** **

**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, 2002.** |
|            |   |
| **o**           | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934 for the transition period  from                                            TO                                            .** |
|            |   |
|            |   |

 

**CommissionFile Number 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 by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days. ýYES    NO o

 

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K is not contained herein, and willnot be contained, to the best of registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form 10-Kor any amendment to this Form 10-K.  o

 

Indicate by check mark whether the Registrant is anaccelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of1934). o  YES   NO  ý

 

Aggregate value of shares of common stock held bynonaffiliates of the registrant based upon the closing price on June 28, 2002(only shares held by directors, officers and their affiliates, and holders ofmore than 5% of Class A or Class B stock are excluded):  $7,596,730

 

Number of shares of common stock outstanding as of theclose of business on March 19, 2003:

 

| Class A |   | 11,375,527 |
|---------|--------|------------|
| Class B |   | 692,472    |

 

**Documents incorporated by reference:**

Portions of thedefinitive Proxy Statement relating to the 2003 Annual Meeting of Shareholders,which will be held on May 15, 2003 (“Proxy Statement”), are incorporated byreference into Part II, Item 9, and Part III in this report.

 

 

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**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.   SLECTED 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 AND RELATED STOCKHOLDER MATTERS |
| ITEM 13. CERTAIN RELATIONSHIPS  AND RELATED TRANSACTIONS                                                 |
| ITEM 14. CONTROLS AND  PROCEDURES                                                                        |
|                                                                                                     |
| **PART IV**                                                                                              |
| ITEM 15. EXHIBITS, FINANCIAL  STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K                               |
| SIGNATURES                                                                                               |
| CERTIFICATIONS                                                                                           |

 

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## **PART I**

 
| **ITEM  1.** | **BUSINESS** |
|--------------|--------------|

 

*Referencesin this Form 10-K to “Rural Cellular,” “RCC,” “we,” “our,” and “us” refer toRural Cellular Corporation and its subsidiaries as a combined entity, exceptwhere it is clear that those terms mean only the parent company.*

 

#### ***Forward-Looking Information***

 

This Form 10-K includes“forward-looking statements” within the meaning of Section 27A of theSecurities Act and Section 21E of the Securities Exchange Act. Allstatements regarding us and our expected financial position, business, andfinancing plans are forward-looking statements. Forward-looking statements canbe identified by, among other things, the use of forward-looking terminologysuch as “believes,” “expects,” “may,” “will,” “should,” “seeks,” “pro forma,”“anticipates,” “intends,” or the negative or other variations of any such termor comparable terminology, or by discussions of strategy or intentions.Although we believe that the expectations reflected in such forward-looking statementsare reasonable, our expectations may prove not to be correct. A number offactors could cause our actual results, performance, and achievements orindustry results to be materially different from any future results,performance, or achievements expressed or implied by such forward-lookingstatements. 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, including those resulting from geopolitical concerns;

•                  demographic changes;

•                  our ability to attract and retain qualified personnel;

•                  our ability to meet the obligations of ourindebtedness;

•                  our ability to meet our schedule for buildout ofour wireless network;

•                  our business plan and our strategy forimplementing our plan;

•                  the market acceptance of the technology we use;

•                  our capital expenditures and fundingrequirements, including our ability to access sufficient capital to meetoperating and financing needs;

•                  the availability of adequate quantities of systeminfrastructure and customer equipment and components to meet our servicedeployment and marketing plans and customer demand;

•                  our ability to achieve and maintain marketpenetration and average customer revenue levels sufficient to provide financialviability;

•                  our ability to integrate the operations of anybusinesses we acquire;

•                  our ability to scale our billing, collection,customer care, and similar back-office operations to keep pace with customergrowth and increased system usage rates;

•                  future legislation or regulatory actions relatingto specialized mobile radio services, other wireless communications services,or telecommunications services generally;

•                  other risks and uncertainties described from timeto time in our reports filed with the Securities and Exchange Commission; and

•                  other factors described in this report including,without limitation, under “Factors that may affect our business, futureoperating results, and financial condition.”

 

1

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In addition, suchforward-looking statements are necessarily dependent upon assumptions,estimates, and data that may be incorrect or imprecise and involve known andunknown risks, uncertainties, and other factors. Accordingly, forward-lookingstatements included in this report do not purport to be predictions of futureevents or circumstances and may not be realized. All subsequent written andoral forward-looking statements attributable to us or persons acting on ourbehalf are expressly qualified in their entirety by the foregoing cautionarystatements. Given these uncertainties, you are cautioned not to place unduereliance on such forward-looking statements. We disclaim any obligation toupdate any such factors or to announce publicly the results of any revisions toany of the forward-looking statements contained in this report to reflectfuture events or developments.

 

***Factorsthat may affect our business, future operating results, and financial condition***

 

**Our future operating results could fluctuate significantly.**

 

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

 

•                  increased costs we may incur in connection withthe buildout of our networks and the further development, expansion, andupgrading of our wireless systems;

•                  fluctuations in the demand for our services andequipment and wireless services;

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

•                  changes in our roaming revenue and expenses dueto renegotiation of our roaming agreements and the development of neighboringor competing networks;

•                  changes in the regulatory environment;

•                  the cost and availability of equipment components;

•                  changes in travel trends; and

•                  changes in general economic conditions that mayaffect, among other things, demand for our services and the creditworthiness ofour customers.

 

We incurred net losses applicable to common shares of approximately$456.5 million, $102.1 million and $83.3 million in the years ended December31, 2002, 2001 and 2000, respectively. We may incur significant net losses aswe seek to increase our customer base in existing markets. We may not generateprofits in the short term or at all. If we fail to achieve profitability, thatfailure could have a negative effect on the market value of our common stock.

 

**We have a significant amount of debt and preferred stock,which may limit our ability to meet our debt service and dividend obligations,to borrow additional money, or to survive a downturn in our business.**

 

As of December 31, 2002, we had approximately$1.211 billion of long-term debt, approximately $553.5 million totalliquidation preference of preferred stock, and shareholders’ deficit ofapproximately $483.1 million. Of the $553.5 million of preferred stock, $435.9million can be exchanged, at our option, subject to compliance with certainleverage ratios under our credit facility and the indentures related to oursenior 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, and other 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 may have limited flexibility to react tochanges 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.

 

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### **Our stock pricehas been and may continue to be volatile. Recently litigation has been instituted against RCC and our officers anddirectors, the defense of which could materially and adversely affect ourbusiness, financial condition, and operating results.**

 

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 in operating results;

•                  our ability to finance our operations, including required paymentsunder our credit facility and other obligations and compliance with our creditfacility covenants;

•                  conditions or trends in the wireless communications industry andchanges in the economic performance and/or market valuation of other wirelesscommunications companies;

•                  our strategic partnerships, joint ventures, or capital commitments; and

•                  additions or departures of key personnel.

 

In addition, the stock market in general has experienced extreme priceand volume fluctuations that have often been unrelated or disproportionate tothe operating performance of the affected companies. These broad market andindustry factors may materially and adversely affect the market price of oursecurities, regardless of our actual operating performance.

 

Securities class action litigation is often brought against companieswhose stock price has been subject to volatility.  Recently, Rural Cellular and certain officers and directors havebeen sued for alleged violations of securities laws. This litigation couldresult in substantial costs and a diversion of management’s attention andresources, which could materially and adversely affect our business, financialcondition, and operating results.

 

**A significant portion of our revenue is from roaming. Basedon industry trends, outcollect roaming yield has been declining over the lastfew years and is expected to continue 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 medium term,including some which are terminable with 30 days’ written notice, and may beterminated prior to expiration upon breach of any of the material terms. Whenthese 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 revenue and operatingincome.

 

In addition, changes in the network footprints ofour competitors and of our roaming partners could have a material adverseeffect on the terms of our roaming agreements and on our outcollect revenue andincollect expenses. For example, if a roaming partner from whom we derive asignificant amount of revenue in one of our service areas were to build its ownnetwork in that service area, our outcollect revenue derived from our roamingrelationship with that partner in that area might decrease or even ceasealtogether, and our leverage in negotiating favorable incollect rates in that partner’snetwork areas could decrease as well.

 

A substantial portion of our roaming revenue isderived from agreements with national wireless providers, AT&T Wireless,Verizon Wireless, and Cingular. Changes in their operations or a significantdecline in the number of their customers could adversely affect our business.For the year ended December 31, 2002, AT&T Wireless, Verizon Wireless, andCingular accounted for approximately 85% of our total roaming minutes. During2002, AT&T Wireless accounted for 10.2% of our total revenue.

 

3

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**Our roaming revenue is subject to some effects ofseasonality, and as a result, our overall revenue and operating income are alsosubject to seasonal fluctuations.**

 

In 2002, 2001, and 2000, a substantial amount ofour revenue 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. As aresult, our roaming revenue increases during vacation periods, introducing ameasure of seasonality to our revenue and operating income. See “Management’sDiscussion and Analysis of Financial Condition and Results of Operations—Seasonality.”

 

**The restrictive covenants in our existing debt and preferredstock instruments and agreements may limit our ability to operate our business.**

 

The instruments governing our debt, including ourcredit facility, the indentures governing our senior subordinated notes, andthe certificates of designation governing our preferred stock, imposesignificant operating and financial restrictions on us. These restrictionssignificantly limit, among other things, our ability and the ability of oursubsidiaries to:

 

•            incur additional debt;

•            pay cash dividends on common stock;

•            repay junior debt prior to statedmaturities;

•            allow the imposition of dividendrestrictions on certain subsidiaries;

•            sell assets;

•            make investments;

•            engage in transactions withshareholders and affiliates;

•            create liens; and

•            engage in some types of mergers oracquisitions.

 

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 corporate activities. Ourfailure to comply with these restrictions could lead to a default under theterms of the relevant debt or a violation of the terms of the preferred stockeven though we are able to meet debt service and dividend obligations.

 

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 our subsidiaries might nothave sufficient funds available, and we might be unable to obtain sufficientfunds from alternative sources, to make these payments. Even if we can obtainadditional financing, the

 

4

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terms might not be favorable to us. If theamounts outstanding under our credit facility were accelerated and we could notobtain sufficient funds to satisfy our obligations, our lenders could proceedagainst our assets and the stock and assets of our subsidiaries. As a result,any event of default could have a material adverse effect on our business andfinancial condition.

 

**We will require substantial amounts of capital to meetvarious obligations and to maintain our wireless network and upgrade to nextgeneration technologies.  Our ability togenerate the capital required to meet our obligations and to maintain anddevelop our network depends on many factors, including some which are beyondour control.**

 

We have required, and will continue to require,substantial capital to maintain our wireless network and upgrade to nextgeneration technologies.  We will alsorequire cash to satisfy obligations to pay interest on our debt, pay dividendson our exchangeable preferred stock, repurchase a swaption, and for otheroperating needs. We will likely need additional financing for any futureacquisitions, to repay or refinance our debt at its final maturities, and tomeet mandatory redemption provisions on our preferred stock.  To the extent that we do not generatesufficient cash from operations to satisfy these needs, we will need to exploreother sources of additional capital, which may include public and privateequity and debt financings, including vendor financing. The amount ofadditional financing that we may require will depend on the success of ouroperations.  The availability ofadditional financing is dependent on conditions in the capital markets.  We may not be able to obtain additionalfinancing on terms acceptable to us and within the limitations contained in theinstruments governing our debt and our preferred stock, or any future financingarrangements.

 

**Our business could be materially and adversely affected byour failure to anticipate and react to frequent and significant technologicalchanges.**

 

The telecommunications industry is subject torapid and significant changes in technology that are evidenced by:

 

•          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 or that is not compatible with the technology selected byone or more of our roaming partners, and as a result, our business, results ofoperations and financial condition could be materially and adversely affected.Moreover, one or more of the technologies that we currently utilize may becomeinferior or obsolete at some time in the future.

 

**We operate in a very competitive business environment, whichcan adversely affect our business and operations. Competitors who offer moreservices than we do may attract our targeted customers.**

 

The wireless communications industry is highlycompetitive. 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.

 

5

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In each of our markets we compete with severalother wireless licensees. To a lesser extent, we also compete in many of ourservice areas with dispatch and conventional mobile telephone companies, satellitetelephone service providers, resellers of wireless services, paging companies,and landline telephone service providers. We expect this competition toincrease in the future, and we may not be able to compete successfully.

 

**Our business is subject to extensive government regulation.The applicable legislation and regulations, and changes to them, couldadversely affect our business by increasing our expenses. We may also be unableto obtain regulatory approvals necessary to operate our business. Any failureto obtain these approvals could negatively affect our results 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 wireless systems, aswell as the number of wireless licenses permitted in each of our markets. Stateand local regulatory authorities also, to a lesser extent, regulate aspects ofour business and services. In addition, the Federal Aviation Administrationregulates aspects of construction, marking, and lighting of communicationstowers on which we depend for the placement of our wireless transmitters.Changes in legislation and regulations governing wireless activities andwireless carriers, our failure to comply with applicable regulations, or ourloss of or failure to obtain any license or licensed area could have a materialadverse effect on our operations.

 

The FCC and state authorities are increasinglylooking to the wireless industry to fund various initiatives, including federaland state universal service programs, telephone number administration, servicesto the hearing-impaired, and emergency 911 networks. In addition, many stateshave imposed significant taxes on providers in the wireless industry and haveadopted or are considering adoption of regulatory requirements on customerbilling and other matters. These initiatives are imposing increased costs on usand other wireless carriers and may otherwise adversely affect our business.For example, the FCC has mandated that wireless providers supply the geographiccoordinates of a customer’s location, either by means of network-based orhandset-based technologies, to public safety dispatch agencies. Theseinitiatives will impose significant costs on us and there can be no assurancethat we will be able to meet these various requirements or that we will not besubject to fines by the FCC in connection with our failure to comply with theserequirements.

 

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 regulatory obligations during theten-year license period. However, we cannot assure you that the FCC will grantus any future renewal applications or that our applications will be free fromchallenge. In addition, FCC rules require wireless licensees to meet buildoutrequirements with respect to particular licenses, and failure to comply withthese and other requirements in a given licensed area could result inrevocation or forfeiture of our license for that area or the imposition offines by the FCC.

 

**Equipment failure and natural disasters may adversely affectour operations.**

 

A major equipment failure or a natural disasteraffecting any of our central switching offices, microwave links, or cell sitescould have a material adverse effect on our operations. Our inability tooperate any portion of our wireless system for an extended time period couldresult in a loss of customers or impair our ability to attract new customers,which would have a material adverse effect on our business, results ofoperations, and financial condition.

 

**Our future financial results could be adversely impacted byasset impairments or other charges.**

 

Effective January 1, 2002, we adopted Statementof Financial Accounting Standards No. 142, “Goodwill and Other IntangibleAssets.”  As a result, we are requiredto test both acquired goodwill and other indefinite-lived intangible assets,consisting primarily of our licensing costs, for impairment on an annual basisbased upon a fair value approach, rather than amortizing them over time.  We are also required to test goodwill forimpairment between annual tests if an event occurs or circumstances change thatwould more likely than not reduce our enterprise fair value below its bookvalue.  These events or circumstancescould include a significant change in the business climate, regulatoryrequirements, operating performance indicators, competition, sale ordisposition of a significant portion of the business, or other factors.  If our market value continues to be lessthan our book value for an

 

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extended period of time, it could trigger theneed for impairment tests of acquired goodwill between annual tests.  Additionally, our licensing costs must betested between annual tests if events or changes in circumstances indicate thatthe asset might be impaired.  The amountof any such annual or interim impairment charge could be significant and couldhave a material adverse effect on our reported financial results for the periodin which the charge is taken.

 

**If wireless handsets are perceived to pose health and safetyrisks, we may be subject to new regulations, and demand for our services maydecrease.**

 

Media reports have suggested that certain radiofrequency emissions from wireless handsets may be linked to various healthconcerns, including cancer, and may interfere with various electronic medicaldevices, including hearing aids and pacemakers. Concerns over radio frequencyemissions may have the effect of discouraging the use of wireless handsets,which would decrease demand for our services. In recent years, the FCC hasupdated the guidelines and methods it uses for evaluating radio frequencyemissions from radio equipment, including wireless handsets. There also aresome safety risks associated with the use of wireless handsets while driving.Legislation has been proposed in the United States Congress and many state andlocal legislative bodies to restrict or prohibit the use of wireless phoneswhile driving motor vehicles. Similar laws have been enacted in other countriesand, to date, the State of New York and a small number of localities in theUnited States have passed restrictive laws. Concerns over these safety risksand the effect of any legislation that may be adopted in response to theserisks could limit our ability to market and sell our wireless services.Additionally, litigation relating to illness, accidents, deaths, or seriousbodily injuries allegedly incurred as a result of wireless phone use couldresult in damage awards and adverse publicity.

 

**We have shareholders who could exercise significant influenceon management.**

 

The holders of our Class M convertible preferredstock currently are able to elect two members to our board of directors and canvote, on an as-converted basis, approximately 2,075,471 shares of our Class A commonstock, which represented as of March 19, 2003, approximately 10.2% of thevoting power of our common stock. If these holders were to disagree withdecisions made by management or the board of directors about our plans oroperations, they might be able to bring significant pressure to change suchplans 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:

 

•                                          provisionsfor a classified board of directors;

•                                          provisionsfor advance notice for director nominations and shareholder proposals;

•                                          provisionsallowing holders of our class B common stock 10 votes per share as compared toone vote per share for our class A common stock;

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

•                                          statutorylimits regarding share acquisitions and business combinations.

 

We also have adopted a share rights plan under which the exercise ofpreferred stock purchase rights attached to each share of common stock couldresult in substantial dilution to any person or group acquiring 15% or more ofour stock without approval from our 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 a change of control transaction, in somecases after notice and grace periods, would constitute an event of defaultpermitting acceleration of the indebtedness.

 

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**We aresubject to limitations on our ability to pay cash dividends on and repurchaseor otherwise satisfy our obligations under our senior exchangeable preferredstock and junior exchangeable preferred stock. If we do not satisfy theseobligations, the holders of these series of preferred stock may have the rightto elect directors 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. If we fail to comply withthe terms of the senior exchangeable preferred stock or the junior exchangeablepreferred stock, the holders of these series of stock will each have the rightto elect directors to our board.

 

**We mayincur increased costs as a result of recently enacted and proposed changes insecurities laws and regulations.**

 

Recently enacted and proposed changes in the laws and regulationsaffecting public companies, including the provisions of the Sarbanes-Oxley Actof 2002 and rules proposed by the SEC and by the stock exchanges and the NasdaqStock Market, could result in increased costs to us as we evaluate theimplications of any new rules and respond to their requirements.  The new rules could make it more difficultfor us to obtain certain types of insurance, including director and officerliability insurance, and we may be forced to accept reduced policy limits andcoverage or incur substantially higher costs to obtain the same or similarcoverage.  The impact of these eventscould also make it more difficult for us to attract and retain qualifiedpersons to serve on our board of directors, our board committees, or asexecutive officers.  We are currentlyevaluating and monitoring developments with respect to new and proposed rulesand cannot predict or estimate the amount of the additional costs we may incuror the timing of such costs.

 

***(a)******                                 GeneralDevelopment of Business***

 

We are a wirelesscommunications service provider in the United States, focusing on ruralmarkets. Our marketed cellular networks cover a total population ofapproximately 5.9 million and serve approximately 667,000 voice customers,excluding wholesale customers, as of December 31, 2002.

 

We believe that ruralmarkets provide growth opportunities because these markets typically have lowercurrent penetration rates and less competition for customers than markets inlarger metropolitan areas. In addition, our rural markets generally contain anumber of vacation destinations and significant highway miles. For these reasons,and because of the distance between population centers, many potentialcustomers spend substantial time traveling through our service areas, resultingin higher roaming revenue than in urban markets.

 

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The following chart summarizes our existing wireless systems as ofDecember 31, 2002:

 
| **Regions**                 |   | **States**         |   | **Percentage  Ownership** |   | **Square  Miles** |   | **Total  Licensed  POPS(1)** |   | **Voice  Customers(2)** |   | **Penetration  %(2)** |   |
|-----------------------------|--------|--------------------|--------|---------------------------|--------|-------------------|--------|------------------------------|--------|-------------------------|--------|-----------------------|--------|
| ***Directly Marketed***     |   |               |   |                      |   |              |   |                         |   |                    |   |                  |   |
| Cellular:                   |   |               |   |                      |   |              |   |                         |   |                    |   |                  |   |
| Midwest                     |   | MN, SD             |   | 100                       | %      | 45,000            |   | 731,000                      |   | 114,647                 |   | 15.7                  | %      |
| Northeast                   |   | MA, ME, NH, NY, VT |   | 100                       | %      | 46,000            |   | 2,037,000                    |   | 261,267                 |   | 12.8                  | %      |
| South                       |   | AL, KS, MS         |   | 100                       | %      | 71,000            |   | 1,474,000                    |   | 106,499                 |   | 7.2                   | %      |
| Northwest                   |   | OR, WA             |   | 100                       | %      | 81,000            |   | 919,000                      |   | 167,051                 |   | 18.2                  | %      |
| Cellular Total              |   |               |   |                      |   | 243,000           |   | 5,161,000                    |   | 649,464                 |   | 12.6                  | %      |
|                        |   |               |   |                      |   |              |   |                         |   |                    |   |                  |   |
| PCS:                        |   |               |   |                      |   |              |   |                         |   |                    |   |                  |   |
| Wireless  Alliance          |   | MN, ND, SD, WI     |   | 70                        | %      | 19,000            |   | 732,000                      |   | 17,209                  |   | 2.4                   | %      |
|                        |   |               |   |                      |   | 262,000           |   | 5,893,000                    |   | 666,673                 |   | 11.3                  | %      |
| ***Not Directly Marketed*** |   |               |   |                      |   |              |   |                         |   |                    |   |                  |   |
| PCS*:*                      |   |               |   |                      |   |              |   |                         |   |                    |   |                  |   |
| Midwest                     |   | MN                 |   | 100                       | %      | 4,000             |   | 288,000                      |   |                    |   |                  |   |
| Northeast                   |   | NH, ME             |   | 100                       | %      | 6,000             |   | 1,138,000                    |   |                    |   |                  |   |
|                        |   |               |   |                      |   |              |   |                         |   |                    |   |                  |   |
| Total                       |   |               |   |                      |   | 272,000           |   | 7,319,000                    |   |                    |   |                  |   |

 

----

(1)               Reflects 2000 U.S. Census Bureau data.

 

(2)               Represents the ratio of wireless voice customers atthe end of the period, to marketed POPs. Customer numbers exclude wholesale,paging and long distance customers.

 

Our 7.3 million totallicensed POPs include 1.4 million POPs in PCS networks in our Midwest andNortheast regions. In these PCS networks, we do not directly market ourservices on a per customer basis; however, they satisfy FCC buildoutrequirements and allow us to receive additional outcollect revenue from ournational roaming partners and minimize our incollect cost from our existingcustomers who travel through them.

 

We directly market ourservices to four operating regions with a total approximate population of 5.9million.  The 667,000 customers in theseservice areas utilize our spectrum and networks with a handset they maypurchase from us to facilitate their wireless communication needs. Within eachof our four regions, we operate through the development of a local presence inthe communities we serve, which we believe enhances our competitive positionand allows us to tailor our products and services to meet our customers’ needs.

 

We have invested capitaland resources to enhance the quality of our networks, expand our geographicfootprint, and broaden our service offerings. As a result of our networkinvestments, we believe our customers receive a high level of both regional andlocal wireless coverage, minimal call blocking and dropped calls, seamless calldelivery and hand-off, and access to digital services. Our digital offeringsare available in all of our markets and include caller identification, shortmessage services, and numeric paging, as well as other ancillary services suchas voicemail and call waiting. As of December 31, 2002, approximately 74% ofour wireless customers were using digital handsets whose digital features canbe utilized in approximately 85% of our service areas.

 

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

 

Our business consists of one reportable operating segment, theoperation of wireless communication systems in the United States.

 

9

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***(c) Description of Business/Service Areas***

 

**Marketingof 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 fixedmonthly access fee, which includes a specified number of minutes, andincremental fees for enhanced services. As a result of our focus on marketingstrategies as well as the upgrade of our networks to digital capability, we areable to offer our customers a wide array of services on an individual orbundled basis. We believe these services stimulate demand for wireless usageand increase customer loyalty. These services include the 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.

•                  *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 existing wireless service as avoice alternative to touchtone.

 

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 travelingwithin specified regional zones, both within and outside of our cellularservice areas. We have also established preferred roaming contracts anddeveloped system integration with adjacent cellular carriers, which permit ourcustomers to receive automatic call delivery, call forwarding, toll-free accessto voicemail, call hand-off, and reduced 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 three national wireless providers, AT&TWireless, Verizon Wireless and Cingular. For the year ended December 31, 2002,AT&T Wireless, Verizon Wireless and Cingular accounted for approximately85% of our total roaming minutes. During 2002, AT&T Wirelessaccounted for 10.2% of our total revenue. Underour agreements with AT&T Wireless, Verizon Wireless, Cingular and otherroaming partners, the roaming yield per minute RCC receives from outcollectcalling minutes, in addition to the cost per minute RCC pays for our customers’incollect activity, declines over time.

 

We signed a roaming agreement with Cingulareffective July 2002 that runs through January 2008.  This agreement establishes RCC as a preferred roaming partnerwith Cingular in RCC’s markets. Our roaming agreement with AT&T Wirelessthat covers the Northeast and Midwest regions is effective July 2002 throughDecember 2004. We currently have a month to month agreement with AT&T forour Northwest and South regions. During 2002, Wireless Alliance entered into anew roaming agreement with its joint venture partner T-Mobile, positioningWireless Alliance for expanded roaming revenue.

 

10

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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.

 

**Distribution and Sales**

 

We market our wirelessproducts and services through direct sales distribution channels, which includecompany-owned retail stores and account executives. We also utilize indirectsales distribution channels, including independent sales agents. Alldistribution channels are managed on a regional basis. We believe that ourdecentralized sales distribution strategy contributes to our service offeringsuccess because our regions are able to tailor their respective programs tomeet the needs of each local market.

 

Our distribution channelsinclude the following:

 

•                  direct sales through:

 

•                        retail stores and kiosks thatwe operate and staff with our employees. As of December 31, 2002, we had 92stores, primarily located in our more densely populated markets. In addition,we had eight stand-alone kiosks. Our retail locations help us establish ourpresence and promote retail customer sales and service; and

 

•                        account executives who are ouremployees and focus on business and major account sales and service; and

 

•                  indirect sales through independentsales agents. Our independent sales agents are established businesses in theircommunities and may include retail electronics stores, farm implement dealers,automobile dealers, automotive parts suppliers, college and universitybookstores, video and music stores, and local telephone companies. Most of theagents sell our services in conjunction with their principal business. Weprovide cellular, digital, and paging equipment to the agents for sale or leaseto customers, and the agents market our services utilizing a cooperativeadvertising program.

 

Each region is responsible for recruiting, training, and supportingsales personnel for each distribution channel. The training and supportprovided to sales personnel is extensive and continuous.

 

**Customer Service**

 

To provide consistentcustomer service in our service centers, we have implemented local monitoringand control systems and maintain customer service departments consisting oftrained personnel who are aware of the needs of the customers in our localmarkets. Our customer service centers are located in Alexandria, Minnesota;Bangor, Maine; Enterprise, Alabama; and Bend, Oregon. Our customer servicecenters in the Northeast and Midwest region can be accessed 24 hours aday, 365 days a year, and are capable of handling customer questions. Allfour service centers are also responsible for processing new service orders andservice changes for existing customers and maintaining customer records.

 

11

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**ServiceMarks**

 

The following tablesummarizes the brand names we use to market our services in our differentregions. 

 
| **Region**    |   | **Brand Name**                    |   |
|---------------|--------|-----------------------------------|--------|
| **Northeast** |   | UNICEL®, CELLULARONE®   |   |
| **Midwest**   |   | CELLULAR 2000®, UNICEL® |   |
| **Northwest** |   | CELLULARONE®                 |   |
| **South**     |   | UNICEL®                      |   |

 

We own the UNICEL®mark.  The CELLULAR 2000® name andrelated marks are owned by Cellular 2000, Inc., of which we currently owna 50% interest. The only business of Cellular 2000, Inc. is the licensingof its service mark to its shareholders. We do not pay any license fees for theuse of the CELLULAR 2000® mark.  TheCELLULARONE® mark is owned by Cellular One Group, and we use the CELLULARONE®service mark pursuant to licensing agreements with Cellular One Group.

 

**NetworkOperations**

 

***Cellular (TDMA)***

 

We develop and build ourwireless service areas in response to customer demand by adding channels toexisting cell sites and by building new cell sites to increase coverage andcapacity. Where appropriate, we also upgrade acquired properties to enable usto provide similar quality service over our entire network. We expect to continueour wireless system expansion where necessary to add and retain customers,enhance customer usage on our systems, and increase roaming traffic. We alsoenhance our systems through scalable network equipment, cell site splitting,cell site sectorization, and digital upgrades of our systems. In addition tothe customer quality aspects, these enhancements generally provide improvednetwork system performance and efficiency of operations.

 

Our cellular networkconsisted of 732 cell sites as of December 31, 2002. We will continue todevelop our wireless service areas by building new cell sites in locations thatincrease capacity and improve coverage. In 2002 we added 48 sites throughcolocation or construction. We plan to colocate and purchase additional cell sitesduring 2003. The additional cell sites will further expand capacity and willallow customers to use lower-powered or hand-held portable telephonesthroughout our service areas and network.

 

We also have PCS networksin our Midwest and Northeast regions. Although we do not directly market ourservice to the residents of these areas, these networks satisfy FCC buildoutrequirements and allow us to receive outcollect revenue from our nationalroaming partners and minimize our incollect cost from our existing customers.

 

We currently rely on TDMAas the primary digital standard for our wireless systems. With TDMA technologyour customers’ phones have digital compatibility with other wireless systemsusing TDMA service. Further, the built-in intelligence of digital handsetsallows us to manage our incollect costs.

 

We continue to evaluate different 2.5and 3.0G network alternatives and expect this overlay to take place over thenext three years.

 

***Wireless Alliance (GSM)***

 

At December 31, 2002,Wireless Alliance had 65 cell sites. Wireless Alliance has a global system formobile technology-based personal communications services network, or “GSM.”Wireless Alliance utilizes T-Mobile’s switch.

 

12

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***Other Licenses***

 

Currently we own, but have not yet developed operating plans for, localmulti-point distribution system licenses. These licenses cover approximately2.6 million POPs and either overlap or are adjacent to our cellular systems.

 

Information regarding RCC’s service areas and licenses is set forth inthe following tables.

 

**Marketed Voice License 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          |   |              |   |         |   |                     |   |

 

13

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**Summary of Licenses Not Directly Marketed**

 
|                                       |   | **%  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                 |   |
|                                       |   |             |   |     |   |          |   |         |   |                     |   |
|                                       |   |             |   | 1,426,00 |   |          |   |         |   |                     |   |

 

**Local Multi-point Distribution System (“LMDS”) LicenseSummary**

 
|                                       |   | **%  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: Reflects2000 U.S. Census Bureau data.

 

***Suppliers and Equipment 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, Ericsson, Inc. and Motorola, Inc.

 

14

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**Competition**

 

We compete againstseveral wireless carriers in each of our markets and also compete with a numberof enhanced specialized mobile radio service providers. We compete forcustomers 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, suchas long distance, landline local exchange, and internet access service, withtheir wireless telecommunication service offerings. Many of our competitorshave been operating for a number of years, currently serve a substantialcustomer base, and have significantly greater financial, personnel, technical,marketing, sales, and distribution resources than we do.

 

The following table listsour competitors on a 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                                    |       | CMS, Nextel Communications, Inc., T-Mobile                     |       |
| South Dakota RSA  4                                                   |   | Western Wireless Corporation                                     |       | Sprint PCS                                                     |       |
| **Northeast:**                                                        |   |                                                             |       |                                                           |       |
| Maine, Bangor  MSA, RSA 1, 2 and 3                                    |   | United States Cellular Corporation                               |       | N/A                                                            |       |
| Massachusetts  RSA 1                                                  |   | Cingular Wireless                                                |       | N/A                                                            |       |
| New Hampshire,  Portsmouth, MSA                                       |   | AT&T Wireless                                                |       | Sprint PCS, Nextel Communications, Inc., T-Mobile              |       |
| New Hampshire  RSA 1                                                  |   | United States Cellular Corporation                               |       | Sprint PCS                                                     |       |
| New York RSA 2                                                        |   | Verizon Wireless                                                 |       | Sprint PCS, Nextel Communications, Inc.                        |       |
| Vermont Burlington  MSA, RSA 1                                        |   | Verizon Wireless                                                 |       | Sprint PCS, Nextel Communications, Inc.                        |       |
| Vermont RSA 2                                                         |   | United States Cellular Corporation, Verizon                      |       | N/A                                                            |       |
| **South:**                                                            |   |                                                             |       |                                                           |       |
| Alabama RSA 3                                                         |   | Cingular Wireless                                                |       | T-Mobile                                                       |       |
| Alabama RSA 4                                                         |   | ALLTEL Corporation                                               |       | T-Mobile, Pine Belt Wireless                                   |       |
| Alabama RSA 5                                                         |   | ALLTEL Corporation, Cingular Wireless, Public  Service Telephone |       | T-Mobile, Nextel Communications, Inc.                          |       |
| Alabama RSA 7                                                         |   | ALLTEL Corporation                                               |       | T-Mobile, 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.                        |       | T-Mobile, Telecorp PCS, Inc.                                   |       |
| Mississippi RSA  3                                                    |   | Cellular Telepak, Inc                                            |       | T-Mobile, Telecorp PCS, Inc.                                   |       |
| **Northwest:**                                                        |   |                                                             |       |                                                           |       |
| Oregon RSA 3                                                          |   | United States Cellular Corporation, AT&T  Wireless           |       | Sprint PCS, Qwest, Nextel Communications, Inc.                 |       |
| Oregon RSA 4                                                          |   | Verizon Wireless, AT&T Wireless                              |       | T-Mobile, Sprint PCS, Qwest, Nextel Communications,  Inc.      |       |
| Oregon RSA 6                                                          |   | United States Cellular Corporation                               |       | Sprint PCS, Nextel Communications, Inc., T-Mobile  Corporation |       |
| Washington RSA 2  and 3                                               |   | Verizon Wireless                                                 |       | Sprint PCS, T-Mobile Corporation                               |       |
| Washington RSA 8                                                      |   | Inland Cellular, AT&T Wireless                               |       | Sprint PCS, Qwest                                              |       |
| **PCS - Wireless Alliance:**                                          |   |                                                             |       |                                                           |       |
| Duluth,  Minnesota / Superior, Wisconsin                              |   | Verizon Wireless, Dobson Communications                          |       | Sprint PCS, Nextel Communications, Inc., Windsong PCS          |       |
| Fargo, North  Dakota / Moorhead, Minnesota; Grand Forks, North Dakota |   | Western Wireless Corporation, Verizon Wireless                   |       | Sprint PCS, Nextel Communications, Inc.                        |       |
| Sioux Falls,  South Dakota                                            |   | Western Wireless Corporation, Verizon Wireless.                  |       | Sprint PCS, Nextel Communications, Inc.                        |       |

 

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The telecommunicationsindustry is experiencing significant technological changes, as evidenced by theincreasing pace of improvements in the capacity and quality of digitaltechnology, shorter cycles for new products and enhancements, and changes inconsumer preferences and expectations. Accordingly, with the entry of newcompetitors and the development of new technologies, products, and services,competition in the wireless telecommunications industry has been dynamic andintense.

 

In the future, we expectto face increased competition from entities holding licenses for PCS spectrumnot yet operating in our markets. We believe that PCS networks will continue tobe focused primarily in urban areas due to capital and population coveragerequirements. The FCC has issued licenses for both narrowband and broadbandPCS, and six broadband licenses were issued in each of our cellular serviceareas. Narrowband PCS typically provides advanced paging and messaging services.Broadband PCS consists of wireless two-way telecommunications services forvoice, data, and other transmissions employing digital micro-cellulartechnology. Many broadband PCS providers compete with existing wirelesssystems. Under FCC rules, PCS license holders are allowed to disaggregate thespectrum covered by their license. Accordingly, we may face competition fromadditional providers of PCS if the FCC approves a disaggregation of spectrumfor any license for PCS in one of our service areas. In addition, the OmnibusBudget Reconciliation Act of 1993 required, among other things, the allocationto commercial use of a portion of 200 MHz of the spectrum currently reservedfor government use. Some portion of this spectrum may be used to create newland-mobile services or to expand existing land-mobile services. Further, theFCC has auctioned or announced plans to auction licenses in the 39 GHz spectrumand 700 MHz spectrum that may be used for wireless communications that wouldcompete with our services.

 

Specialized mobile radioand other private radio systems, such as those generally used by localdispatch, fleet services, and other communications services that have thetechnical capability to handle mobile telephone calls, includinginterconnection to the landline telephone network, may provide competition insome markets. In addition, enhanced specialized mobile radio systems maycompete with our wireless services by providing high quality digitalcommunication technology, lower rates, enhanced privacy, and additionalfeatures such as paging, particularly in metropolitan areas.

 

We also compete to alesser extent with resellers, landline telephone service providers, fixedwireless services, and satellite-based telecommunications systems. TheFCC requires all wireless licensees to provide service to “resellers.” Areseller provides wireless services to customers but does not hold a FCClicense and might not own facilities. Instead, the reseller buys blocks ofwireless telephone numbers and capacity from a licensed carrier and resellsservice through its own distribution network to the public. Thus, a reseller isboth a customer of a wireless licensee’s service and also a competitor of thatlicensee. Several small resellers currently operate in our service areas.

 

We anticipate that marketprices for wireless communications service and equipment will continue todecline in the future based upon increased competition and cost reductions. Ourability to compete successfully is dependent, in part, on our ability toanticipate and respond to various competitive factors affecting the industry.Our marketing and sales organization includes a group that carefully monitorsand analyzes competitive products and service offerings, changes in consumerpreferences, changes in demographic trends and economic conditions, and pricingstrategies by competitors that could adversely affect our operations or presentstrategic opportunities.

 

We believe that we arestrategically positioned to compete with other communications technologies thatnow exist and with wireless resellers. Continuing technological advances intelecommunications and FCC policies that encourage the development of newspectrum-based technologies make it difficult, however, to predict theextent of future competition.

 

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**Legislation and Regulation**

 

***Overview***

 

Our business is subject 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 regulatory developments andlegislation does not purport to describe all present and proposed federal,state, and local regulation and legislation affecting the telecommunicationsindustry. Many existing federal and state laws and regulations are currentlythe subject of judicial proceedings, legislative hearings, and administrativeproposals that could change, in varying degrees, the manner in which thisindustry operates. Neither the outcome of these proceedings nor their impactupon the telecommunications industry or us can be predicted at this time.*

 

***Federal Licensing ofWireless Systems***

 

*Geographic Market Area Licenses:*CMRS providers operate under licenses granted bythe FCC within a specified market area. For cellular systems those market areasare typically Metropolitan Statistical Areas (“MSA”) or Rural Service Areas(“RSAs”) as defined by the FCC. PCS systems are normally licensed with marketareas known as Major Trading Areas (“MTAs”) or Basic Trading Areas (“BTAs”),although it is possible to obtain, and we currently hold, some PCS licensesthat are for market areas smaller than an entire MTA or BTA, known as apartitioned area.

 

While the FCC has used an assortment of methodsin the past to grant licenses, most if not all new CMRS licenses granted by theFCC are by auction.  The FCC determinesthe availability of licenses in particular frequency ranges, as well as theterms under which license auctions are conducted. Our ability to secure newlicenses that could be used to introduce advanced “third generation” wirelessservices may be dependent upon our success in future FCC auctions.

 

*Constructionand Operation:* A cellular licensee has the exclusive right tobuild out its cellular system and serve the entire area that falls within itsMSA or RSA for a period of five years following grant of the initialconstruction permit. At the end of the five-year period, however, thelicensee’s exclusive MSA or RSA rights become limited to the CellularGeographic Service Area (“CGSA”) actually served by the licensee, as determinedpursuant to a formula adopted by the FCC and set forth in a System InformationUpdate filing with the FCC. At the end of the five-year period, any entity mayapply to serve portions of the MSA or RSA not already being served by thelicensee. The five-year exclusivity period has expired for most licensees andparties have filed unserved area applications and obtained licenses that cutoff rights of earlier licensees to expand CGSA in such MSAs or RSAs.

 

To maintain our PCS licenses we are required bythe FCC’s rules to construct facilities covered by such licenses and to offerservices to a certain percentage of the population covered by those licenseswithin specified periods, 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. In the St. Cloud, Minnesota BTA, we are in the process ofbuilding out a PCS system under a license that requires a certification ofsufficient construction by September 29, 2004, and a certification ofsufficient additional construction by September 29, 2009, if a forfeiture oflicense is to be avoided. We have reason to believe that our construction willprogress at a pace that allows for timely certifications to the FCC of fullcompliance with the construction requirements.

 

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Because we hold PCS licensees we must comply withFCC microwave relocation rules. A block of spectrum licensed for PCS may beencumbered by a previously licensed microwave system. In such a case, if thePCS licensee cannot avoid interference to the microwave system, the FCCrequires the PCS licensee to pay the microwave licensee’s reasonable costs torelocate to other spectrum, including costs for new equipment and possibly newtowers up to limits specified in FCC rules. A PCS licensee is also obligated toparticipate in cost sharing if a previous relocation of a microwave incumbentbenefits more than one PCS licensee. We believe that we are in compliance withapplicable microwave relocation and cost sharing rules adopted by the FCC.

 

CMRS providers also must satisfy a variety of FCCrequirements relating to technical and reporting matters, includingcoordination of proposed frequency usage with adjacent systems in order toavoid electrical interference between adjacent systems. The FCC also requireslicensees to secure FCC consent to system modifications in specified instances.

 

CMRS systems are subject to Federal AviationAdministration regulations respecting the location, marking, lighting, andconstruction of transmitter towers and antennas and may be subject toregulation under the National Environmental Policy Act and the environmentalregulations and registration requirements of the FCC. The FCC has also adoptedguidelines and methods for evaluating radio frequency emissions from radioequipment. We believe that all wireless devices we currently provide to ourcustomers, and all towers that we own or occupy, comply with these standards.

 

We use, among other facilities, common carrier point-to-point microwavefacilities to connect cell sites and to link the cell sites to the mainswitching office. These facilities are separately licensed by the FCC and aresubject to regulation as to technical parameters, frequency protection, andservice.

 

*Renewal of Licenses:* 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 circumstances thatwould prevent the approval of any future renewal application, no assurance canbe 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.

 

*Assignment of Licenses or Transfer of Control of Licensees*: FCC licenses are generally transferable,subject to specified limitations prescribed by the Communications Act and theFCC. One notable limitation is the FCC’s cellular cross-interest rule thatprecludes attributable ownership interests in both frequency Block A andfrequency Block B cellular carriers in the same RSA, absent a waiver of therule. The FCC’s prior approval is required for the assignment or transfer ofcontrol of a license for a wireless system. Before we can complete a purchaseor sale, we must file appropriate applications with the FCC, and the public isby law granted a period of time, typically 30 days, to oppose or comment onthem. In addition, the FCC has established transfer disclosure requirementsthat require licensees who assign or transfer control of a license acquiredthrough an auction within the first three years of their license terms to fileassociated sale contracts, option agreements, management agreements, or otherdocuments disclosing the total consideration that the licensee would receive inreturn for the transfer or assignment of its license. Non-controlling minorityinterests in an entity that holds a FCC license generally may be bought or soldwithout FCC approval, subject to the FCC’s cellular cross-interest rule and anyapplicable FCC notification requirements.

 

*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 a licensee’s capital

 

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stock may be directly owned or voted by non-U.S.citizens or their representatives, by a foreign government or itsrepresentatives, or by a foreign corporation. If an FCC licensee is controlledby another entity, up to 25% of that entity’s capital stock may be owned orvoted by non-U.S. citizens or their representatives, by a foreign government orits representatives, or by a foreign corporation. Indirect foreign ownershipabove the 25% level may be allowed should the FCC find such higher levels notinconsistent with the public interest.

 

# ***RegulatoryMatters and Developments***

 

*E911:*Cellular and PCS licensees must comply with the FCC’s rules regarding emergency911 service. There is a staged process for the required deployment of enhanced911 services, referred to by the FCC as Phase I and Phase II. Under Phase I,cellular and PCS licensees were required as of April 1, 1998, or within sixmonths of a request 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 PCS licensees must provide to the designated PSAP the location ofall wireless 911 callers, by longitude and latitude, in conformance withparticular 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.  Pursuant to terms and conditionsof an FCC “Order to Stay” adopted in July 2002, granting us an extension of thecompliance deadlines, we are subject to requirements of the FCC that requirethat we provide Phase II enhanced 911 service to at least 50% of a requestingPSAP’s coverage area or population beginning March 1, 2003, or within sixmonths of a PSAP request, whichever is later, and to 100% of a requestingPSAP’s coverage area or population by March 1, 2004 or within 18 months of sucha request, 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, and to two rural countiesof Alabama, where we provide cellular or PCS service.  We anticipate that we will be able to implement Phase II serviceby the applicable deadlines, but we are not certain that our network-basedsystem when deployed in RSAs will meet the location accuracy standards requiredunder Phase II. The FCC has been requested by a group of wireless licenseesserving small markets to forbear, through December 31, 2005, from enforcementof the location accuracy standards under Phase II. We supported that request incomments filed with the FCC and suggested that the forbearance also apply to usand to other similarly sized wireless licensees that serve RSAs. If wedetermine that we will be unable to meet any applicable deadline, we willsubmit to the FCC a petition for temporary waiver and extension of time todeploy Phase II enhanced 911 service, citing technological or other hindrancesto timely implementation.  We have noassurance that any such petitions will be granted, or that we will not besubject to one or more enforcement orders or fines by the FCC in connectionwith our failure to comply with Phase II enhanced 911 requirements. In November1999, the FCC determined that a cost recovery mechanism no longer has to be inplace before a carrier is obligated to provide enhanced 911 services. Theimplementation of enhanced 911 obligations may have a financial impact on us.We are not yet able to predict the extent of that impact.

 

*Interconnection:*FCC rules provide that a local exchange carrier (“LEC”) mustprovide CMRS carriers interconnection within a reasonable time after it isrequested, unless such interconnection is not technically feasible oreconomically reasonable, and that CMRS carriers are entitled to compensationfrom LECs for terminating wireline-to-wireless traffic that originates andterminates within the same MTA. There are several proceedings pending beforethe FCC aimed at reforming the compensation arrangements for the exchange oflocal and long distance telecommunications traffic. These proceedings couldresult in changes to compensation arrangements we have with LECs andinterexchange carriers for the exchange of telecommunications traffic.Additionally, although key provisions of FCC orders implementing theCommunication Act’s interconnection requirements have been affirmed by thecourts, there remain certain court challenges to the FCC rules.

 

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*Universal Service:* The Communications Act mandates that telecommunications carrierscontribute to the federal Universal Service Fund (“USF”), the purpose of whichis to ensure that basic telephone services are available and affordable for allcitizens. The USF is intended to promote access to communications services inhigh cost areas and for low income persons, schools, libraries, and ruralhealth care providers. We also are required to contribute to state universalservice funds. The federal USF is administered jointly by the FCC, the fundadministrator, and state regulatory authorities, some of which are still in theprocess of establishing their administrative rules. Because we are permitted tocollect the required contribution amounts from our customers, we expect thatour obligation to contribute to the USF will have a minimal financial impact onus. We have filed applications in various states to be designated as acompetitive Eligible Telecommunications Carrier (“ETC”), and in the states ofWashington, Alabama and Mississippi, we have been granted ETC status. Undercurrent federal rules, in any state where we are designated as an ETC, we areeligible to receive high-cost support from the USF. Our ability to receive USFsupport, and our obligations to pay into state and federal universal servicefunds, are subject to change based upon pending regulatory proceedings, courtchallenges, and marketplace conditions.

 

*Local Number Portability/Number Pooling:*  The FCC has adopted rules on telephonenumber portability and number pooling in an effort to achieve more efficientnumber utilization. Cellular and PCSlicensees are required to provide number portability, which enables customersto change providers and services without changing their telephone number. ByNovember 24, 2003, CMRS providers must be able to offer number portabilitywithout impairment of quality, reliability, or convenience when switchingservice providers, including the ability to support roaming throughout theirnetworks. To date, the FCC has not generally extended this deadline. Althoughthe failure to comply with this obligation could result in a fine or revocationof our licenses, we are not yet able to predict whether we will be able tocomply with the number portability requirements prior to the existing deadline.

 

*CALEA:*Telecommunicationscarriers also are subject to the Communications Assistance for Law EnforcementAct (“CALEA”) which is under the purview of the Department of Justice. CALEArequires carriers to have a specific number of open ports available for lawenforcement personnel with the appropriate legal authority to perform wiretapson each carrier’s network. Full implementation of CALEA’s assistance capabilityrequirements was previously required by June 30, 2000. However, because the FCCfound that there was a lack of equipment available to meet these requirements,it accepted petitions for a two-year extension of this deadline on acarrier-by-carrier basis. We submitted such a petition and were granted a two-yearextension, until June 30, 2002, to comply with CALEA’s assistance capabilityrequirements. We are not yet in compliance for the same reason, and wepetitioned the FCC for another two-year extension, which remains pending.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 CALEA prior to the applicable deadlines, we could befined up to $10,000 per day. We are not yet able to predict whether we will beable to comply with CALEA requirements prior to the current deadlines.

 

*Other FCC-Mandated Payments*: We also are required to contribute annually tothe Telecommunications Relay Service Fund and the North American Numbering PlanAdministration Fund and to remit regulatory fees to the FCC with respect to ouroperations. We do not expect that these contribution obligations will have amaterial financial impact on us.

 

*Access by the Disabled:* The FCC has adopted rules that determine theobligations of telecommunications carriers to make their services accessible toindividuals with disabilities. The rules require wireless and other providersto offer equipment and services that are accessible to and useable by personswith disabilities. While the rules exempt telecommunications carriers frommeeting general 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,product line, or services at our expense.

 

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*Healthand Safety:*Various media reports have suggested that radiofrequency emissions from wireless handsets may be linked to an assortment ofhealth concerns, including cancer, and may interfere with some electronic medicaldevices, including hearing aids and pacemakers. Concerns over radio frequencyemissions may have the effect of discouraging the use of wireless handsets, andthus decrease demand for wireless products and 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. In addition, interest groups have requested thatthe FCC investigate claims that wireless technologies pose health concerns andcause interference with airbags, hearing aids, and medical devices. The FDA hasissued guidelines for the use of wireless phones by pacemaker wearers. Safetyconcerns have also been raised with respect to the use of wireless handsetswhile driving. Federal, state and local legislation has been proposed and, insome instances, enacted in response to these concerns. The FCC’s safety limitsfor human exposure to radio frequency emissions went into effect September 1,2000. After September 1, 2000, if any facility, operation or device is found tobe non-compliant with radio frequency emissions guidelines, and if any requiredenvironmental assessment has not been filed, penalties ranging from fines tolicense forfeiture may be imposed.

 

*RegulatoryOversight:*The rapid growth and penetration of wirelessservices has prompted the interest of the FCC, state legislatures, and statepublic utility commissions to oversee certain practices by the wirelessindustry, generally in the form of efforts to regulate customer billing,termination of service arrangements, advertising, filing of “informational”tariffs, certification of operation, and other areas. While the CommunicationsAct generally preempts state and local governments from regulating the entryof, or the rates charged by, wireless carriers, a state has authority toregulate “other terms and conditions” of service offerings by CMRS providersand may petition the FCC to allow it to regulate the rates of CMRS providers.No state has petitioned the FCC, but such action by the states in the futurecannot be precluded. Several states have also proposed or imposed consumerprotection regulations on CMRS providers. At the local level, wirelessfacilities typically are subject to zoning and land use regulation and may besubject to fees for use of public rights of way. Although local and stategovernments cannot categorically prohibit the construction of wirelessfacilities in any community, or take actions that have the effect of prohibitingconstruction, securing state and local government approvals for new tower sitesmay become a more difficult and lengthy process.

 

The FCC has expanded the flexibility of cellular, PCS, and other CMRSproviders to provide fixed as well as mobile services. Such fixed servicesinclude, but need not be limited to, “wireless local loop” services toapartment and office buildings, and wireless backup services to privatebusiness exchanges and local area networks, to be used in the event ofinterruptions due to weather or other emergencies. The FCC has determined thatfixed services provided as an ancillary service to a carrier’s mobile servicewill be regulated as commercial mobile radio services.

 

The FCC does not currently specify the rates CMRS carriers may chargefor their services, nor does it require the filing of tariffs for wirelessoperations. However, the FCC has the authority to regulate the rates, terms,and conditions under which we provide service because CMRS carriers arestatutorily considered to be common carriers and thus are required to chargejust and reasonable rates and are not allowed to engage in unreasonablediscrimination. The FCC has adopted rules governing charges for long distanceservice (e.g., rate integration) and use of customer proprietary networkinformation (“CPNI”), but these rules have been vacated by the courts and arenow subject to further FCC review. Additionally, the FCC has adopted rulesgoverning billing practices. While none of these existing requirements have amaterial impact on our operations, there is no assurance that future regulatorychanges may not materially impact us. The FCC has determined that theCommunications Act does not preempt state damages claims as a matter of law,but whether a specific damage award is prohibited would depend upon the factsof a particular case. This ruling may affect the number of class action suitsbrought against CMRS providers and the amount of damages awarded by courts.

 

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**Employeesand Sales Agents**

 

As of March 1, 2003, we had 1,056 employees,including 464 in sales and marketing, 281 in customer service, 167 in networkand systems operations, 98 in administration and 46 in finance and accounting.Approximately 45 of our employees were part-time. None of our employees isrepresented by a labor organization, and we believe we have excellent relationswith our employees. In addition, we utilize approximately 420 independent salesagents. Wireless Alliance has no full-time or part-time employees but operatesutilizing our employees.

 
| **ITEM 2.** | **PROPERTIES** |
|-------------|----------------|

 

Our corporate facilities include the following:

 
|                    |   | **Address**                                           |   | **Lease/  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            |   | 10,413           |   |
| 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           |   |

 

As of December 31, 2002, our network consisted of the following cellsites:

 

| Midwest            |   | 134 |   |
|--------------------|--------|-----|--------|
| Wireless  Alliance |   | 65  |   |
| Northeast          |   | 211 |   |
| Northwest          |   | 164 |   |
| South              |   | 158 |   |
| Total              |   | 732 |   |

 

Our leased sites consistof either land leases, tower leases, or both. We own all the equipment withinthe leased sites. The leases covering leased sites have various expirationdates and are with numerous lessors. These leases generally have renewaloptions that we would anticipate exercising. Due to our network design, loss ofa leased location would not have a material impact on the operations of aregion’s business.

 

We do not have anymaterial outstanding environmental issues with respect to any of ourproperties.

 

We have 92 retaillocations, of which almost all are leased. The leases covering these locationshave various expiration dates. We believe that the loss of any one of theseretail sites would not have a material impact on our business as we wouldlikely be able to obtain substantially equivalent alternative space.

 

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| **ITEM  3.** | **LEGAL PROCEEDINGS** |
|--------------|-----------------------|

 

***Securities Claims***.  RCC and certain of our officers have beennamed as defendants in the following actions:

 

•                  NoormohammedGurwala v. Rural Cellular Corporation, Richard P. Ekstrand, Wesley E. Schultzand David J. Del Zoppo, filed on December 24, 2002 in U.S. DistrictCourt for the District of Minnesota.

 

•                  RoderickB. Brown v. Rural Cellular Corporation, Richard P. Ekstrand and Wesley E.Schultz, filed on January 13, 2003 in U.S. District Court for the Districtof Minnesota.

 

•                  ChristianDiaz v. Rural Cellular Corporation, Richard P. Ekstrand, Wesley E. Schultz andDavid J. Del Zoppo, filed on February 4, 2003 in U.S. District Court forthe District of Minnesota.

 

•                  KennethKetter v. Rural Cellular Corporation, Richard P. Ekstrand, Wesley E. Schultzand David J. Del Zoppo, filed on February 14, 2003 in U.S. DistrictCourt for the District of Minnesota.

 

The plaintiffs in the Gurwala action, the Diaz action,and the Ketter action seek to represent a class consisting of allpersons (except defendants) who purchased the common stock of RCC in the marketduring the time period from January 6, 2002 through November 13, 2002.  The plaintiff in the Brown actionseeks to represent a class consisting of all persons (except defendants) whopurchased any publicly-traded securities of RCC during the time period fromMay, 2001 through November 12, 2002.  Inall four actions, plaintiffs allege that RCC’s publicly-announced financialresults misstated the actual performance because we had inappropriatelyaccounted for certain transactions. Plaintiffs further allege that, as a result, the market price of RCCsecurities was artificially inflated during the respective class periods.  Plaintiffs allege that defendants are liableunder Sections 10(b) and 20(a) of the Securities Exchange Act of 1934.  Plaintiffs seek compensatory damages in anunspecified amount, plus their attorneys’ fees, and costs.

 

The procedures of the Private Securities Litigation Reform Act (“PSLRA”)apply to these cases.  Pursuant to thoseprocedures, the court will consolidate the actions and appoint lead plaintiffsand lead counsel.  The lead plaintiffswill file a consolidated amended complaint. The parties have agreed that noresponse to the complaints listed above will be due, but that the defendantswill respond to a consolidated amended complaint. Under the PSLRA, discovery isstayed until a motion to dismiss is denied or defendants file an answer to theconsolidated amended complaint.

 

The defendants are beneficiaries of directors’ and officers’ liabilityinsurance, which includes coverage for securities claims, subject to certainexclusions.  The carriers have beennotified of these actions, but have not provided a formal position on coverage.  We anticipate that additional cases withsimilar allegations may be filed.

 

***Derivative Action***.  The following is a purported derivativeaction brought against all of RCC’s directors and against Rural CellularCorporation, as a nominal defendant.

 

•                  HieneJunge v. Richard P. Ekstrand, Wesley E. Schultz, Ann K. Newhall, Jeffrey S.Gilbert, Marvin C. Nicolai, George M. Revering, Don C. Swenson, George W.Wikstrom, Paul J. Finnegan, and John Hunt; and Rural Cellular Corporation asnominal defendant, commenced on or about February 20, 2003 in DouglasCounty District Court, Alexandria, Minnesota.

 

The plaintiff is a shareholder of RCC and claims to bring suit onbehalf of RCC.  No pre-lawsuit demand toinvestigate the allegations or bring the action was made on the board ofdirectors.  The plaintiff alleges thatthe directors breached their fiduciary duties to RCC, or abused their control,or grossly mismanaged the company, or wasted company assets, by allowing orcausing RCC to improperly account for certain transactions in its financialstatements during the time period from May 2001 through November 12, 2002.  The plaintiff further alleges that theimproper accounting eventually led to the commencement of federal securitiesclass actions (described above) against the company, which allegedly will causeRCC to expend significant sums of money. The plaintiff seeks compensatory damages against the directors in anunspecified amount, plus his attorneys’ fees and costs.

 

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***Other Claims***.*** ***We are involved from time to time in other routine legalmatters and other claims incidental to our business.  We believe that the resolution of such routine matters and otherincidental claims, taking into account established reserves and insurance, willnot have a material adverse impact on our consolidated financial position orresults of operations.

 
| **ITEM  4.** | **SUBMISSION OF  MATTERS TO A VOTE OF SECURITY HOLDERS** |
|--------------|----------------------------------------------------------|

 

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

 

**EXECUTIVE OFFICERS OF THE REGISTRANT**

 

The following table sets forth certain information with regard to eachof our executive officers:

 
| **Name**            |   | **Age** |   | **Position**                                                    |
|---------------------|--------|---------|--------|-----------------------------------------------------------------|
|                |   |    |   |                                                            |
| Richard P. Ekstrand |   | 53      |   | President, Chief  Executive Officer and Director                |
|                |   |    |   |                                                            |
| Wesley E. Schultz   |   | 46      |   | Executive Vice  President, Chief Financial Officer and Director |
|                |   |    |   |                                                            |
| Ann K. Newhall      |   | 52      |   | Executive Vice  President, Chief Operating Officer and Director |
|                |   |    |   |                                                            |
| David J. Del Zoppo  |   | 47      |   | Vice President, Finance  and Accounting                         |

 

***Richard P. Ekstrand*** has served as ourPresident, Chief Executive Officer, and a director since 1990.****** He currently serves on the board of directorsand executive committee of the Cellular Telecommunications Internet Association(CTIA) and the Wireless Foundation. Mr. Ekstrand previously served as Chairmanof the Board of Directors of both CTIA and the Wireless Foundation. He also wasa founding director of the Rural Cellular Association and served as a directoruntil 2000. In addition, he is past President of the Minnesota TelephoneAssociation, the Association of Minnesota Telephone Utilities, and theMinnesota Telecommunications Association. Mr. Ekstrand is the sole shareholder,president, and a director of North Holdings, Inc. (formerly Lowry TelephoneCo., Inc.), which is a shareholder of Rural Cellular. From 1980 through 2000,Mr. Ekstrand had served as vice president and a director of Lowry TelephoneCo., Inc. North Holdings, Inc. is a member of Lowry Telephone Company, LLC, ofwhich Mr. Ekstrand is the treasurer and a member of the board of governors.

 

***Wesley E. Schultz***has served as Executive Vice President andChief Financial Officer since August 2000. He joined us in May 1996 as VicePresident of Finance and Chief Financial Officer.  In August 1999, he was appointed a director and in October 1999,he was appointed Senior Vice President and Chief Financial Officer andAssistant Secretary. Mr. Schultz is a certified public accountant and servedfor three years as an auditor with Deloitte and Touche LLP.

 

***Ann K. Newhall***hasserved as Executive Vice President and Chief Operating Officer sinceAugust 2000. She joined us in February 1999 as Senior Vice President andGeneral Counsel and was appointed a director in August 1999.  In February 2000, she was appointedSecretary. Prior to joining us, Ms. Newhall was a shareholder attorney withMoss & Barnett, A Professional Association, most recently serving asPresident and a director of the firm. Ms. Newhall received her J.D. from theUniversity of Minnesota Law School in 1977.

 

***David J. Del Zoppo***has served as Vice President, Finance andAccounting since October 1999.  Hejoined RCC in May 1997 as Controller and was appointed Vice President in July1998. Mr. Del Zoppo is a certified public accountant and served for four yearsas an auditor with KPMG, LLP.

 

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**PART II**

 

## **ITEM5.**              MARKETFOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

 

Our Class A common stock was traded on The Nasdaq National Market underthe symbol RCCC until December 18, 2002. Since that date, RCC’s Class A commonstock has been quoted on the OTC Bulletin Board under the symbol RCCC.OB.

 

The following table indicates the high and low sales price for eachquarter of the 2002 and 2001 fiscal years on the Nasdaq National Market throughDecember 17, 2002, and on the OTC Bulletin Board from December 18, 2002 throughDecember 31, 2002.

 

|           |   | **High** |   | **Low** |   |
|----------------|--------|----------|--------|---------|--------|
| **2002**       |   |     |   |    |   |
| First Quarter  |   | $        | 23.05  |    | $      | 2.90 |   |
| Second Quarter |   | $        | 5.15   |    | $      | 0.80 |   |
| Third Quarter  |   | $        | 2.69   |    | $      | 0.65 |   |
| Fourth Quarter |   | $        | 2.50   |    | $      | 0.58 |   |
|           |   |     |   |    |   |
| **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 19, 2003, there were approximately 120 holders of record ofour Class A common stock and approximately 20 holders of record of our Class Bcommon stock.

 

#### ***Dividend Policy***

 

RCC has never paid dividends on its Common Stock.  We currently intend to retain all futureearnings, if any, for the operation and expansion of our business and do notexpect to pay any cash dividends on our Common Stock in the foreseeable future.Further, the terms of our credit facilities, senior subordinated notes, andexchangeable preferred stock limit our ability to pay dividends on our CommonStock.

 

25

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| **ITEM  6.** | **SELECTED  FINANCIAL DATA** |
|--------------|------------------------------|

 

The data set forth below should be read in conjunction with“Management’s Discussion and Analysis of Financial Condition and Results ofOperations” and the consolidated financial statements and accompanying notesincluded elsewhere in this Form 10-K.

 

Our financial performance, and the year-to-year comparability of suchperformance, have been affected by acquisitions (see discussion in Item 7),increased borrowings under our credit facility, issuance of preferredsecurities and the issuance of senior subordinated notes to fund our growth.Accordingly, we do not believe our historical financial condition and resultsof operations set forth below are indicative nor should they be relied upon asan indicator of our future performance.

 

26

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The following tables set forth certain of our consolidated financialand operating data as of and for each of the five years in the period endedDecember 31, 2002. We derived the selected financial data for each of the fiveyears ended December 31 from our consolidated financial statements. 

 
| **(In thousands, except per share and other operating data)**                                                  |   | **Years  ended December 31,** |         |
|----------------------------------------------------------------------------------------------------------------|--------|-------------------------------|--------------|
|                                                                                                           |   | **2002**                      |         | **2001** |   | **2000** |   | **1999** |   | **1998** |   |
|                                                                                                           |   |                          |         |   |   |   |   |   |   |   |   |
| **Statement  of Operations Data:**                                                                             |   |                          | ** **   |   | ** ** |   | ** ** |   | ** ** |   | ** ** |
| Revenue:                                                                                                       |   |                          | ** **   |   | ** ** |   | ** ** |   | ** ** |   | ** ** |
| Service                                                                                                        |   | **$**                         | **315,012**  | ** ** | $ | 305,988 |   | $ | 238,556 |   | $ | 125,361 |   | $ | 90,997 |   |
| Roaming                                                                                                        |   | **122,703**                   | ** **   | 116,541 |   | 98,693 |   | 43,081 |   | 19,821 |   |
| Equipment                                                                                                      |   | **20,442**                    | ** **   | 18,627 |   | 18,848 |   | 7,299 |   | 2,700 |   |
| Total  revenue                                                                                                 |   | **458,157**                   | ** **   | 441,156 |   | 356,097 |   | 175,741 |   | 113,518 |   |
| Operating  expenses:                                                                                           |   |                          | ** **   |   |   |   |   |   |   |   |   |
| Network  costs                                                                                                 |   | **97,200**                    | ** **   | 101,509 |   | 85,988 |   | 38,549 |   | 33,863 |   |
| Cost  of equipment sales                                                                                       |   | **29,184**                    | ** **   | 28,415 |   | 34,711 |   | 10,951 |   | 5,968 |   |
| Selling,  general and administrative                                                                           |   | **114,264**                   | ** **   | 117,855 |   | 95,034 |   | 54,753 |   | 39,156 |   |
| Depreciation  and amortization                                                                                 |   | **82,497**                    | ** **   | 112,577 |   | 91,078 |   | 41,277 |   | 26,532 |   |
| Total  operating expenses                                                                                      |   | **323,145**                   | ** **   | 360,356 |   | 306,811 |   | 145,530 |   | 105,519 |   |
| Operating  income                                                                                              |   | **135,012**                   | ** **   | 80,800 |   | 49,286 |   | 30,211 |   | 7,999 |   |
| Other  income (expense):                                                                                       |   |                          | ** **   |   |   |   |   |   |   |   |   |
| Interest  expense                                                                                              |   | **(111,159**                  | **)**        | (130,432 | ) | (89,839 | ) | (27,116 | ) | (19,060 | ) |
| Interest  and dividend income                                                                                  |   | **562**                       | ** **   | 1,172 |   | 2,249 |   | 467 |   | 1,461 |   |
| Minority  interest                                                                                             |   | **—**                    | ** **   | — |   | — |   | 1,663 |   | 4,553 |   |
| Other                                                                                                          |   | **66**                        | ** **   | (752 | ) | (24 | ) | (338 | ) | (535 | ) |
| Other  expense, net                                                                                            |   | **(110,531**                  | **)**        | (130,012 | ) | (87,614 | ) | (25,324 | ) | (13,581 | ) |
| Income  (loss) before income taxes, extraordinary item and cumulative change in  accounting principle          |   | **24,481**                    | ** **   | (49,212 | ) | (38,328 | ) | 4,887 |   | (5,582 | ) |
| Income  tax provision                                                                                          |   | **—**                    | ** **   | — |   | — |   | 37 |   | — |   |
| Income  (loss) before extraordinary item and cumulative change in accounting  principle                        |   | **24,481**                    | ** **   | (49,212 | ) | (38,328 | ) | 4,850 |   | (5,582 | ) |
| Extraordinary  item – early extinguishment of debt                                                        |   | **(3,319**                    | **)**        | — |   | (925 | ) | — |   | (1,042 | ) |
| Income  (loss) before cumulative change in accounting principle                                                |   | **21,162**                    | ** **   | (49,212 | ) | (39,253 | ) | 4,850 |   | (6,624 | ) |
| Cumulative  change in accounting principle                                                                     |   | **(417,064**                  | **)**        | 1,621 |   | — |   | — |   | — |   |
| Net  income (loss)                                                                                             |   | **(395,902**                  | **)**        | (47,591 | ) | (39,253 | ) | 4,850 |   | (6,624 | ) |
| Preferred  stock dividend                                                                                      |   | **(60,556**                   | **)**        | (54,545 | ) | (44,081 | ) | (15,912 | ) | (9,090 | ) |
| Net  loss applicable to common shares                                                                          |   | **$**                         | **(456,458** | **)** | $ | (102,136 | ) | $ | (83,334 | ) | $ | (11,062 | ) | $ | (15,714 | ) |
| Weighted  average common shares outstanding                                                                    |   | **11,920**                    | ** **   | 11,865 |   | 11,510 |   | 9,047 |   | 8,916 |   |
|                                                                                                           |   |                          | ** **   |   |   |   |   |   |   |   |   |
| Net  loss applicable to common shares before extraordinary item and cumulative  change in accounting principle |   | **$**                         | **(3.02**    | **)** | $ | (8.74 | ) | $ | (7.16 | ) | $ | (1.22 | ) | $ | (1.64 | ) |
| Extraordinary  item                                                                                            |   | **(0.28**                     | **)**        | — |   | (0.08 | ) | — |   | (0.12 | ) |
| Cumulative  change in accounting principle                                                                     |   | **(34.99**                    | **)**        | .13 |   | — |   | — |   | — |   |
| Net  loss per basic and diluted share                                                                          |   | **$**                         | **(38.29**   | **)** | $ | (8.61 | ) | $ | (7.24 | ) | $ | (1.22 | ) | $ | (1.76 | ) |

 

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|                                                          |   | **As of  December 31,** |         |
|---------------------------------------------------------------|--------|-------------------------|--------------|
| **(In thousands, except per share and other operating data)** |   | **2002**                |         | **2001** |   | **2000** |   | **1999** |   | **1998** |   |
| **Balance  Sheet Data:**                                      |   |                    |         |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Working  capital (deficit)                                    |   | **$**                   | **(55,496**  | **)** | $ | (18,273 | ) | $ | (23,578 | ) | $ | (5,887 | ) | $ | (9,538 | ) |
| Net  property and equipment                                   |   | **240,536**             | ** **   | 244,980 |   | 234,490 |   | 130,651 |   | 131,714 |   |
| Total  assets                                                 |   | **1,462,978**           | ** **   | 1,836,779 |   | 1,771,796 |   | 526,278 |   | 480,524 |   |
| Total  long-term liabilities                                  |   | **1,211,026**           | ** **   | 1,286,301 |   | 1,157,472 |   | 339,742 |   | 298,851 |   |
| Total  shareholders’ (deficit) equity                    |   | **$**                   | **(483,115** | **)** | $ | (33,830 | ) | $ | 79,955 |   | $ | 9,427 |   | $ | 19,279 |   |
|                                                          |   |                    |         |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                          |   | **As of  December 31,** |         |
|                                                          |   | **2002**                |         | **2001** |   | **2000** |   | **1999** |   | **1998** |   |
| **Other  Operating Data:**                                    |   |                    | ** **   |   |   |   |   |   |   |   |   |
| Customers (not  including long distance and paging):          |   |                    | ** **   |   | ** ** |   | ** ** |   | ** ** |   | ** ** |
| Postpaid                                                      |   | **639,221**             | ** **   | 599,514 |   | 531,290 |   | 243,277 |   | 203,100 |   |
| Prepaid                                                       |   | **27,452**              | ** **   | 33,255 |   | 20,832 |   | 2,494 |   | 296 |   |
| Wholesale                                                     |   | **55,700**              | ** **   | 29,139 |   | 12,727 |   | — |   | — |   |
| Total customers                                               |   | **722,373**             | ** **   | 661,908 |   | 564,849 |   | 245,771 |   | 203,396 |   |
|                                                          |   |                    | ** **   |   |   |   |   |   |   |   |   |
| Marketed POPs(1)                                              |   | **5,893,000**           | ** **   | 5,893,000 |   | 5,443,000 |   | 3,118,000 |   | 3,049,000 |   |
|                                                          |   |                    | ** **   |   |   |   |   |   |   |   |   |
| Penetration(2)                                                |   | **11.3**                | **%**        | 10.7 | % | 10.1 | % | 7.9 | % | 6.7 | % |
|                                                          |   |                    | ** **   |   |   |   |   |   |   |   |   |
| Retention(3)                                                  |   | **98.2**                | **%**        | 97.8 | % | 98.2 | % | 98.3 | % | 98.3 | % |
|                                                          |   |                    | ** **   |   |   |   |   |   |   |   |   |
| Average monthly  revenue per customer(4)                      |   | **$**                   | **57**       | ** ** | $ | 59 |   | $ | 61 |   | $ | 54 |   | $ | 55 |   |
|                                                          |   |                    | ** **   |   |   |   |   |   |   |   |   |
| Acquisition cost  per customer(5)                             |   | **$**                   | **373**      | ** ** | $ | 287 |   | $ | 358 |   | $ | 365 |   | $ | 395 |   |
|                                                          |   |                    | ** **   |   |   |   |   |   |   |   |   |
| Cell sites /  Base stations:                                  |   | **732**                 | ** **   | 684 |   | 654 |   | 328 |   | 286 |   |
|                                                               |        |                         |              |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(1)          For2002 and 2001, updated to reflect 2000 U.S. Census Bureau OfficialStatistics.   For years 1998 through2000, updated to reflect July 1, 1997, 1990 U.S. Census Bureau OfficialStatistics.

 

(2)          Represents the ratio of wireless voice customers,excluding wholesale, at 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 revenue 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 the gross postpaid and prepaid wireless voicecustomers added during such period.

 

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| **ITEM 7.** | **MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS** |
|-------------|-------------------------------------------------------------------------------------------------|

 

**CRITICALACCOUNTING POLICIES AND ESTIMATES**

 

The following discussion and analysis is based upon our consolidatedfinancial statements, which have been prepared in accordance with accountingprinciples generally accepted in the United States of America.  The preparation of our consolidatedfinancial statements requires management to make estimates and assumptions thataffect the reported amounts of revenue and expenses, and assets andliabilities, during the periods reported. Estimates are used when accounting for certain items such as unbilledrevenue, allowance for doubtful accounts, depreciation and amortizationperiods, income taxes, valuation of intangible assets, and litigationcontingencies.  We base our estimates onhistorical experience, where applicable, and other assumptions that we believeare reasonable under the circumstances.

 

We believe that the following critical accounting policies affect ourmore significant judgments and estimates used in the preparation of ourconsolidated financial statements.

 

## **Goodwill andIndefinite-Lived Intangible Assets**

 

We evaluate our goodwill and indefinite livedintangible assets for impairment at least annually and more frequently whenindicators of impairment exist. Effective with the adoption of Statementof Financial Accounting Standards (“SFAS”) No.142, RCC is no longer amortizing goodwill or indefinite lived assets.Additionally, we have reassessed the useful lives of previously recognizedintangible assets (primarily customer lists and FCC licensing costs). Wereassessed the useful life of our customer lists and determined our currentpolicy continues to be appropriate.  Asignificant portion of our intangible assets consists of licenses that provideour wireless operations with the exclusive right to utilize certain radiofrequency spectrum to provide cellular communication services. While licensesare issued for only a fixed time, generally ten years, such licenses aresubject to renewal by the FCC. Renewals of licenses have occurred routinely andat nominal cost. Moreover, we have determined that there are currently nolegal, regulatory, contractual, competitive, economic or other factors thatlimit the useful life of our wireless licenses. As a result, licenses will betreated as an indefinite-lived intangible asset under the provisions of SFASNo. 142 and will not be amortized but rather will be tested for impairment. Wewill reevaluate the useful life determination for licenses each quarter todetermine whether events and circumstances continue to support an indefiniteuseful life.

 

Upon adoption of SFAS No. 142, we completed animpairment test for both our goodwill and licensing costs and determined thatthere were impairments of $5.0 million and $412.0 million, respectively.  We used a fair value approach, usingprimarily discounted cash flows, to complete the transitional impairmenttests.  In accordance with SFAS No. 142,the impairment charges are recorded in our consolidated financial statements forthe first quarter of 2002.

 

On a prospective basis, we are required to testboth consolidated goodwill and other indefinite-lived intangible assets,including licenses, for impairment on an annual basis (October 1) using a fairvalue approach. Additionally, goodwill must be tested for impairment betweenannual tests if an event occurs or circumstances change that would more likelythan not reduce the fair value of an entity below its carrying value. Theseevents or circumstances would include a significant change in the businessclimate, including a significant sustained decline in an entity’s market value,regulatory requirements, operating performance indicators, competition, sale ordisposition of a significant portion of the business, or other factors.  Other indefinite-lived intangible assetsmust be tested between annual tests if events or changes in circumstancesindicate that the asset might be impaired. We performed our annual impairmenttest for both goodwill and licensing costs during the fourth quarter of 2002,using methodologies consistent with those applied for our transitionalimpairment tests performed as of January 1, 2002. No further impairment wasrecognized as a result of this testing.

 

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We believe that the accounting estimate relatedto determining the fair value of goodwill and indefinite-lived intangibleassets, and thus any impairment, is a “critical accounting estimate” because(i) it is highly susceptible to change from period to period because itrequires management to make cash flow assumptions about future sales, operatingcosts, and discount rates over an indefinite life and (ii) the impact thatrecognizing an impairment would have on the assets reported on our balancesheet as well as our net income (loss) would be material.  In estimating future operations, we use ourinternal budgets, which require significant judgment on anticipated customergrowth and business trends.

 

**Revenue Recognition - Service**

 

We recognize service revenue based upon minutes of use processed andcontracted fees, net of credits and adjustments for service discounts. As aresult of our billing cycle cut-off times, we are required to make estimatesfor service revenue earned but not yet billed at the end of each month. Theseestimates are based primarily upon historical minutes of use processed.  We follow this method since reasonablydependable estimates of the revenue can be made.  Actual billing cycle results and related revenue may vary,depending on customer usage and rate plan mix, from the results estimated atthe end of each quarter.

 

**Revenue Recognition - Roaming Revenueand Incollect Cost**

** **

Roaming revenue and incollect cost information is provided to RCCprimarily through a third party centralized clearinghouse. From theclearinghouse we receive monthly settlement data. Management bases its accrualof roaming revenue and incollect expense on these clearinghouse reports. RCCfollows this method since reasonably dependable estimates of roaming revenueand incollect cost can be made.

 

**Allowancefor Doubtful Accounts**

 

We maintain an allowance for doubtful accounts for estimated lossesthat will result from failure of our customers to pay amounts owed. We base ourestimates on the aging of our accounts receivable balances and our historicalwrite-off experience, net of recoveries. If the financial condition of ourcustomers were to deteriorate, additional allowances may be required.

 

**Depreciation of Property andEquipment**

 

When recording the depreciation expense associated with our wirelesscommunications equipment, we use estimated useful lives. To monitor for changesin technology and industry conditions, we periodically evaluate the usefullives of our wireless communications equipment. These evaluations could resultin a change in their useful lives in future periods.

 

While we believe our estimates of useful lives are reasonable,significant differences in actual experience or significant change in ourassumptions may materially affect future depreciation expense.

 

**Impairmentof Long-Lived Assets**

 

RCC assesses the impairment of its long-lived assets whenever events orchanges in circumstances indicate that the carrying value may not berecoverable as measured by the sum of the expected future undiscounted cashflows. Factors management considers that could trigger an impairment reviewinclude significant underperformance relative to minimum future operatingresults, significant change in the manner of use of the assets, significanttechnological or industry changes, or changes in the strategy for our overallbusiness. When we determine that the carrying value of certain long-livedassets may not be recoverable based upon the existence of one or more of theabove indicators of impairment, we then measure any impairment based on aprojected discounted cash flow method using a discount rate determined bymanagement to be commensurate with the risk inherent in our current businessmodel.

 

30

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We believe that the accounting estimate related to determining anyimpairment relating to long-lived assets is a “critical accounting estimate”because (i) it is highly susceptible to change from period to period because itrequires management to make cash flow assumptions about future sales, operatingcosts, and discount rates over an indefinite life and (ii) the impact thatrecognizing an impairment would have on the assets reported on our balancesheet as well as our net income (loss) would be material.  In estimating future operations, we use ourinternal budgets which require significant judgment on anticipated customergrowth and business trends.

 

**IncomeTaxes**

 

We account for income taxes in accordance with SFAS No. 109,“Accounting for Income Taxes.”  As partof the process of preparing the consolidated financial statements, we arerequired to estimate income taxes in each of the jurisdictions in which weoperate. This process involves estimating actual current tax exposure togetherwith assessing temporary differences resulting from differing treatment of itemsfor tax and accounting purposes. These differences result in deferred taxassets and liabilities.  We must thenassess the likelihood that deferred tax assets will be recovered from futuretaxable income and, to the extent we believe that recovery is not likely, wemust establish a valuation allowance. To the extent RCC increases or decreasesthe valuation allowance in a period, we must include an expense or benefitwithin the tax provision in the consolidated statement of operations.

 

Significant management judgment is required in determining theprovision for income taxes, deferred tax assets and liabilities, and anyvaluation allowance recorded against net deferred tax assets. As of December31, 2002, we had recorded a valuation allowance of $158.2 million due touncertainties related to our ability to utilize the deferred tax assets.  The deferred tax assets consist principallyof certain net operating losses (NOL) being carried forward, as well asimpairment write-downs of intangible assets not currently deductible for taxpurposes.  The valuation allowance isbased on our historical operations projected forward and our estimate of futuretaxable income and the period over which deferred tax assets will be recoverable.It is possible that we could be profitable in the future at levels that causeus to conclude that it is more likely than not that we will realize a portionor all of the NOL carryforward. Upon reaching such a conclusion, we wouldimmediately record the estimated net realizable value of the deferred tax assetat that time and would then provide for income taxes at a rate equal to ourcombined federal and state effective rates, which would be approximately 38%under current tax law.  Subsequentrevisions to the estimated net realizable value of the deferred tax asset couldcause the provision for income taxes to vary significantly from period toperiod, although our cash tax payments would remain unaffected until thebenefit of the NOL is utilized.

 

**Litigationand Other Loss Contingencies**

 

In the ordinary course of business, RCC is subject to litigation andother contingencies.  Management mustuse its best judgment and estimates of probable outcomes when determining theimpact.  RCC assesses the impact ofclaims and litigation on a regular basis and updates the assumptions andestimates used to prepare the consolidated financial statements.

 

#### ***RECENTLYISSUED ACCOUNTING PRONOUNCEMENTS***

 

In March 2003, the Financial Accounting Standards Board (“FASB”) issuedSFAS No. 149, “Accounting for Certain Financial Instruments withCharacteristics of Liabilities and Equity,” which is effective at the beginningof the first interim period beginning after June 15, 2003. SFAS No. 149establishes standards for our classification of liabilities in the financial statementsthat have characteristics of both liabilities and equity. We believe thatadoption of SFAS No. 149 will result in our redeemable preferred stock beingpresented in long-term liabilities on the balance sheet and dividends on thepreferred stock being classified as interest expense instead of as dividends.

 

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In December 2002, the FASB issued SFAS No. 148, “Accounting forStock-Based Compensation—Transition and Disclosure, an Amendment of FASBStatement No. 123.” SFAS No. 148 amends SFAS No. 123, “Accounting forStock-Based Compensation,” to provide alternative methods of transition for avoluntary change to the fair value based method of accounting for employeestock-based compensation. In addition, SFAS No. 148 amends the disclosurerequirements of SFAS No. 123 to require prominent disclosure in annual andinterim financial statements about the method of accounting used by the issuerfor stock-based compensation and its effect on the issuer’s reported results.The disclosure provisions of SFAS No. 148 are included in the Notes toConsolidated Financial Statements. We applied the principles of APB Opinion No.25 and related interpretations in accounting for our stock-based compensationplans.

 

In November 2002, the Emerging Issues Task Force (“EITF”) reached aconsensus on Issue No. 00-21, “Revenue Arrangements with MultipleDeliverables.”  EITF No. 00-21 addresseshow revenue arrangements with multiple deliverables should be divided intoseparate units of accounting and how the arrangement consideration should beallocated to the identified separate accounting units.  EITF No. 00-21 is effective after June 15,2003.  We have not yet determined theimpact adopting EITF No. 00-21 will have on our results of operations orfinancial position.

 

In November 2002, the FASB issued FASB Interpretation No. 45,“Guarantor’s Accounting and Disclosure Requirements for Guarantees, IncludingIndirect Guarantees of Indebtedness of Others” (“FIN 45”). FIN 45 clarifies therequirements for a guarantor’s accounting for and disclosure of certain issuedand outstanding guarantees. The initial recognition and initial measurementprovisions of FIN 45 are applicable to guarantees issued or modified afterDecember 31, 2002. The disclosure requirements of FIN 45 are effective forfinancial statements for interim or annual periods ending after December 15,2002.

 

In July2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exitor Disposal Activities.” SFAS No. 146 supersedes previous accounting guidance,principally EITF Issue No. 94-3, “Liability Recognition for Certain EmployeeTermination Benefits and Other Costs to Exit an Activity (including CertainCosts Incurred in a Restructuring).” SFAS No. 146 requires companies torecognize costs associated with exit or disposal activities when they areincurred rather than at the date of a commitment to an exit or disposal plan.Examples of costs covered by SFAS No. 146 include lease termination costs andcertain employee severance costs that are associated with a restructuring,discontinued operation, plant closing, or other exit or disposal activity. Wewill adopt SFAS No. 146 prospectively for exit or disposal activities initiatedafter December 31, 2002.

 

In April 2002, the FASB issued SFAS No. 145, “Rescission of FASBStatements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and TechnicalCorrections.” SFAS No. 145 requires that gains and losses from theextinguishments of debt be classified as extraordinary items only if they meetthe criteria in Accounting Principles Board Opinion No. 30 (“Opinion No. 30”).SFAS No. 145 is effective for RCC for periods beginning January 1, 2003. Uponthe adoption of SFAS No. 145, RCC will reclassify prior period statements ofoperations to conform to the presentation required by SFAS No. 145. Under SFASNo. 145, we will report gains and losses on extinguishments of debt in interestexpense.

 

In October 2001, the FASB issued SFAS No. 144, “Accounting for theImpairment or Disposal of Long-Lived Assets.” SFAS No. 144 supersedes SFAS No.121, “Accounting for the Impairment of Long-Lived Assets and for Long-LivedAssets to Be Disposed Of.” SFAS No. 144 develops a single accounting model forlong-lived assets to be disposed of, whether previously held and used or newlyacquired. RCC adopted this statement on January 1, 2002. There was no impact toour financial statements.

 

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In July 2001, the FASB issued SFAS No. 143, “Accounting for AssetRetirement Obligations.” SFAS No. 143 provides accounting and reportingstandards for costs associated with the retirement of long-lived assets. Itrequires entities to record the fair value of a liability for an assetretirement obligation in the period in which it is incurred. When the liabilityis initially recorded, the entity capitalizes the cost by increasing thecarrying amount of the related long-lived asset. Over time, the liability isaccreted to its present value, and the capitalized cost is depreciated over theuseful life of the related asset. Upon settlement of the liability, an entityeither settles the obligation for its recorded amount or incurs a gain or lossupon settlement. We have determined this new accounting standard will notaffect our results of operations, financial position and cash flows. We wererequired to implement this standard effective January 1, 2003.

 

In accordance with the guidance set forth in SFAS No. 142,“Goodwill and Other Intangible Assets,” we evaluate our goodwill and indefinitelived intangible assets for impairment at least annually and more frequentlywhen indicators of impairment exist. Effective with the adoption of SFAS No.142, RCC no longer amortizes goodwill or indefinite lived assets.  Additionally, we have reassessed the usefullives of previously recognized intangible assets (primarily FCC licensing costsand customer lists). A significant portion of our intangible assets consists oflicenses that provide our wireless operations with the exclusive right toutilize certain radio frequency spectrum to provide cellular communicationservices. While licenses are issued for only a fixed time, generally ten years,such licenses are subject to renewal by the FCC. Renewals of licenses haveoccurred routinely and at nominal cost. Moreover, we have determined that thereare currently no legal, regulatory, contractual, competitive, economic or otherfactors that limit the useful life of our wireless licenses. As a result,licenses will be treated as indefinite-lived intangible assets under theprovisions of SFAS No. 142 and will not be amortized but rather will be testedfor impairment. We will reevaluate the useful life determination for licenseseach quarter to determine whether events and circumstances continue to supportan indefinite useful life. We reassessed the useful life of our customer listsand determined that our current policy continues to be appropriate.

 

Upon adoption of SFAS No. 142, we completed an impairment test for bothour consolidated goodwill and our licensing costs and determined that therewere impairments of $5.0 million and $412.0 million, respectively.  RCC used a fair value approach, usingprimarily discounted cash flows, to complete the transitional impairmenttests.  In accordance with SFAS No. 142,the impairment charges are recorded in RCC’s consolidated financial statementsfor the first quarter of 2002.

 

On aprospective basis, RCC is required to test both consolidated goodwill and otherindefinite-lived intangible assets, including licenses, for impairment on anannual basis (October 1) using a fair value approach. Additionally, goodwillmust be tested for impairment between annual tests if an event occurs orcircumstances change that would more likely than not reduce the fair value ofan entity below its carrying value. These events or circumstances would includea significant change in the business climate, including a significant sustaineddecline in an entity’s market value, regulatory requirements, operatingperformance indicators, competition, sale or disposition of a significantportion of the business, or other factors. Other indefinite-lived intangible assets must be tested between annualtests if events or changes in circumstances indicate that the asset might beimpaired. RCC performed its annual impairment test for both goodwill andlicensing costs during the fourth quarter of 2002, using methodologiesconsistent with those applied for its transitional impairment tests performedas of January 1, 2002. No further impairment was recognized as a result ofthis testing.

 

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**BUSINESSOVERVIEW**

 

We have materiallyexpanded our business since 1996 through a series of acquisitions, increasingthe population to whom we market our services from 636,000 to 5.9 million,covering portions of the Midwest, Northeast, South, and Northwest regions. Asof December 31, 2002, we provided wireless voice services to approximately667,000 customers, excluding wholesale customers.

 

Our principal operatingobjective is to increase revenue and achieve profitability through increasedpenetration in existing markets. We believe that we can achieve this objectivebecause our rural markets provide growth opportunities due to their lowercurrent penetration rates and reduced competition for customers as compared towireless systems located in larger metropolitan areas.

 

Our revenue primarilyconsists of service, roaming, and equipment revenue, each of which is describedbelow:

 

•  **Service** revenue includes 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 wireless and paging equipment lease revenue. Alsoincluded are activation fees and charges for such features as voicemail, callwaiting, and call forwarding. Service revenue also includes incollect revenue,which consist of charges to our customers when they use their wireless phonesin other wireless markets. We do not charge installation or connection fees.

 

•  **Roaming** revenue includes only outcollectrevenue, which we receive when other wireless providers’ customers use ournetwork.

 

•  **Equipment** revenue includes sales ofwireless and paging equipment, accessory sales to customers, and networkequipment reselling.

 

Our operating expensesinclude network costs, cost of equipment sales, selling, general andadministrative expenses, and depreciation and amortization, each of which isdescribed below:

 

•  **Network costs** include switching andtransport expenses and expenses associated with the maintenance and operationof our wireless network facilities, including salaries for employees involvedin network operations, site costs, charges from other service providers forresold minutes, and the expense associated with incollect revenue.

 

•  **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 per gross additional customer. We expect to continuethese discounts and promotions because we believe they will increase the numberof our wireless customers and, consequently, increase service revenue. Cost ofequipment sales does not include the cost of handsets leased to customers, asthis cost is capitalized and depreciated over the useful life of the handset.

 

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

 

•  **Depreciation and amortization** representsthe costs associated with the depreciation of fixed assets and the amortizationof customer lists. Under the rules of SFAS No. 142, RCC believes licenses andgoodwill qualify as having indefinite useful lives and, therefore, as ofJanuary 1, 2002, they are no longer being amortized. Depreciation andamortization also includes the depreciation of the capitalized cost of handsetsleased to customers.

 

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In addition to the operating expenses discussed above, RCC also incursother expenses, primarily interest expense related to financing, and preferredstock dividends.

 

•                                          **Interestexpense** primarily results from borrowings under the credit facilityand the senior subordinated notes, the proceeds of which were used to financeacquisitions, repay other borrowings, and further develop RCC’s wirelessnetwork. Also contributing to interest expense are adjustments reflecting theineffective portion of a derivative’s change in fair value, the change in fairmarket value of derivatives not qualifying for hedge accounting under SFAS No.133, the amortization of deferred financing costs, and the noncash amortizationof costs incurred from unwinding certain financial instruments.

 

•                                          **Preferredstock dividends** are related to our issuances of preferred securitiesin 1998 and 2000. We currently pay dividends on our senior and juniorexchangeable preferred stock by issuing additional shares. Beginning in August2003, we are required to pay cash dividends on our senior exchangeablepreferred stock, and beginning in May 2005, we are required to pay cashdividends on our junior exchangeable preferred stock.

 

### **Customer base**

 

### **Our customer base contains threetypes of customers: postpaid, wholesale, and prepaid.  Postpaid customers account for the largest portion of ourcustomer base, at 88.5%.  Thesecustomers pay a monthly access fee for a wireless service plan that generallyincludes a fixed amount of minutes and certain service features.  In addition to the monthly access fee, thesecustomers are typically billed in arrears for long-distance charges, roamingcharges and minutes of use exceeding the rate plans.  Our wholesale customers are similar to our postpaid customers inthat they pay monthly fees to utilize our network and services; however, thecustomers are billed by a third party (reseller), who has effectively resoldour service to the end user (customer). We in turn bill the third party for themonthly usage of the end user.  Thewholesale base accounts for 7.7% of our total customer base.  Our prepaid customers, which account for3.8% of our customer base, are customers that prepay for an agreed upon amountof minutes.  Our average monthly revenueper customer and total gross additions are calculated and reported based onlyon postpaid customer information.**

 

**STRATEGIC HISTORY**

 

We were founded in 1991 through the combination of five partnershipsholding different cellular licenses in Minnesota. Since then, we have completedthe following acquisitions:

 

•            In May 1997, we acquired wirelessoperations and licenses covering portions of Maine for approximately$85.7 million.

 

•            In July 1998, we acquired wirelessoperations and licenses covering all of Vermont and portions of Massachusetts,New Hampshire, and New York for approximately $262.5 million.

 

•            In August 1998, we acquired wirelessoperations and a license in western Maine for approximately $7.5 million.

 

•            In February 1999, we acquired wirelessoperations and a license in South Dakota for approximately $11.9 million.

 

•            In April 2000, we acquired wirelessoperations and licenses covering portions of Alabama, Kansas, Mississippi,Oregon, and Washington for approximately $1.265 billion.

 

•            In January 2001, we acquired wirelessoperations and licenses in the Portsmouth, New Hampshire service area forapproximately $194.3 million. In the acquisition, we also acquired an ILECbusiness of the seller. We sold the ILEC business in October 2001 forapproximately $35.5 million.

 

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All of these acquisitionswere accounted for as purchases and subsequent operating results have beenincluded in our historical financial statements from their respective dates ofacquisition.

 

 

**RESULTSOF OPERATIONS**

 

The following table presents certain statement of operations data as apercentage of total revenue for the periods indicated.

 
|                                                                                                  |   | **Years  ended December 31,** |   |
|-------------------------------------------------------------------------------------------------------|--------|-------------------------------|--------|
|                                                                                                  |   | **2002**                      |   | **2001** |   | **1999** |   |
| REVENUE:                                                                                              |   |                          |   |   |   |   |   |
| Service                                                                                               |   | 68.8                          | %      | 69.4 | % | 67.0 | % |
| Roaming                                                                                               |   | 26.7                          |   | 26.4 |   | 27.7 |   |
| Equipment                                                                                             |   | 4.5                           |   | 4.2 |   | 5.3 |   |
| Total revenue                                                                                         |   | 100.0                         |   | 100.0 |   | 100.0 |   |
|                                                                                                  |   |                          |   |   |   |   |   |
| OPERATING  EXPENSES:                                                                                  |   |                          |   |   |   |   |   |
| Network costs                                                                                         |   | 21.2                          |   | 23.0 |   | 24.1 |   |
| Cost of  equipment sales                                                                              |   | 6.4                           |   | 6.4 |   | 9.7 |   |
| Selling, general  and administrative                                                                  |   | 24.9                          |   | 26.7 |   | 26.7 |   |
| Depreciation and  amortization                                                                        |   | 18.0                          |   | 25.5 |   | 25.6 |   |
| Total operating  expenses                                                                             |   | 70.5                          |   | 81.6 |   | 86.1 |   |
| OPERATING INCOME                                                                                      |   | 29.5                          |   | 18.4 |   | 13.9 |   |
|                                                                                                  |   |                          |   |   |   |   |   |
| OTHER INCOME  (EXPENSE):                                                                              |   |                          |   |   |   |   |   |
| Interest expense                                                                                      |   | (24.2                         | )      | (29.6 | ) | (25.2 | ) |
| Interest and  dividend income                                                                         |   | 0.1                           |   | 0.3 |   | 0.6 |   |
| Other                                                                                                 |   | 0.0                           |   | (0.2 | ) | 0.0 |   |
| Other expense,  net                                                                                   |   | (24.1                         | )      | (29.5 | ) | (24.6 | ) |
| INCOME (LOSS) BEFORE INCOME TAXES, EXTRAORDINARY ITEM, AND CUMULATIVE  CHANGE IN ACCOUNTING PRINCIPLE |   | 5.4                           |   | (11.1 | ) | (10.7 | ) |
| INCOME TAX PROVISION                                                                                  |   | —                        |   | — |   | — |   |
| INCOME (LOSS) BEFORE EXTRAORDINARY ITEM AND CUMULATIVE CHANGE IN  ACCOUNTING PRINCIPLE                |   | 5.4                           |   | (11.1 | ) | (10.7 | ) |
| EXTRAORDINARY ITEM-EARLY EXTINGUISHMENT OF DEBT                                                       |   | (0.7                          | )      | — |   | (0.3 | ) |
| INCOME (LOSS) BEFORE CUMULATIVE CHANGE IN ACCOUNTING PRINCIPLE                                        |   | 4.7                           |   | (11.1 | ) | (11.0 | ) |
| CUMULATIVE CHANGE IN ACCOUNTING PRINCIPLE                                                             |   | (91.0                         | )      | 0.3 |   | — |   |
| NET LOSS                                                                                              |   | (86.3                         | )      | (10.8 | ) | (11.0 | ) |
| PREFERRED STOCK DIVIDEND                                                                              |   | (13.2                         | )      | (12.4 | ) | (12.4 | ) |
| NET LOSS APPLICABLE TO COMMON SHARES                                                                  |   | (99.5                         | )%     | (23.2 | )% | (23.4 | )% |

 

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**YearsEnded December 31, 2002 and 2001**

 

***Revenue***

 

***Service Revenue.*** Service revenue for 2002 increased2.9% to $315.0 million from $306.0 million in 2001. The revenue growth reflectsthe revenue resulting from additional customers added through increasedpenetration in existing markets partially offset by moderate declines in localservice revenue per customer (“LSR”).

 

The decline in LSR to $41 in 2002from $42 in 2001 is the result of several factors, including: (i) larger homecalling areas; (ii) more rate plans that included long distance at noadditional charge; and (iii) an increase in numbers of rate plans that shareminutes with an existing plan at lower access rates.  We continue to focus on attracting and retaining customers withrate plans that provide more features and include minutes at a higher averagerecurring access charge.

 

For all of 2002, retention was 98.2%as compared to 97.8% in 2001. Postpaid net customer additions for all of 2002were 42,832 as compared to 46,520 in 2001. For all of 2002, RCC reported179,069 postpaid gross adds as compared to 199,598 in 2001. Because of thegrowing popularity of wholesale distribution programs, wholesale customeradditions increased to 55,700, a 91.2% increase over 2001. Prepaid customersfor all of 2002 declined by 5,803.

 

***Roaming Revenue.*** For all of 2002, increases in outcollect minutescontinued to offset declines in yield, resulting in roaming revenue increasing5.3% to $122.7 million as compared to $116.5 million in 2001. Roaming yield forall of 2002 was $0.26 as compared to $0.34 in 2001.

 

AT&T Wireless, Verizon Wireless and Cingularaccount for approximately 85% of our outcollect minutes. During 2002, AT&TWireless accounted for 10.2% of our total revenue. Under our agreements withAT&T Wireless, Verizon Wireless, Cingular and other roaming partners, theroaming yield per minute RCC receives from outcollect calling minutes, inaddition to the cost per minute RCC pays for our customers’ incollect activity,declines over time.

 

We signed a roaming agreement with Cingulareffective July 2002 that runs through January 2008 which establishes RCC as apreferred roaming partner with Cingular in RCC’s markets. Our roaming agreementwith AT&T Wireless that covers the Northeast and Midwest regions iseffective July 2002 through December 2004. We currently have a month to monthagreement with AT&T for our Northwest and South regions. During 2002,Wireless Alliance entered into a new roaming agreement with its joint venturepartner T-Mobile, positioning Wireless Alliance for expanded roaming revenue.

 

***Equipment Revenue.***Equipment revenue increased 9.7% for 2002 to $20.4 million from $18.6 millionin 2001. The increase in equipment revenue reflects the additional averagerevenue per handset sold, increased network equipment reselling, and a decreasein phone service leasing.

 

***Operating Expenses***

 

***Network Costs.*** Forthe year ended December 31, 2002, network costs declined 4.2% to $97.2 millionas compared to $101.5 million in 2001. Contributing to this decline was adecrease in incollect cost, a material component of network costs, reflectingreduced pricing contained in new roaming arrangements. For 2002, incollect costdeclined 5.4% to $47.1 million as compared to $49.8 million in 2001. Per minuteincollect cost for the year ended December 31, 2002 was $0.18 per minute ascompared to $0.25 in 2001.

 

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***Cost of Equipment Sales.***Cost of equipment sales for 2002 increased 2.7% to $29.2 million as compared to$28.4 million in 2001. As a percentage of revenue, cost of equipment sales for2002 remained unchanged at 6.4% as compared to 2001. Contributing to theincrease in cost of equipment sales was a reduced emphasis on our phone serviceleasing plans during 2002, under which the cost of handsets is capitalizedrather than expensed as cost of equipment sales. During 2002, we capitalizedapproximately $13.3 million in phone service handsets as compared to $20.1million capitalized in 2001.

 

Although customers generally are responsible for purchasing orotherwise obtaining their own handsets, we have historically sold handsetsbelow cost to respond to competition and general industry practice and expectto continue to do so in the future, as we believe that this will result inincreased revenue from increases in the number of our wireless customers.

 

***Selling, General and Administrative.***For the year ended December 31, 2002, selling, general and administrativeexpense (“SG&A”) decreased 3.0% to $114.3 million as compared to $117.9million in 2001. As a percentage of revenue, SG&A decreased to 24.9% in2002 from 26.7% in 2001.  The decreasein SG&A primarily reflects decreases in bad debt expense.  Bad debt expense for the year ended December31, 2002 declined to $8.0 million as compared to $13.9 million in 2001.

 

We anticipate cost efficiencies to continue on a per customer basis in2003 as compared to 2002. We anticipate bad debt expense in 2003 to becomparable to 2002.

 

***Depreciation and Amortization.***Depreciation and amortization expense for 2002 decreased 26.7% as compared to2001 to $82.5 million from $112.6 million. The decrease primarily reflects theJanuary 1, 2002 adoption of SFAS No. 142 and the corresponding discontinuanceof amortization of goodwill and licenses, partially offset by the growth in ourwireless network assets. During 2001, we amortized $62.8 million in licenses,goodwill and customer lists. During 2002, we amortized $20.6 million incustomer lists. Phone service equipmentdepreciation expense for 2002 was****** $15.8 million ascompared to  $8.5 million in 2001.

 

***Other Income (Expense)***

 

***Interest Expense.***Interest expense for 2002, including the effect of SFAS No. 133, decreased14.8% to $111.2 million as compared to $130.4 million in 2001.  The decline in interest expense primarilyreflects noncash adjustments related to the accounting for derivativeinstruments pursuant to SFAS No. 133, declines in interest rates, and anoverall reduction in our long-term debt.

 

The following table sets forth adjustments relating to SFAS No. 133:

 
|                             |   | **Year ended  December 31, 2002**      |   | **Year ended  December 31, 2001** |   |
|----------------------------------|--------|----------------------------------------|--------|-----------------------------------|--------|
| **(In  thousands)**              |   | **Prior to  SFAS No. 133  Adjustment** |   | **SFAS No.  133  Adjustment**     |   | **As  Reported** |   | **Prior to  SFAS No.  133  Adjustment** |   | **SFAS No.  133  Adjustment** |   | **As  Reported** |   |
| *Statement  of Operations Data:* |   |                                   |   |                              |   |   |   |   |   |   |   |   |   |
| Interest expense                 |   | $                                      | 96,055 |                              | $      | 15,104 |   | $ | 111,159 |   | $ | 114,007 |   | $ | 16,425 |   | $ | 130,432 |   |
|                                  |        |                                        |        |                                   |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

As of December 31, 2002, the effective rate ofinterest on our credit facility, excluding the impact of hedge agreements, was4.5% as compared to 4.9% at December 31, 2001. Long-term debt as ofDecember 31, 2002 was $1.211 billion as compared to $1.286 billion as ofDecember 31, 2001.

 

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***Preferred Stock Dividends***

 

Preferred stock dividends in 2002 increased 11.0% to $60.6 million ascompared to $54.5 million in 2001. The increase primarily resulted from ourpractice of paying dividends by issuing additional shares of exchangeablepreferred stock rather than in cash, thereby increasing the basis for subsequentdividend distributions. To holders of record on February 1, 2003, RCCdistributed 6,838 and 5,963 shares of senior and junior exchangeable preferredstock, respectively, in payment of dividends on February 15, 2003**. **See Note 6 of Notes to theConsolidated Financial Statements for additional information regardingpreferred stock dividends. During 2002, RCC issued 25,509 and 22,134 shares ofsenior and junior exchangeable preferred stock, respectively, asdividends.  We currently pay dividendson our senior and junior exchangeable preferred stock by issuing additionalshares. Beginning in August 2003, dividends on our senior exchangeablepreferred stock are to be paid in cash, and beginning in May 2005, dividends onour junior exchangeable preferred stock are to be paid in cash.

 

### ***Extraordinary Item – Early Extinguishment of Debt***

 

In January 2002, RCC issued $300 million of 9 3⁄4% senior subordinated notes, the proceeds of whichwere used to pay down a portion of the credit facility. In connection with thisissuance, RCC reported a $3.3 million extraordinary loss to write-off theunamortized deferred financing costs related to the early extinguishment of therepaid debt.

 

***Cumulative Change in Accounting Principle***

 

Effective January 1, 2002, we adopted SFAS No. 142, which requirescessation of goodwill and license amortization and a fair value approach totesting the impairment of goodwill and indefinite lived intangible assets. Wecompleted a transitional impairment test for both our goodwill and ourlicensing costs and determined that there were impairments of $5.0 million and$412.0 million, respectively.  RCC useda fair value approach, using primarily discounted cash flows, to complete thetransitional impairment tests.  Weamended our Form 10-Qs for the first two quarters of 2002 to reflect the effectof the SFAS No. 142 impairment charge as an cumulative change in accountingprinciple.

 

On aprospective basis, we are required to test both goodwill and otherindefinite-lived intangible assets, including licensing costs, for impairmenton an annual basis based upon a fair value approach. We performed our annualimpairment test for both goodwill and licensing costs as of October 1, 2002using methodologies consistent with those applied under our transitional impairmenttests performed as of January 1, 2002 and determined there was noadditional impairment to be recognized. Other indefinite-lived intangibleassets will be tested between annual tests if events or changes incircumstances indicate that the asset might be impaired. (See Recently IssuedAccounting Pronouncements.)

 

**Years Ended December 31, 2001 and2000**

 

***Revenue***

 

***Service Revenue.***Service revenue for 2001 increased 28.3% to $306.0 million from $238.6 millionin 2000. The revenue growth reflects the additional revenue resulting from theacquisitions of Triton Cellular in April 2000 and Saco River in January 2001together with additional customers added through increased penetration inexisting markets.

 

***Roaming Revenue.***Reflecting the acquisition of Triton Cellular and Saco River, together withincreases in outcollect roaming minutes, roaming revenue for 2001 increased18.1% to $116.5 million from $98.7 million in 2000. Roaming minutes in existingmarkets have increased in part due to the activation of additional cell sitesand increased industry-wide wireless usage. Partially offsetting the effectfrom increases in roaming minutes during 2001 was the decrease in outcollectroaming yield per minute. Including toll, outcollect roaming yield decreased to$0.34 per minute in 2001 as compared to $0.49 in 2000. AT&T Wireless andVerizon Wireless accounted for approximately 70% of our outcollect minutes.

 

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***Equipment Revenue.***Equipmentrevenue for 2001 decreased 1.2% to $18.6 million from $18.8 million in 2000.The decrease in equipment revenue reflects reductions in network equipmentreselling together with a increase in phone service leasing offset in part bythe additional equipment revenue from the Triton Cellular and Saco Riveracquisitions.

 

***Operating Expenses***

 

***Network Costs.***Primarily reflecting the additional network costs from the acquisition ofTriton Cellular and Saco River and increases in incollect minutes, 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. Total incollect cost was $49.8 million in 2001 as compared to$48.6 million in 2000. Offsetting the increase in incollect minutes was adecline in per minute cost in 2001 to $0.25 from $0.40 in 2000. As a percentageof total revenue, network costs for 2001 decreased to 23.0% from 24.1% in 2000.

 

***Cost of Equipment Sales.***Cost of equipment sales for 2001 decreased 18.1% to $28.4 million as comparedto $34.7 million in 2000. As a percentage of revenue, cost of equipment salesfor 2001 decreased to 6.4% as compared to 9.7% in 2000. Contributing to thedecrease in cost of equipment sales was a greater emphasis on our phone serviceleasing plans during 2001 under which the cost of handsets is capitalizedrather than expensed as cost of equipment sales. The initial cost of thesecapitalized handsets is not included in acquisition cost per customer,contributing to the decrease in 2001 as compared to 2000. The capitalized costof the handset is depreciated over a period of 19-24 months. During 2001, wecapitalized approximately $20.1 million in phone service handsets.

 

***Selling, General and Administrative.***SG&A for 2001 increased 24.0% over 2000 to $117.9 million from $95.0million. The increase in SG&A primarily reflects RCC’s ownership of TritonCellular and Saco River operations in 2001. Also contributing to the increasein SG&A was an increase in bad debt expense to $13.9 million in 2001 ascompared to $5.1 million in 2000. SG&A, as a percentage of sales, was 26.7%in both 2001 and 2000.

 

***Depreciation and Amortization.***Depreciation and amortization expense for 2001 increased 23.6% over 2000 to$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 contributingto added depreciation expense during 2001 was $46.0 million of capitalexpenditures during the year ended December 31, 2001.

 

***Other Income (Expense)***

 

***Interest Expense.***Interest expense for 2001 increased 45.2% to $130.4 million as compared to$89.8 million in 2000. The increase primarily reflects increased borrowingsunder the credit facility to complete the acquisitions of Triton Cellular andSaco River and a $16.4 million noncash charge reflecting accounting forderivative instruments pursuant to SFAS No. 133 (as amended by SFAS No. 138),which we adopted on January 1, 2001.

 

***Preferred Stock Dividends***

 

Preferred stock dividends in 2001 increased 23.7% to $54.5 million ascompared to $44.1 million in 2000. The increase primarily resulted from the issuancesof junior and senior exchangeable preferred stock in February 2000, Class Tpreferred stock in March 2000, and Class M preferred stock in April 2000. SeeNote 1 of Notes to Consolidated Financial Statements for additional informationregarding preferred stock dividends.

 

Also contributing to the increase in preferred stock dividends is ourpractice of paying dividends by issuing additional shares of exchangeablepreferred stock rather than in cash, thereby increasing the basis forsubsequent dividend distributions. During 2001, RCC issued 22,817 and 19,618shares of senior and junior exchangeable preferred stock, respectively, asdividends.

 

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**Liquidity and Capital Resources**

 

We need cash primarily for working capital, capital expenditures, debtservice, and customer growth. In past years, we have met these requirementsthrough cash flow from operations, borrowings under our credit facility, salesof common and preferred stock, and issuance of senior subordinated notes.   Over the next 12 months we will requirecash for capital expenditures associated with network maintenance andenhancements, upgrades to new technologies, interest and principal payments onour outstanding debt, customer acquisition initiatives, payment of dividends onour senior exchangeable preferred stock, should we determine to pay suchdividends, and repurchase of an outstanding swaption.  We may also require cash to purchase additional spectrum and toretire additional outstanding debt.  Weexpect to be able to meet these needs using cash flow from operations, and$53.8 million in cash and cash equivalents on hand as of December 31, 2002, andborrowings under our facility.  In theevent we need to obtain additional cash from external sources, our ability toobtain such cash will be affected by our operating performance and the capitalmarkets.

 

Beginning in 2003 our cash requirements will increase each year, due inpart to scheduled principal payments under our credit facility and payment ofcash dividends on our preferred stock. We currently pay dividends on our senior and junior exchangeablepreferred stock by issuing additional shares of exchangeable preferred stock.  Beginning August 15, 2003, for our seniorexchangeable preferred stock, and beginning May 15, 2005, for our juniorexchangeable preferred stock, dividends are to be paid in cash.  In addition, we may need substantial cashresources to upgrade our networks to 2.5G and 3.0G technologies starting in2003.

 

As of December 31, 2002, we had a credit facility with a consortium oflenders providing up to $275.0 million in revolving loans and $986.7 million interm loans. As of December 31, 2002, $793.9 million was outstanding under thecredit facility.  Our credit facility containscertain financial covenants that, among other things, limit our ability toincur indebtedness, make investments, create or permit liens, make capitalexpenditures, make guarantees, and pay cash dividends. The Company's Financialcovenants do not include the operations of Wireless Alliance. The financialcovenants require our cellular operations to comply with the followingfinancial ratios:

 
|                                                       |   | **December 31,  2002** |   | **March 31,  2003** |   | **June30,  2003** |   | **September30,  2003** |   | **December 31,  2003** |   | **December 31,  2004** |   | **December 31,  2005 and after** |   |
|------------------------------------------------------------|--------|------------------------|--------|---------------------|--------|-------------------|--------|------------------------|--------|------------------------|--------|------------------------|--------|----------------------------------|--------|
|                                                       |   |                   |   |                |   |              |   |                   |   |                   |   |                   |   |                             |   |
| Total leverage ratio                                       |   | 6.00                   | X      | 6.50                | X      | 6.50              | X      | 5.75                   | X      | 5.00                   | X      | 5.00                   | X      | 5.00                             | X      |
|                                                       |   |                   |   |                |   |              |   |                   |   |                   |   |                   |   |                             |   |
| Senior leverage ratio                                      |   | 4.00                   | X      | 4.25                | X      | 4.25              | X      | 4.25                   | X      | 4.00                   | X      | 4.00                   | X      | 4.00                             | X      |
|                                                       |   |                   |   |                |   |              |   |                   |   |                   |   |                   |   |                             |   |
| Annualized operating cash flow to pro forma debt  service) |   | 1.20                   | X      | 1.05                | X      | 1.05              | X      | 1.05                   | X      | 1.05                   | X      | 1.20                   | X      | 1.20                             | X      |
|                                                       |   |                   |   |                |   |              |   |                   |   |                   |   |                   |   |                             |   |
| Annualized fixed charge coverage ratio                     |   | 1.00                   | X      | 1.00                | X      | 1.00              | X      | 1.00                   | X      | 1.00                   | X      | 1.00                   | X      | 1.00                             | X      |
|                                                       |   |                   |   |                |   |              |   |                   |   |                   |   |                   |   |                             |   |
| Annualized operating cash flow to interest expense         |   | 1.50                   | X      | 1.50                | X      | 1.50              | X      | 1.50                   | X      | 1.50                   | X      | 1.50                   | X      | 2.00                             | X      |

 

Our credit facility also requires the use of derivatives to manageinterest rate risk (see Item 7A for further discussion). In January 2002 andMarch 2001, we obtained amendments and waivers of certain financial covenantsin the credit facility. As of December 31, 2002, we were in compliance with allcovenants and had $258.9 million in unused capacity under the revolver. Futureavailability under the revolver will be determined quarterly based on our leverageratios as described by the credit facility agreement. Although the fourthquarter of 2003 presents a challenge because of the reduction in our totalleverage ratio, based on our current operating budgets, we believe we will bein compliance with all credit facility covenants throughout 2003.

 

On January 16, 2002, we issued $300 million aggregate principal amountof 9 3⁄4% senior subordinated notes due 2010. The net proceeds from the offeringof the notes were used to pay down borrowings under our credit facility.

 

For the year ended December 31, 2002, we paid interest on our seniorsubordinated notes and our credit facility of $26.6 million and $60.2 million,respectively, with cash from operations. In 2003, we expect to fund our cashinterest payments on our senior subordinated notes and the credit facility withcash from operations.

 

41

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The following table summarizes our anticipated cashrequirements under our contractual obligations existing as of December 31,2002, excluding interest payable under the credit facility, the 9 5/8% seniorsubordinated notes, and the 9 3/4% senior subordinated notes. 

 
|                                                                                                |   | **Total** |      | **2003** |   | **2004** |   | **2005** |   | **2006** |   | **2007** |   | **Thereafter** | ** ** |
|-----------------------------------------------------------------------------------------------------|--------|-----------|-----------|----------|--------|----------|--------|----------|--------|----------|--------|----------|--------|----------------|------------|
| **(in thousands)**                                                                                  |   |      |      |     |   |     |   |     |   |     |   |     |   |           |       |
| Credit facility                                                                                     |   | $         | 793,853   |     | $      | 35,959   |   | $        | 61,043 |     | $      | 71,958   |   | $              | 87,240     |   | $ | 91,605 |   | $ | 446,048 |   |
|                                                                                                |   |      |      |     |   |     |   |     |   |     |   |     |   |           |       |
| 9 3/4% Senior subordinated notes   (due 1/15/2010)                                             |   | 300,000   |      | —   |   | —   |   | —   |   | —   |   | —   |   | 300,000        |       |
| 9 5/8% Senior subordinated notes  (due 5/15/2008)                                                   |   | 125,000   |      | —   |   | —   |   | —   |   | —   |   | —   |   | 125,000        |       |
|                                                                                                |   |      |      |     |   |     |   |     |   |     |   |     |   |           |       |
| *Senior exchangeable preferred stock  (due 5/15/2010) including anticipated dividends paid in kind. |   | 254,776   |      | —   |   | —   |   | —   |   | —   |   | —   |   | 254,776        |       |
| *Senior exchangeable preferred stock cash dividends beginning August  15, 2003                      |   | 202,860   |      | 14,492   |   | 28,980   |   | 28,980   |   | 28,980   |   | 28,980   |   | 72,448         |       |
|                                                                                                |   |      |      |     |   |     |   |     |   |     |   |     |   |           |       |
| **Junior exchangeable preferred stock (due 2/15/2011) including  anticipated dividends paid in kind |   | 255,863   |      | —   |   | —   |   | —   |   | —   |   | —   |   | 255,863        |       |
| ** Junior exchangeable preferred stock cash dividends beginning May 15,  2005                       |   | 188,040   |      | —   |   | —   |   | 23,505   |   | 31,340   |   | 31,340   |   | 101,855        |       |
|                                                                                                |   |      |      |     |   |     |   |     |   |     |   |     |   |           |       |
| Class M voting  convertible preferred stock                                                         |   | 288,155   |      | —   |   | —   |   | —   |   | —   |   | —   |   | 288,155        |       |
|                                                                                                |   |      |      |     |   |     |   |     |   |     |   |     |   |           |       |
| ***Swaption early termination                                                                       |   | 30,072    |      | 30,072   |   | —   |   | —   |   | —   |   | —   |   | —         |       |
|                                                                                                |   |      |      |     |   |     |   |     |   |     |   |     |   |           |       |
| Tower option due in 2003                                                                            |   | 6,500     |      | 6,500    |   | —   |   | —   |   | —   |   | —   |   | —         |       |
|                                                                                                |   | 2,445,119 |      | 87,023   |   | 90,023   |   | 124,443  |   | 147,560  |   | 151,925  |   | 1,844,145      |       |
|                                                                                                |   |      |      |     |   |     |   |     |   |     |   |     |   |           |       |
| **Operating  lease obligations**                                                                    |   | 29,308    |      | 8,310    |   | 6,633    |   | 4,954    |   | 3,059    |   | 1,610    |   | 4,742          |       |
|                                                                                                |   |      |      |     |   |     |   |     |   |     |   |     |   |           |       |
| Total contractual cash obligations                                                                  |   | $         | 2,474,427 |     | $      | 95,333   |   | $        | 96,656 |     | $      | 129,397  |   | $              | 150,619    |   | $ | 153,535 |   | $ | 1,848,887 |   |

 

----

*Assumes that senior exchangeable preferred stockdividends are paid in kind through May 15, 2003 and cash thereafter.

**Assumes that junior exchangeable preferredstock dividends are paid in kind through February 15, 2005 and cash thereafter.

*** Assumes the counterparty exercisesthe optional early termination provision requiring RCC to pay the counterpartyon May 15, 2003 the market valuation of the swaption, which was $30.1million at December 31, 2002. 

 

Net cash provided by operating activities was $138.3 million for theyear ended December 31, 2002. Adjustments to the $395.9 million net loss toreconcile to net cash provided by operating activities included $82.5 millionin depreciation and amortization, a $15.1 million change in financialinstruments valuation, a cumulative change in accounting principle of $417.1million, a $6.5 million increase in accounts payable, a $1.1 million increasein advance billings and customer deposits, an extraordinary item of $3.3million for early extinguishment of debt and a $6.7 million increase in otheraccrued expenses.

 

Net cash used in investing activities for the year ended December 31,2002 was $58.7 million. The principal use of cash was $59.8 million inpurchases of property and equipment. These purchases reflect the continuedexpansion of our existing wireless coverage, leasing of handsets to certaincustomer groups, and upgrading of existing cell sites and switching equipment.We have substantial ongoing capital expenditure requirements. Anticipatedcapital expenditures in 2003 will include the enhancement and maintenance ofour existing infrastructure and upgrades to next generation technologies.

 

Net cash used in financing activities was $27.8 million for the yearended December 31, 2002, consisting primarily of $362.6 million from theissuance of long-term debt, partially offset by $380.4 million in repayments oflong-term debt. In addition, we incurred $10.3 million in debt issuance costsrelating to our senior debt offering in January 2002 and amending the terms ofour credit facility.

 

#### ***Other Matters***

 

#### ***Inflation***

 

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

 

42

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#### ***Seasonality***

 

We experience seasonal fluctuations in revenue and operating income.Our average monthly roaming revenue per cellular customer increases during thesecond and third calendar quarters. This increase reflects greater usage by ourroaming customers who travel in our cellular service area for weekend andvacation recreation or work in seasonal industries. Because our cellularservice area includes many seasonal recreational areas, we expect that roamingrevenue will continue to fluctuate seasonally more than service revenue.

 

Certain unaudited quarterly results for 2002 and 2001 are set forthbelow (in thousands, except per share data):

 
|                                                                                                                    |   | **2002 Quarter Ended** |     | **2001Quarter Ended** |   |
|-------------------------------------------------------------------------------------------------------------------------|--------|------------------------|----------|-----------------------|--------|
|                                                                                                                    |   | **March 31,**          |     | **June 30,**          |   | **September  30,** |   | **December  31,** |   | **March 31,** |   | **June 30,** |   | **September  30,** |   | **December  31,** |   |
| Revenue:                                                                                                                |   |                   |     |                  |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Service                                                                                                                 |   | $                      | 74,313   |                  | $      | 79,273 |   | $ | 81,828 |   | $ | 79,598 |   | $ | 70,036 |   | $ | 80,151 |   | $ | 80,234 |   | $ | 75,567 |   |
| Roaming                                                                                                                 |   | 26,162                 |     | 33,855                |   | 35,400 |   | 27,286 |   | 23,215 |   | 28,350 |   | 38,106 |   | 26,870 |   |
| Equipment                                                                                                               |   | 3,279                  |     | 4,564                 |   | 7,098 |   | 5,501 |   | 5,133 |   | 4,545 |   | 4,842 |   | 4,107 |   |
| Total Revenue                                                                                                           |   | $                      | 103,754  |                  | $      | 117,692 |   | $ | 124,326 |   | $ | 112,385 |   | $ | 98,384 |   | $ | 113,046 |   | $ | 123,182 |   | $ | 106,544 |   |
|                                                                                                                    |   |                   |     |                  |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating income                                                                                                        |   | $                      | 31,425   |                  | $      | 38,178 |   | $ | 38,627 |   | $ | 26,782 |   | $ | 15,833 |   | $ | 23,534 |   | $ | 27,971 |   | $ | 13,462 |   |
|                                                                                                                    |   |                   |     |                  |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income (loss) before extraordinary item and cumulative change in  accounting principle                              |   | $                      | 2,612    |                  | $      | 11,303 |   | $ | 10,236 |   | $ | 330 |   | $ | (21,271 | ) | $ | (7,075 | ) | $ | (12,310 | ) | $ | (8,556 | ) |
| Net income (loss)                                                                                                       |   | $                      | (417,771 | )                     | $      | 11,303 |   | $ | 10,236 |   | $ | 330 |   | $ | (19,650 | ) | $ | (7,075 | ) | $ | (12,310 | ) | $ | (8,556 | ) |
| Net loss applicable to common shares                                                                                    |   | $                      | (432,312 | )                     | $      | (3,629 | ) | $ | (5,098 | ) | $ | (15,419 | ) | $ | (32,813 | ) | $ | (20,505 | ) | $ | (26,101 | ) | $ | (22,717 | ) |
| Net loss per share applicable to common shares before extraordinary  item and cumulative change in accounting principle |   | $                      | (1.00    | )                     | $      | (0.30 | ) | $ | (0.43 | ) | $ | (1.29 | ) | $ | (2.91 | ) | $ | (1.73 | ) | $ | (2.20 | ) | $ | (1.91 | ) |
| Net loss per basic and diluted share                                                                                    |   | $                      | (36.27   | )                     | $      | (0.30 | ) | $ | (0.43 | ) | $ | (1.29 | ) | $ | (2.77 | ) | $ | (1.73 | ) | $ | (2.20 | ) | $ | (1.91 | ) |
|                                                                                                                         |        |                        |          |                       |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

43

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| **ITEM 7A.** | **QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK** |
|--------------|----------------------------------------------------------------|

 

**MarketRisk**

 

In the normal course of business, RCC is exposed to market risk fromfluctuations in interest rates.  Weaddress this risk through a risk management program that includes the use ofderivative financial instruments.  Thecounterparties to these instruments are major financial institutions and webelieve that credit loss in the event of nonperformance is remote.  We do not enter into any derivative transactionsfor speculative purposes.

 

*InterestRate Risk*

 

We use senior subordinated notes and bank credit facilities to finance,in part, our acquisition activities, capital requirements, and operations.These on-balance sheet financial instruments, to the extent they provide forvariable rates of interest, expose us to interest rate risk.

 

At December 31, 2002, amounts outstanding under our credit facilitytotaled $793.9 million. We are required bythe terms of the credit facility to maintain interest rate swaps on at least50% of the principal amount of the loans outstanding for an averageperiod of three years from the date of the hedge agreements.  At December 31, 2002, RCC held interest rateswap and collar agreements with a notional amount of $409.0 million to convertvariable rate debt to fixed rate debt.  Additionally, we entered into a combination option termed a “flooridor”with a total notional amount of $252.0 million to reduce our effectiveborrowing rate on our bank debt in a declining interest rate environment.

 

In January 2002, we issued $300.0 million of 9 3/4% Senior SubordinatedNotes.  We entered into two reverseswaps with a total notional amount of $135.4 million at that time in order tolower the effective interest rate on the notes.  After giving effect to these financial instruments and the saleof the 9 3/4% notes, approximately 57% of RCC’s debt is fixed rate debt atDecember 31, 2002 as compared to approximately 61% at December 31, 2001.

 

RCC’s existing 9 5/8% senior subordinated notes mature in 2008 and areredeemable at our option for a premium after May 15, 2003. Under someconditions, it could become economically desirable to redeem the notes. Inorder to monetize the value of the option to redeem those notes, we enteredinto a “swaption” with respect to the notes. The counterparty purchased theswaption from us on March 1, 2001 for $8.7 million. Under the swaption, thecounterparty has the right, but not the obligation, to receive a quarterlypayment based on a rate of 9.625% per annum on the $131.0 million notionalamount of the swaption in return for a quarterly payment based on LIBOR plus1.50% per annum on that notional amount. This right was exercised on March 13,2003.  The counterparty also has theright to exercise an optional early termination provision of the swaption onMay 15, 2003. We anticipate that thecounterparty will exercise the optional early termination provision, requiringRCC to pay the counterparty the negative fair market value of the swaption asof May 15, 2003.  As of December31, 2002, the swaption was carried on our balance sheet at its fair marketvalue as a $30.1 million liability within current liabilities. The swaptionterminates on March 15, 2008.

 

A substancial portion of the derivatives hedging the credit facility($325.0 million additional) will be maturing in the second quarter of 2003 andwill need to be replaced to meet our credit agreements. In March 2003, weentered into an additional $200.0 million swap reducing the amount needed toreplace expiring agreements to $125.0 million.

 

See Note 5 of Notes to Consolidated Financial Statements for additionalinformation regarding financial instrument activity.

 

44

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RCC’s derivative instruments and valuations are set forth inthe table below.  The fair values arebased on quoted market prices or, if quoted market prices are not available,estimates using present value and other valuation techniques.  

 
|                                              |   |                 |     | **Carrying value**      |     | **Estimated fair market value** |     |
|---------------------------------------------------|--------|----------------------|----------|-------------------------|----------|---------------------------------|----------|
| **(Dollars in thousands)**                        |   | **Notional  amount** |     | **December  31,  2002** |     | **December  31,  2001**         |     | **December  31,  2002** |   | **December  31,  2001** |   |
|                                              |   |                 |     |                    |     |                            |     |   |   |   |   |
| **Financial assets**                              |   |                 |     |                    |     |                            |     |   |   |   |   |
|                                              |   |                 |     |                    |     |                            |     |   |   |   |   |
| Interest rate  flooridors(i) **:**                |   |                 |     |                    |     |                            |     |   |   |   |   |
| Fleet Bank  (terminates May 12, 2003)        |   | $                    | 252,000  |                    | $        | 631                             |     | $ | 1,699 |   | $ | 631 |   | $ | 1,699 |   |
| Total financial  assets                           |   | $                    | 252,000  |                    | $        | 631                             |     | $ | 1,699 |   | $ | 631 |   | $ | 1,699 |   |
| **Financial  liabilities**                        |   |                 |     |                    |     |                            |     |   |   |   |   |
|                                              |   |                 |     |                    |     |                            |     |   |   |   |   |
| Credit  facility                                  |   | $                    | —   |                    | $        | 793,853                         |     | $ | 1,111,510 |   | $ | 689,064 |   | $ | 987,145 |   |
| 9  5/8% senior subordinated notes                 |   | —               |     | 125,000                 |     | 125,000                         |     | 81,250 |   | 127,031 |   |
| 9  3/4% senior subordinated notes                 |   | —               |     | 300,000                 |     | —                          |     | 195,000 |   | — |   |
| 11  3/8% senior exchangeable preferred stock      |   | —               |     | 240,882                 |     | 215,373                         |     | 57,812 |   | 187,375 |   |
| 12  1⁄4% junior exchangeable preferred stock   |   | —               |     | 195,035                 |     | 172,901                         |     | 42,908 |   | 145,237 |   |
| Class  M convertible preferred stock(ii)          |   | —               |     | 110,000                 |     | 110,000                         |     | 110,000 |   | 110,000 |   |
| Class  T convertible preferred stock(ii)          |   | —               |     | 7,541                   |     | 7,541                           |     | 7,541 |   | 7,541 |   |
|                                              |   | —               |     | 1,772,311               |     | 1,742,325                       |     | 1,183,575 |   | 1,564,329 |   |
|                                              |   |                 |     |                    |     |                            |     |   |   |   |   |
| Derivative  financial instruments                 |   |                 |     |                    |     |                            |     |   |   |   |   |
| Interest  rate swap agreements:                   |   |                 |     |                    |     |                            |     |   |   |   |   |
| TD Securities  (terminates May 16, 2005)     |   | 84,000               |     | 9,010                   |     | 5,854                           |     | 9,010 |   | 5,854 |   |
| PNC Bank  (terminates May 16, 2003)          |   | 42,000               |     | 975                     |     | 2,703                           |     | 975 |   | 2,703 |   |
| *Union Bank (unwound  January 17, 2002)*     |   | *—*             | * * | *—*                | * * | *5,387*                         | * * | *—* | * * | *5,387* | * * |
| *Fleet Bank (unwound  January 14, 2002)*     |   | *—*             | * * | *—*                | * * | *2,791*                         | * * | *—* | * * | *2,791* | * * |
| Reverse  swap agreements:                         |   |                 |     |                    |     |                            |     |   |   |   |   |
| Fleet Bank  (terminates January 15, 2010)    |   | 75,000               |     | 1,832                   |     | —                          |     | 1,832 |   | — |   |
| Dresdner Bank  (terminates January 15, 2010) |   | 60,390               |     | 1,316                   |     | —                          |     | 1,316 |   | — |   |
| Interest  rate collar agreements:                 |   |                 |     |                    |     |                            |     |   |   |   |   |
| PNC Bank  (terminates May 25, 2003)          |   | 47,000               |     | 966                     |     | 2,025                           |     | 966 |   | 2,025 |   |
| *Fleet Bank (unwound January 14,  2002)*     |   | *—*             | * * | *—*                | * * | *3,553*                         | * * | *—* | * * | *3,553* | * * |
| Union Bank  (terminates June 5, 2003)             |   | 96,000               |     | 1,622                   |     | 2,961                           |     | 1,622 |   | 2,961 |   |
| PNC Bank  (terminates June 6, 2003)               |   | 94,000               |     | 1,827                   |     | 3,301                           |     | 1,827 |   | 3,301 |   |
| Union Bank  (terminates June 5, 2003)             |   | 46,000               |     | 936                     |     | 1,746                           |     | 936 |   | 1,746 |   |
| Swaption(iii)**:**                                |   |                 |     |                    |     |                            |     |   |   |   |   |
| TD Securities  (terminates March 15, 2008)        |   | 131,016              |     | 30,072                  |     | 12,628                          |     | 30,072 |   | 12,628 |   |
|                                              |   |                 |     |                    |     |                            |     |   |   |   |   |
|                                              |   | 675,406              |     | 48,556                  |     | 42,949                          |     | 48,556 |   | 42,949 |   |
| Other  long-term liabilities                      |   | —               |     | 323                     |     | 6,842                           |     | 323 |   | 6,842 |   |
| Total financial  liabilities                      |   | $                    | 675,406  |                    | $        | 1,821,190                       |     | $ | 1,792,116 |   | $ | 1,232,454 |   | $ | 1,614,120 |   |

 

----

(i)The financial instrument does not qualify for hedge accountingtreatment under SFAS No. 133 and as such is recorded in the balance sheet atfair value with related changes in fair value included in the statement ofoperations.

(ii) The financial instrument is not actively traded and therefore, inthis disclosure, its estimated fair market value is stated at its carryingvaluation.

(iii) Rural Cellular Corporation has $125 million in subordinated debtthat was issued in May 1998 and matures in May 2008. The $8.7 million value ofan embedded call option within the subordinated debt was monetized in March2001 resulting in a swaption. The swaption does not qualify for hedgeaccounting treatment under SFAS No. 133 and as such is recorded in the balancesheet at fair value with related changes in fair value included in thestatement of operations.

 

45

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| **ITEM 8.** | **FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA** |
|-------------|-------------------------------------------------|

 

See Consolidated Financial Statements and Notes.

 
| **ITEM 9.** | **CHANGES  IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE** |
|-------------|-------------------------------------------------------------------------------------------|

 

This information required under this Item is included in the ProxyStatement under “Item No. 3 - Ratification of Appointment of IndependentAuditors.”

 

46

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**PART III**

 
| **ITEM 10.** | **DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT** |
|--------------|--------------------------------------------------------|

 

Information regarding directors of Rural Cellular is set forth in theProxy Statement under the heading “Item No. 1 - Election of Directors” and isincorporated herein by reference. Information regarding our executive officersis contained in Part I of this Form 10-K.

 
| **ITEM 11.** | **EXECUTIVE COMPENSATION** |
|--------------|----------------------------|

 

Information required by this item is set forth in the Proxy Statementunder the headings “Item No. 1 - Election of Directors” and “ExecutiveCompensation” and is incorporated herein by reference.

## ** **

| **ITEM 12.** | **SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND  MANAGEMENT, AND RELATED STOCKHOLDER MATTERS** |
|--------------|------------------------------------------------------------------------------------------------------|

 

Information required by this item is set forth in the Proxy Statementunder the heading “Common Stock Ownership” and “Item No. 2 – Amendment ofEmployee Stock Purchase Plan” and is incorporated herein by reference.

## ** **

| **ITEM 13.** | **CERTAIN RELATIONSHIPS AND RELATED  TRANSACTIONS** |
|--------------|-----------------------------------------------------|

 

Information required by this item is set forth in the Proxy Statementunder the heading “Certain Transactions” and is incorporated herein byreference.

 
| **ITEM 14.** | **CONTROLS  AND PROCEDURES** |
|--------------|------------------------------|

 

***(a)******         Evaluationof disclosure controls and procedures.***

 

Within 90 days prior to the date of this report (the “EvaluationDate”), the Company’s Chief Executive Officer and Chief Financial Officercarried out an evaluation of the effectiveness of the Company’s “disclosurecontrols and procedures,” as defined in Rules 13a-14(c) and 15d-14(c) under theSecurities Exchange Act. Based on that evaluation, these officers haveconcluded that as of the Evaluation Date, the Company’s disclosure controls andprocedures were effective in ensuring that the information the Company isrequired to disclose in reports filed or submitted under the Exchange Act isrecorded, processed, summarized, and reported, within the time period specifiedin the Commission’s rules and forms, and that the disclosure controls areeffective in ensuring that the information required to be reported isaccumulated and communicated to our management, including our principalexecutive and financial officers, as appropriate to allow timely decisionsregarding required disclosure.

 

***(b)******         Changes ininternal controls.***

 

There were no significant changes in the Company’s internal controlsor, to the Company’s knowledge, in other factors that could significantlyaffect the Company’s disclosure controls and procedures subsequent to theEvaluation Date.

 

47

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# **PART IV**

| **ITEM 15.** | **EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS  ON FORM 8-K** |
|--------------|-----------------------------------------------------------------------|

 
| **(a)** | **(1)**                                                                                                                                                                                                                               | **Consolidated Financial Statements**                                                                                                                                                   |
|---------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    |                                                                                                                                                                                                                                  |                                                                                                                                                                                    |
|    |                                                                                                                                                                                                                                  | Independent  Auditors’ Report and Report of Independent Public Accountants                                                                                                         |
|    |                                                                                                                                                                                                                                  |                                                                                                                                                                                    |
|    |                                                                                                                                                                                                                                  | Consolidated Balance Sheets  as of December 31, 2002 and 2001                                                                                                                           |
|    |                                                                                                                                                                                                                                  |                                                                                                                                                                                    |
|    |                                                                                                                                                                                                                                  | Consolidated  Statements of Operations for the Years Ended December 31, 2002, 2001 and 2000                                                                                             |
|    |                                                                                                                                                                                                                                  |                                                                                                                                                                                    |
|    |                                                                                                                                                                                                                                  | Consolidated  Statements of Shareholders’ (Deficit) Equity for the Years Ended December 31,  2002, 2001 and 2000                                                                   |
|    |                                                                                                                                                                                                                                  |                                                                                                                                                                                    |
|    |                                                                                                                                                                                                                                  | Consolidated  Statements of Cash Flows for the Years Ended December 31, 2002, 2001 and 2000                                                                                             |
|    |                                                                                                                                                                                                                                  |                                                                                                                                                                                    |
|    |                                                                                                                                                                                                                                  | Notes to  Consolidated Financial Statements                                                                                                                                             |
|    |                                                                                                                                                                                                                                  |                                                                                                                                                                                    |
|    | **(2)**                                                                                                                                                                                                                               | **Consolidated Financial Statement Schedules**                                                                                                                                          |
|    |                                                                                                                                                                                                                                  |                                                                                                                                                                                    |
|    |                                                                                                                                                                                                                                  | The following financial  statement schedules are filed as part of this Form 10-K:                                                                                                       |
|    |                                                                                                                                                                                                                                  |                                                                                                                                                                                    |
|    |                                                                                                                                                                                                                                  | Independent  Auditors’ Report and Report of Independent Public Accountants                                                                                                         |
|    |                                                                                                                                                                                                                                  |                                                                                                                                                                                    |
|    |                                                                                                                                                                                                                                  | Schedule II - Valuation  and Qualifying Accounts                                                                                                                                        |
|    |                                                                                                                                                                                                                                  |                                                                                                                                                                                    |
|    |                                                                                                                                                                                                                                  | 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 81.                                                                                                                                                          |
|    |                                                                                                                                                                                                                                  |                                                                                                                                                                                    |
| **(b)** | **Reports on Form 8-K**                                                                                                                                                                                                               |
|    |                                                                                                                                                                                                                                  |
|    | A Report on Form 8-K  dated December 18, 2002, reporting under Items 5 and 7, the delisting of  RCC’s common stock from the Nasdaq National Market.                                                                         |
|    |                                                                                                                                                                                                                                  |                                                                                                                                                                                    |
|    | A Report on Form 8-K  dated November 13, 2002, reporting under Items 7 and 9, RCC’s third quarter  2002 earnings.                                                                                                           |
|    |                                                                                                                                                                                                                                  |                                                                                                                                                                                    |
|    | A Report on Form 8-K  dated October 9, 2002, reporting under Items 5 and 7  RCC’s receipt of a Nasdaq Staff  Determination indicating RCC’s common stock may be subject to delisting from  the Nasdaq National Market. |
|    |                                                                                                                                                                                                                                  |                                                                                                                                                                                    |
| **(c)** | **Exhibits**                                                                                                                                                                                                                          |
|    |                                                                                                                                                                                                                                  |                                                                                                                                                                                    |
|    | See Exhibit Index on  page 81.                                                                                                                                                                                                        |
|    |                                                                                                                                                                                                                                  |                                                                                                                                                                                    |
| **(d)** | **Financial Statement Schedules**                                                                                                                                                                                                     |
|    |                                                                                                                                                                                                                                  |                                                                                                                                                                                    |
|    | See Item 15 (a) (2),  above.                                                                                                                                                                                                          |

## ** **

48

----

 

## **SIGNATURES**

 

Pursuant to the requirements of Section 13 or 15(d) of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned, thereunto duly authorized.

 
| **Signature**           |   | **Title**                               |   | **Date**       |
|-------------------------|--------|-----------------------------------------|--------|----------------|
|                    |   |                                    |   |           |
| /s/ Richard P. Ekstrand |   | President and                           |   | March 21, 2003 |
| Richard P. Ekstrand     |   | Chief Executive Officer                 |   |           |
|                    |   | (Principal Executive  Officer)          |   |           |
|                    |   | and Director                            |   |           |
|                    |   |                                    |   |           |
| /s/ Wesley E. Schultz   |   | Executive Vice  President,              |   | March 21, 2003 |
| Wesley E. Schultz       |   | Chief Financial Officer and Director    |   |           |
|                    |   |                                    |   |           |
| /s/ David J. Del Zoppo  |   | Vice President, Finance  and Accounting |   | March 21, 2003 |
| David J. Del Zoppo      |   | (Principal Accounting  Officer)         |   |           |
|                    |   |                                    |   |           |
| /s/ Ann K. Newhall      |   | Director                                |   | March 21, 2003 |
| Ann K. Newhall          |   |                                    |   |           |
| /s/ George W. Wikstrom  |   | Director                                |   | March 21, 2003 |
| George W. Wikstrom      |   |                                    |   |           |
|                    |   |                                    |   |           |
| /s/ Don C. Swenson      |   | Director                                |   | March 21, 2003 |
| Don C. Swenson          |   |                                    |   |           |
|                    |   |                                    |   |           |
| /s/ Marvin C. Nicolai   |   | Director                                |   | March 21, 2003 |
| Marvin C. Nicolai       |   |                                    |   |           |
|                    |   |                                    |   |           |
| /s/ George M. Revering  |   | Director                                |   | March 21, 2003 |
| George M. Revering      |   |                                    |   |           |
|                    |   |                                    |   |           |
| /s/ John Hunt           |   | Director                                |   | March 21, 2003 |
| John Hunt               |   |                                    |   |           |
|                    |   |                                    |   |           |
| /s/ Paul J. Finnegan    |   | Director                                |   | March 21, 2003 |
| Paul J. Finnegan        |   |                                    |   |           |

 

49

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CERTIFICATION OFPRINCIPAL EXECUTIVE OFFICER

PURSUANT TO SECTION302(a) OF THE SARBANES-OXLEY ACT OF 2002

 

I, Richard P. Ekstrand, certify that:

 

(1) I have reviewed this annual report on Form 10-K of Rural CellularCorporation, Inc.;

 

(2) Based on my knowledge, this annual report does not contain anyuntrue statement of a material fact or omit to state a material fact necessaryto make the statements made, in light of the circumstances under which suchstatements were made, not misleading with respect to the period covered by thisannual report;

 

(3) Based on my knowledge, the financial statements, and otherfinancial information included in this annual report, fairly present in allmaterial respects the financial condition, results of operations and cash flowsof the registrant as of, and for, the periods presented in this annual report;

 

(4) The registrant’s other certifying officer and I are responsible forestablishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-14 and 15d-14) for the registrant and have:

 

(a) designed such disclosure controls and proceduresto ensure that material information relating to the registrant, including itsconsolidated subsidiaries, is made known to us by others within those entities,particularly during the period in which this annual report is being prepared;

 

(b) evaluated the effectiveness of the registrant’sdisclosure controls and procedures as of a date within 90 days prior to thefiling date of this annual report (the “Evaluation Date”); and

 

(c) presented in this annual report our conclusionsabout the effectiveness of the disclosure controls and procedures based on ourevaluation as of the Evaluation Date;

 

(5) The registrant’s other certifying officer and I have disclosed,based on our most recent evaluation, to the registrant’s auditors and the auditcommittee of registrant’s board of directors (or persons performing theequivalent

function):

 

(a) all significant deficiencies in the design oroperation of internal controls which could adversely affect the registrant’sability to record, process, summarize and report financial data and haveidentified for the registrant’s auditors any material weaknesses in internalcontrols; and

 

(b) any fraud, whether or not material, that involvesmanagement or other employees who have a significant role in the registrant’sinternal controls; and

 

(6) The registrant’s other certifying officer and I have indicated inthis annual report whether or not there were significant changes in internalcontrols or in other factors that could significantly affect internal controlssubsequent to the date of our most recent evaluation, including any correctiveactions with regard to significant deficiencies and material weaknesses.

 
| Date: March 21, 2003 | By: /s/ Richard P. Ekstrand |   |
|----------------------|-----------------------------|--------|
|                 | Richard P. Ekstrand         |

 

50

----

 

CERTIFICATION OF CHIEF FINANCIALOFFICER

PURSUANT TO SECTION302(a) OF THE SARBANES-OXLEY ACT OF 2002

 

I, Wesley E. Schultz, certify that:

 

(1) I have reviewed this annual report on Form 10-K of Rural CellularCorporation, Inc.;

 

(2) Based on my knowledge, this annual report does not contain anyuntrue statement of a material fact or omit to state a material fact necessaryto make the statements made, in light of the circumstances under which suchstatements were made, not misleading with respect to the period covered by thisannual report;

 

(3) Based on my knowledge, the financial statements, and otherfinancial information included in this annual report, fairly present in allmaterial respects the financial condition, results of operations and cash flowsof the registrant as of, and for, the periods presented in this annual report;

 

(4) The registrant’s other certifying officer and I are responsible forestablishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-14 and 15d-14) for the registrant and have:

 

(a) designed such disclosure controls and proceduresto ensure that material information relating to the registrant, including itsconsolidated subsidiaries, is made known to us by others within those entities,particularly during the period in which this annual report is being prepared;

 

(b) evaluated the effectiveness of the registrant’sdisclosure controls and procedures as of a date within 90 days prior to thefiling date of this annual report (the “Evaluation Date”); and

 

(c) presented in this annual report our conclusionsabout the effectiveness of the disclosure controls and procedures based on ourevaluation as of the Evaluation Date;

 

(5) The registrant’s other certifying officer and I have disclosed,based on our most recent evaluation, to the registrant’s auditors and the auditcommittee of registrant’s board of directors (or persons performing the equivalent

function):

 

(a) all significant deficiencies in the design oroperation of internal controls which could adversely affect the registrant’sability to record, process, summarize and report financial data and haveidentified for the registrant’s auditors any material weaknesses in internalcontrols; and

 

(b) any fraud, whether or not material, that involvesmanagement or other employees who have a significant role in the registrant’sinternal controls; and

 

(6) The registrant’s other certifying officer and I have indicated inthis annual report whether or not there were significant changes in internalcontrols or in other factors that could significantly affect internal controlssubsequent to the date of our most recent evaluation, including any correctiveactions with regard to significant deficiencies and material weaknesses.

 
| Date: March 21, 2003 | By: /s/ Wesley E. Schultz |   |
|----------------------|---------------------------|--------|
|                 | Wesley E. Schultz         |

# ** **

51

----

 

# **INDEPENDENT AUDITORS’ REPORT**

 

Shareholders and Board of Directors

Rural Cellular Corporation and Subsidiaries

Alexandria, Minnesota

 

We have audited the accompanying consolidated balance sheets of RuralCellular Corporation and Subsidiaries (the Company) as of December 31,2002 and 2001, and the related consolidated statements of operations,shareholders’ (deficit) equity, and cash flows for each of the two years in theperiod ended December 31, 2002. These financial statements are the responsibility of the Company’smanagement.  Our responsibility is to expressan opinion on these financial statements based on our audits.  The financial statements of the Company asof December 31, 2000 and for the year then ended were audited by otherauditors who have ceased operations. Those auditors expressed an unqualified opinion on those financialstatements in their report dated February 1, 2002.

 

We conducted our audits in accordance with auditing standards generallyaccepted in the United States of America. Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free ofmaterial misstatement.  An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation.  Webelieve that our audits provide a reasonable basis for our opinion.

 

In our opinion, such consolidated financial statements present fairly,in all material respects, the financial position of the Company as ofDecember 31, 2002 and 2001, and the results of its operations and its cashflows for each of the two years in the period ended December 31, 2002 inconformity with accounting principles generally accepted in the United Statesof America.

 

As discussed in Note 5, effective January 1, 2001, the Company adoptedthe provisions of Statement of Financial Accounting Standards (“SFAS”)No. 133, *Accounting for Derivative Instruments and Hedging Activities*,as amended by SFAS No. 138, *Accounting for Certain Derivative Instruments andCertain Hedging Activities*(an amendment of SFAS No. 133).

 

As discussed in Note 3 to the consolidated financial statements, theCompany changed its method of accounting for goodwill and licenses in 2002.

 

As discussed above, the consolidated financial statements of theCompany as of December 31, 2000 and for the year then ended were audited byother auditors who have ceased operations. As described in Note 3, these financial statements have beenrevised to include the transitional disclosures required by SFAS No. 142, *Goodwill andOther Intangible Assets,*which was adopted by the Company as ofJanuary 1, 2002.  Our audit procedureswith respect to the disclosures in Note 3 with respect to 2000 included (i)agreeing the previously reported net loss to the previously issued financialstatements and the adjustments to reported net loss representing amortizationexpense recognized in this period related to goodwill and licenses that are nolonger being amortized as a result of initially applying SFAS No. 142 to theCompany’s underlying records obtained from management, and (ii) testing themathematical accuracy of the reconciliation of adjusted net loss to reportednet loss and the related earnings-per-share amounts.  In our opinion, the disclosures for 2000 in Note 3 areappropriate.  However, we were not engagedto audit, review, or apply any procedures to the 2000 consolidated financialstatements of the Company other than with respect to such disclosures and,accordingly, we do not express an opinion or any other form of assurance on the2000 consolidated financial statements taken as a whole.

 
| Deloitte & Touche LLP |
|---------------------------|
|                      |
| Minneapolis, Minnesota    |
| February 7, 2003          |

 

52

----

 

## **THIS IS A COPY OF APREVIOUSLY ISSUED REPORT**

 

###### ***In accordance with the Securities and ExchangeCommission’s amendment of Rule 2-02 of Regulation S-X, the following report isa copy of a report previously issued by Arthur Andersen LLP, our formerindependent public accountants, who have ceased operations.***

 

**REPORT OF INDEPENDENT PUBLICACCOUNTANTS**

 

To Rural CellularCorporation:

 

We have auditedthe accompanying 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 toexpress an opinion on these financial statements based on our audits.

 

We conducted ouraudits in accordance 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 statement presentation.We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion,the financial statements referred to above present fairly, in all materialrespects, the financial position of Rural Cellular Corporation and subsidiariesas of December 31, 2001 and 2000, and the results of their operations and theircash flows 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 inNote 5 to the financial statements, effective January 1, 2001 the Companyadopted the provisions of SFAS No.133, “Accounting for Derivative Instrumentsand Hedging Activities.”

 
| Arthur Andersen  LLP     |
|--------------------------|
|                     |
| Minneapolis,  Minnesota, |
| February 1, 2002         |

 

53

----

 

**RURAL CELLULAR CORPORATION AND SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

**(In thousands)**

 

**ASSETS**

** **
|                                                                               |   | **As of  December 31,** |          |
|------------------------------------------------------------------------------------|--------|-------------------------|---------------|
|                                                                               |   | **2002**                |          | **2001** |   |
| CURRENT ASSETS:                                                                    |   |                    |          |   |   |
| Cash and cash  equivalents                                                         |   | **$**                   | **53,788**    |   | $ | 1,995 |   |
| Accounts receivable,  less allowance for doubtful accounts of $3,096 and $4,016    |   | **46,442**              |          | 45,279 |   |
| Inventories                                                                        |   | **6,624**               |          | 6,617 |   |
| Other current  assets                                                              |   | **3,217**               |          | 2,408 |   |
| Total current  assets                                                              |   | **110,071**             |          | 56,299 |   |
| PROPERTY AND  EQUIPMENT, less accumulated depreciation of $172,629 and $137,776    |   | **240,536**             |          | 244,980 |   |
| LICENSES AND  OTHER ASSETS:                                                        |   |                    |          |   |   |
| Licenses, less  accumulated amortization of  $50,409  and $50,409             |   | **618,576**             |          | 1,030,624 |   |
| Goodwill, less  accumulated amortization of  $32,336  and $32,493             |   | **369,829**             |          | 361,184 |   |
| Customer lists,  less accumulated amortization of   $66,282 and $45,730       |   | **92,748**              |          | 113,299 |   |
| Deferred debt  issuance costs, less accumulated amortization of $11,427 and $8,306 |   | **25,176**              |          | 22,549 |   |
| Other assets,  less accumulated amortization of $1,432 and $1,230                  |   | **6,042**               |          | 7,844 |   |
| Total licenses  and other assets                                                   |   | **1,112,371**           |          | 1,535,500 |   |
|                                                                               |   | **$**                   | **1,462,978** |   | $ | 1,836,779 |   |

 

The accompanying notes are an integral part of theseconsolidated financial statements.

 

54

----

 

**LIABILITIES AND SHAREHOLDERS’ DEFICIT**

** **
|                                                                                       |   | **As of  December 31,** |          |
|--------------------------------------------------------------------------------------------|--------|-------------------------|---------------|
|                                                                                       |   | **2002**                |          | **2001** |   |
| CURRENT  LIABILITIES:                                                                      |   |                    |          |   |   |
| Accounts payable                                                                           |   | **$**                   | **41,633**    |   | $ | 35,167 |   |
| Current portion  of long-term debt                                                         |   | **79,047**              |          | 189 |   |
| Advance billings  and customer deposits                                                    |   | **10,447**              |          | 9,315 |   |
| Accrued interest                                                                           |   | **18,476**              |          | 13,033 |   |
| Dividends  payable                                                                         |   | **6,412**               |          | 5,710 |   |
| Other accrued  expenses                                                                    |   | **9,552**               |          | 11,158 |   |
| Total current  liabilities                                                                 |   | **165,567**             |          | 74,572 |   |
| LONG-TERM  LIABILITIES                                                                     |   | **1,211,026**           |          | 1,286,301 |   |
| Total  liabilities                                                                         |   | **1,376,593**           |          | 1,360,873 |   |
|                                                                                       |   |                    |          |   |   |
| COMMITMENTS AND  CONTINGENCIES (Note 9)                                                    |   |                    |          |   |   |
|                                                                                       |   |                    |          |   |   |
|                                                                                       |   |                    |          |   |   |
| REDEEMABLE  PREFERRED STOCK                                                                |   | **569,500**             |          | 509,736 |   |
| SHAREHOLDERS’  DEFICIT:                                                               |   |                    |          |   |   |
| Class A common  stock; $.01 par value; 200,000 shares authorized, 11,229 and 11,176 issued |   | **112**                 |          | 112 |   |
| Class B common  stock; $.01 par value; 10,000 shares authorized, 693 and 728 issued        |   | **7**                   |          | 7 |   |
| Additional  paid-in capital                                                                |   | **192,294**             |          | 191,964 |   |
| Accumulated  deficit                                                                       |   | **(669,508**            | )             | (213,050 | ) |
| Accumulated  other comprehensive loss                                                      |   | **(6,020**              | )             | (12,863 | ) |
| Total  shareholders’ deficit                                                          |   | **(483,115**            | )             | (33,830 | ) |
|                                                                                       |   | **$**                   | **1,462,978** |   | $ | 1,836,779 |   |

 

The accompanying notesare an integral part of these consolidated financial statements.

 

55

----

 

**RURAL CELLULAR CORPORATION AND SUBSIDIARIES**

### **CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**(In thousands, except per share data)**

 
|                                                                                                           |   | **For the years ended December 31,** |         |
|----------------------------------------------------------------------------------------------------------------|--------|--------------------------------------|--------------|
|                                                                                                           |   | **2002**                             |         | **2001** |   | **2000** |   |
| REVENUE:                                                                                                       |   |                                 |         |   |   |   |   |
| Service                                                                                                        |   | **$**                                | **315,012**  |   | $ | 305,988 |   | $ | 238,556 |   |
| Roaming                                                                                                        |   | **122,703**                          |         | 116,541 |   | 98,693 |   |
| Equipment                                                                                                      |   | **20,442**                           |         | 18,627 |   | 18,848 |   |
| Total revenue                                                                                                  |   | **458,157**                          |         | 441,156 |   | 356,097 |   |
| OPERATING  EXPENSES:                                                                                           |   |                                 |         |   |   |   |   |
| Network costs,  excluding depreciation and amortization                                                        |   | **97,200**                           |         | 101,509 |   | 85,988 |   |
| Cost of  equipment sales                                                                                       |   | **29,184**                           |         | 28,415 |   | 34,711 |   |
| Selling, general  and administrative                                                                           |   | **114,264**                          |         | 117,855 |   | 95,034 |   |
| Depreciation and  amortization                                                                                 |   | **82,497**                           |         | 112,577 |   | 91,078 |   |
| Total operating  expenses                                                                                      |   | **323,145**                          |         | 360,356 |   | 306,811 |   |
| OPERATING INCOME                                                                                               |   | **135,012**                          |         | 80,800 |   | 49,286 |   |
| OTHER INCOME  (EXPENSE):                                                                                       |   |                                 |         |   |   |   |   |
| Interest expense                                                                                               |   | **(111,159**                         | )            | (130,432 | ) | (89,839 | ) |
| Interest and  dividend income                                                                                  |   | **562**                              |         | 1,172 |   | 2,249 |   |
| Other                                                                                                          |   | **66**                               |         | (752 | ) | (24 | ) |
| Other expense,  net                                                                                            |   | **(110,531**                         | )            | (130,012 | ) | (87,614 | ) |
| INCOME (LOSS)  BEFORE INCOME TAXES, EXTRAORDINARY ITEM AND CUMULATIVE CHANGE IN ACCOUNTING  PRINCIPLE          |   | **24,481**                           |         | (49,212 | ) | (38,328 | ) |
| INCOME TAX  PROVISION                                                                                          |   | **—**                           |         | — |   | — |   |
| INCOME (LOSS)  BEFORE EXTRAORDINARY ITEM AND CUMULATIVE CHANGE IN ACCOUNTING PRINCIPLE                         |   | **24,481**                           |         | (49,212 | ) | (38,328 | ) |
| EXTRAORDINARY  ITEM - EARLY EXTINGUISHMENT OF DEBT                                                             |   | **(3,319**                           | )            | — |   | (925 | ) |
| INCOME (LOSS)  BEFORE CUMULATIVE CHANGE IN ACCOUNTING PRINCIPLE                                                |   | **21,162**                           |         | (49,212 | ) | (39,253 | ) |
| CUMULATIVE  CHANGE IN ACCOUNTING PRINCIPLE                                                                     |   | **(417,064**                         | )            | 1,621 |   | — |   |
| NET LOSS                                                                                                       |   | **(395,902**                         | )            | (47,591 | ) | (39,253 | ) |
| PREFERRED STOCK  DIVIDEND                                                                                      |   | **(60,556**                          | )            | (54,545 | ) | (44,081 | ) |
| NET LOSS  APPLICABLE TO COMMON SHARES                                                                          |   | **$**                                | **(456,458** | ) | $ | (102,136 | ) | $ | (83,334 | ) |
| WEIGHTED AVERAGE  COMMON SHARES OUTSTANDING, BASIC AND DILUTED                                                 |   | **11,920**                           |         | 11,865 |   | 11,510 |   |
|                                                                                                           |   |                                 |         |   |   |   |   |
| NET LOSS  APPLICABLE TO COMMON SHARES BEFORE EXTRAORDINARY ITEM AND CUMULATIVE CHANGE  IN ACCOUNTING PRINCIPLE |   | **$**                                | **(3.02**    | ) | $ | (8.74 | ) | $ | (7.16 | ) |
| EXTRAORDINARY  ITEM                                                                                            |   | **(0.28**                            | )            | — |   | (0.08 | ) |
| CUMULATIVE  CHANGE IN ACCOUNTING PRINCIPLE                                                                     |   | **(34.99**                           | )            | 0.13 |   | — |   |
| NET LOSS PER  BASIC AND DILUTED SHARE                                                                          |   | **$**                                | **(38.29**   | ) | $ | (8.61 | ) | $ | (7.24 | ) |

 

The accompanying notesare an integral part of these consolidated financial statements.

 

56

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**RURALCELLULAR CORPORATION AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OFSHAREHOLDERS’ (DEFICIT) EQUITY**

**FOR THEYEARS ENDED DECEMBER 31, 2002, 2001 AND 2000**

**(Inthousands)**

** **
|                                                              |   | **Class A  Common  Stock  Shares** |   | **Class A  Common  Stock  Amount** |   | **Class B  Common  Stock  Shares** |   | **Class B  Common  Stock  Amount** |   | **Additional  Paid-In  Capital** |   | **Accumulated  Deficit** |    | **Accumulated  Other  Comprehensive  Loss** |   | **Shareholders’  (Deficit) equity** |   | **Comprehensive  Loss** |     |
|-------------------------------------------------------------------|--------|------------------------------------|--------|------------------------------------|--------|------------------------------------|--------|------------------------------------|--------|----------------------------------|--------|--------------------------|---------|---------------------------------------------|--------|------------------------------------------|--------|-------------------------|----------|
| 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 and total comprehensive loss |   | —                             |   | —                             |   | —                             |   | —                             |   | —                           |   | (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 applicableto common shares                               |   | —                             |   | —                             |   | —                             |   | —                             |   | —                           |   | (102,136                 | )       | —                                      |   | (102,136                                 | )      | (102,136                | )        |
| Cumulative effect of SFAS No. 133 at January 1, 2001              |   |                               |   |                               |   | —                             |   | —                             |   | —                           |   | —                   |    | (5,526                                      | )      | (5,526                                   | )      | (5,526                  | )        |
| Current year effect of SFAS No. 133                               |   | —                             |   | —                             |   |                               |   |                               |   | —                           |   | —                   |    | (7,337                                      | )      | (7,337                                   | )      | (7,337                  | )        |
| Total comprehensive loss                                          |   | —                             |   | —                             |   | —                             |   | —                             |   | —                           |   | —                   |    | —                                      |   | —                                   |   | (114,999                | )        |
| BALANCE,  December 31, 2001                                       |   | 11,176                             |   | 112                                |   | 728                                |   | 7                                  |   | 191,964                          |   | (213,050                 | )       | (12,863                                     | )      | (33,830                                  | )      |                    |     |
| Conversion of Class B common stock to Class A  common stock       |   | 35                                 |   | 0                                  |   | (35                                | )      | 0                                  |   |                             |   |                     |    | —                                      |   |                                     |   | —                  |     |
| Stock issued through employee stock purchase plan                 |   | 17                                 |   | 0                                  |   | —                             |   | 0                                  |   | 317                              |   | —                   |    | —                                      |   | 317                                      |   | —                  |     |
| Stock options exercised                                           |   | 1                                  |   | 0                                  |   | —                             |   | 0                                  |   | 13                               |   | —                   |    | —                                      |   | 13                                       |   | —                  |     |
| COMPONENTS OF COMPREHENSIVE LOSS                                  |   |                               |   |                               |   |                               |   |                               |   |                             |   |                     |    |                                        |   |                                     |   |                    |     |
| Net loss applicable to common shares                              |   | —                             |   | —                             |   | —                             |   | —                             |   | —                           |   | (456,458                 | )       | —                                      |   | (456,458                                 | )      | (456,458                | )        |
| Current year effect of SFAS No. 133                               |   | —                             |   | —                             |   | —                             |   | —                             |   | —                           |   | —                   |    | 6,843                                       |   | 6,843                                    |   | 6,843                   |     |
| Total comprehensive loss                                          |   | —                             |   | —                             |   | —                             |   | —                             |   | —                           |   | —                   |    | —                                      |   |                                     |   | $                       | (449,615 | ) |
| BALANCE,  December 31, 2002                                       |   | 11,229                             |   | $                                  | 112    |                               | 693    |                               | $      | 7                                |   | $                        | 192,294 |                                        | $      | (669,508                                 | )      | $                       | (6,020   | ) | $ | (483,115 | ) |   |   |
|                                                                   |        |                                    |        |                                    |        |                                    |        |                                    |        |                                  |        |                          |         |                                             |        |                                          |        |                         |          |  |  |  |  |  |  |  |

 

The accompanying notesare an integral part of these consolidated financial statements.

 

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**RURALCELLULAR CORPORATION AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(Inthousands)**

** **
|                                                                                               |   | **For the years ended December 31,** |         |
|----------------------------------------------------------------------------------------------------|--------|--------------------------------------|--------------|
|                                                                                               |   | **2002**                             |         | **2001** |   | **2000** |   |
| OPERATING  ACTIVITIES:                                                                             |   |                                 | ** **   |   |   |   |   |
| Net loss                                                                                           |   | **$**                                | **(395,902** | **)** | $ | (47,591 | ) | $ | (39,253 | ) |
| Adjustments to  reconcile to net cash provided by operating activities:                            |   |                                 | ** **   |   |   |   |   |
| Depreciation and  amortization                                                                     |   | **82,497**                           | ** **   | 112,577 |   | 91,078 |   |
| Extraordinary  item – early extinguishment of debt                                            |   | **3,319**                            | ** **   | — |   | 925 |   |
| Adjustments of  interest rate derivatives to fair market value                                     |   | **15,104**                           | ** **   | 16,425 |   | — |   |
| Cumulative  change in accounting principle                                                         |   | **417,064**                          | ** **   | (1,621 | ) | — |   |
| Other                                                                                              |   | **3,209**                            | ** **   | 1,964 |   | 1,421 |   |
| Change in other  operating elements:                                                               |   |                                 | ** **   |   |   |   |   |
| Accounts  receivable                                                                               |   | **(475**                             | **)**        | 849 |   | (14,071 | ) |
| Inventories                                                                                        |   | **(7**                               | **)**        | 292 |   | 145 |   |
| Other current  assets                                                                              |   | **(809**                             | **)**        | 605 |   | 192 |   |
| Accounts payable                                                                                   |   | **6,466**                            | ** **   | (7,786 | ) | 25,297 |   |
| Advance billings  and customer deposits                                                            |   | **1,112**                            | ** **   | 1,199 |   | 1,721 |   |
| Other accrued  liabilities                                                                         |   | **6,744**                            | ** **   | (1,410 | ) | 14,717 |   |
| Net cash  provided by operating activities                                                         |   | **138,322**                          | ** **   | 75,503 |   | 82,172 |   |
| INVESTING  ACTIVITIES:                                                                             |   |                                 | ** **   |   |   |   |   |
| Purchases of  property and equipment                                                               |   | **(59,835**                          | **)**        | (45,979 | ) | (54,832 | ) |
| Proceeds from  sale of property and equipment                                                      |   | **462**                              | ** **   | — |   | — |   |
| Purchases of  wireless properties, net of cash acquired                                            |   | **—**                           | ** **   | (178,566 | ) | (1,232,692 | ) |
| Proceeds from  sale of other long-lived assets                                                     |   | **650**                              | ** **   | 48,929 |   | — |   |
| Pending  acquisition costs                                                                         |   | **—**                           | ** **   | — |   | (10,000 | ) |
| Other                                                                                              |   | **37**                               | ** **   | 1,080 |   | (1,763 | ) |
| Net cash used in  investing activities                                                             |   | **(58,686**                          | **)**        | (174,536 | ) | (1,299,287 | ) |
| FINANCING  ACTIVITIES:                                                                             |   |                                 | ** **   |   |   |   |   |
| Proceeds from  issuance of common stock related to employee stock purchase plan and stock  options |   | **331**                              | ** **   | 1,214 |   | 966 |   |
| Proceeds from  offering of common stock, net                                                       |   | **—**                           | ** **   | — |   | 160,436 |   |
| Proceeds from  issuance of preferred securities, net                                               |   | **—**                           | ** **   | — |   | 263,394 |   |
| Proceeds from  issuance of long-term debt                                                          |   | **362,550**                          | ** **   | 349,344 |   | 1,104,948 |   |
| Repayments of  long-term debt                                                                      |   | **(380,402**                         | **)**        | (256,089 | ) | (299,350 | ) |
| Proceeds from  swaption                                                                            |   | **—**                           | ** **   | 8,720 |   | — |   |
| Proceeds from  interest rate swap transactions                                                     |   | **—**                           | ** **   | — |   | 6,550 |   |
| Payments of debt  issuance costs                                                                   |   | **(10,322**                          | **)**        | (4,366 | ) | (18,909 | ) |
| Net cash (used  in) provided by financing activities                                               |   | **(27,843**                          | **)**        | 98,823 |   | 1,218,035 |   |
| NET INCREASE  (DECREASE)  IN CASH                                                             |   | **51,793**                           | ** **   | (210 | ) | 920 |   |
| CASH AND CASH  EQUIVALENTS, at beginning of year                                                   |   | **1,995**                            | ** **   | 2,205 |   | 1,285 |   |
| CASH AND CASH  EQUIVALENTS, at end of year                                                         |   | **$**                                | **53,788**   | ** ** | $ | 1,995 |   | $ | 2,205 |   |

 

The accompanying notesare an integral part of these consolidated financial statements.

 

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**RURAL CELLULAR CORPORATION**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**DECEMBER 31, 2002, 2001, and 2000**

 

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

 

Rural Cellular Corporation and its subsidiaries (the “Company” or“RCC”), a Minnesota corporation, provide wireless communication services inportions of the Midwest, South, Northeast and Northwest areas of the UnitedStates. The Company operates its cellular and paging systems under licensesgranted by the Federal Communications Commission (“FCC”). The Company’soperations are subject to the applicable rules and regulations of the FCC.

 

At December 31, 2002, the Company had negativeworking capital of $(55.5) million and a shareholders’ deficit of $(483.1)million.

 

Beginning in 2003 the Company’s cash requirements will increase eachyear, due in part to scheduled principal payments under its credit facility andpayment of cash dividends on its preferred stock.  The Company currently pays dividends on its senior and juniorexchangeable preferred stock by issuing additional shares of exchangeablepreferred stock.  Beginning August 15,2003, for the Company’s senior exchangeable preferred stock, and beginning May15, 2005, for its junior exchangeable preferred stock, dividends are to be paidin cash.  In addition, the Company mayneed substantial cash resources to upgrade its networks to 2.5G and 3.0G technologiesstarting in 2003.

 

**2.  Strategic History:**

 

RCC was founded in 1991through the combination of five partnerships holding different cellularlicenses in Minnesota. Since then, it has completed the following acquisitions(the “Acquisitions”):

 

•              InMay 1997, the Company acquired wireless operations and licenses coveringportions of Maine for approximately $85.7 million.

 

•              InJuly 1998, the Company acquired wireless operations and licenses coveringall of Vermont and portions of Massachusetts, New Hampshire, and New York forapproximately $262.5 million.

 

•              InAugust 1998, the Company acquired wireless operations and a license inwestern Maine for approximately $7.5 million.

 

•              InFebruary 1999, the Company acquired wireless operations and a license inSouth Dakota for approximately $11.9 million.

 

•              InApril 2000, the Company acquired wireless operations and licenses coveringportions of Alabama, Kansas, Mississippi, Oregon, and Washington forapproximately $1.265 billion.

 

•              InJanuary 2001, the Company acquired wireless operations and licenses in thePortsmouth, New Hampshire service area for approximately $194.3 million.In the acquisition, the Company also acquired an ILEC business of the seller.The Company sold the ILEC business in October 2001 for approximately $35.5million.

 

#### ***Accounting Treatment***

 

The purchase prices for the Acquisitions were allocated to the netassets based on their estimated fair values and the excess was allocated tolicenses and goodwill. The Acquisitions were accounted for under the purchasemethod of accounting; accordingly, operating results for each acquired businesshave been included from the date of acquisition.

 

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**3.****              Summaryof Significant Accounting Policies:**

 

***Revenue Recognition***

 

The Company’s revenue primarily consists of service, roaming andequipment revenue, each of which is described below:

 

•                    **Service**revenue includes 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 cellular andpaging equipment lease revenue. Also included are activation fees and chargesfor such features as voicemail, call waiting, and call forwarding. Servicerevenue also includes incollect revenue, which consists of charges to itscustomers when they use their wireless phones in other wireless markets.  The Company does not charge installation orconnection fees.

 

•                    **Roaming**revenue includes outcollect revenue. Roaming revenue and incollect costinformation is provided to RCC primarily through a third party centralizedclearinghouse. From the clearinghouse the Company receives settlement data eachmonth. Management bases its accrual of roaming revenue and incollect expense onthese clearinghouse reports. RCC follows this method since reasonablydependable estimates of roaming revenue and incollect cost can be made.

 

•                    **Equipment**revenue includes sales of cellular and paging equipment, accessory sales tocustomers, and network equipment reselling.

 

#### ***Recently IssuedAccounting Pronouncements***

 

In March 2003, the Financial Accounting Standards Board (“FASB”) issuedSFAS No. 149, “Accounting for Certain Financial Instruments withCharacteristics of Liabilities and Equity,” which is effective at the beginningof the first interim period beginning after June 15, 2003. SFAS No. 149establishes standards for the Company’s classification of liabilities in thefinancial statements that have characteristics of both liabilities and equity.The Company believes that adoption of SFAS No. 149 will result in itsredeemable preferred stock being presented in long-term liabilities on thebalance sheet and dividends on the preferred stock being classified as interestexpense instead of as dividends.

 

In December 2002, the FASB issued SFAS No. 148, “Accounting forStock-Based Compensation—Transition and Disclosure, an Amendment of FASBStatement No. 123.” SFAS No. 148 amends SFAS No. 123, “Accounting forStock-Based Compensation,” to provide alternative methods of transition for avoluntary change to the fair value based method of accounting for employeestock-based compensation. In addition, SFAS No. 148 amends the disclosurerequirements of SFAS No. 123 to require prominent disclosure in annual andinterim financial statements about the method of accounting used by the issuerfor stock-based compensation and its effect on the issuer’s reported results.The disclosure provisions of SFAS No. 148 are included in Note 7 of these Notesto Consolidated Financial Statements. The Company applies the principles of APBOpinion No. 25 and related interpretations in accounting for its stock-basedcompensation plans.

 

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In November 2002, the Emerging Issues Task Force (“EITF”) reached aconsensus on Issue No. 00-21, “Revenue Arrangements with MultipleDeliverables.” EITF Issue No. 00-21 addresses how revenue arrangements withmultiple deliverables should be divided into separate units of accounting andhow the arrangement consideration should be allocated to the identifiedseparate accounting units.  EITF No.00-21 is effective for fiscal periods beginning after June 15, 2003.  The Company has not yet determined theimpact adopting EITF No. 00-21 will have on its results of operations orfinancial position.

 

In November 2002, the FASB issued FASB Interpretation No. 45,“Guarantor’s Accounting and Disclosure Requirements for Guarantees, IncludingIndirect Guarantees of Indebtedness of Others” (“FIN 45”). FIN 45 clarifies therequirements for a guarantor’s accounting for and disclosure of certain issuedand outstanding guarantees. The initial recognition and initial measurementprovisions of FIN 45 are applicable to guarantees issued or modified afterDecember 31, 2002. The disclosure requirements of FIN 45 are effective forfinancial statements for interim or annual periods ending after December 15,2002.

 

In July2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exitor Disposal Activities.” SFAS No. 146 supersedes previous accounting guidance,principally EITF Issue No. 94-3, “Liability Recognition for Certain EmployeeTermination Benefits and Other Costs to Exit an Activity (including CertainCosts Incurred in a Restructuring).” SFAS No. 146 requires companies torecognize costs associated with exit or disposal activities when they areincurred rather than at the date of a commitment to an exit or disposal plan.Examples of costs covered by SFAS No. 146 include lease termination costs andcertain employee severance costs that are associated with a restructuring,discontinued operation, plant closing, or other exit or disposal activity. TheCompany will adopt SFAS No. 146 prospectively for exit or disposal activitiesinitiated after December 31, 2002.

 

In April 2002, the FASB issued SFAS No. 145, “Rescission of FASBStatements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and TechnicalCorrections.” SFAS No. 145 requires that gains and losses from theextinguishments of debt be classified as extraordinary items only if they meetthe criteria in Accounting Principles Board Opinion No. 30 (“Opinion No. 30”).SFAS No. 145 is effective for RCC for periods beginning January 1, 2003. Uponthe adoption of SFAS No. 145, RCC will reclassify prior period statements ofoperations to conform to the presentation required by SFAS No. 145. Under SFASNo. 145, the Company will report gains and losses on extinguishments of debt ininterest expense.

 

In October 2001, the FASB issued SFAS No. 144, “Accounting for the Impairmentor Disposal of Long-Lived Assets.” SFAS No. 144 supersedes SFAS No. 121,“Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assetsto Be Disposed Of.” SFAS No. 144 develops a single accounting model forlong-lived assets to be disposed of, whether previously held and used or newlyacquired. RCC adopted this statement on January 1, 2002. There was no impact tothe Company’s financial statements.

 

In July 2001, the FASB issued SFAS No. 143, “Accounting for AssetRetirement Obligations.” SFAS No. 143 provides accounting and reportingstandards for costs associated with the retirement of long-lived assets. Itrequires entities to record the fair value of a liability for an assetretirement obligation in the period in which it is incurred. When the liabilityis initially recorded, the entity capitalizes the cost by increasing thecarrying amount of the related long-lived asset. Over time, the liability isaccreted to its present value, and the capitalized cost is depreciated over theuseful life of the related asset. Upon settlement of the liability, an entityeither settles the obligation for its recorded amount or incurs a gain or lossupon settlement. The Company has determined this new accounting standard willnot affect its results of operations, financial position and cash flows. TheCompany was required to implement this standard effective January 1, 2003.

 

In accordance with guidance set forth in SFAS No. 142, “Goodwilland Other Intangible Assets,” the Company evaluates its goodwill and indefinitelived intangible assets for impairment at least annually and more frequentlywhen indicators of impairment exist. Effective with the adoption of SFAS No.142, RCC is no longer amortizing goodwill or indefinite lived assets.  Additionally, the Company has reassessed theuseful lives of previously recognized intangible assets (primarily customerlists and FCC licensing costs). The Company reassessed the useful life of itscustomer lists and determined its current policy continues to be appropriate.  A significant portion of the Company’sintangible assets consists of licenses that provide its wireless operationswith the exclusive right to utilize certain radio frequency spectrum to providecellular communication services. While licenses are issued for only a

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fixed time, generally ten years, such licenses are subject to renewalby the FCC. Renewals of licenses have occurred routinely and at nominal cost.Moreover, the Company has determined that there are currently no legal,regulatory, contractual, competitive, economic or other factors that limit theuseful life of the Company’s wireless licenses. As a result, licenses will betreated as an indefinite-lived intangible asset under the provisions of SFASNo. 142 and will not be amortized but rather will be tested for impairment. TheCompany will reevaluate the useful life determination for licenses each quarterto determine whether events and circumstances continue to support an indefiniteuseful life.

 

Upon adoption of SFAS No. 142, the Company completed an impairment testfor both its goodwill and licensing costs and determined that there wereimpairments of $5.0 million and $412.0 million, respectively.  RCC used a fair value approach, usingprimarily discounted cash flows, to complete the transitional impairmenttests.  In accordance with SFAS No. 142,the impairment charges are recorded in RCC’s consolidated financial statementsfor the first quarter of 2002.

 

On aprospective basis, RCC is required to test both goodwill and otherindefinite-lived intangible assets, including licenses, for impairment on anannual basis (October 1) using a fair value approach. Additionally, goodwillmust be tested for impairment between annual tests if an event occurs orcircumstances change that would more likely than not reduce the fair value ofthe entity below its carrying value. These events or circumstances wouldinclude a significant change in the business climate, including a significantsustained decline in an entity’s market value, regulatory requirements,operating performance indicators, competition, sale or disposition of asignificant portion of the business, or other factors.  Other indefinite-lived intangible assetsmust be tested between annual tests if events or changes in circumstancesindicate that the asset might be impaired. RCC performed its annual impairmenttest for both goodwill and licensing costs during the fourth quarter of 2002,using methodologies consistent with those applied for its transitionalimpairment tests performed as of January 1, 2002. No further impairmentwas recognized as a result of this testing.

 

#### ***Principles of Consolidation***

 

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

 

***Income Taxes***

 

The Company follows the liability method of accounting for income taxes,and deferred income taxes are based on the estimated future tax effects ofdifferences between the financial statement and tax bases of assets andliabilities based on enacted tax laws.

 

***Net Loss Per Common Share***

 

Basic EPS is computed by dividing net loss by the weighted averagenumber of shares outstanding during the year. Diluted EPS is computed byincluding dilutive common stock equivalents with the basic weighted averageshares outstanding.   Potential commonshares of 1,908,084, 1,588,734, and 1,266,422 related to the Company’soutstanding stock options were excluded from the computation of diluted lossper share for the years ended December 31, 2002, 2001 and 2000, respectively,as inclusion of these shares would have been antidilutive.

 

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#### ***Cash Equivalents***

 

The Company considers all highly liquid investments with an originalmaturity of three months or less to be cash equivalents.

 

***Inventories***

 

Inventories consist of cellular telephone equipment, pagers, andaccessories and are stated at the lower of cost, determined using the averagecost method, or market.

 

***Property and Equipment***

 

Property and equipmentare recorded 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 and equipment and theuseful lives of the Company’s assets are as follows as of December 31:

 
| **(in thousands)**                  |   | **2002**     |        | **2001** |   | **Useful  Lives** |   |
|-------------------------------------|--------|--------------|-------------|----------|--------|-------------------|--------|
| Land                                |   | **$**        | **7,204**   |     | $      | 7,021             |   | N/A |   |
| Building and  towers                |   | **93,335**   |        | 89,113   |   | 15-39 Years       |   |
| Equipment                           |   | **255,370**  |        | 225,098  |   | 2-10 Years        |   |
| Phone service  equipment            |   | **24,082**   |        | 31,998   |   | 19 Months         |   |
| Furniture and  fixtures             |   | **22,305**   |        | 22,401   |   | 3-10 Years        |   |
| Assets under  construction          |   | **10,869**   |        | 7,125    |   | N/A               |   |
|                                |   | **413,165**  |        | 382,756  |   |              |   |
|                                |   |         |        |     |   |              |   |
| Less—accumulated  depreciation |   | **(172,629** | )           | (137,776 | )      |              |   |
|                                |   |         |        |     |   |              |   |
| Property and  equipment – net  |   | **$**        | **240,536** |     | $      | 244,980           |   |   |   |

 

The Company’s network construction expenditures are recorded as assetsunder construction until the system or assets are placed in service, at whichtime the assets are transferred to the appropriate property and equipmentcategory.  During the years endedDecember 31, 2002 and 2001, as a component of assets under construction, theCompany capitalized $1.1 million and $1.7 million, respectively, in salaries ofthe Company’s engineering employees. The Company did not capitalize interest cost in 2002 or 2001.

 

At December 31, 2002, accumulated depreciation on phone serviceequipment was approximately $15.3 million as compared to $18.6 million atDecember 31, 2001. Phone service equipment depreciation expense for the yearended December 31, 2002 was $15.8 million as compared to $8.5 million in 2001.The gross carrying value of phone service equipment disposals in 2002 was $21.2million as compared to $5.9 million in 2001.

 

Total depreciation expense for the year ended December 31, 2002 was$61.5 million, $49.3 million in 2001, and $43.8 million in 2000.

 

***Licenses and Other Intangible Assets***

 

Licenses consist of the cost of acquiring paging licenses, the valueassigned to the Wireless Alliance personal communications services (“PCS”)licenses, other PCS licenses, local multipoint distribution service (“LMDS”)licenses, and the value assigned to cellular licenses acquired throughacquisitions. Other intangibles, resulting primarily from acquisitions, includethe value assigned to customer lists and goodwill. Amortization is computedusing the straight-line method based on the estimated useful life of the asset(see discussion of “Recently Issued Accounting Pronouncements”).

 

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The components of licenses and other intangible assets are as followsas of December 31:

 
|                          |   | **2002**                 |          | **2001**                     |   |
|-------------------------------|--------|--------------------------|---------------|------------------------------|--------|
| **(in thousands)**            |   | **Gross Carrying Value** |          | **Accumulated Amortization** |   | **Net Carrying Value** |   | **Gross Carrying Value** |   | **Accumulated Amortization** |   | **Net Carrying Value** |   |
| **Licenses**                  |   | **$**                    | **668,985**   |                         | **$**  | **(50,409)** |   | **$** | **618,576** |   | $ | 1,081,033 |   | $ | (50,409) |   | $ | 1,030,624 |   |
|                          |   |                     |          |                         |   |   |   |   |   |   |   |   |   |
| **Other  intangible assets:** |   |                     |          |                         |   |   |   |   |   |   |   |   |   |
| Goodwill                      |   | **402,165**              | ** **    | **(32,336**                  | **)**  | **369,829** |   | 393,677 |   | (32,493 | ) | 361,184 |   |
| Customer lists                |   | **159,030**              | ** **    | **(66,282**                  | **)**  | **92,748** |   | 159,029 |   | (45,730 | ) | 113,299 |   |
| Total                         |   | **$**                    | **1,230,180** | ** **                   | **$**  | **(149,027** | **)** | **$** | **1,081,153** |   | $ | 1,633,739 |   | $ | (128,632 | ) | $ | 1,505,107 |   |

 

The effect of the adoption of SFAS No. 142 on the reported net loss andbasic and diluted loss per share for all periods presented in the accompanyingstatements of operations is as follows:

 
|                                                           |   | **(Before extraordinary item and cumulative  change in accounting principle  and including the effect of preferred stock  dividends)** |        | **(As reported)** |   |
|----------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------|-------------|-------------------|--------|
|                                                           |   | **For years ended December 31,**                                                                                                       |        |              |   |
| **(in thousands, except per share amounts)**                   |   | **2002**                                                                                                                               |        | **2001**          |   | **2000** |   | **2002** |   | **2001** |   | **2000** |   |
| Net loss applicable to common shares                           |   | **$**                                                                                                                                  | **(36,075** | **)**             | $      | (103,757 | ) | $ | (82,409 | ) | **$** | **(456,458** | **)** | $ | (102,136 | ) | $ | (83,334 | ) |
| Add back: goodwill  amortization                               |   | —                                                                                                                                 |        | 16,690            |   | 12,531 |   | — |   | 16,690 |   | 12,531 |   |
| Add back: license  amortization                                |   | —                                                                                                                                 |        | 26,512            |   | 19,499 |   | — |   | 26,512 |   | 19,499 |   |
| Adjusted net loss  applicable to common shares                 |   | **$**                                                                                                                                  | **(36,075** | **)**             | $      | (60,555 | ) | $ | (50,379 | ) | $ | **(456,458)** |   | $ | (58,934 | ) | $ | (51,304 | ) |
|                                                           |   |                                                                                                                                   |        |              |   |   |   |   |   |   |   |   |   |
| Weighted average  common shares outstanding, basic and diluted |   | **11,920**                                                                                                                             |        | 11,865            |   | 11,510 | ** ** | **11,920** |   | 11,865 |   | 11,510 |   |
| **Basic  and diluted loss per share:**                         |   |                                                                                                                                   |        |              |   |   |   |   |   |   |   |   |   |
| Net loss per basic and diluted share                           |   | **$**                                                                                                                                  | **(3.02**   | **)**             | $      | (8.74 | ) | $ | (7.16 | ) | **$** | **(38.29** | **)** | $ | (8.61 | ) | $ | (7.24 | ) |
| Add back: goodwill amortization                                |   | **—**                                                                                                                             |        | 1.41              |   | 1.09 |   | **—** | ** ** | 1.41 |   | 1.09 |   |
| Add back: license amortization                                 |   | **—**                                                                                                                             |        | 2.23              |   | 1.69 |   | **—** | ** ** | 2.23 |   | 1.69 |   |
| Adjusted loss per share (basic and diluted)                    |   | **$**                                                                                                                                  | **(3.02**   | **)**             | $      | (5.10 | ) | $ | (4.38 | ) | **$** | **(38.29** | **)** | $ | (4.97 | ) | $ | (4.46 | ) |

 

Licenses, Goodwill and Customer list amortization expense wasapproximately $20.6 million, $62.8 million and $46.8 million for the yearsended December 31, 2002, December 31, 2001 and December 31, 2000,respectively.  It is estimated to beapproximately $20.6 million in each of 2003 through 2006, and $10.4 million in2007.

 

The changes in carrying amount of goodwill and licenses for the yearended December 31, 2002 are as follows (in thousands):

 
|                                   |   | **Goodwill** |    | **Licenses** |   | **Total** |   |
|----------------------------------------|--------|--------------|---------|--------------|--------|-----------|--------|
| Balance as of  December 31, 2001       |   | $            | 361,184 |         | $      | 1,030,624 |   | $ | 1,391,808 |   |
| Goodwill  reclassification             |   | 13,661       |    | —       |   | 13,661    |   |
| Impairment  charges under SFAS No. 142 |   | (5,016       | )       | (412,048     | )      | (417,064  | )      |
|                                   |   |         |    |         |   |      |   |
| Balance as of  December 31, 2002       |   | $            | 369,829 |         | $      | 618,576   |   | $ | 988,405 |   |

 

***Deferred Debt Issuance Costs***

 

### **Deferred debt issuance costs relateto the credit facility and the senior subordinated notes (see Note 4). Thesecosts are being amortized over the respective instruments’ terms.**

 

64

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***Other Assets***

 

Other assets primarily consist of costs related to Wireless Alliancespectrum relocation costs, restricted investments and investments inunconsolidated affiliates. Restricted investments represent the Company’sinvestments in the stock of CoBank and are stated at cost, which approximatesfair value.  The restricted investmentswere purchased pursuant to the terms of a loan agreement and are restricted asto withdrawal. Investments in unconsolidated affiliates are accounted for usingthe equity method and represent the Company’s ownership interests in Cellular2000, Inc.  Cellular 2000, Inc. is anentity organized to own the Cellular 2000 trade name and the relatedtrademark.  Other assets also includethe fair market value of an interest rate instrument (“Flooridor”), which wasentered into during 2000 and terminates in 2003 (see Note 5).

 

***Business and Credit Concentrations***

 

RCC operates in one business segment, the operation of wirelesscommunication systems in the United States. During 2002, no single customeraccounted for more than 10% of our total revenue or accounts receivable otherthan AT&T Wireless, which accounted for 10.2% of our total revenue. During2001 and 2000, no single customer accounted for more than 10% of our totalrevenue.

 

***Long-lived Assets***

 

Effective January 1, 2002, the Company adopted SFAS No. 144 forassessing the impairment of amortizable intangible assets and other long-livedassets. Under SFAS No. 144, if the sum of the expected future cash flows(undiscounted and without interest charges) were less than the carrying amountof the amortizable intangible assets and/or other long-lived assets, theCompany would recognize an impairment loss. The Company would measure anyimpairment based on a projected cash flow method using a discounted ratedetermined by management to be commensurate with the risk inherent in itscurrent business model.

 

***Use of**Estimates***

 

The preparation of financial statements in conformity with accountingprinciples generally accepted in the United States requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenue and expensesduring the reported periods.  Ultimateresults could differ from those estimates.

 

***Reclassifications***

 

Certain reclassifications have been made to prior year’s consolidatedfinancial statements in order to conform to the 2002 presentations.  Such reclassifications had no effect ontotal shareholders’ deficit, net loss applicable to common shares or loss pershare as previously reported.

 

***Comprehensive Loss***

 

The Company follows the provisions of SFAS No. 130, “ReportingComprehensive Income,” which established standards for reporting and display ofcomprehensive income and its components. Comprehensive income (loss) reflects the change in equity of a businessenterprise during a period from transactions and other events and circumstancesfrom nonowner sources.  For the Company,comprehensive loss represents net losses and the deferred gains on derivativeinstruments.  In accordance with SFASNo. 130, the Company has chosen to disclose comprehensive loss in theaccompanying consolidated statement of shareholders’ (deficit) equity.

 

65

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**4.  Long-term Liabilities:**

 

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

 

|                                  |   | **2002**    |          | **2001**  |   |
|---------------------------------------|--------|-------------|---------------|-----------|--------|
|                                  |   |        |          |      |   |
| Credit facility                       |   |        |          |      |   |
| (net of current  portion of $35,959): |   |        |          |      |   |
| Revolver                              |   | **$**       | **16,142**    |      | $      | 159,800 |   |
| Term Loan A  (terminates 04/03/2008)  |   | **316,540** |          | 426,508   |   |
| Term Loan B  (terminates, 04/03/2008) |   | **185,223** |          | 225,101   |   |
| Term Loan C  (terminates, 04/03/2009) |   | **185,223** |          | 225,101   |   |
| Term Loan D  (terminates, 10/03/2009) |   | **54,766**  |          | 75,000    |   |
|                                  |   | **757,894** |          | 1,111,510 |   |
|                                  |   |        |          |      |   |
| 9 3/4% Senior  Subordinated Notes     |   | **300,000** |          | —    |   |
| 9 5/8% Senior  Subordinated Notes     |   | **125,000** |          | 125,000   |   |
| Derivative  financial instruments     |   | **12,158**  |          | 42,949    |   |
| Deferred tax  liability               |   | **15,651**  |          | —    |   |
| Other                                 |   | **323**     |          | 6,842     |   |
| Long-term  liabilities                |   | **$**       | **1,211,026** |      | $      | 1,286,301 |   |

 

***Credit facility –***Advances under the credit facility bear interestat the London Interbank Offering Rate (“LIBOR”) plus an applicable margin basedon the Company’s ratio of indebtedness to annualized operating cash flow as ofthe end of the most recently completed fiscal quarter.  As of December 31, 2002, the effective rateof interest on the credit facility, excluding the impact of hedge agreements,was 4.53%.  A commitment fee not toexceed 0.50% on the unused portion of the credit facility is payable quarterly.Borrowings under the credit facility are secured by a pledge of all the assetsof the Company, excluding its ownership in the stock of Cellular 2000, Inc. andits 70% ownership in Wireless Alliance, LLC. At December 31, 2002, the Companyhad $258.9 million available under its credit facility. Futureavailability under the revolver will be determined quarterly based on ourleverage ratios as described by the credit facility agreement.

 

The credit facility is subject to variouscovenants, including the ratio of senior indebtedness to annualized operatingcash flow, the ratio of total indebtedness to annualized operating cash flow,and the ratio of annualized operating cash flow to interest expense. Mandatorycommitment reductions are required upon any material sale of assets.  InJanuary 2002 and March 2001, the Company obtained amendments and waivers ofcertain of the financial covenants in the credit facility. As of December 31,2002, the Company was in compliance with all covenants.

 

***Deferred gain on hedge and swap agreements****–*InMay 2000, the Company settled swaps it had entered into in August 1998 with atotal notional amount of $165 million, resulting in a gain of approximately$3.1 million.  In July 2000, the Companysettled swaps it had entered into in February 1999 with a total notional amountof $250 million, resulting in a gain of approximately $4.3 million.  In accordance with SFAS No. 133, effectiveJanuary 1, 2001, gains not accreted from these transactions were reclassifiedinto other comprehensive loss within the equity section of the balancesheet.  These gains are being accretedinto income over the original terms of the settled swaps.

 

***9 5/8 % SeniorSubordinated Notes*** - In 1998, the Company issued $125million principal amount of 9 5/8% Senior Subordinated Notes due 2008. Interest on the Senior Subordinated Notes ispayable semi-annually on May 15 and November 15. The Senior Subordinated Noteswill mature on May 15, 2008, and are redeemable, in whole or in part, at theoption of the Company, at any time on or after May 15, 2003.

 

***9 3/4 % Senior Subordinated Notes***- In 2002, the Company issued $300 million principal amount of 9 3/4 % seniorsubordinated notes due 2010. Interest on the 9 3⁄4% senior subordinated notes ispayable semi-annually on January 15 and July 15. The 9 3⁄4% senior subordinatednotes will mature on January 15, 2010, and are redeemable, in whole or in part,at the option of the Company, at any time on or after January 16, 2006.

 

66

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### ***Currentportion of long-term debt***

### ** **

As of December 31, 2002, the Company’s current portion of long-termdebt included the following:

 
| **(in thousands)**            |   | **Amount** |   |
|-------------------------------|--------|------------|--------|
| Credit facility               |   | $          | 35,959 |   |
|                          |   |       |   |
| Financial  Instruments        |   |       |   |
| Swaption(1)                   |   | 30,072     |   |
| Other financial  instruments  |   | 6,326      |   |
|                          |   |       |   |
| Purchase option  agreement(2) |   | 6,500      |   |
| Other                         |   | 190        |   |
| Total                         |   | $          | 79,047 |   |

 

----

(1) The Company anticipates that the counterparty will exercisethe optional early termination provision of the Swaption requiring RCC to paythe counterparty the negative fair market value of the swaption on May 15,2003.

 

### **(2) In conjunction with an acquisition, the Company becameparty to a purchase option agreement whereby it may acquire certain cell sitesin the future for $6.5 million.  Theoption expired February 28, 2003 at which time the Company exercised theoption.  At December 31, 2002, theoption was included in current liabilities. 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 credit facility, 9 5/8% SeniorSubordinated Notes, 9 3/4% Senior Subordinated Notes and early termination ofthe Swaption are as follows;

 
|                     |   |                 |    | **9 5/8%**                     |   | **9 3/4%**                     |   |                             |    |      |   |
|--------------------------|--------|----------------------|---------|--------------------------------|--------|--------------------------------|--------|----------------------------------|---------|-----------|--------|
| **(in thousands)  Year** |   | **Credit  Facility** |    | **Senior  Subordinated Notes** |   | **Senior  Subordinated Notes** |   | **Termination  of  Swaption(1)** |    | **Total** |   |
| 2003                     |   | $                    | 35,959  |                           | $      | —                         |   | $                                | —  |      | $      | 30,072 |   | $ | 66,031 |   |
| 2004                     |   | 61,043               |    | —                         |   | —                         |   | —                           |    | 61,043    |   |
| 2005                     |   | 71,958               |    | —                         |   | —                         |   | —                           |    | 71,958    |   |
| 2006                     |   | 87,240               |    | —                         |   | —                         |   | —                           |    | 87,240    |   |
| 2007                     |   | 91,605               |    | —                         |   | —                         |   | —                           |    | 91,605    |   |
| Thereafter               |   | 446,048              |    | 125,000                        |   | 300,000                        |   | —                           |    | 871,048   |   |
| Total                    |   | $                    | 793,853 |                           | $      | 125,000                        |   | $                                | 300,000 |      | $      | 30,072 |   | $ | 1,248,925 |   |

 

----

(1)          TheCompany anticipates that the counterpartywill exercise the optional early termination provision of the Swaption,requiring RCC to pay the counterparty the negative fair market of the swaptionon May 15, 2003.

 

### **5.     Financial Instruments:**

 

SFAS No. 133, “Accounting for DerivativeInstruments and Hedging Activities” (as amended by SFAS No. 137 and No. 138),requires that an entity determine the fair value of all derivatives andrecognize them as either assets or liabilities on the balance sheet.  The changes in fair value of the derivativeare booked based on the intended use of the derivative, the ability to meethedge designation criteria and the degree of effectiveness measured at eachperiod end.

 

The Company uses derivative financial instrumentsto reduce its exposure to adverse fluctuations in interest rates, to meet bankcovenants, and to reduce borrowing rates. RCC is not a party to leveraged derivatives and does not hold or issuefinancial instruments for speculative purposes.

 

67

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*Interest Rate Management*

 

The Company is required under the terms of its credit facility ($793.9million) to mitigate the risk of risinginterest rates on at least 50% of the principal amount of the loans outstandingfor an average period of three years from the date of the hedgeagreements.  At year end, RCC heldinterest rate swap and collar agreements, with a notional amount of $409.0million, to reduce the risk of rising interest rates on variable ratedebt.  The swaps and collars aredesignated and documented as cash flow hedges and are tested for effectivenessquarterly.  These derivatives arerecorded on the balance sheet at fair value and the effective gains (losses)are accumulated in other comprehensive income (“OCI”).  Values in OCI are reclassified to interestexpense when the hedged variable rate interest payment is recognized inearnings.  Overperformance of the swapidentified during effectiveness testing is recognized immediately in interestexpense, along with the collar’s time value, which is excluded from testing.

 

The Company entered into its reverse swaps($135.0 million notional) and purchased a flooridor ($252.0 million notional)to reduce the effective borrowing rates associated with the credit facility andthe fixed rate 9 3/4% Senior Subordinated Notes in a declining interest rateenvironment.    These instruments, inaddition to the swaption, do not qualify for SFAS No. 133 cash flow or fairvalue hedge accounting treatment, and as such, the entire change in fair valueof these instruments is reflected in interest expense each period.

 

RCC’s derivative instruments and valuations are set forth inthe table below.  The fair values arebased on quoted market prices or, if quoted market prices are not available,estimates using present value and other valuation techniques except for Class Mand Class T convertible preferred stock.

 

68

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RCC’s derivative instruments and valuations are set forth inthe table below.

 
|                                              |   |                 |     | **Carrying value**     |     | **Estimated fair market value** |      |
|---------------------------------------------------|--------|----------------------|----------|------------------------|----------|---------------------------------|-----------|
| **(Dollars in thousands)**                        |   | **Notional  amount** |     | **December  31, 2002** |     | **December  31, 2001**          |      | **December  31, 2002** |   | **December  31, 2001** |   |
|                                              |   |                 |     |                   |     |                            |      |   |   |   |   |
| Financial  assets                                 |   |                 |     |                   |     |                            |      |   |   |   |   |
| Interest rate  flooridors (i)  :             |   |                 |     |                   |     |                            |      |   |   |   |   |
| Fleet Bank  (terminates May 12, 2003)             |   | $                    | 252,000  |                   | $        | 631                             |      | $ | 1,699 |   | $ | 631 |   | $ | 1,699 |   |
| Total financial  assets                           |   | $                    | 252,000  |                   | $        | 631                             |      | $ | 1,699 |   | $ | 631 |   | $ | 1,699 |   |
|                                              |   |                 |     |                   |     |                            |      |   |   |   |   |
| **Financial  liabilities**                        |   |                 |     |                   |     |                            |      |   |   |   |   |
| Credit  facility                                  |   | —               |     | 793,853                |     | $                               | 1,111,510 |   | $ | 689,064 |   | $ | 987,145 |   |
| 9  5/8% senior subordinated notes                 |   | —               |     | 125,000                |     | 125,000                         |      | 81,250 |   | 127,031 |   |
| 9  3/4% senior subordinated notes                 |   | —               |     | 300,000                |     | —                          |      | 195,000 |   | — |   |
| 11  3/8% senior exchangeable preferred stock      |   | —               |     | 240,882                |     | 215,373                         |      | 57,812 |   | 187,375 |   |
| 12  1⁄4% junior exchangeable preferred stock   |   | —               |     | 195,035                |     | 172,901                         |      | 42,908 |   | 145,237 |   |
| Class  M  convertible preferred stock(ii)    |   | —               |     | 110,000                |     | 110,000                         |      | 110,000 |   | 110,000 |   |
| Class  T  convertible preferred stock(ii)    |   | —               |     | 7,541                  |     | 7,541                           |      | 7,541 |   | 7,541 |   |
|                                              |   | —               |     | 1,772,311              |     | 1,742,325                       |      | 1,183,575 |   | 1,564,329 |   |
| Derivative  financial instruments                 |   |                 |     |                   |     |                            |      |   |   |   |   |
| Interest  rate swap agreements:                   |   |                 |     |                   |     |                            |      |   |   |   |   |
| TD Securities  (terminates May 16, 2005)     |   | 84,000               |     | 9,010                  |     | 5,854                           |      | 9,010 |   | 5,854 |   |
| PNC Bank  (terminates May 16, 2003)          |   | 42,000               |     | 975                    |     | 2,703                           |      | 975 |   | 2,703 |   |
| *Union Bank (unwound January 17,  2002)*          |   | *—*             | * * | *—*               | * * | *5,387*                         | * *  | *—* | * * | *5,387* | * * |
| *Fleet Bank (unwound  January 14, 2002)*     |   | *—*             | * * | *—*               | * * | *2,791*                         | * *  | *—* | * * | *2,791* | * * |
| Reverse  swap agreements:                         |   |                 |     |                   |     |                            |      |   |   |   |   |
| Fleet Bank  (terminates January 15, 2010)    |   | 75,000               |     | 1,832                  |     | —                          |      | 1,832 |   | — |   |
| Dresdner Bank  (terminates January 15, 2010) |   | 60,390               |     | 1,316                  |     | —                          |      | 1,316 |   | — |   |
| Interest  rate collar agreements:                 |   |                 |     |                   |     |                            |      |   |   |   |   |
| PNC Bank  (terminates May 25, 2003)               |   | 47,000               |     | 966                    |     | 2,025                           |      | 966 |   | 2,025 |   |
| *Fleet Bank (unwound January 14,  2002)*          |   | *—*             | * * | *—*               | * * | *3,553*                         | * *  | *—* | * * | *3,553* | * * |
| Union Bank  (terminates June 5, 2003)             |   | 96,000               |     | 1,622                  |     | 2,961                           |      | 1,622 |   | 2,961 |   |
| PNC Bank  (terminates June 6, 2003)               |   | 94,000               |     | 1,827                  |     | 3,301                           |      | 1,827 |   | 3,301 |   |
| Union Bank  (terminates June 5, 2003)             |   | 46,000               |     | 936                    |     | 1,746                           |      | 936 |   | 1,746 |   |
| Swaption(iii):                                    |   |                 |     |                   |     |                            |      |   |   |   |   |
| TD Securities  (terminates March 15, 2008)   |   | 131,016              |     | 30,072                 |     | 12,628                          |      | 30,072 |   | 12,628 |   |
|                                              |   |                 |     |                   |     |                            |      |   |   |   |   |
|                                              |   | 675,406              |     | 48,556                 |     | 42,949                          |      | 48,556 |   | 42,949 |   |
| Other  long-term liabilities                      |   | —               |     | 323                    |     | 6,842                           |      | 323 |   | 6,842 |   |
| Total financial liabilities                       |   | $                    | 675,406  |                   | $        | 1,821,190                       |      | $ | 1,792,116 |   | $ | 1,232,454 |   | $ | 1,614,120 |   |

 

----

(i)The financial instrument does not qualify for hedge accountingtreatment under SFAS No. 133 and as such is recorded in the balance sheet atfair value with related changes in fair value included in the statement ofoperations.

(ii) The financial instrument is not actively traded and therefore theestimated fair market value is stated at the carrying valuation.

(iii) Rural Cellular Corporation has $125 million in subordinated debtthat was issued in May 1998 and matures in May 2008. The $8.7 million value ofan embedded call option within the subordinated debt was monetized in March2001 resulting in a swaption. The swaption does not qualify for hedgeaccounting treatment under SFAS No. 133 and as such is recorded in the balancesheet at fair value with related changes in fair value included in thestatement of operations.

 

69

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Because LIBOR rates have declined subsequent to the inception of theCompany’s swaps and collars, their respective market valuations have decreased.Therefore, as required by SFAS No. 133, this decline in market valuation isreflected in the financial statements by an increase in the derivativefinancial instrument liabilities together with adjustments to interest expenseand accumulated other comprehensive loss.

 

The following table sets forth these adjustments for 2002:

 
| **(In thousands)**              |   | **Prior to  SFAS No.  133 Adjustment** |   | **SFAS No.  133  Adjustment** |   | **As  Reported** |   |
|---------------------------------|--------|----------------------------------------|--------|-------------------------------|--------|------------------|--------|
| *Statement of Operations Data:* |   |                                   |   |                          |   |             |   |
| Interest expense                |   | $                                      | 96,055 |                          | $      | 15,104           |   | $ | 111,159 |   |
|                                 |        |                                        |        |                               |        |                  |        |  |  |  |

 
|                                                                                                       |   | **As Reported at December 31, 2001** | ** ** | **SFAS No. 133 Adjustment for year ended  December 31, 2002** | ** ** | **As  Reported at December 31, 2002** | ** ** |
|------------------------------------------------------------------------------------------------------------|--------|--------------------------------------|------------|---------------------------------------------------------------|------------|---------------------------------------|------------|
| *Balance Sheet Data:*                                                                                      |   |                                 |       |                                                          |       |                                  |       |
| ASSETS:                                                                                                    |   |                                 | ** ** |                                                          | ** ** |                                  | ** ** |
| Derivative  financial instruments included in other assets                                                 |   | $                                    | 1,699      |                                                          | $          | (1,068                                | )          | $ | 631 |   |
| LIABILITIES:                                                                                               |   |                                 |       |                                                          |       |                                  |       |
| Derivative  financial instruments included in current portion of long term debt and  long-term liabilities |   | $                                    | 42,949     |                                                          | $          | 5,607                                 |       | $ | 48,556 |   |
| SHAREHOLDERS’  DEFICIT:                                                                               |   |                                 |       |                                                          |       |                                  |       |
| Accumulated  other comprehensive loss                                                                      |   | $                                    | (12,863    | )                                                             | $          | 6,843                                 |       | $ | (6,020 | ) |

 

**6.Redeemable Preferred Stock:**

 

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

 
|                         |   | **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, 2002** |   | **Accrued  dividends at  Dec. 31, 2002  (In thousands)** |   |
|------------------------------|--------|----------------------|--------|------------------------------|--------|----------------------------------------|--------|--------------------------------------------------------|------------|-------------------------------------------|---------|---------------------------------------------------------------|--------|----------------------------------------------------------|--------|
| Senior                       |   |                 |   |                         |   |                                   |   |                                                   |       |                                      |    |                                                          |   |                                                     |   |   |
| Exchangeable Preferred Stock |   | 05/15/2010           |   | 11.375                       | %      | —                                 |   | Non-Voting                                             |       | 150,000                                   |    | 90,882                                                        |   | $                                                        | 3,426  |   |
| Junior                       |   |                 |   |                         |   |                                   |   |                                                   |       |                                      |    |                                                          |   |                                                     |   |
| Exchangeable Preferred Stock |   | 02/15/2011           |   | 12.250                       | %      | —                                 |   | Non-Voting                                             |       | 140,000                                   |    | 55,035                                                        |   | 2,986                                                    |   |
| Class  M  Voting        |   |                 |   |                         |   |                                   |   |                                                   |       |                                      |    |                                                          |   |                                                     |   |   |
| Convertible Preferred Stock  |   | 04/03/2012           |   | 8.000                        | %      | $                                      | 53.000 |                                                   | Voting     |                                      | 110,000 |                                                          | — |                                                     | 26,711 |   |
| Class T  Convertible         |   |                 |   |                         |   |                                   |   |                                                   |       |                                      |    |                                                          |   |                                                     |   |   |
| Preferred Stock              |   | 04/03/2020           |   | 4.000                        | %      | $                                      | 50.631 |                                                   | Non-Voting |                                      | 7,541   |                                                          | — |                                                     | 829    |   |
| Total                        |   |                 |   |                         |   |                                   |   |                                                   |       | 407,541                                   |    | 145,917                                                       |   | $                                                        | 33,952 |   |

 

Preferred security balance sheetreconciliation (in thousands):

 
|                                                                         |   | **As of  December 31, 2002** |    |
|------------------------------------------------------------------------------|--------|------------------------------|---------|
| Preferred  securities originally issued                                      |   | $                            | 407,541 |   |
| Preferred  dividends issued (Junior and Senior)                              |   | 145,917                      |    |
| Accrued  long-term preferred security dividends   (Class M and Class T) |   | 27,540                       |    |
| Unamortized  issuance costs                                                  |   | (11,498                      | )       |
| Net  preferred securities                                                    |   | $                            | 569,500 |   |

 

70

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Dividends on the Senior ExchangeablePreferred Stock are cumulative, payable quarterly, and may be paid, at theCompany’s option, on any dividend payment date occurring on or before May 15,2003, either in cash or by the issuance of additional shares of SeniorExchangeable Preferred Stock having an aggregate liquidation preference equalto the amount of such dividends.

 

Dividends on the Junior ExchangeablePreferred Stock are cumulative, are payable quarterly, and may be paid, at theCompany’s option, on any dividend payment date occurring on or before February15, 2005, either in cash or by the issuance of additional shares of JuniorExchangeable Preferred Stock having an aggregate liquidation preference equalto the amount of such dividends.

 

The Senior and Junior Exchangeable Preferred Stock are non-voting,except as otherwise required by law and as provided in the Certificates ofDesignation. The Certificates of Designation provide that upon the accumulationof accrued and unpaid dividends, if any, on the outstanding Senior and JuniorExchangeable Preferred Stock in an amount equal to six full quarterly dividends(whether or not consecutive), the holders of a majority of the outstandingshares of Exchangeable Preferred Stock, voting as a class, will be entitled toelect the lesser of two directors and that number of directors constituting 25%of the members of the Board of Directors.

 

Dividends on the Class M Preferred Stock are compounded, accrue at 8%per annum, and are payable upon redemption or upon liquidation of theCompany.  The Class M preferred stock isconvertible into the Company’s Class A common stock at $53.00 per share subjectto certain adjustments.  Dividends arenot payable if the shares are converted. The holders of the Class M preferred stock are entitled to vote on allmatters submitted to the holders of the common stock on an as-converted basis.

 

In order to comply with the FCC rules regarding cross-ownership ofcellular licensees within a given market, the Company issued 7,541 shares ofClass T Convertible Preferred Stock to Telephone & Data Systems, Inc.(“TDS”) with a par value of $1,000 per share on March 31, 2000 in exchange for43,000 shares of Class A common stock and 105,940 shares of Class B commonstock owned by TDS. TDS or the Company can convert the Class T preferred stockinto the original number of shares of Class A or Class B common stock in thefuture if ownership by TDS of the Common Stock would then be permissible underFCC rules. Dividends on the Class T preferred stock are cumulative, have afixed coupon rate of 4% per annum, and are payable in April 2020.  Dividends are not payable if the shares areconverted.

 

The Senior Exchangeable PreferredStock is senior to the Junior Exchangeable Preferred Stock, Class M ConvertiblePreferred Stock, Class T Convertible Preferred Stock and common stock of RCCwith respect to dividend rights and rights on liquidation, winding-up anddissolution of RCC.  The JuniorExchangeable Preferred Stock is junior to the Senior Exchangeable PreferredStock and Class T Convertible Preferred Stock and senior to the Class MConvertible Preferred Stock and common stock with respect to dividend rightsand rights on liquidation, winding-up and dissolution of RCC.  Shares of the Senior and Junior ExchangeablePreferred Stock and Class T Convertible Preferred Stock are non-voting, exceptas otherwise required by law and as provided in their respective Certificatesof Designation.

 

We are required to redeem the Senior Exchangeable Preferred Stock,Junior Exchangeable Preferred Stock, Class M Convertible Preferred Stock, andClass T Convertible Preferred Stock at 100% of their total liquidationpreference plus accumulated and unpaid dividends at their respective redemptiondates.

 

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

 

***Authorized Shares***

 

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

 

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***Common Stock Rights***

 

Holders of Class A common stock are entitled to one vote for each shareowned while holders of Class B common stock are entitled to ten votes for eachshare owned.  Each share of Class Bcommon stock may at any time be converted into one share of Class A commonstock at the option of the holder.  Allissued Class B common shares may also be converted into an equivalent number ofClass A common shares upon the affirmative vote of not less than 66 2/3% of thethen issued Class B common shares. Further, Class B common shares are automatically converted to an equalnumber of Class A common shares if they are transferred to anyone who is not anaffiliate of the transferring shareholder.

 

The following table showscertain information relating to the RCC’s outstanding shares and the relatedvoting rights as of March 19, 2003:

 
| **Class of Stock**         |   | **Shares outstanding** |   | **Voting rights  per share** |   | **Total votes per class** |   |
|----------------------------|--------|------------------------|--------|------------------------------|--------|---------------------------|--------|
| Class A common stock       |   | 11,375,527             |   | 1                            |   | 11,375,527                |   |
| Class B common stock       |   | 692,472                |   | 10                           |   | 6,924,720                 |   |
| Class M preferred stock(1) |   | 2,075,471              |   | 1                            |   | 2,075,471                 |   |
| Total                      |   | 14,143,470             |   |                         |   | 20,375,718                |   |

 

----

(1) Reflecting the voting rights on an as-converted basis.

 

On April 30, 1999 RCC adopted rights plans for its Class A common stockand Class B common stock. The rights plans give each holder of Class A commonstock the right to purchase 1/100th of a newly authorized preferredshare that is essentially equivalent to one share of Class A common stock andeach holder of Class B common stock the right to purchase 1/100th ofa newly authorized preferred share, essentially equivalent to one share ofClass B common stock.  The exerciseprice for both the Class A rights and the Class B rights is $120 per right.

 

The rights become exercisable by existing shareholders only followingthe acquisition by a buyer, without prior approval of the Company’s board ofdirectors, of 15% or more of the outstanding Common Stock, Class A and Class B,or following the announcement of a tender offer for 15% of the outstandingCommon Stock.  If a person acquires 15%or more of the Company’s Common Stock, each right (except those held by theacquiring person) will entitle the holder to purchase shares of the Company’sClass A or Class B common stock, as appropriate, having a market value of twicethe right’s exercise price, or, in effect, at a 50% discount from the thencurrent market value.  If the Companywere acquired in a merger or similar transaction after a person acquires 15% ofthe Company’s outstanding Common Stock, without prior approval of the board ofdirectors, each right would entitle the holder (other than the acquirer) topurchase shares of the acquiring company having a market value of twice theexercise price of the right, or, in effect, at a discount of 50%. Until theacquisition by any person of 15% or more of the Company’s Common Stock, therights can be redeemed by the board of directors for $.001 per right.

 

***Stock Compensation Plans***

 

The stock compensation plan (the “Plan”) for employees authorizes theissuance of up to 2,400,000 shares of Class A common stock in the form of stockoptions, stock appreciation rights or other stock-based awards.  The Plan provides that the exercise price ofany option shall not be less than 85% of the fair market value of the Class Acommon stock as of the date of the grant (100% in the case of incentive stockoptions).  Options and other awards grantedunder the Plan vest and become exercisable as determined by the Board ofDirectors or a stock option committee.

 

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The stock option plan for nonemployee directors authorizes the issuanceof up to 400,000 shares of Class A common stock. The plan provides that theoption price shall not be less than the fair market value of the Class A commonstock outstanding on the date of grant. The options vest and become exercisable one year following the date of grantand expire five years thereafter.

 

Under the employee stock purchaseplan, employees who satisfy certain length of service and other criteria arepermitted to purchase shares of Class A common stock at 85% of the fair marketvalue of the Class A common stock on January 1 or December 31 of each year,whichever is lower. In February 2003, RCC’s Board of Directors adopted anamendment to increase the number of shares reserved under the plan to750,000.  This amendment is subject toapproval at the 2003 Annual Meeting of Shareholders.

 

The following table summarizes optionplan activity through December 31, 2002:

 
|                                                  |   | **Nonemployee Directors Plan** |   | **Stock  Compensation Plan** |   | **Employee Stock Purchase Plan** |       |
|-------------------------------------------------------|--------|--------------------------------|--------|------------------------------|--------|----------------------------------|------------|
| Options  initially authorized under plan              |   | 210,000                        |   | 1,400,000                    |   | 250,000                          |       |
| Additional options authorized  through plan amendment |   | 190,000                        |   | 1,000,000                    |   | —                           | ** ** |
| Options granted                                       |   | (267,750                       | )      | (2,506,606                   | )      | (249,961                         | )          |
| Options cancelled                                     |   | 47,250                         |   | 437,700                      |   | —                           |       |
|                                                  |   |                           |   |                         |   |                             |       |
| Options remaining to be issued at December 31, 2002   |   | 179,500                        |   | 331,094                      |   | 39                               |       |

 

Options outstanding for employees andnonemployees as of December 31, 2002 have exercise prices ranging between $3.18and $79.25. Information related to stock options is as follows:

 
|                                           |   | **2002**      |       | **2001**                              |      | **2000**   |      |
|------------------------------------------------|--------|---------------|------------|---------------------------------------|-----------|------------|-----------|
|                                           |   | **Shares**    |       | **Weighted  Average  Exercise Price** |      | **Shares** |      | **Weighted  Average   Exercise Price** |   | **Shares** |   | **Weighted  Average  Exercise Price** |   |
|                                           |   |          |       |                                  |      |       |      |   |   |   |   |   |   |
| Outstanding,  beginning of period              |   | **1,588,734** |       | **$**                                 | **26.78** |       | 1,266,422 |   | $ | 25.80 |   | 1,046,547 |   | $ | 12.36 |   |
| Granted                                        |   | **503,550**   | ** ** | **4.43**                              |      | 477,006    |      | 30.68 |   | 299,950 |   | 70.86 |   |
| Exercised                                      |   | **(1,450**    | **)**      | **8.99**                              |      | (70,844    | )         | 11.05 |   | (55,375 | ) | 10.92 |   |
| Cancelled                                      |   | **(182,750**  | **)**      | **63.23**                             |      | (83,850    | )         | 46.90 |   | (24,700 | ) | 40.66 |   |
|                                           |   |          |       |                                  |      |       |      |   |   |   |   |   |   |
| Outstanding, end of period                     |   | **1,908,084** | ** ** | **$**                                 | **17.40** |       | 1,588,734 |   | $ | 26.78 |   | 1,266,422 |   | $ | 25.80 |   |
|                                           |   |          |       |                                  |      |       |      |   |   |   |   |   |   |
| Exercisable, end of period                     |   | **1,015,784** | ** ** | **$**                                 | **19.12** |       | 700,781   |   | $ | 18.33 |   | 488,052 |   | $ | 12.28 |   |
| Weighted average fair value of options granted |   |          |       | **$**                                 | **3.85**  |       |      |   | $ | 24.67 |   |   |   | $ | 55.94 |   |

 

The following table summarizescertain information 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       |   | 807,653                 |   | 5                                                 |   | $                                    | 5.67   |                    | 369,453   |                                 | $      | 8.40 |   |
| $10.00 – $19.99     |   | 503,275                 |   | 6                                                 |   | $                                    | 13.60  |                    | 374,575   |                                 | $      | 13.84 |   |
| $20.00 – $29.99     |   | 303,600                 |   | 8                                                 |   | $                                    | 26.90  |                    | 59,000    |                                 | $      | 27.38 |   |
| $30.00 – $39.99     |   | 180,106                 |   | 8                                                 |   | $                                    | 35.23  |                    | 138,326   |                                 | $      | 34.45 |   |
| $40.00 – $49.99     |   | 20,000                  |   | 7                                                 |   | $                                    | 43.25  |                    | 12,000    |                                 | $      | 43.25 |   |
| $50.00 – $59.99     |   | 20,300                  |   | 7                                                 |   | $                                    | 53.60  |                    | 11,120    |                                 | $      | 54.52 |   |
| $60.00 – $69.99     |   | 36,750                  |   | 7                                                 |   | $                                    | 68.25  |                    | 36,750    |                                 | $      | 68.25 |   |
| $70.00 – $80.00     |   | 36,400                  |   | 7                                                 |   | $                                    | 76.97  |                    | 14,560    |                                 | $      | 76.97 |   |
| $0.00 – $80.00      |   | 1,908,084               |   | 7                                                 |   | $                                    | 17.40  |                    | 1,015,784 |                                 | $      | 19.12 |   |

 

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The Company accounts for stock options under Accounting PrinciplesBoard Opinion No. 25, under which no compensation cost has beenrecognized.  Had compensation cost forthe Company’s plans been determined consistent with SFAS No. 148 and SFAS No.123, the Company’s results of operations and net loss per share would have beenadjusted to the following pro forma amounts:

 

|                                          |   | **Years  ended December 31,** |         |
|-----------------------------------------------|--------|-------------------------------|--------------|
| **(in thousands, except for per share data)** |   | **2002**                      |         | **2001** |   | **2000** |   |
| Net loss  applicable to common shares:        |   |                          | ** **   |   |   |   |   |
| As reported                                   |   | **$**                         | **(456,458** | **)** | $ | (102,136 | ) | $ | (83,334 | ) |
| Fair value  compensation expense              |   | **(5,290**                    | **)**        | (5,741 | ) | (2,276 | ) |
| Pro forma                                     |   | **$**                         | **(461,748** | **)** | $ | (107,877 | ) | $ | (85,610 | ) |
| Net loss per  basic and diluted share:        |   |                          | ** **   |   |   |   |   |
| As reported                                   |   | **$**                         | **(38.29**   | **)** | $ | (8.61 | ) | $ | (7.24 | ) |
| Fair value  compensation expense              |   | **(0.45**                     | **)**        | (0.48 | ) | (0.20 | ) |
| Pro forma                                     |   | **$**                         | **(38.74**   | **)** | $ | (9.09 | ) | $ | (7.44 | ) |

 

The fair value of each option grantis estimated on the date of the grant using the Black-Scholes option-pricingmodel with the following assumptions used for grants in 2002, 2001 and 2000:expected volatility of 88.0%, 67.71% and 63.47%, respectively; risk-freeinterest rates of 4.25% in 2002, 7.25% in 2001 and 8.25% in 2000; expected lifeof 10 years and no expected dividend yield. The per share weighted average fair value of options granted in 2002,2001 and 2000 was $3.85, $24.67 and $55.94 per share, respectively.

 

**8.  Income Taxes:**

 

The income tax effect of the items that create deferred income taxassets and liabilities are as follows (In thousands):

 

** **

|                               |   | **December  31,** |        |
|------------------------------------|--------|-------------------|-------------|
|                               |   | **2002**          |        | **2001** |   |
| Deferred income tax  assets:       |   |              |        |   |   |
| Operating loss  carryforwards      |   | **$**             | **93,040**  | ** ** | $ | 73,487 |   |
| Tax credit  carryforwards          |   | **—**        | ** **  | 85 |   |
| Temporary  differences:            |   |              | ** **  |   |   |
| Allowance for  doubtful accounts   |   | **1,036**         | ** **  | 1,467 |   |
| Derivatives                        |   | **18,212**        | ** **  | 15,675 |   |
| Intangible  assets                 |   | **52,946**        | ** **  | — |   |
| Other                              |   | **2,317**         | ** **  | 3,265 |   |
| Valuation  allowance               |   | **(158,245**      | **)**       | (33,915 | ) |
| Total deferred  income tax assets  |   | **9,306**         | ** **  | 60,064 |   |
| Deferred income  tax liabilities:  |   |              | ** **  |   |   |
| Depreciation                       |   | **(23,312**       | **)**       | (20,555 | ) |
| Intangible  assets                 |   | **—**        | ** **  | (37,545 | ) |
| Other                              |   | **(1,645**        | **)**       | (1,964 | ) |
| Net deferred  income tax liability |   | **$**             | **(15,651** | **)** | $ | — |   |

 

As of December 31, 2002, the Company had tax operating losscarryforwards of approximately $244.8 million available to offset future incometax liabilities.  These carryforwardsexpire in the years 2006 through 2022. Internal Revenue Code Section 382 contains provisions that limit theavailability and timing of usage of net operating loss carryforwards in the eventof certain changes in the ownership of the Company’s common stock.

 

74

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In assessing the realizability of deferred tax assets, managementconsiders whether it is more likely than not that some portion or all of thedeferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon thegeneration of future taxable income during the periods in which those temporarydifferences become deductible. Management has considered the scheduled reversal of deferred taxliabilities, the limitations under Internal Revenue Code Section 382 followinga change in ownership and tax planning strategies in making thisassessment.  Based upon the assessment,management has established a valuation allowance for net deferred income taxassets currently not expected to be realized.

 

**9.  Commitments and Contingencies:**

 

***Employment Agreements***

 

The Company has employment agreements with certain executive officerswith terms of three years.  Theseagreements provide for payment of amounts up to three times their annualcompensation if there is a termination of their employment as a result of achange in control of the Company, as defined in the agreements.  The maximum contingent liability under theseagreements was $6.9 million at December 31, 2002.

 

#### ***Legal and Regulatory Matters***

 

***Securities Claims***.  The Company and certain of its officers havebeen named as defendants in the following actions:

 

•       Noormohammed Gurwala v. Rural CellularCorporation, Richard P. Ekstrand, Wesley E. Schultz and David J. Del Zoppo,filed on December 24, 2002 in U.S. District Court for the District ofMinnesota.

 

•       Roderick B. Brown v. Rural CellularCorporation, Richard P. Ekstrand and Wesley E. Schultz, filed on January13, 2003 in U.S. District Court for the District of Minnesota.

 

•       Christian Diaz v. Rural CellularCorporation, Richard P. Ekstrand, Wesley E. Schultz and David J. Del Zoppo,filed on February 4, 2003 in U.S. District Court for the District of Minnesota.

 

•       Kenneth Ketter v. Rural CellularCorporation, Richard P. Ekstrand, Wesley E. Schultz and David J. Del Zoppo,filed on February 14, 2003 in U.S. District Court for the District ofMinnesota.

 

The plaintiffs in the Gurwala action, the Diaz action,and the Ketter action seek to represent a class consisting of allpersons (except defendants) who purchased the common stock of RCC in the marketduring the time period from January 6, 2002 through November 13, 2002.  The plaintiff in the Brown actionseeks to represent a class consisting of all persons (except defendants) whopurchased any publicly-traded securities of RCC during the time period from May2001 through November 12, 2002.  In allfour actions, plaintiffs allege that RCC’s publicly-announced financial resultsmisstated the actual performance because the Company had inappropriatelyaccounted for certain transactions. Plaintiffs further allege that, as a result, the market price of RCCsecurities was artificially inflated during the respective class periods.  Plaintiffs allege that defendants are liableunder Sections 10(b) and 20(a) of the Securities Exchange Act of 1934.  Plaintiffs seek compensatory damages in anunspecified amount, plus their attorneys’ fees, and costs.

 

The procedures of the Private Securities Litigation Reform Act(“PSLRA”) apply to these cases. Pursuant to those procedures, the court will consolidate the actions andappoint lead plaintiffs and lead counsel. The lead plaintiffs will then file a consolidated amendedcomplaint.  The parties have agreed thatno response to the complaints listed above will be due, but that the defendantswill respond to a consolidated amended complaint.  Under the PSLRA, discovery is stayed until a motion to dismiss isdenied or defendants file an answer to the consolidated amended complaint.

 

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The defendants are beneficiaries of directors’ and officers’ liabilityinsurance, which includes coverage for securities claims, subject to certainexclusions.  The carriers have beennotified of these actions, but have not provided a formal position oncoverage.  The Company anticipates thatadditional cases with similar allegations may be filed.

 

***Derivative Action***.  The following is a purported derivative actionbrought against all of RCC’s directors and against Rural Cellular Corporation,as a nominal defendant.

 

**•     **Hiene Junge v.Richard P. Ekstrand, Wesley E. Schultz, Ann K. Newhall, Jeffrey S. Gilbert,Marvin C. Nicolai, George M. Revering, Don C. Swenson, George W. Wikstrom, PaulJ. Finnegan, and John Hunt; and Rural Cellular Corporation as nominal defendant,commenced on or about February 20, 2003 in Douglas County District Court,Alexandria, Minnesota.

 

The plaintiff is a shareholder of RCC and claims to bring suit onbehalf of RCC.  No pre-lawsuit demand toinvestigate the allegations or bring the action was made on the board ofdirectors.  The plaintiff alleges thatthe directors breached their fiduciary duties to RCC, or abused their control,or grossly mismanaged the company, or wasted company assets, by allowing orcausing RCC to improperly account for certain transactions in its financialstatements during the time period from May 2001 through November 12, 2002.  The plaintiff further alleges that theimproper accounting eventually led to the commencement of federal securitiesclass actions (described above) against the company, which allegedly will causeRCC to expend significant sums of money. The plaintiff seeks compensatory damages against the directors in anunspecified amount, plus his attorneys’ fees and costs.

 

***Other Claims***.*** ***The Company is involved from time to time in otherroutine legal matters and other claims incidental to its business.  The Company believes that the resolution ofsuch routine matters and other incidental claims, taking into accountestablished reserves and insurance, will not have a material adverse impact onits consolidated financial position or results of operations.

 

***Leases***

 

The Company leases office space and real estate under noncancelableoperating leases.  Future minimumpayments under these leases as of December 31, 2002 are as follows:

 

| **Year**   |   | **Amount  (in thousands)** |   |
|------------|--------|----------------------------|--------|
|       |   |                       |   |
| 2003       |   | $                          | 8,310  |   |
| 2004       |   | 6,633                      |   |
| 2005       |   | 4,954                      |   |
| 2006       |   | 3,059                      |   |
| 2007       |   | 1,610                      |   |
| Thereafter |   | 4,742                      |   |
| Total      |   | $                          | 29,308 |   |

 

Under the terms of the lease agreements, the Company also isresponsible for certain operating expenses and taxes.  Total rent expense of $9.7 million, $8.3 million and $5.8 millionwas charged to operations for the years ended December 31, 2002, 2001 and 2000.

 

***Off-Balance Sheet Financings andLiabilities***

 

Other than lease commitments, legal contingencies incurred in thenormal course of business, and employment contracts for key employees, theCompany does not have any off-balance sheet financing arrangements orliabilities. The Company does not have any majority-owned subsidiaries or anyinterests in, or relationships with, any material special-purpose entities thatare not included in the consolidated financial statements.

 

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**10.  Defined Contribution Plan:**

 

The Company has a defined contribution savings and profit-sharing planfor employees who meet certain age and service requirements.  Under the savings portion of the plan, employeesmay elect to contribute a percentage of their salaries to the plan, with theCompany contributing a matching percentage of the employees’contributions.  Under the profit-sharingportion of the plan, the Company contributes a percentage of employees’salaries.  Contributions charged tooperations for the years ended December 31, 2002, 2001 and 2000 were $570,000,$728,000 and $662,000, respectively. The percentages the Company matches under the savings portion of theplan and contributes under the profit-sharing portion of the plan aredetermined annually by the Company’s Board of Directors.

** **

**11.  Supplemental Cash Flow Information**:

 

|                                |   | **Years  ended December 31,** |       |
|-------------------------------------|--------|-------------------------------|------------|
|                                |   | **(in  thousands)**           |       |
|                                |   | **2002**                      |       | **2001** |   | **2000** |   |
| **Cash  paid for:**                 |   |                          |       |   |   |   |   |
| Interest                            |   | **$**                         | **86,775** |   | $ | 116,961 |   | $ | 76,640 |   |
| **Noncash financing transactions:** |   |                          | ** ** |   | ** ** |   | ** ** |
| Preferred stock  dividends          |   | **$**                         | **60,556** |   | $ | 54,545 |   | $ | 44,081 |   |

 

**12.Quarterly Results of Operations (Unaudited):**

 
|                                                                                                                     |   | **2002 Quarter Ended** |     | **2001 Quarter Ended** |   |
|--------------------------------------------------------------------------------------------------------------------------|--------|------------------------|----------|------------------------|--------|
|                                                                                                                     |   | **March 31,**          |     | **June 30,**           |   | **September  30,** |   | **December  31,** |   | **March 31,** |   | **June 30,** |   | **September  30,** |   | **December  31,** |   |
| Revenue:                                                                                                                 |   |                   |     |                   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Service                                                                                                                  |   | $                      | 74,313   |                   | $      | 79,273 |   | $ | 81,828 |   | $ | 79,598 |   | $ | 70,036 |   | $ | 80,151 |   | $ | 80,234 |   | $ | 75,567 |   |
| Roaming                                                                                                                  |   | 26,162                 |     | 33,855                 |   | 35,400 |   | 27,286 |   | 23,215 |   | 28,350 |   | 38,106 |   | 26,870 |   |
| Equipment                                                                                                                |   | 3,279                  |     | 4,564                  |   | 7,098 |   | 5,501 |   | 5,133 |   | 4,545 |   | 4,842 |   | 4,107 |   |
| Total Revenue                                                                                                            |   | $                      | 103,754  |                   | $      | 117,692 |   | $ | 124,326 |   | $ | 112,385 |   | $ | 98,384 |   | $ | 113,046 |   | $ | 123,182 |   | $ | 106,544 |   |
|                                                                                                                     |   |                   |     |                   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating income                                                                                                         |   | $                      | 31,425   |                   | $      | 38,178 |   | $ | 38,627 |   | $ | 26,782 |   | $ | 15,833 |   | $ | 23,534 |   | $ | 27,971 |   | $ | 13,462 |   |
|                                                                                                                     |   |                   |     |                   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income  (loss) before extraordinary item and cumulative change in accounting  principle                              |   | $                      | 2,612    |                   | $      | 11,303 |   | $ | 10,236 |   | $ | 330 |   | $ | (21,271 | ) | $ | (7,075 | ) | $ | (12,310 | ) | $ | (8,556 | ) |
| Net income  (loss)                                                                                                       |   | $                      | (417,771 | )                      | $      | 11,303 |   | $ | 10,236 |   | $ | 330 |   | $ | (19,650 | ) | $ | (7,075 | ) | $ | (12,310 | ) | $ | (8,556 | ) |
| Net loss  applicable to common shares                                                                                    |   | $                      | (432,312 | )                      | $      | (3,629 | ) | $ | (5,098 | ) | $ | (15,419 | ) | $ | (32,813 | ) | $ | (20,505 | ) | $ | (26,101 | ) | $ | (22,717 | ) |
| Net loss per  share applicable to common shares before extraordinary item and cumulative  change in accounting principle |   | $                      | (1.00    | )                      | $      | (0.30 | ) | $ | (0.43 | ) | $ | (1.29 | ) | $ | (2.91 | ) | $ | (1.73 | ) | $ | (2.20 | ) | $ | (1.91 | ) |
| Net loss per  basic and diluted share                                                                                    |   | $                      | (36.27   | )                      | $      | (0.30 | ) | $ | (0.43 | ) | $ | (1.29 | ) | $ | (2.77 | ) | $ | (1.73 | ) | $ | (2.20 | ) | $ | (1.91 | ) |

 

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# **INDEPENDENTAUDITORS’ REPORT**

 

 

Shareholders and Board of Directors

Rural Cellular Corporation and Subsidiaries

Alexandria, Minnesota

 

We have audited the consolidated financial statements of Rural CellularCorporation and Subsidiaries (the Company) as of December 31, 2002 and 2001,and for each of the two years in the period ended December 31, 2002, andhave issued our report thereon dated February 7, 2003, which expresses anunqualified opinion and includes explanatory paragraphs relating to:  (i) the adoption of Statement ofFinancial Accounting Standards (SFAS) No. 142, described in Note 3,(ii) the adoption of SFAS No. 133 (as amended by SFAS No. 138), describedin Note 5 and (iii) the application of procedures relating to certainother disclosures and reclassification of financial statement amounts relatedto the 2000 consolidated financial statements that were audited by otherauditors who have ceased operations and for which we have expressed no opinionor other form of assurance other than with respect to such disclosures andreclassifications; such consolidated financial statements and report areincluded elsewhere in this Form 10-K. Our audits also included the financial statement schedule of the Companylisted in Item 15 (a)(2).

 

This financial statement schedule is the responsibility of theCompany’s management.  Ourresponsibility is to express an opinion based on our audits.  The financial statement schedule of theCompany as of and for the year ended December 31, 2000, was audited byother auditors who have ceased operations. Those auditors expressed an unqualified opinion on this financialstatement schedule in their report dated February 1, 2002.  In our opinion, such financial statementschedule, when considered in relation to the basic consolidated financialstatements taken as a whole, presents fairly in all material respects theinformation set forth therein.

 

Deloitte & Touche LLP

 

Minneapolis, Minnesota

February 7, 2003

 

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THIS IS A COPY OF A PREVIOUSLY ISSUED REPORT

 

###### ***In accordance withthe Securities and Exchange Commission’s amendment of Rule 2-02 of RegulationS-X, the following report is a copy of a report previously issued by ArthurAndersen LLP, our former independent public accountants, who have ceasedoperations.***

** **

**REPORT OF INDEPENDENT PUBLICACCOUNTANTS**

 

To Rural CellularCorporation:

 

We have audited, inaccordance with auditing standards generally accepted in the United States, theconsolidated financial statements included in Rural Cellular Corporation’s Form10-K and have issued our report thereon dated February 1, 2002.  Our audit was made for the purpose offorming 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 AndersenLLP

 

Minneapolis,Minnesota

February 1, 2002

 

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**RURAL CELLULAR CORPORATION AND SUBSIDIARIES**

**ScheduleII****- Valuation and Qualifying Accounts**

***Allowance for Doubtful Accounts:***

*** ***
|                           |   | **Years  Ended December 31,** |   |
|--------------------------------|--------|-------------------------------|--------|
| **(in thousands)**             |   | **2002**                      |   | **2001** |   | **2000** |   |
| Balance, at  beginning of year |   | $                             | 4,016  |   | $ | 2,385 |   | $ | 894 |   |
| Additions  charged to income   |   | 10,809                        |   | 16,291 |   | 9,440 |   |
| Write-offs                     |   | (11,729                       | )      | (14,660 | ) | (7,949 | ) |
| Balance, at end  of year       |   | $                             | 3,096  |   | $ | 4,016 |   | $ | 2,385 |   |

 

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**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                                                                       |   | [3]    |
| 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                                                                                                                                                                                                                                                                                          |   | [4]    |
| 4.5(b)     |   | Amendment to the Class A Rights Agreement dated  March 31, 2000                                                                                                                                                                                                                                                                              |   | [5]    |
| 4.6(a)     |   | Recapitalization Agreement dated October 31, 1999 by  and between Rural Cellular Corporation and Telephone and Data Systems, Inc.                                                                                                                                                                                                            |   | [6]    |
| 4.6(b)     |   | First Amendment to Recapitalization Agreement dated  December 6, 1999 by and between Rural Cellular Corporation and Telephone and Data  Systems, Inc.                                                                                                                                                                                        |   | [6]    |
| 4.6(c)     |   | Second Amendment to Recapitalization Agreement dated  March 31, 2000 by and between Rural Cellular Corporation and Telephone and  Data Systems, Inc.                                                                                                                                                                                         |   | [6]    |
| 4.6(d)     |   | Registration Rights Agreement dated March 31, 2000  by and between Rural Cellular Corporation and Telephone and Data Systems,  Inc.                                                                                                                                                                                                          |   | [6]    |
| 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                                                                                                              |   | [6]    |
| 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”) |   | [6]    |
| 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                                                                                             |   | [6]    |
| 4.7(c)     |   | Registration Rights Agreement dated April 3, 2000  among Rural Cellular Corporation and Class M Investors                                                                                                                                                                                                                                    |   | [6]    |
| 10.1(a)    |   | 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(b)    |   | 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(c)    |   | 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(d)    |   | 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                                                                                                                  |   | [3]    |
| 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 David Del Zoppo  effective January 1, 2001                                                                                                                                                                                                                                                                  |   | [8]    |
| *10.8(b)   |   | Amendment to Change of Control Agreement with David  Del Zoppo effective July 24, 2001                                                                                                                                                                                                                                                       |   | [14]   |
| *10.9 (a)  |   | Key Employee Deferred Compensation Plan                                                                                                                                                                                                                                                                                                      |   | [16]   |
| *10.9 (b)  |   | Amendment to Key Employee Deferred Compensation Plan                                                                                                                                                                                                                                                                                         |   | **     |
| *10.10     |   | Management Incentive Plan                                                                                                                                                                                                                                                                                                                    |   | [17]   |
| 16         |   | Letter from Arthur Andersen LLP                                                                                                                                                                                                                                                                                                              |   | [18]   |
| 21         |   | Subsidiaries of Registrant                                                                                                                                                                                                                                                                                                                   |   | **     |
| 23         |   | Consent of Deloitte & Touche LLP                                                                                                                                                                                                                                                                                                         |   | **     |
| 99.1       |   | Section 906 Certification Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                         |   | **     |
| 99.2       |   | Section 906 Certification Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                         |   | **     |

 

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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 Report on Form 10-K for the  year ended December 31, 2001 and incorporated herein by reference.                       |
| [4]  | Filed as an exhibit to Registration Statement on  Form 8-A filed May 19, 1999 and incorporated herein by reference.                          |
| [5]  | Filed as an exhibit to Registration Statement on  Form 8-A/A-1 filed April 18, 2000 and incorporated herein by reference.                    |
| [6]  | Filed as an exhibit to Report on Form 8-K 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.                                 |
| [18] | Filed as an exhibit to Report on Form 8-K dated June  10, 2002 and incorporated herein by reference.                                         |
| *    | Management contract or  compensatory plan or arrangement required to be filed as an exhibit to this  form.                                   |
| **   | Filed herewith.                                                                                                                              |

 

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