesprimarily consist of service, roaming and equipment revenues, each of which isdescribed below:

 

•        **Service** revenues include monthly accesscharges, charges for airtime used in excess of the time included in the servicepackage purchased, activation fees, long distance charges derived from callsplaced by customers as well as cellular and paging equipment lease revenues.Also included are activation fees and charges for such features as voicemail,call waiting, and call forwarding. The Company also includes IncollectRevenue.  The Company does not chargeinstallation or connection fees.

 

•        **Roaming** revenues include OutcollectRevenue.

 

•        **Equipment** revenues include sales ofcellular and paging equipment, accessory sales to customers, and networkequipment reselling.

 

***IncomeTaxes***

 

The Company follows theliability method of accounting for income taxes, and deferred income taxes arebased on the estimated future tax effects of differences between the financialstatement and tax bases of assets and liabilities based on enacted tax laws.

 

F-9

----

 

***NetIncome (Loss) Per Common Share***

 

Basic EPS is computed bydividing net income (loss) by the weighted average number of shares outstandingduring the year. Diluted EPS is computed by including dilutive common stockequivalents with the basic weighted average shares outstanding.  Potential common shares of 1,588,734,1,266,422 and 1,046,547 related to the Company’s outstanding stock options wereexcluded from the computation of diluted loss per share for the years endedDecember 31, 2001, 2000 and 1999, respectively, as inclusion of these shareswould have been antidilutive.

 

***Cash Equivalents***

 

The Company considers allhighly liquid investments with an original maturity of three months or less tobe cash equivalents.

 

***Inventories***

 

Inventories consist of cellulartelephone equipment, pagers and accessories and are stated at the lower ofcost, determined using the average cost method, or market.

 

***Propertyand Equipment***

 

Property and equipment arerecorded at cost.  Additions,improvements or major renewals are capitalized, while expenditures that do notenhance or extend the asset’s useful life are charged to operating expenses asincurred. Depreciation is computed using the straight-line method based on theestimated useful life of the asset.

 

The components of property andequipment and the useful lives of the Company’s assets are as follows as ofDecember 31:

 
|                             |   | **2001**            |        | **2000**   |   | **Useful  Lives** |   |
|----------------------------------|--------|---------------------|-------------|------------|--------|-------------------|--------|
|                             |   | **(in  thousands)** |        |
| Land                             |   | **$**               | **7,021**   | ** ** | $      | 6,145             |   | N/A |   |
| Building and towers              |   | **89,113**          | ** **  | 81,424     |   | 15-39 Years       |   |
| Equipment                        |   | **225,098**         | ** **  | 192,580    |   | 2-10 Years        |   |
| Phone service equipment          |   | **31,998**          | ** **  | 17,761     |   | 19-24 Months      |   |
| Furniture and fixtures           |   | **22,401**          | ** **  | 18,431     |   | 3-10 Years        |   |
| Assets under construction        |   | **7,125**           | ** **  | 11,595     |   | N/A               |   |
|                             |   | **382,756**         | ** **  | 327,936    |   |              |   |
|                             |   |                | ** **  |       |   |              |   |
| Less-accumulated depreciation    |   | **(137,776**        | **)**       | (93,446    | )      |              |   |
| **Property and equipment - net** |   | **$**               | **244,980** | ** ** | $      | 234,490           |   |   |   |

 

The Company’s networkconstruction expenditures are recorded as assets under construction until thesystem or assets are placed in service, at which time the assets aretransferred to the appropriate property and equipment category.  Throughout the years ended December 31, 2001and 2000, as a component of assets under construction, the Company capitalized$1.7 million and $2.2 million, respectively, in salaries of the Company’sengineering employees during the construction period for projects that extendedbeyond one year.  The Company did notcapitalize interest cost in 2001. During 2000, the Company capitalized $420,000in interest cost that was related to the digital upgrade in the Company’sNortheast region.

 

At December 31, 2001,accumulated depreciation on phone service equipment was approximately $18.6million as compared to $14.8 million at December 31, 2000.

 

F-10

----

 

***Licensesand Other Intangible Assets***

 

Licenses consist of the cost ofacquiring paging licenses, the value assigned to the Wireless Alliance personalcommunications services (PCS) licenses, other PCS licenses, local multipointdistribution service (“LMDS”) licenses, and the value assigned to cellularlicenses acquired through acquisitions. Other intangibles, resulting primarilyfrom acquisitions, include the value assigned to customer lists and goodwill.Amortization is computed using the straight-line method based on the estimateduseful life of the asset.

 

The components of licenses andother intangible assets are as follows as of December 31:

 
|                                          |   |                |          |       |         | **Amortizable** |         |
|-----------------------------------------------|--------|---------------------|---------------|------------|--------------|-----------------|--------------|
|                                          |   | **2001**            |          | **2000**   |         | **Lives**       |         |
|                                          |   | **(in  thousands)** |          |
| **Licenses:**                                 |   |                | *** ***  |       | *** *** |            | *** *** |
| Cellular                                      |   | **$**               | **1,041,458** | ** ** | $            | 967,958         |         | 33 - 40 Years |   |
| PCS                                           |   | **32,255**          | ** **    | 11,792     |         | 40 Years        |         |
| Paging                                        |   | **275**             | ** **    | 275        |         | 30 Years        |         |
| Local Multi-Point Distribution                |   | **7,045**           | ** **    | 7,045      |         | 40 Years        |         |
|                                          |   |                | ** **    |       |         |            |         |
| **Other intangible assets:**                  |   |                | ** **    |       |         |            |         |
| Goodwill                                      |   | **393,677**         | ** **    | 370,980    |         | 20 - 40 Years   |         |
| Customer lists                                |   | **159,030**         | ** **    | 151,330    |         | 7-10 Years      |         |
|                                          |   | **1,633,740**       | ** **    | 1,509,380  |         |            |         |
| Less-accumulated amortization                 |   | **(128,633**        | **)**         | (66,574    | )            |            |         |
| **Licenses and other intangible assets, net** |   | **$**               | **1,505,107** | ** ** | $            | 1,442,806       |         |   |   |

 

***DeferredDebt Issuance Costs***

 

Deferreddebt issuance costs relate to the credit facility and the senior subordinatednotes (see Note 4). These costs are being amortized over the respectiveinstruments’ terms.

 

***OtherAssets***

 

Other assets primarily consistof costs related to restricted investments, spectrum relocation and investmentsin unconsolidated affiliates. Restricted investments represent the Company’sinvestments in stock of the CoBank, ACB and are stated at cost, whichapproximates fair value.  The restrictedinvestments were purchased pursuant to the terms of a loan agreement and arerestricted as to withdrawal. Spectrum relocation costs are being amortized over15 years. Investments in unconsolidated affiliates are accounted for using theequity method and represent the Company’s ownership interests in Cellular 2000,Inc.  Cellular 2000, Inc. is an entityorganized to own the Cellular 2000 trade name and the related trademark.  Other assets also include the fair marketvalue of an interest rate instrument (“Flooridor”) which was entered intoduring 2000 and terminates in 2003.

 

***Businessand Credit Concentrations***

 

The Company provides wirelesscommunication services in portions of the Midwest, South, Northeast andNorthwest areas of the United States. No single customer accounted for morethan 10% of revenues or accounts receivable.

 

***Long-LivedAssets***

 

The Company periodicallyevaluates whether events and circumstances have occurred which may affect theestimated useful life or the recoverability of the remaining balance of itsgoodwill and other long-lived assets. If such events or circumstances were to indicate that the carrying amountof these assets would not be recoverable, the Company would estimate the futurecash flows expected to result from the use of the assets and their eventualdisposition.  If the sum of the expectedfuture cash flows (undiscounted and without interest charges) were less thanthe carrying amount of goodwill and other long-lived assets, the Company wouldrecognize an impairment loss.

 

F-11

----

 

 

The Company did not record anyimpairment changes in the year ended December 31, 2001.  If asset recovery is in question, theCompany uses an estimate of future net undiscounted cash flows over theremaining useful lives of the long-lived assets to measure recoverability.  Effective January 1, 2002, the Company willfollow the provisions of SFAS 142 for assessing the impairment of goodwill.

 

***Useof**Estimates***

 

The preparation of financialstatements in conformity with accounting principles generally accepted in theUnited States requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and disclosure of contingentassets and liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the reported periods.  Ultimate results could differ from thoseestimates.

 

Certain amounts in priorperiods have been reclassified to conform to the current presentation. Suchreclassifications had no effect on previously reported results of operations orshareholders’ equity.

 

***ComprehensiveLoss***

 

The Company follows theprovisions of SFAS No. 130, “Reporting Comprehensive Income,” which establishedstandards for reporting and display of comprehensive income and itscomponents.  Comprehensive income (loss)reflects the change in equity of a business enterprise during a period fromtransactions and other events and circumstances from nonowner sources.  For the Company, comprehensive lossrepresents net loss and the deferred gain (loss) on derivativeinstruments.  In accordance with SFASNo. 130, the Company has chosen to disclose comprehensive loss in theaccompanying statement of shareholders’ equity.

 

**4. Long-term Liabilities:**

 

The Company had the following long-term liabilities outstanding as ofDecember 31 (in thousands):

 
|                                       |   | **2001**  |      | **2000**  |   |
|--------------------------------------------|--------|-----------|-----------|-----------|--------|
| Credit facility:                           |   |      |      |      |   |
| Revolver                                   |   | $         | 159,800   |      | $      | 93,350 |   |
| Term Loan A (terminates 04/03/2008)        |   | 426,508   |      | 450,000   |   |
| Term Loan B (terminates, 04/03/2008)       |   | 225,101   |      | 237,500   |   |
| Term Loan C (terminates, 04/03/2009)       |   | 225,101   |      | 237,500   |   |
| Term Loan D (terminates, 10/03/2009)       |   | 75,000    |      | –    |   |
|                                       |   | 1,111,510 |      | 1,018,350 |   |
|                                       |   |      |      |      |   |
| Deferred gain on hedge and swap agreements |   | –    |      | 7,374     |   |
| 9 5/8% Senior Subordinated Notes           |   | 125,000   |      | 125,000   |   |
| Derivative financial instruments           |   | 46,985    |      | –    |   |
| Other                                      |   | 6,843     |      | 6,748     |   |
| Long-term liabilities                      |   | $         | 1,290,338 |      | $      | 1,157,472 |   |

 

***Creditfacility –***Advancesunder the credit facility bear interest at the London Interbank Offering Rate(“LIBOR”) plus an applicable margin based on the Company’s ratio ofindebtedness to annualized operating cash flow as of the end of the mostrecently completed fiscal quarter.  Asof December 31, 2001, the effective rate of interest on the credit facility,excluding the impact of hedge agreements, was 4.9%.  A commitment fee not to exceed 0.50% on the unused portion of thecredit facility is payable quarterly. Borrowings under the credit facility aresecured by a pledge of all the assets of the Company, excluding its ownershipin the stock of Cellular 2000, Inc. and its 70% ownership in Wireless Alliance,LLC. The credit facility is subject to various covenants, including the ratioof indebtedness to annualized operating cash flow and the ratio of annualizedoperating cash flow to interest expense. Mandatory commitment reductionsare required upon any material sale of assets. On December 14, 2000 and March 31, 2001 the Company obtained amendmentsand waivers of certain of the financial covenants in the credit facility. As ofDecember 31, 2001, the Company was in compliance with all covenants.  At December 31, 2001, the Company had $115.2million available under its credit facility.

 

F-12

----

 

***Deferredgain on hedge and swap agreements******–***In May 2000, the Company settled swaps it had entered into in August1998 with a total notional amount of $165 million, resulting in a gain ofapproximately $3.1 million.  In July 2000,the Company settled swaps it had entered into in February 1999 with a totalnotional amount of $250 million, resulting in a gain of approximately $2.8million.  In 2001, gains not accretedfrom these transactions were reclassed into other comprehensive loss within theequity section of the balance sheet.

 

***95/8 % Senior Subordinated Notes*** - On May 14, 1998,the Company issued $125 million principal amount of 9 5/8 % Senior SubordinatedNotes due 2008. Interest on the SeniorSubordinated Notes is payable semi-annually on May 15 and November 15 of eachyear. The Senior Subordinated Notes will mature on May 15, 2008, and areredeemable, in whole or in part, at the option of the Company, at any time onor after May 15, 2003.

 

***DerivativeFinancial Instruments*—**(see footnote 5 of the Notes to Consolidated Financial Statements)

 

***Other*** **-**In conjunction with the acquisition of Triton Cellular, the Company becameparty to a purchase option agreement whereby it may acquire certain cell sitesin the future for $6.5 million.  Theoption expires February 28, 2003.  Sincethe Company expects to exercise the option, the unpaid portion of the totalcost has been included as long-term debt. The Company assumed an agreement to utilize the assets covered by theoption for the period prior to exercising the option.  The ongoing payments pursuant to this agreement have beenreflected as interest expense in the accompanying consolidated statements ofoperations.

 

Maturities of the creditfacility and the 9 5/8% Senior Subordinated Notes are as follows;

 

| **Year**   |   | **Credit  Facility** |       | **9 5/8%  Senior  Subordinated  Notes** |   | **Total**  |   |
|------------|--------|----------------------|------------|-----------------------------------------|--------|------------|--------|
|       |   | **(in  thousands)**  |       |
| 2002       |   | $                    | **–** |                                    | $      | **–** |   | $ | **–** |   |
| 2003       |   | 43,924               |       | **–**                              |   | 43,924     |   |
| 2004       |   | 74,560               |       | **–**                              |   | 74,560     |   |
| 2005       |   | 96,438               |       | **–**                              |   | 96,438     |   |
| 2006       |   | 171,860              |       | **–**                              |   | 171,860    |   |
| Thereafter |   | 724,728              |       | 125,000                                 |   | 849,728    |   |
| Total      |   | $                    | 1,111,510  |                                    | $      | 125,000    |   | $ | 1,236,510 |   |

 

See footnote 12 of the Notes toConsolidated Financial Statements regarding events subsequent to December 31,2001.

 

F-13

----

 

**5.  Financial Instruments:**

 

TheCompany is required by the credit facility to maintain interest rate swaps onat least 50% of the principal amount of the loans outstanding foran average period of three years from the date of the hedge agreements. Theintent of these derivative financialinstruments is to manage interest expense. FASBStatement No. 107, “Disclosures about Fair Value of Financial Instruments,”requires disclosure of fair value information about financial instruments forwhich it is practicable to estimate that value, whether or not recognized inthe balance sheet. In cases where quoted market prices are not available, fairvalues are based on estimates using present value or other valuationtechniques. SFAS No. 107 excludes certain financial instruments and allnon-financial instruments from its disclosure requirements.

 

The Company’sfinancial instruments are as follows:

 
|                                           |   |                            |       | **Interest  rate range** |       | **Carrying  value**        |       | **Estimated  fair market value** |      |
|------------------------------------------------|--------|---------------------------------|------------|--------------------------|------------|----------------------------|------------|----------------------------------|-----------|
|                                           |   | **Notional  amount**            |       | **(Not to  exceed)**     |       | **(Not to be  less than)** |       | **December  31, 2001**           |      | **December  31, 2000** |   | **December  31, 2001** |   | **December  31, 2000** |   |
|                                           |   | **(****Dollars in  thousands)** |       |
| **Financial  assets**                          |   |                            |       |                     |       |                       |       |                             |      |   |   |   |   |   |   |
| Cash                                           |   | $                               | **–** |                     | **–** |                       | **–** |                             | $         | 1,995 |   | $ | 2,205 |   | $ | 1,995 |   | $ | 2,205 |   |
| (*) Interest rate flooridor **:**              |   |                            |       |                     |       |                       |       |                             |      |   |   |   |   |   |   |
| Fleet Bank (terminates May 12, 2003)           |   | 252,000                         |       | **–**               |       | **–**                 |       | 1,699                            |      | **–** |   | 1,699 |   | 2,640 |   |
| Accounts receivable, net                       |   | **–**                      |       | **–**               |       | **–**                 |       | 45,279                           |      | 43,324 |   | 45,279 |   | 43,324 |   |
| Total financial assets                         |   | 252,000                         |       |                     |       |                       |       | $                                | 48,973    |   | $ | 45,529 |   | $ | 48,973 |   | $ | 48,169 |   |
|                                           |   |                            |       |                     |       |                       |       |                             |      |   |   |   |   |   |   |
| **Financial liabilities**                      |   |                            |       |                     |       |                       |       |                             |      |   |   |   |   |   |   |
| Credit facility                                |   | **–**                      |       | **–**               |       | **–**                 |       | $                                | 1,111,510 |   | $ | 1,018,350 |   | $ | 987,145 |   | $ | 993,899 |   |
| 9 5/8% Senior subordinated notes               |   | **–**                      |       | **–**               |       | **–**                 |       | 125,000                          |      | 125,000 |   | 127,031 |   | 116,875 |   |
| 11 3/8% Senior exchangeable preferred stock    |   | **–**                      |       | **–**               |       | **–**                 |       | 215,373                          |      | 172,817 |   | 187,375 |   | 141,710 |   |
| 12 1⁄4% Junior exchangeable preferred stock |   | **–**                      |       | **–**               |       | **–**                 |       | 172,901                          |      | 159,618 |   | 145,237 |   | 131,094 |   |
|                                           |   | **–**                      |       | **–**               |       | **–**                 |       | 1,624,784                        |      | 1,475,785 |   | 1,446,788 |   | 1,383,578 |   |
| Derivative financial instruments               |   |                            |       |                     |       |                       |       |                             |      |   |   |   |   |   |   |
| Interest rate swap agreements:                 |   |                            |       |                     |       |                       |       |                             |      |   |   |   |   |   |   |
| TD Securities (terminates May 16, 2003)        |   | 84,000                          |       | 6.632                    | %          | 6.632                      | %          | 6,095                            |      | **–** |   | 6,095 |   | 3,500 |   |
| PNC Bank (terminates May 16, 2003)             |   | 42,000                          |       | 7.609                    | %          | 7.609                      | %          | 3,016                            |      | **–** |   | 3,016 |   | 1,756 |   |
| Union Bank (terminates May 16, 2003)           |   | 84,000                          |       | 7.591                    | %          | 7.591                      | %          | 6,153                            |      | **–** |   | 6,153 |   | 3,577 |   |
| Fleet Bank (terminates May 16, 2003)           |   | 42,000                          |       | 6.530                    | %          | 6.530                      | %          | 2,924                            |      | **–** |   | 2,924 |   | 1,767 |   |
| Interest rate collar agreements:               |   |                            |       |                     |       |                       |       |                             |      |   |   |   |   |   |   |
| PNC Bank (terminates May 25, 2003)             |   | 47,000                          |       | 9.000                    | %          | 6.510                      | %          | 2,597                            |      | **–** |   | 2,597 |   | 916 |   |
| Fleet Bank (terminates May 25, 2003)           |   | 94,000                          |       | 9.000                    | %          | 5.810                      | %          | 4,654                            |      | **–** |   | 4,654 |   | 916 |   |
| Union Bank (terminates June 5, 2003)           |   | 96,000                          |       | 9.000                    | %          | 5.480                      | %          | 3,779                            |      | **–** |   | 3,779 |   | 1,341 |   |
| PNC Bank (terminates June 6, 2003)             |   | 94,000                          |       | 9.000                    | %          | 5.860                      | %          | 4,287                            |      | **–** |   | 4,287 |   | 1,093 |   |
| Union Bank (terminates June 5, 2003)           |   | 46,000                          |       | 9.000                    | %          | 6.100                      | %          | 2,231                            |      | **–** |   | 2,231 |   | **–** |   |
| (**) Swaption:                                 |   |                            |       |                     |       |                       |       |                             |      |   |   |   |   |   |   |
| TD Securities (terminates March 15, 2008)      |   | 131,016                         |       | **–**               |       | **–**                 |       | 11,249                           |      | **–** |   | 11,249 |   | **–** |   |
|                                           |   | 760,016                         |       |                     |       |                       |       | 46,985                           |      | **–** |   | 46,985 |   | 14,866 |   |
| Other financial instruments                    |   | **–**                      |       | **–**               |       | **–**                 |       | **–**                       |      | 7,374 |   |   |   | 7,374 |   |
| Other long-term liabilities                    |   | **–**                      |       | **–**               |       | **–**                 |       | 6,843                            |      | 6,748 |   | 6,843 |   | 6,748 |   |
| Total financial liabilities                    |   | $                               | 1,012,016  |                     |       |                       |       |                             | $         | 1,678,612 |   | $ | 1,489,907 |   | $ | 1,500,616 |   | $ | 1,412,566 |   |

 

----

(*) During 2000, the Companyentered into an interest rate instrument (“Flooridor”). The Flooridor does notqualify for hedge accounting treatment under SFAS No. 133 and as such isrecorded in the balance sheet at fair value. The related changes in fair value are included in the statement ofoperations.

 

(**)Rural Cellular Corporation has $125 million in subordinated debt that wasissued in May 1998 and matures in May 2008.  The $8.7 million value of an embedded calloption within the subordinated debt was monetized in March 2001 resulting in aswaption.  The swaption qualifies forhedge accounting treatment under SFAS 133.

 

F-14

----

 

AtDecember 31, 2001, RCC has interest rate swap and collar agreements coveringdebt with a notional amount of $629.0 million to effectively change theinterest on the underlying debt from a variable rate to a fixed rate for theterm of the agreements. After giving effect to these instruments, over 61% ofRCC's debt was essentially fixed rate debt at December 31, 2001.

 

At thesame time RCC entered into swap agreements with a total notional amount of$252.0 million, RCC also entered into two ‘‘flooridors’’ with an equivalenttotal notional amount in order to further manage our interest expense. RCC paidthe counterparty $1.2 million to enter into the flooridors. Under theflooridors, if, as of a quarterly reference date, LIBOR is less than 7.35% butgreater than 6.85%, the counterparty is required to make a quarterly paymentequal to the difference between LIBOR and 7.35% on the notional amount of$252.0 million. If, as of a quarterly reference date, LIBOR is less than 6.85%,the counterparty is required to make a quarterly payment equal to 0.50% on thetotal notional amount. If LIBOR is equal to or greater than 7.35%, neitherparty is required to make a payment. The flooridors terminate on May 12, 2003.The flooridor does not qualify for hedge accounting, all adjustments to fairvalue are recognized in earnings.

 

As required by SFAS No. 133 (asamended by SFAS No. 137 and No. 138), “Accounting for Derivative Instrumentsand Hedging Activities” (“SFAS No. 133”), the Company must record in itsbalance sheet, either as an asset or a liability, the financial instruments'fair market value.  In addition, SFASNo. 133 requires that changes in the fair value of derivatives will either beoffset against the change in the fair value of the hedged assets or liabilitiesor recognized in accumulated other comprehensive loss until the hedged item isrecognized in earnings. The ineffective portion of a derivative’s change infair value will be immediately recognized in earnings. SFAS No. 133, asamended, was effective January 1, 2001 for the year ended December 31, 2001.The adoption of SFAS No. 133 has not significantly altered the Company’shedging strategies; however, its application may increase the volatility ofinterest expense and other comprehensive income (loss).

 

Because LIBOR rates havedeclined subsequent to the inception of the Company’s swaps and collars, theirrespective market valuations have decreased. Therefore, as required by SFAS No.133, this decline in market valuation is reflected in the financial statementsby the increase in the derivative financial instrument liabilities togetherwith adjustments to interest expense.

 

The following table sets forththese adjustments for 2001.

 
|                            |   | **Prior to  SFAS   No. 133 Adjustment** |    | **SFAS No.  133 Adoption (January1, 2001)** |       | **SFAS No.  133 Adjustment** |       | **As  Reported** |   |
|---------------------------------|--------|-----------------------------------------|---------|---------------------------------------------|------------|------------------------------|------------|------------------|--------|
|                            |   | **(In  thousands)**                     |    |
| *Statement of Operations Data:* |   |                                    |    |                                        |       |                         |       |             |   |
| Interest expense, net           |   | $                                       | 114,009 |                                        | **–** |                         | $          | 1,263            |   | $ | 115,272 |   |
| Cumulative effect adjustment    |   | **–**                              |    | $                                           | (137       | )                            | **–** |             | $      | (137 | ) |
|                                 |        |                                         |         |                                             |            |                              |            |                  |        |  |  |  |  |  |  |

 
| ***Balance Sheet Data:***                                                 |                               | **At  December 31,  2000** |   | **SFAS No.  133 Adoption on January 1, 2001** |   | **SFAS No.  133   Adjustment   for  year   ended   December 31,   2001** |   | **As**  |   |
|---------------------------------------------------------------------------|------------------------------------|---------------------------------|--------|-----------------------------------------------|--------|-------------------------------------------------------------------------------|--------|---------|--------|
| **prior to  SFAS   No. 133   adjustment**                                 | **Reported  at December 31, 2001** |
| ASSETS:                                                                   |                               |                            |   |                                          |   |                                                                          |   |    |   |
| Derivative financial  instruments included in other current   assets |                               | $                               | 1,019  |                                          | $      | 1,621                                                                         |   | $       | (942   | ) | $ | 1,698 |   |
| LIABILITIES:                                                              |                               |                            |   |                                          |   |                                                                          |   |    |   |
| Derivative financial  instruments included in long— term liabilities |                               | $                               | 8,720  |                                          | $      | 14,867                                                                        |   | $       | 23,398 |   | $ | 46,985 |   |
| SHAREHOLDERS’ (DEFICIT) EQUITY:                                      |                               |                            |   |                                          |   |                                                                          |   |    |   |
| Accumulated other comprehensive  loss                                     |                               | **–**                      |   | $                                             | (5,917 | )                                                                             | $      | (24,660 | )      | $ | (30,577 | ) |

 

*See footnote 12 of the Notes to ConsolidatedFinancial Statements regarding events subsequent to December 31, 2001.*

 

F-15

----

 

**6. Preferred Securities:**

 

The Company has issued thefollowing preferred stock with liquidation preferences of $1,000 per share:

 
|                                              |   | **Mandatory Redemption Date** |   | **Dividend   rate per annum** |   | **Conversion price to common   stock** |   | **Other features, rights, preferences and powers** |       | **Number of shares originally issued** |    | **Shares distributed as dividends through   Dec. 31, 2001** |   | **Accrued dividends at Dec.   31, 2001 (In thousands)** |   |
|---------------------------------------------------|--------|-------------------------------|--------|-------------------------------|--------|----------------------------------------|--------|----------------------------------------------------|------------|----------------------------------------|---------|-------------------------------------------------------------|--------|--------------------------------------------------------------|--------|
| Senior   Exchangeable Preferred Stock             |   | 05/15/2010                    |   | 11.375                        | %      | —                                 |   | Non-Voting                                         |       | 150,000                                |    | 65,373                                                      |   | $                                                            | 3,062  |   |
|                                              |   |                          |   |                          |   |                                   |   |                                               |       |                                   |    |                                                        |   |                                                         |   |   |
| Junior   Exchangeable Preferred Stock             |   | 02/15/2011                    |   | 12.250                        | %      | —                                 |   | Non-Voting                                         |       | 140,000                                |    | 32,901                                                      |   | $                                                            | 2,648  |   |
|                                              |   |                          |   |                          |   |                                   |   |                                               |       |                                   |    |                                                        |   |                                                         |   |   |   |
| Class M   Voting Convertible Preferred Stock |   | 04/03/2012                    |   | 8.000                         | %      | $                                      | 53.000 |                                               | Voting     |                                   | 110,000 |                                                        | — |                                                         | $      | 15,400 |   |
|                                              |   |                          |   |                          |   |                                   |   |                                               |       |                                   |    |                                                        |   |                                                         |   |   |   |
| Class T Convertible Preferred Stock               |   | 04/03/2020                    |   | 4.000                         | %      | $                                      | 50.631 |                                               | Non-Voting |                                   | 7,541   |                                                        | — |                                                         | $      | 527 |   |
| Total                                             |   |                          |   |                          |   |                                   |   |                                               |       | 407,541                                |    | 98,274                                                      |   | $                                                            | 21,637 |   |

 

Preferred security balancesheet reconciliation (in thousands):

 
|                                                                    |   | **As of  December 31, 2001** |    |
|-------------------------------------------------------------------------|--------|------------------------------|---------|
| Preferred securities originally issued                                  |   | $                            | 407,541 |   |
| Preferred dividends issued (Junior and  Senior)                         |   | 98,274                       |    |
| Accrued long-term preferred security  dividends   (Class M and Class T) |   | 15,927                       |    |
| Unamortized issuance costs                                              |   | (12,906                      | )       |
| Net preferred securities                                                |   | $                            | 508,836 |   |

 

Dividends on the SeniorExchangeable Preferred Stock are cumulative, payable quarterly, and may bepaid, at the Company’s option, on any dividend payment date occurring on orbefore May 15, 2003, either in cash or by the issuance of additional shares ofSenior Exchangeable Preferred Stock having an aggregate liquidation preferenceequal to the amount of such dividends. Thereafter, all dividends will be payable in cash only.

 

Dividends on the JuniorExchangeable Preferred Stock are cumulative, are payable quarterly, and may bepaid, at the Company’s option, on any dividend payment date occurring on orbefore February 15, 2005, either in cash or by the issuance of additionalshares of Junior Exchangeable Preferred Stock having an aggregate liquidationpreference equal to the amount of such dividends.  Thereafter, all dividends will be payable in cash only.

 

F-16

----

 

Dividends on the Class MPreferred Stock are cumulative and accrue at 8% per annum and are payable uponredemption or upon liquidation of the Company. The Class M preferred stock is convertible into the Company’s Class Acommon stock at $53.00 per share subject to certain adjustments.  Dividends are not payable if the shares areconverted.

 

In order to comply with the FCCrules 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”) with a par value of $1,000 per share on March31, 2000 in exchange for 43,000 shares of Class A Common Stock and 105,940shares of Class B Common Stock owned by TDS. TDS or the Company can convert theClass T preferred stock into the original number of shares of Class A or ClassB Common Stock in the future if ownership by TDS of the Common Stock would thenbe permissible under FCC rules. Dividends on the Class T preferred stock arecumulative and have a fixed coupon rate of 4% per annum and are payable inApril 2020.  Dividends are not payableif the shares are converted.

 

The Senior ExchangeablePreferred Stock is senior to all classes of junior preferred stock and commonstock of the Company with respect to dividend rights and rights on liquidation,winding-up and dissolution of the Company. The Junior Exchangeable Preferred Stock is junior to the SeniorExchangeable Preferred Stock and Class T Convertible Preferred Stock and seniorto the Class M Convertible Preferred Stock and common stock with respect todividend rights and rights on liquidation, winding-up and dissolution of theCompany. Shares of the Senior and Junior Exchangeable Preferred Stock and ClassT Convertible Preferred Stock are non-voting, except as otherwise required bylaw and as provided in their respective Certificates of Designation.

** **

**7. Shareholders’ (Deficit) Equity:**

 

***AuthorizedShares***

 

The Company has 300,000,000shares of authorized capital stock consisting of 200,000,000 shares of Class Acommon stock, 10,000,000 shares of Class B common stock and 90,000,000undesignated shares.

 

***CommonStock Rights***

 

Class A common shareholders areentitled to one vote for each share owned while Class B common shareholders areentitled to ten votes for each share owned. Each share of Class B common stock may at any time be converted into oneshare of Class A common stock at the option of the holder.  All issued Class B common shares may also beconverted into an equivalent number of Class A common shares upon theaffirmative vote of not less than 66 2/3% of the then issued Class B commonshares.  Further, Class B common sharesare automatically converted to an equal number of Class A common shares if theyare transferred to anyone who is not an affiliate of the transferringshareholder of the Company.

 

The following table showscertain information relating to the RCC’s outstanding shares and voting rightsas of March 20, 2002:

 
| **Class of Stock**          |   | **Shares   outstanding** |   | **Voting rights   per share** |   | **Total voting rights**

**per class** |   |
|-----------------------------|--------|--------------------------|--------|-------------------------------|--------|----------------------------------------|--------|
| Class A  common stock       |   | 11,193,622               |   | 1                             |   | 11,193,622                             |   |
| Class B common stock        |   | 727,416                  |   | 10                            |   | 7,274,160                              |   |
| Class M preferred stock (1) |   | 2,075,471                |   | 1                             |   | 2,075,471                              |   |
| Total                       |   | 13,996,509               |   |                          |   | 20,543,253                             |   |

 

----

(1)Reflecting the conversion of Class M Preferred Stock into common stock at  $53 per share 

 

F-17

----

 

On April 30, 1999 RCC adoptedshareholder 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 purchase1/100th of a newly authorized preferred share that is essentiallyequivalent to one share of Class A Common Stock and each holder of Class BCommon Stock the right to purchase 1/100th of a newly authorizedpreferred share, essentially equivalent to one share of Class B CommonStock.  The exercise price for both theClass A rights and the Class B rights is $120 per right.

 

The rights become exercisableby existing shareholders only following the acquisition by a buyer, withoutprior approval of the Company’s board of directors, of 15% or more of theoutstanding Common Stock, Class A and Class B, or following the announcement ofa tender offer for 15% of the outstanding Common Stock.  If a person acquires 15% or more of theCompany’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 BCommon Stock, as appropriate, having a market value of twice the right’sexercise price, or, in effect, at a 50% discount from the then current marketvalue.  If the Company were acquired ina merger or similar transaction after a person acquires 15% of the Company’soutstanding Common Stock, without prior approval of the board of directors,each right would entitle the holder (other than the acquirer) to purchaseshares of the acquiring company having a market value of twice the exerciseprice of the right, or, in effect, at a discount of 50%. Until the acquisitionby any person of 15% or more of the Company’s Common Stock, the rights can beredeemed by the board of directors for $.001 per right.

 

***StockCompensation Plans***

 

The stock compensation plan(the “Plan”) for employees authorizes the issuance of up to 2,400,000 shares ofClass A common stock in the form of stock options, stock appreciation rights orother stock-based awards.  The Planprovides that the exercise price of any option shall not be less than 85% ofthe 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 becomeexercisable as determined by the Board of Directors or a stock optioncommittee.

 

The stock option plan fornonemployee directors authorizes the issuance of up to 210,000 shares of ClassA common stock.  The plan provides thatthe option price shall not be less than the fair market value of the Class Acommon stock outstanding on the date of grant. The options vest and become exercisable one year following the date ofgrant and expire five years thereafter.

 

The employee stock purchaseplan authorizes the issuance of 250,000 shares of Class A common stock.Employees who satisfy certain length of service and other criteria arepermitted to purchase shares at 85% of the fair market value of the Class A commonstock on January 1 or December 31 of each year, whichever is lower.

 

F-18

----

 

Options outstanding as ofDecember 31, 2001 have exercise prices ranging between $8.75 and $79.25.Information related to stock options is as follows:

 
|                                            |   | **2001**   |   | **2000**                            |   | **1999**   |      |
|-------------------------------------------------|--------|------------|--------|-------------------------------------|--------|------------|-----------|
|                                            |   | **Shares** |   | **Weighted Average Exercise Price** |   | **Shares** |      | **Weighted Average Exercise Price** |   | **Shares** |   | **Weighted Average Exercise Price** |   |
| Outstanding,  beginning of period               |   | 1,266,422  |   | $                                   | 17.18  |       | 1,046,547 |   | $ | 12.36 |   | 872,700 |   | $ | 11.17 |   |
| Granted                                         |   | 477,006    |   | 30.68                               |   | 299,950    |      | 70.86 |   | 323,250 |   | 14.53 |   |
| Exercised                                       |   | (70,844    | )      | 11.05                               |   | (55,375    | )         | 10.92 |   | (129,903 | ) | 9.95 |   |
| Canceled                                        |   | (83,850    | )      | 46.90                               |   | (24,700    | )         | 40.66 |   | (19,500 | ) | 10.99 |   |
|                                            |   |       |   |                                |   |       |      |   |   |   |   |   |   |   |   |   |
| Outstanding, end of period                      |   | 1,588,734  |   | $                                   | 26.78  |       | 1,266,422 |   | $ | 17.18 |   | 1,046,547 |   | $ | 12.36 |   |
|                                            |   |       |   |                                |   |       |      |   |   |   |   |   |   |   |   |   |
| Exercisable, end of period                      |   | 700,781    |   | $                                   | 18.33  |       | 488,052   |   | $ | 12.28 |   | 317,557 |   | $ | 11.15 |   |
| Weighted  average fair value of options granted |   |       |   | $                                   | 24.67  |       |      |   | $ | 55.94 |   |   |   | $ | 10.94 |   |

 

The following table summarizesinformation concerning currently outstanding and exercisable options:

 
| **Exercise Price Range** |   | **Number   Outstanding** |   | **Weighted Average Remaining Contractual Life** |   | **Weighted Average Exercise Price** |   | **Number   Exercisable** |    | **Weighted Average Exercise Price** |   |
|--------------------------|--------|--------------------------|--------|-------------------------------------------------|--------|-------------------------------------|--------|--------------------------|---------|-------------------------------------|--------|
| $ 0.00 –  $9.99     |   | 334,953                  |   | 5                                               |   | $                                   | 8.98   |                     | 295,953 |                                | $      | 9.00 |   |
| $ 10.00 –  $19.99   |   | 531,975                  |   | 6                                               |   | $                                   | 13.57  |                     | 297,875 |                                | $      | 13.96 |   |
| $ 20.00 –  $29.99   |   | 280,000                  |   | 9                                               |   | $                                   | 27.38  |                     | 5,000   |                                | $      | 27.38 |   |
| $ 30.00 –  $39.99   |   | 194,656                  |   | 9                                               |   | $                                   | 35.35  |                     | 29,123  |                                | $      | 35.30 |   |
| $ 40.00 –  $49.99   |   | 20,000                   |   | 8                                               |   | $                                   | 43.25  |                     | 8,000   |                                | $      | 43.25 |   |
| $ 50.00 –  $59.99   |   | 21,100                   |   | 9                                               |   | $                                   | 53.69  |                     | 8,220   |                                | $      | 55.30 |   |
| $ 60.00 –  $69.99   |   | 36,750                   |   | 4                                               |   | $                                   | 68.25  |                     | 36,750  |                                | $      | 68.25 |   |
| $ 70.00 –  $80.00   |   | 169,300                  |   | 9                                               |   | $                                   | 78.37  |                     | 19,860  |                                | $      | 78.11 |   |
| $ 0.00 –  $80.00    |   | 1,588,734                |   | 8                                               |   | $                                   | 26.78  |                     | 700,781 |                                | $      | 18.33 |   |

 

The Company accounts for stockoptions under Accounting Principles Board Opinion No. 25, under which nocompensation cost has been recognized. Had compensation cost for the Company’s plans been determined consistentwith SFAS No. 123, “Accounting for Stock-Based Compensation,” the Company’sresults of operations and net loss per share would have been adjusted to thefollowing pro forma amounts:

 
|                                  |   | **Years  ended December 31,**                  |    |
|---------------------------------------|--------|------------------------------------------------|---------|
|                                  |   | **2001**                                       |    | **2000** |   | **1999** |   |
|                                  |   | **(in  thousands, except for per share data)** |    |
| Net loss applicable to common shares: |   |                                           |    |   |   |   |   |
| As reported                           |   | $                                              | (87,559 | ) | $ | (83,334 | ) | $ | (11,062 | ) |
| Pro forma                             |   | (89,226                                        | )       | (84,782 | ) | (12,510 | ) |
| Basic and diluted net loss per share: |   |                                           |    |   |   |   |   |
| As reported                           |   | $                                              | (7.38   | ) | $ | (7.24 | ) | $ | (1.22 | ) |
| Pro forma                             |   | $                                              | (7.52   | ) | $ | (7.37 | ) | $ | (1.38 | ) |

 

F-19

----

 

The fair value of each optiongrant is estimated on the date of the grant using the Black-Scholesoption-pricing model with the following weighted average assumptions used forgrants in 2001, 2000 and 1999: expected volatility of 52.53%, 63.47% and54.78%, respectively; risk-free interest rates of 8.5%; expected life of 10years and no expected dividend yield. The per share weighted average fair value of options granted in 2001,2000 and 1999 was $24.67, $55.94 and $10.94 per share, respectively.

 

**8. Income Taxes:**

The components of the Company’sincome tax provision are as follows (in thousands):

 
|     |   | **Years ended December 31,** |   |
|----------|--------|------------------------------|--------|
|     |   | **2001**                     |   | **2000** |   | **1999** |   |
| Current: |   |                         |   |   |   |   |   |
| Federal  |   | $                            | – |   | $ | – | ** ** | **$** | – | ** ** |
| State    |   | –                       |   | – | ** ** | **37** | ** ** |
|     |   | –                       |   | – | ** ** | **37** | ** ** |
| Deferred |   | –                       |   | – | ** ** | – | ** ** |
|     |   | $                            | – |   | $ | – | ** ** | **$** | **37** | ** ** |

 

The Company’s income taxprovision for the year ended December 31, 1999 relates to franchise fees forstates in which the Company has operations.

 

The income tax effect of theitems that create deferred income tax assets and liabilities are as follows (Inthousands):

** **

|                             |   | **December 31,** |       |
|----------------------------------|--------|------------------|------------|
|                             |   | **2001**         |       | **2000** |   |
| Deferred income tax assets:      |   |             |       |   |   |
| Operating loss carryforwards     |   | **$**            | **73,487** |   | $ | 52,116 |   |
| Tax credit carryforwards         |   | **85**           |       | 85 |   |
| Temporary differences:           |   |             |       |   |   |
| Allowance for doubtful accounts  |   | **1,467**        |       | 769 |   |
| Derivatives                      |   | **765**          |       | – |   |
| Other                            |   | **3,265**        |       | 2,407 |   |
| Valuation allowance              |   | **(19,005**      | **)**      | (19,242 | ) |
| Total deferred income tax assets |   | **60,064**       |       | 36,135 |   |
| Deferred income tax liabilities: |   |             |       |   |   |
| Depreciation                     |   | **(20,555**      | **)**      | (12,721 | ) |
| Intangible assets                |   | **(37,545**      | **)**      | (21,714 | ) |
| Other                            |   | **(1,964**       | **)**      | (1,700 | ) |
| Net deferred income tax asset    |   | **$**            | –     |   | $ | – |   |

 

In assessing the realizabilityof deferred tax assets, management considers whether it is more likely than notthat some portion or all of the deferred tax assets will not be realized.  The ultimate realization of deferred taxassets is dependent upon the generation of future taxable income during theperiods in which those temporary differences become deductible.  Management has considered the scheduledreversal of deferred tax liabilities and tax planning strategies in making thisassessment.  Based upon the assessment,management has established a valuation allowance for net deferred income taxassets not expected to be offset by deferred income tax liabilities due to theuncertainty of the realization of future tax benefits.

 

F-20

----

 

As of December 31, 2001, theCompany had tax operating loss carryforwards of approximately $193.4 millionavailable to offset future income tax liabilities.  These carryforwards expire in the years 2006 through 2021.  The Tax Reform Act of 1986 containsprovisions that may limit the availability and timing of usage of net operatingloss carryforwards in the event of certain changes in the ownership of theCompany’s Common Stock.

 

**9. Commitments and Contingencies:**

 

***EmploymentAgreements***

 

The Company has employmentagreements with certain executive officers with terms of three years.  These agreements provide for payment ofamounts up to three times their annual compensation if there is a terminationof their employment as a result of change in control of the Company, as definedin the agreements.  The maximumcontingent liability under these agreements was $5.2 million at December 31,2001.

 

***Legal and Regulatory Matters***

 

The Company is subject tovarious legal and regulatory matters arising in the normal course ofbusiness.  Management does not believeany of these matters will have a significant effect on the Company and itsfinancial position or results of operations.

 

***Leases***

 

The Company leases office spaceand real estate under noncancelable operating leases.  Future minimum payments under these leases as of December 31,2001 are as follows:

 

|       |   | **Amount**         |   |
|------------|--------|--------------------|--------|
| **Year**   |   | **(in thousands)** |   |
| 2002       |   | $                  | 7,142  |   |
| 2003       |   | 5,410              |   |
| 2004       |   | 4,023              |   |
| 2005       |   | 2,716              |   |
| 2006       |   | 1,476              |   |
| Thereafter |   | 3,623              |   |
| Total      |   | $                  | 24,390 |   |

 

Under the terms of the leaseagreements, the Company also is responsible for certain operating expenses andtaxes.  Total rent expense of $8.3million, $5.8 million and $3.3 million was charged to operations for the yearsended December 31, 2001, 2000 and 1999.

 

**10. Defined Contribution Plan:**

 

The Company has a definedcontribution savings and profit-sharing plan for employees who meet certain ageand service requirements.  Under thesavings portion of the plan, employees may elect to contribute a percentage oftheir salaries to the plan, with the Company contributing a matching percentageof the employees’ contributions.  Underthe profit-sharing portion of the plan, the Company contributes a percentage ofemployees’ salaries.  Contributionscharged to operations for the years ended December 31, 2001, 2000 and 1999 were$728,000, $662,000 and $435,000, respectively. The percentages the Company matches under the savings portion of theplan and contributes under the profit-sharing portion of the plan aredetermined annually by the Company’s Board of Directors.

 

F-21

----

 

**11. Supplemental Cash Flow Information:**

 
|                                      |   | **Years ended December 31,** |        |
|-------------------------------------------|--------|------------------------------|-------------|
|                                      |   | **2001**                     |        | **2000** |   | **1999** |   |
|                                      |   | **(in thousands)**           |        |
| **Cash paid for:**                        |   |                         |        |   |   |   |   |
| Interest                                  |   | **$**                        | **116,961** |   | $ | 76,640 |   | $ | 25,488 |   |
| Income taxes                              |   | **–**                   |        | **–** |   | 46 |   |
| **Noncash financing transactions:**       |   |                         |        |   |   |   |   |
| Preferred Security Dividends paid in kind |   | **$**                        | **53,644**  |   | $ | 44,081 |   | $ | 15,912 |   |

 

**12. Events Subsequent to December 31, 2001:**

 

***93/4 % Senior Subordinated Notes*** - On January 16,2002, the Company issued $300 million of aggregate principal amount 9 3⁄4% seniorsubordinated notes due 2010. The net proceeds from the sale were used to paydown existing debt. 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 areredeemable, in whole or in part, at the option of the Company, at any time onor after January 15, 2006.  In addition,at any time prior to January 15, 2005, the Company may redeem up to 35% of theaggregate principal amount of 9 3⁄4% senior subordinated notes with the net cashproceeds of a qualifying event at a price equal to 109.75% of the aggregate principalamount thereof, plus accrued and unpaid interest, if any, to the date ofredemption; provided that at least 65% of the aggregate principal amount ofnotes issued under the indenture (including additional notes but without takinginto account notes that are issued in exchange for other notes under aregistration rights agreement) remains outstanding immediately following suchredemption.

 

Within 30days after the occurrence of a change of control, the Company will be requiredto make an offer to purchase all outstanding 9 3⁄4% senior subordinated notes ata price equal to 101% of the aggregate principal amount thereof, plus accruedand unpaid interest, if any, to the date of purchase. As defined, the 9 3⁄4%senior subordinated notes are unsecured senior subordinated obligations of theCompany and will be subordinated in right of payment to future seniorindebtedness of the Company and effectively subordinated to all obligations ofthe Company’s subsidiaries.

 

F-22

----

 

The table below reflects theapplication to the credit facility of the net proceeds from the sale of the 93⁄4% senior subordinated notes;

 
| **Credit Facility** |   | **(In thousands)** |    |
|---------------------|--------|--------------------|---------|
| Revolver            |   | $                  | 139,658 |   |
| Term A              |   | 67,222             |    |
| Term B              |   | 35,478             |    |
| Term C              |   | 35,479             |    |
| Term D              |   | 11,821             |    |
| Total               |   | $                  | 289,658 |   |

 

As of January 14, 2002,maturities of the credit facility, the 9 5/8% senior subordinated notes and the9 3⁄4% Senior Subordinated Notes are as follows:

 
| **Year**   |   | **Credit Facility** |    | **9 5/8%   Senior   Subordinated   Notes** |   | **9 3⁄4%   Senior   Subordinated   Notes** |   | **Total** |    |
|------------|--------|---------------------|---------|--------------------------------------------|--------|-----------------------------------------------|--------|-----------|---------|
|       |   | **(in thousands)**  |    |
| 2002       |   | $                   | –  |                                       | $      | –                                        |   | $         | –  |   | $ | – |   |
| 2003       |   | 37,001              |    | –                                     |   | –                                        |   | 37,001    |    |
| 2004       |   | 62,808              |    | –                                     |   | –                                        |   | 62,808    |    |
| 2005       |   | 74,035              |    | –                                     |   | –                                        |   | 74,035    |    |
| 2006       |   | 89,754              |    | –                                     |   | –                                        |   | 89,754    |    |
| Thereafter |   | 550,255             |    | 125,000                                    |   | 300,000                                       |   | 975,255   |    |
| Total      |   | $                   | 813,853 |                                       | $      | 125,000                                       |   | $         | 300,000 |   | $ | 1,238,853 |   |

 

After thecompletion of the 9 3⁄4% senior subordinated notes  offering, the Company had $262.9 million available under itscredit facility. In connection with the offering of the 9 3⁄4% seniorsubordinated notes, the Company amended the terms of its credit facility. Theamendments:

 

•              permitted the Company to issue the 9 3⁄4% seniorsubordinated notes,

•              allowed the Company to repay the term loan andrevolving loan without reducing borrowing availability under the revolver,

•              changed the total leverage ratio, the ratio ofannualized operating cash flow to interest expense, and pro forma debt ratio toreflect the offering and to provide the Company with greater flexibility,

•              decreased the permitted senior leverage ratio,

•              made some technical changes to the restrictedpayment covenant and the description of permitted indebtedness,

•              expanded the kinds of events that would triggerthe change of control default, and

•              remove a requirement to sell some of theCompany’s assets.

 

InJanuary 2002, in conjunction with the issuance of the 9 3⁄4% senior subordinatednotes and the resulting higher proportion of fixed rate debt as compared tofloating rate debt, RCC reviewed its derivatives portfolio. After this review,the Company entered into, at market, two reverse swap hedging transactions withcombined notional value of $135 million effectively increasing the proportionof RCC’s floating rate debt. In the reverse swaps, the Company agreed toreceive a fixed rate of 9.75% in exchange for paying a floating rate plus aspread over LIBOR.  If LIBOR plus theapplicable spread is less than 9.75%, the Company receives a payment from thecounterparty for the difference between the two rates on the notional amount.  If LIBOR plus the applicable spread is morethan 9.75%, the Company will make a payment to the counterparty based on thedifference in rates on the notional amount.

 

F-23

----

 

The following financialinstruments were entered into in January 2002:

 
| **Instrument**   |   | **Notional   Amount  (in thousands)** |    | **RCC  Receives** |   | **RCC  Pays**               |                        | **Effective  Date** |              | **Termination   Date** |
|------------------|--------|---------------------------------------|---------|-------------------|--------|-----------------------------|-----------------------------|---------------------|-------------------|------------------------|
| Reverse  Swap;   |   |                                  |    |              |   |                        |                        |                |              |                   |
| Fleet Bank       |   | $                                     | 75,000  |              | 9.75%  |                        | LIBOR +  630.0 basis points |                | January 15,  2002 |                   | January 15,  2010 |
| Dresdner Bank AG |   | 60,390                                |    | 9.75%             |   | LIBOR +  622.5 basis points |                        | January 17,  2002   |              | January 15,  2010      |
|             |   | $                                     | 135,390 |              |   |                        |                        |                |              |                   |   |

 

In conjunction with enteringinto the reverse swaps, RCC unwound two fixed pay swaps with a total notionalamount of $126 million and one collar with a notional amount of $94 million inJanuary 2002. There was no disbursement of cash involved in the terminationbecause the cost involved in unwinding the fixed pay swaps and the collar, asreflected by the negative market value of these financial instruments,effectively increased the spread over LIBOR on the reverse swaps entered intoJanuary 2002. In addition, the cost involved in unwinding the fixed pay swapsand the collar is being amortized over the original lives of the instruments.

 

The following financialinstruments were unwound in January 2002:

 
|                                             |   | **Interest rate range** |   |                      |   |
|--------------------------------------------------|--------|-------------------------|--------|---------------------------|--------|
| **Instrument**                                   |   | **Not to exceed**       |   | **Not to be less   than** |   | **Notional   Amount** |   | **Negative market valuation plus accrued interest** |   |
|                                             |   |                    |   |                      |   | **(in thousands)** |   |
| Collar;  Fleet Bank   (unwound January 14, 2002) |   | 9.000                   | %      | 5.810                     | %      | $ | 94,000 |   | $ | 4,928 |   |
|                                             |   |                    |   |                      |   |   |   |   |   |
| Swap; Fleet  Bank   (unwound January 14, 2002)   |   | 6.530                   | %      | 6.530                     | %      | 42,000 |   | 3,445 |   |
| Swap; Union  Bank   (unwound January 17, 2002)   |   | 7.591                   | %      | 7.591                     | %      | 84,000 |   | 6,176 |   |
|                                             |   |                    |   |                      |   | 126,000 |   | 9,621 |   |
|                                             |   |                    |   |                      |   | $ | 220,000 |   | $ | 14,549 |   |

 

At January 17, 2002, aftergiving effect to these changes in financial instruments and the 9 3⁄4% seniorsubordinated notes, approximately 56% of RCC's debt is essentially fixed ratedebt as compared to approximately 61% at December 31, 2001.

 

F-24

----

 

**REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS**

 

To Rural Cellular Corporation:

 

We haveaudited, in accordance with auditing standards generally accepted in the UnitedStates, the consolidated financial statements included in Rural CellularCorporation’s Form 10-K and have issued our report thereon dated February 1,2002.  Our audit was made for thepurpose of forming an opinion on those statements taken as a whole.  The schedule listed in the index ofconsolidated financial statements is the responsibility of the Company’smanagement and is presented for purposes of complying with the Securities andExchange Commission’s rules and is not part of the basic consolidated financialstatements.  This schedule has beensubjected to the auditing procedures applied in the audits of the basicconsolidated financial statements and, in our opinion, fairly states in allmaterial respects the financial data required to be set forth therein inrelation to the basic consolidated financial statements taken as a whole.

 

Arthur Andersen LLP

 

Minneapolis, Minnesota,

February 1, 2002

 

S-1

----

 

**RURAL CELLULARCORPORATION AND SUBSIDIARIES**

**Schedule II -Valuation and Qualifying Accounts**

 

***Allowancefor Uncollectible Accounts:***

*** ***
|                          |   | **Years Ended December 31,** |   |
|-------------------------------|--------|------------------------------|--------|
|                          |   | **2001**                     |   | **2000** |   | **1999** |   |
|                          |   | **(in thousands)**           |   |
| Balance, at beginning of year |   | $                            | 2,385  |   | $ | 894 |   | $ | 1,555 |   |
| Additions charged to income   |   | 16,291                       |   | 9,440 |   | 3,029 |   |
| Write-offs                    |   | (14,660                      | )      | (7,949 | ) | (3,690 | ) |
| Balance, at end of year       |   | $                            | 4,016  |   | $ | 2,385 |   | $ | 894 |   |

 

S-2

----

 

**EXHIBIT INDEX**

 
| Number   |   | Description                                                                                                                                                                                                                                                                                                                                                                      |   |   |
|----------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
| 3.1(a)   |   | Articles of  Incorporation                                                                                                                                                                                                                                                                                                                                                       |   | [1]    |
| 3.1(b)   |   | Amendment to  Articles of Incorporation, effective March 24, 2000                                                                                                                                                                                                                                                                                                                |   | [1]    |
| 3.2(a)   |   | Amended and  Restated Bylaws                                                                                                                                                                                                                                                                                                                                                     |   | [1]    |
| 3.2(b)   |   | Amendment to  Amended and Restated Bylaws, effective March 22, 2000                                                                                                                                                                                                                                                                                                              |   | [1]    |
| 4.1      |   | Indenture  dated May 14, 1998 between Rural Cellular Corporation, as Issuer, and Norwest  Bank Minnesota, N.A., as Trustee, with respect to the 9 5/8% Senior  Subordinated Notes Due 2008, including form of the 9 5/8% Senior  Subordinated Notes Due 2008                                                                                                                |   | [2]    |
| 4.2      |   | Indenture  dated January 16, 2002 between Rural Cellular Corporation, as Issuer, and  Wells Fargo Bank Minnesota, N.A., as Trustee, with respect to the 9 3⁄4% Senior  Subordinated Notes Due 2010, including form of the 9 3/4% Senior Subordinated  Notes Due 2010                                                                                                          |   | **     |
| 4.3      |   | Certificate  of Designation of 11 3/8% Senior Exchangeable Preferred Stock                                                                                                                                                                                                                                                                                                       |   | [2]    |
| 4.4      |   | Certificate  of Designation of 12 1/4% Junior Exchangeable Preferred Stock                                                                                                                                                                                                                                                                                                       |   | [1]    |
| 4.5(a)   |   | Class A  Share Rights Agreement dated April 30, 1999                                                                                                                                                                                                                                                                                                                             |   | [3]    |
| 4.5(b)   |   | Amendment  to the Class A Rights Agreement dated  March 31, 2000                                                                                                                                                                                                                                                                                                            |   | [4]    |
| 4.6(a)   |   | Recapitalization  Agreement dated October 31, 1999 by and between Rural Cellular  Corporation and Telephone and Data Systems, Inc.                                                                                                                                                                                                                                     |   | [5]    |
| 4.6(b)   |   | First  Amendment to Recapitalization Agreement dated December 6, 1999 by and  between Rural Cellular Corporation and Telephone and Data Systems, Inc.                                                                                                                                                                                                                  |   | [5]    |
| 4.6(c)   |   | Second  Amendment to Recapitalization Agreement dated March 31, 2000 by and  between Rural Cellular Corporation and Telephone and Data Systems, Inc.                                                                                                                                                                                                                   |   | [5]    |
| 4.6(d)   |   | Registration  Rights Agreement dated March 31, 2000 by and between Rural Cellular  Corporation and Telephone and Data Systems, Inc.                                                                                                                                                                                                                                    |   | [5]    |
| 4.6(e)   |   | Certificate  of Designation of Voting Power, Preferences and Relative Participating,  Optional and Other Special Rights, Qualifications, and Restrictions of  Class T Convertible Preferred Stock of Rural Cellular Corporation                                                                                                                                             |   | [5]    |
| 4.7(a)   |   | Preferred  Stock Purchase Agreement dated April 3, 2000 among Rural Cellular  Corporation, Madison Dearborn Capital Partners III, L.P., Madison  Dearborn Special Equity III, L.P., Special Advisors Fund I, LLC,  Boston Ventures Limited Partnership V and Toronto Dominion  Investments, Inc. (collectively “Class M Investors”) |   | [5]    |
| 4.7(b)   |   | Certificate  of Designation of Voting Power, Preferences and Relative Participating,  Optional and Other Special Rights, Qualifications and Restrictions of Class M  Redeemable Voting Convertible Preferred Stock of Rural Cellular Corporation                                                                                                                                 |   | [5]    |
| 4.7(c)   |   | Registration  Rights Agreement dated April 3, 2000 among Rural Cellular Corporation  and Class M Investors                                                                                                                                                                                                                                                                  |   | [5]    |
| 10.1(a)  |   | Second  Amended and Restated Loan Agreement dated April 3, 2000 among Rural Cellular  Corporation and certain financial institutions and Toronto Dominion (Texas),  Inc. as administrative agent                                                                                                                                                                                 |   | [6]    |
| 10.1(b)  |   | Third  Amended and Restated Loan Agreement dated June 29, 2000 among Rural Cellular  Corporation and certain financial institutions and Toronto Dominion (Texas),  Inc. as administrative agent                                                                                                                                                                                  |   | [7]    |
| 10.1(c)  |   | First  Amendment to the Third Amended and Restated Loan Agreement dated December 14,  2000 among Rural Cellular Corporation and certain financial institutions and  Toronto Dominion (Texas), Inc. as administrative agent                                                                                                                                                       |   | [8]    |
| 10.1(d)  |   | Second  Amendment to the Third Amended and Restated Loan Agreement dated March 31,  2001 among Rural Cellular Corporation and certain financial institutions and  Toronto Dominion (Texas), Inc., as administrative agent                                                                                                                                                        |   | [9]    |
| 10.1(e)  |   | Third  Amendment to the Third Amended and Restated Loan Agreement dated January 10,  2002, among Rural Cellular Corporation and certain financial institutions and  Toronto Dominion (Texas), Inc., as administrative agent                                                                                                                                                      |   | **     |
| 10.2(a)  |   | Trademark  and Trade Name License Agreements between Cellular 2000, Inc. and North Woods  Cellular Partnership, Northern Lights Cellular Partnership, Great River  Cellular Partnership, Cellular Five Partnership and Heartland Cellular  Partnership                                                                                                                           |   | [10]   |
| 10.2(b)  |   | Assignment  and Assumption Agreements by and between Rural Cellular Corporation and each  partnership                                                                                                                                                                                                                                                                            |   | [10]   |
| *10.3    |   | 1995 Stock  Compensation Plan, as amended to date                                                                                                                                                                                                                                                                                                                                |   | [11]   |
| *10.4    |   | Stock Option  Plan for Nonemployee Directors, as amended to date                                                                                                                                                                                                                                                                                                                 |   | [12]   |
| *10.5(a) |   | Employment  Agreement with Richard P. Ekstrand effective January 22, 1999                                                                                                                                                                                                                                                                                                        |   | [13]   |
| *10.5(b) |   | Amendment to  Employment Agreement with Richard P. Ekstrand effective January 1, 2001                                                                                                                                                                                                                                                                                            |   | [8]    |
| *10.5(c) |   | Second  Amendment to Employment Agreement with Richard P. Ekstrand effective July 24,  2001                                                                                                                                                                                                                                                                                      |   | [14]   |
| *10.5(d) |   | Third  Amendment to Employment Agreement with Richard P. Ekstrand effective August  23, 2001                                                                                                                                                                                                                                                                                     |   | [14]   |
| *10.6(a) |   | Employment  Agreement with Wesley E. Schultz effective January 22, 1999                                                                                                                                                                                                                                                                                                          |   | [13]   |
| *10.6(b) |   | Amendment to  Employment Agreement with Wesley E. Schultz effective January 1, 2001                                                                                                                                                                                                                                                                                              |   | [8]    |
| *10.6(c) |   | Second  Amendment to Employment Agreement with Wesley E. Schultz effective July 24,  2001                                                                                                                                                                                                                                                                                        |   | [14]   |
| *10.6(d) |   | Third  Amendment to Employment Agreement with Wesley E. Schultz effective August 23,  2001                                                                                                                                                                                                                                                                                       |   | [14]   |
| *10.7(a) |   | Employment  Agreement with Ann K. Newhall effective February 6, 1999                                                                                                                                                                                                                                                                                                             |   | [15]   |
| *10.7(b) |   | Amendment to  Employment Agreement with Ann K. Newhall effective January 1, 2001                                                                                                                                                                                                                                                                                                 |   | [8]    |
| *10.7(c) |   | Second  Amendment to Employment Agreement with Ann K. Newhall effective July 24, 2001                                                                                                                                                                                                                                                                                            |   | [14]   |
| *10.7(d) |   | Third  Amendment to Employment Agreement with Ann K. Newhall effective August 23,  2001                                                                                                                                                                                                                                                                                          |   | [14]   |
| *10.8(a) |   | Change of  Control Agreement with Scott Donlea effective January 1, 2001                                                                                                                                                                                                                                                                                                         |   | [8]    |
| *10.8(b) |   | Amendment to  Change of Control Agreement with Scott Donlea effective July 24, 2001                                                                                                                                                                                                                                                                                              |   | [14]   |
| *10.9(a) |   | Change of  Control Agreement with David Del Zoppo effective January 1, 2001                                                                                                                                                                                                                                                                                                      |   | [8]    |
| *10.9(b) |   | Amendment to  Change of Control Agreement with David Del Zoppo effective July 24, 2001                                                                                                                                                                                                                                                                                           |   | [14]   |
| *10.10   |   | Key Employee  Deferred Compensation Plan                                                                                                                                                                                                                                                                                                                                         |   | [16]   |
| *10.11   |   | Retention  Bonus and Severance Benefit Plan 2001                                                                                                                                                                                                                                                                                                                                 |   | [14]   |
| *10.12   |   | Management  Incentive Plan                                                                                                                                                                                                                                                                                                                                                       |   | [17]   |
| 21       |   | Subsidiaries  of Registrant                                                                                                                                                                                                                                                                                                                                                      |   | **     |
| 23       |   | Consent of  Arthur Andersen LLP                                                                                                                                                                                                                                                                                                                                                  |   | **     |
| 99       |   | Arthur  Andersen Engagement Representation                                                                                                                                                                                                                                                                                                                                       |   | **     |

 

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*Indicates management contractor compensatory plan or agreement required to be filed as an exhibit to thisForm.

 

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|  [1] |   | Filed as an  exhibit to Report on Form 10-K for the year ended December 31, 1999 and  incorporated herein by reference.                      |
|-----------|--------|----------------------------------------------------------------------------------------------------------------------------------------------|
|  [2] |   | Filed as an  exhibit to Registration Statement on Form S-4 (SEC No. 333-57677), filed June  25, 1998, and incorporated herein by reference.  |
|  [3] |   | Filed as an  exhibit to Registration Statement on Form 8-A filed May 19, 1999 and  incorporated herein by reference.                         |
|  [4] |   | Filed as an  exhibit to Registration Statement on Form 8-A/A-1 filed April 18, 2000 and  incorporated herein by reference.                   |
|  [5] |   | Filed as an  exhibit to Report on Form 8-K dated April 1, 2000 and incorporated herein by  reference.                                        |
|  [6] |   | Filed as an  exhibit to Report on Form 8-K/A dated April 1, 2000 and incorporated herein  by reference.                                      |
|  [7] |   | Filed as an  exhibit to Report on Form 10-Q for the quarter ended June 30, 2000 and  incorporated herein by reference.                       |
|  [8] |   | Filed as an  exhibit to Report on Form 10-K for the year ended December 31, 2000, and  incorporated herein by reference.                     |
|  [9] |   | Filed as an  exhibit to Report on Form 10-Q/A for the quarter ended March 31, 2001, and  incorporated herein by reference.                   |
| [10]      |   | Filed as an  exhibit to Registration Statement on Form S-1 (Sec. No. 33-80189) filed  December 8, 1995 and incorporated herein by reference. |
| [11]      |   | Filed with  definitive proxy statement for 2000 Annual Meeting on April 7, 2000 and  incorporated herein by reference.                       |
| [12]      |   | Filed as an  exhibit to Report on Form 10-K for the year ended December 31, 1996 and  incorporated herein by reference.                      |
| [13]      |   | Filed as an  exhibit to Report on Form 10-K for the year ended December 31, 1998 and  incorporated herein by reference.                      |
| [14]      |   | Filed as an  exhibit to Report on Form 10-Q/A for the quarter ended September 30, 2001,  and incorporated herein by reference.               |
| [15]      |   | Filed as an  exhibit to Report on Form 10-Q for the quarter ended March 31, 1999 and  incorporated herein by reference.                      |
| [16]      |   | Filed as an  exhibit to Report on Form 10-Q/A for the quarter ended June 30, 2001, and  incorporated herein by reference.                    |
| [17]      |   | Filed with  Proxy Statement for 2001 Annual Meeting on April 9, 2001, and incorporated  herein by reference.                                 |

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**           Filed herewith.

 

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