| RURAL CELLULAR CORP ITEM 1A RISK FACTORS We encourage you to read the risk factors below in connection with the other sections of this Annual Report on Form 10-K Our future operating results could fluctuate significantly |
| We believe that our future operating results and cash flows may fluctuate due to many factors, some of which are outside our control |
| These factors include the following: • increased costs we may incur in connection with our networks and the further development, expansion, and upgrading of our wireless systems; • fluctuations in the demand for our services and equipment and wireless services in general; • increased competition, including price competition; • changes in our roaming revenue and expenses due to renegotiation of our roaming agreements and the development of neighboring or competing networks; • changes in the regulatory environment; • changes in the level of support provided by the Universal Service Fund (“USF”); • the cost and availability of equipment components; • seasonality of roaming revenue; • changes in travel trends; • acts of terrorism, political tensions, unforeseen health risks, unusual weather patterns, and other catastrophic occurrences that could affect travel and demand for our services; and • changes in general economic conditions that may affect, among other things, demand for our services and the creditworthiness of our customers |
| We incurred net losses applicable to common shares of approximately dlra71dtta3 million, dlra71dtta9 million, and dlra50dtta1 million in the years ended December 31, 2005, 2004, and 2003, respectively |
| We may continue to incur significant net losses as we seek to increase our customer base in existing markets |
| We may not generate profits in the short-term or at all |
| If we fail to achieve profitability, that failure could have a negative effect on the market value of our common stock |
| 21 _________________________________________________________________ [56]Table of Contents Our implementation of 2dtta5G network technology has resulted in network capacity constraints and heightened customer churn |
| We have recently deployed 2dtta5G technology in all of our territories and have experienced and may continue to experience technical difficulties and network coverage issues |
| In addition, we have experienced network capacity constraints relating to the initial migration of our TDMA customers to 2dtta5G We have incurred, and may continue to incur, costs to address these issues, including costs for engineering, additional equipment, and additional spectrum in certain markets |
| These costs may be significant |
| As our customers migrate from TDMA to 2dtta5G service, some have been dissatisfied with our service and switched to a competitor, resulting in increased churn and reduced revenues and profitability |
| Continuing problems could damage our reputation and affect our ability to attract new customers |
| In addition, network quality issues could affect our roaming arrangements |
| To the extent we are required to spend significant amounts on correcting problems with our network, we will have fewer resources available for marketing and customer acquisition activities, which would affect our customer growth |
| We may not be successful in reversing the six quarter trend of declining postpaid customers, which would force us to change our business plan and financial outlook and would likely negatively affect the price of our stock |
| Our current business plans assume that we will increase our customer base over time, providing us with increased economies of scale |
| If we are unable to attract and retain a growing customer base, we would be forced to change our current business plans and financial outlook and there would likely be a material negative affect on the price of our common stock |
| As we dedicate more resources to 2dtta5G technology, our TDMA customers may seek other competitive offerings, resulting in a loss of customers and reduced profitability |
| We expect to continue operating our TDMA network for the foreseeable future while current customers migrate to 2dtta5G technology |
| However, we will not upgrade our TDMA network with the same features as are available on our 2dtta5G networks, and we expect manufacturers will not produce innovative TDMA handsets with upgraded functions |
| As we dedicate more spectrum to 2dtta5G networks, our remaining TDMA customers may experience difficulties in using our services |
| Further, as our TDMA customers attempt to roam while traveling outside of our service areas, their service may be degraded due to the removal of TDMA capability within other carriers’ cell sites |
| All of these potential developments could drive our TDMA customers to our competitors rather than to our 2dtta5G product offerings and thereby reduce our market share and revenue |
| 22 _________________________________________________________________ [57]Table of Contents We have required and will continue to require substantial amounts of capital to maintain our upgrade to 2dtta5G technologies and to meet various obligations under our financing arrangements |
| Our ability to generate the required capital depends on many factors, including some that are beyond our control |
| We have required, and will continue to require, substantial capital to maintain our wireless network, to satisfy obligations on our debt and exchangeable preferred stock, and for other operating needs |
| Including the cost of our 2dtta5G technology overlays, our total capital expenditures for 2005 were dlra95dtta0 million |
| We believe that we have sufficient funds to finance our planned capital expenditures for network construction, but we may require additional capital in the event of significant departures from our current business plan, unforeseen delays, cost overruns, unanticipated expenses, regulatory changes, engineering design changes, and other technological issues or if we acquire additional licenses |
| We will likely need additional financing to repay or refinance our debt at its final maturities and to meet mandatory redemption provisions on our preferred stock |
| To the extent that we do not generate sufficient cash from operations to satisfy these needs, we will need to explore other sources of capital, which may include public and private equity and debt financings, including vendor financing |
| The availability of additional financing is dependent on conditions in the capital markets |
| We may not be able to obtain additional financing on terms acceptable to us and within the limitations contained in the instruments governing our debt and our preferred stock or any future financing arrangements |
| If we fail to obtain any required financing, we may need to delay or abandon our development and expansion plans and we may fail to meet regulatory requirements for build-out of our network and not be in compliance with certain regulations, such as CALEA Any failure to upgrade could also have a negative effect on our roaming revenues, since most of our roaming partners’ customers will likely use the latest technology handsets as our roaming partners upgrade their networks |
| Our ability to meet our debt service requirements and our customers’ needs may also be impaired, which would have a material adverse effect on our business |
| If the demand for wireless data services does not grow, or if we fail to capitalize on such demand, it could have an adverse effect on our growth |
| We have committed significant resources to wireless data services and our business plan assumes increasing demand for such services |
| Although demand for wireless data services is growing, it is currently a small portion of our revenues |
| Continued growth in demand for wireless data services is dependent on development and availability of popular applications and availability of handsets and other wireless devices with features, functionality, and pricing desired by customers |
| If applications and devices are not developed or do not become commercially acceptable, our revenues could be adversely affected |
| Even if such demand does develop, our ability to deploy and deliver wireless data services relies, in many instances, on new and unproven technology |
| Existing technology may not perform as expected, and we may not be able to obtain new technology to effectively and economically deliver these services |
| We cannot give assurance that there will be widespread demand for advanced wireless data services, that revenues from data services will constitute a significant portion of our total revenues in the near future, or that we can provide such services on a profitable basis |
| 23 _________________________________________________________________ [58]Table of Contents Our business could be materially and adversely affected by our failure to anticipate and react to frequent and significant technological changes |
| The telecommunications industry is subject to rapid and significant changes in technology that are evidenced by: • the introduction of 3dtta0G digital handsets and applications; • evolving industry standards; • the availability of new radio frequency spectrum allocations for wireless services; • ongoing improvements in the capacity and quality of digital technology; • shorter development cycles for new products and enhancements; • developments in emerging wireless transmission technologies; and • changes in end-user requirements and preferences |
| It is possible that we may select a technology that does not achieve widespread commercial success or that is not compatible with the technology selected by one or more of our roaming partners, and as a result, our business, results of operations and financial condition could be materially and adversely affected |
| Moreover, one or more of the technologies that we currently utilize may become inferior or obsolete at some time in the future |
| A significant portion of our revenue is from roaming charges |
| Outcollect roaming yields have been declining over the last few years and are expected to continue to decline in the future |
| As a result, our future operating results could be adversely affected if increases in roaming minutes do not offset anticipated decreases in roaming yield |
| In 2005, 2004, and 2003, approximately 23prca, 21prca, and 26prca, respectively, of our revenue was derived from roaming charges incurred by other wireless providers for use of our network by their customers who traveled within our coverage areas |
| A substantial portion of our roaming revenue is derived from Cingular, Verizon Wireless, and T-Mobile |
| Changes in their operations or a significant decline in the number of their customers could adversely affect our business |
| For the years ended December 31, 2005, 2004, and 2003, Cingular (on a pro forma basis giving effect to its 2004 merger with AT&T Wireless (“AWE”)), Verizon Wireless, and T-Mobile accounted for approximately 92prca, 86prca, and 89prca, respectively, of our total outcollect roaming minutes |
| For the years ended December 31, 2005, 2004, and 2003, Cingular (on a pro forma basis giving effect to its 2004 merger with AWE) accounted for approximately 11dtta9prca, 9dtta9prca, and 14dtta5prca, of our total revenue |
| Changes in the network footprints of these providers could have a material adverse effect on our outcollect revenue and incollect expenses |
| For example, if a roaming partner from which we derive a significant amount of revenue in one of our service areas were to build its own network in that service area, our outcollect revenue derived from our roaming relationship with that partner in that service area might decrease or even cease altogether, and our ability to negotiate favorable incollect rates in that partner’s other service areas could suffer as well |
| Any overbuild of our service areas by our roaming partners would also result in increased competition, which could have a negative impact on our outcollect roaming revenues, business, operating results, and retention |
| Our roaming agreements have varying terms, from month-to-month to up to five years, and some are terminable with 30 days’ written notice |
| When these agreements expire or are terminated, we may be unable to renegotiate these roaming agreements or to obtain roaming agreements with other wireless providers upon acceptable terms |
| Failure to obtain acceptable roaming agreements could lead to a substantial decline in our revenue and operating income |
| 24 _________________________________________________________________ [59]Table of Contents Our roaming revenue is subject to some effects of seasonality, and as a result, our overall revenue and operating income are also subject to seasonal fluctuations |
| In 2005, 2004, and 2003, a substantial amount of our revenue was derived from roaming charges incurred by other wireless providers for use of our network by their customers who traveled within our service areas |
| Our service areas include a number of resort destinations |
| As a result, our roaming revenue increases during vacation periods, introducing a measure of seasonality to our revenue and operating income |
| ” We operate in a very competitive business environment, which can adversely affect our business and operations |
| Competitors who offer more services than we do may attract our targeted customers |
| We operate in highly competitive markets, and there is substantial and increasing competition in all aspects of the wireless communications business |
| Some competitors may market services we do not offer, such as cable television, internet access, landline local exchange, or long distance services, which may make their services more attractive to customers |
| Competition for customers is based primarily upon services and features offered, system coverage, technical quality of wireless systems, price, customer service, capacity, and strength of distribution channels |
| In each of our markets we compete with several other wireless licensees |
| Increasingly, cellular services have become a viable alternative to landline voice services for certain customers, putting cellular licensees in direct competition with traditional landline telephone service providers |
| Cable and other companies are providing telecommunications services to the home, and of these, some carriers are providing local and long distance voice services using Voice over Internet Protocol, or VoIP In particular circumstances, these carriers may be able to avoid payment of access charges to local exchange carriers for the use of their networks on long distance calls |
| Cost savings for these carriers could result in lower rates for customers and increased competition for wireless services |
| Continuing industry consolidation has resulted in the increased presence of regional and national wireless operators within some of our service areas |
| Many of these national operators provide services comparable to ours and, because they operate in a wider geographic area, are able to offer no or low cost roaming and toll calls over a wider area |
| In addition, some national wireless operators have recently begun to build networks in certain of the more densely populated or well-traveled portions of our service areas |
| National advertising and promotional programs by national wireless operators run in our markets are also a source of additional competitive and pricing pressures, even though these operators may not provide service in those markets |
| If the wireless communications industry continues to consolidate and we do not participate in that consolidation, even stronger competitors may be created |
| The FCC has eliminated the spectrum cap and the cellular cross-interest restriction in all markets |
| These regulatory actions may facilitate the creation of larger and more formidable competitors |
| Several of our competitors also operate in multiple segments of the industry |
| In the future, we expect to face increased competition from entities providing similar services using other communications technologies |
| Given the rapid advances in the wireless communications industry, it is possible that new technologies will evolve that will compete with our products and services |
| In addition, a number of our competitors have substantially greater financial, technical, marketing, sales, and distribution resources |
| With so many companies targeting many of the same customers, we may not be able to successfully attract and retain customers and grow our customer base and revenues, which could have a materially adverse effect on our future business, strategy, operations, and financial condition |
| 25 _________________________________________________________________ [60]Table of Contents Market prices for wireless service may decline in the future |
| We expect significant price competition among wireless providers that may lead to increasing movement of customers between operators, resulting in reductions in average monthly service revenue per customer |
| While we will try to maintain or grow our customer base and average monthly service revenue per customer, we cannot assure you that we will be able to do so |
| A significant decline in the pricing of services could adversely affect our financial condition and results of operations |
| Wireless number portability may continue to have a negative impact on our customer retention and increase our marketing costs |
| Wireless number portability allows customers to keep their wireless phone number when switching to a different service provider |
| Wireless number portability has increased and may continue to increase competition and reduce retention |
| Since implementation of wireless number portability in our markets, we have experienced increased churn |
| A high rate of churn would adversely affect our results of operations by reducing revenue and increasing the cost of adding new customers |
| Such costs generally include commission expense and/or significant handset discounts, which are significant factors in income and profitability |
| We may be required to grant promotional credits, subsidize product upgrades, and/or reduce pricing to match competitors’ initiatives and to retain customers, which could adversely impact our operating results |
| If we encounter significant problems, such as delays, inaccuracies, or loss of customer information from our database, in the process of upgrading our billing function, we could experience customer dissatisfaction and increased churn, which could have a material adverse impact on our financial performance |
| During the second half of 2005, we transferred our Northeast, Northwest and South territory GSM customers to the VeriSign data processing and billing system |
| This process has caused disruption in our billing cycles, including delays in mailing of and errors in statements sent to customers, and customers may be dropped from our database |
| In addition, the transition has caused additional customer service calls to be made to our call center |
| If such problems are significant or prolonged, our customers may become dissatisfied and decide to switch to a rival carrier |
| Also, we are dependent on future performance of an outside contractor |
| Any significant or prolonged problems with our billing function could have a material adverse impact on our business, financial condition, and results of operations |
| Regulation or potential litigation relating to the use of wireless phones while driving could adversely affect our results of operations |
| Further, if wireless handsets are perceived to pose health and safety risks, we may be subject to new regulations, and demand for our services may decrease |
| Some studies have indicated that using wireless phones while driving may distract drivers’ attention, making accidents more likely |
| These concerns could lead to litigation relating to accidents, deaths, or serious bodily injuries, or to new restrictions or regulations on wireless phone use, any of which also could have material adverse effects on our results of operations |
| A number of US states and local governments are considering or have recently enacted legislation that would restrict or prohibit the use of a wireless handset while driving or, alternatively, require the use of a hands-free telephone |
| Legislation of this sort, if enacted, would require wireless service providers to provide hands-free enhanced services, such as voice activated dialing and hands-free speaker phones and headsets |
| If we are unable to provide hands-free services and products to customers in a timely and adequate fashion, our ability to generate revenues could suffer |
| It has been suggested that certain radio frequency emissions from wireless handsets may be linked to various health concerns, including cancer, and may interfere with various electronic medical devices, including hearing aids and pacemakers |
| Concerns over the effect of radio frequency emissions may discourage the use of wireless handsets, which would decrease demand for our services |
| 26 _________________________________________________________________ [61]Table of Contents Our business is subject to extensive government regulation, which could adversely affect our business by increasing our expenses |
| We also may be unable to obtain or retain regulatory approvals necessary to operate our business, which would negatively affect our results of operations |
| The FCC regulates many aspects of our business, including the licensing, construction, interconnection, operation, acquisition, and sale of our wireless systems, as well as the number of wireless licenses issued in each of our markets |
| State and local regulatory authorities, to a lesser extent, also regulate aspects of our business and services |
| In addition, the Federal Aviation Administration regulates aspects of construction, marking, and lighting of communications towers on which we place our wireless transmitters |
| Changes in legislation and regulations governing wireless activities, wireless carriers, and availability of USF support, our failure to comply with applicable regulations, or our loss of or failure to obtain any license or licensed area could have a material adverse effect on our operations |
| The FCC and state authorities are increasingly looking to the wireless industry to fund various initiatives, including federal and state universal service programs, telephone number administration, services to the hearing-impaired, and emergency 911 services |
| In addition, many states have imposed significant taxes on providers in the wireless industry and have adopted or are considering adoption of regulatory requirements regarding customer billing and other matters |
| These initiatives have imposed and will continue to impose increased costs on us and other wireless carriers and may otherwise adversely affect our business |
| Under Phase II of its emergency 911 service rules, for example, the FCC has mandated that wireless providers supply the geographic coordinates of a customer’s location, by means of network-based or handset-based technologies, to public safety dispatch agencies |
| We have received requests from PSAPs for deployment of Phase II enhanced 911 service that relate to various areas where we provide cellular or PCS service and we have met the applicable 50prca-coverage benchmark |
| Nevertheless, if the FCC finds that the accuracy results produced by any of our Phase II deployments are not in compliance with FCC rules, the FCC could issue enforcement orders and impose monetary forfeitures upon us |
| We have filed with the FCC a request for waiver of the applicable FCC rule concerning field test results in the State of Vermont, which may not be compliant with FCC location accuracy requirements if averaged only with results from the State of Vermont |
| To the extent that we are not meeting the FCC’s E911 Phase II location accuracy requirements in Vermont and other states we may need to file one or more additional petitions with the FCC to request a waiver of those requirements |
| The FCC has issued notices of apparent liability requiring other CMRS providers to pay fines based upon violations of enhanced 911 service requirements |
| The implementation of enhanced 911 obligations may have a financial impact on us |
| Each of our wireless licenses is subject to renewal upon expiration of its current term, which is generally ten years |
| Grants of wireless license renewals are governed by FCC rules establishing a presumption in favor of incumbent licensees that have complied with their regulatory obligations during the ten-year license period |
| However, we cannot provide assurance that the FCC will grant us any future renewal applications or that our applications will be free from challenge |
| In addition, FCC rules require wireless licensees to meet build-out requirements with respect to particular licenses, and failure to comply with these and other requirements in a given licensed area could result in revocation or nonrenewal of our license for that area or the imposition of fines by the FCC 27 _________________________________________________________________ [62]Table of Contents Our designation or certification as an Eligible Telecommunications Carrier (“ETC”) in any state where we conduct business could be refused, conditioned, or revoked due to circumstances beyond our control, thus depriving us of financial support in that state from the Universal Service Fund (“USF”) |
| In addition, we cannot be certain that we will continue to receive payments at the current levels |
| In order to receive financial support from the USF in any state, we must receive ETC certification in that state |
| Currently, we are ETC certified in ten of the states in which we offer wireless services |
| If designation or certification in any of these states were revoked or conditioned, our financial results could be adversely affected |
| Further, there are several FCC proceedings underway that are likely to change the way universal service programs are funded and the ways these funds are disbursed to program recipients |
| At this time, it is not clear what impact changes in the rules, if any, will have on our continued eligibility to receive USF support |
| Loss of USF revenues could adversely affect our future financial performance |
| If we are unable to comply with obligations imposed by the Communications Assistance for Law Enforcement Act (‘‘CALEA’’), our financial results could be adversely affected |
| The Communications Assistance for Law Enforcement Act (‘‘CALEA’’) requires us to make services accessible to law enforcement for surveillance purposes |
| Additional requirements have been adopted to require cellular and PCS licensees to accommodate interception of digital packet mode telecommunications |
| We will become obligated to comply with these requirements only if and when we commence to offer services that make use of digital packet mode technology |
| If we are not able to comply with CALEA prior to the applicable deadlines, we could be subject to substantial fines |
| We cannot predict yet whether we will be able to comply with CALEA requirements prior to the applicable deadlines |
| Equipment failure and natural disasters may adversely affect our operations |
| A major equipment failure or a natural disaster affecting any of our central switching offices, microwave links, or cell sites could have a material adverse effect on our operations |
| Our inability to operate any portion of our wireless system for an extended time period could result in a loss of customers or impair our ability to attract new customers, which would have a material adverse effect on our business, results of operations, and financial condition |
| Difficulties in the continued upgrade of our wireless systems could increase our planned capital expenditures, delay the continued build-out of our networks, and negatively impact our roaming arrangements |
| Whenever we upgrade our networks, we need to: • select appropriate equipment vendors; • select and acquire appropriate sites for our transmission equipment, or cell sites; • purchase and install low-power transmitters, receivers, and control equipment, or base radio equipment; • build out any required physical infrastructure; • obtain interconnection services from local telephone service carriers; and • test cell sites |
| 28 _________________________________________________________________ [63]Table of Contents Our ability to perform these necessary steps successfully may be hindered by, among other things, any failure to: • obtain necessary zoning and other regulatory approvals; • lease or obtain rights to sites for the location of our base radio equipment; • obtain any necessary capital; • acquire any additional necessary spectrum from third parties; and • commence and complete the construction of sites for our equipment in a timely and satisfactory manner |
| In addition, we may experience cost overruns and delays not within our control caused by acts of governmental entities, design changes, material and equipment shortages, delays in delivery, and catastrophic occurrences |
| Any failure to upgrade our wireless systems on a timely basis may affect our ability to provide the quality of service in our markets consistent with our current business plan, and any significant delays could have a material adverse effect on our business |
| Failure to meet upgrade milestones or to comply with other requirements under our roaming agreements could have an adverse effect on our roaming revenue |
| Our future financial results could be adversely impacted by asset impairments or other charges |
| Effective January 1, 2002, we adopted Statement of Financial Accounting Standards (“SFAS”) Nodtta 142, “Goodwill and Other Intangible Assets” (“SFAS Nodtta 142”) |
| As a result, we are required to test both goodwill and other indefinite-lived intangible assets, consisting primarily of our spectrum licenses, for impairment on an annual basis based upon a fair value approach, rather than amortizing them over time |
| We are also required to test goodwill for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce our enterprise fair value below its book value |
| Additionally, the value of our licenses must be tested between annual tests if events or changes in circumstances indicate that the value might be impaired |
| The amount of any such annual or interim impairment charge could be significant and could have a material adverse effect on our reported financial results for the period in which the charge is taken |
| Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and Estimates — Goodwill and Other Indefinite-Lived Intangible Assets |
| ” Effective January 1, 2002, we adopted SFAS Nodtta 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS Nodtta 144”) |
| As a result, we are required to assess the impairment of our long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable as measured by the sum of the expected future undiscounted cash flows |
| ” Any operating losses resulting from impairment charges under SFAS Nodtta 142 or SFAS Nodtta 144 could have an adverse effect on the market price of our securities |
| We may not be able to successfully integrate acquired or exchanged properties, which could have an adverse effect on our financial results |
| We seek to improve our networks and service areas through selective acquisitions of other providers’ properties and other assets, and in some instances, we may exchange our properties or assets for the properties and assets of another carrier |
| We will be required to integrate with our operations any properties we acquire, which may have billing systems, customer care systems, and other operational characteristics that differ significantly from those of our networks |
| We may be unsuccessful in those efforts, and customer retention in acquired properties and surrounding areas may suffer as a result, which could have an adverse effect on our business and results of operations |
| 29 _________________________________________________________________ [64]Table of Contents We will continue to incur increased costs as a result of being a public company subject to the Sarbanes-Oxley Act of 2002 (“SOA”), as well as new rules implemented by the Securities and Exchange Commission and The Nasdaq Stock Market |
| As a public company, we incur significant legal, accounting, and other expenses |
| In addition, the SOA, as well as new rules subsequently implemented by the SEC and The Nasdaq Stock Market, have required changes in corporate governance practices of public companies |
| We expect these new rules and regulations to increase our legal and financial compliance costs and to make certain activities more time-consuming and costly |
| In addition, the new rules could make it more difficult for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage |
| The impact of these events could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees, or as executive officers |
| If we fail to maintain an effective system of internal and disclosure controls, we may not be able to accurately report our financial results or prevent fraud |
| Effective internal and disclosure controls are necessary for us to provide reliable financial reports and effectively prevent fraud and to operate successfully as a public company |
| If we cannot provide reliable financial reports or prevent fraud, our reputation and operating results would be harmed |
| We may in the future discover material weaknesses in our internal controls as defined under interim standards adopted by the Public Company Accounting Oversight Board (“PCAOB”) and significant deficiencies and deficiencies in certain of our disclosure controls and procedures |
| Under the PCAOB standards, a “material weakness” is a significant deficiency or combination of significant deficiencies that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected |
| A “significant deficiency” is a control deficiency or combination of control deficiencies that adversely affect a company’s ability to initiate, authorize, record, process, or report external financial data reliably in accordance with generally accepted accounting principles such that there is a more than remote likelihood that a misstatement of a company’s annual or interim financial statements that is more than inconsequential will not be prevented or detected |
| While we have taken steps to improve our internal and disclosure controls, we cannot be certain that we will be able to maintain adequate controls over our financial processes and reporting in the future |
| Any failure to maintain effective controls or timely effect any necessary improvement of our internal and disclosure controls could harm operating results or cause us to fail to meet our reporting obligations, which could affect our ability to remain listed with The Nasdaq National Market |
| Ineffective internal and disclosure controls could also cause investors to lose confidence in our reported financial information, which would likely have a negative effect on the trading price of our securities |
| Our common stock price has been and may continue to be volatile |
| Litigation instituted against us and our officers and directors as a result of changes in the price of our securities could materially and adversely affect our business, financial condition, and operating results |
| The trading price of our Class A common stock has been and is likely to continue to be highly volatile and could be subject to wide fluctuations in response to factors such as: • actual or anticipated variations in operating results; • our ability to finance our operations and meet obligations under our financing arrangements • conditions or trends in the wireless communications industry and changes in the economic performance and/or market valuation of other wireless communications 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 price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of the affected companies |
| These broad market and industry factors may materially and adversely affect the market price of our securities, regardless of our actual operating performance |
| Often a drop in a company’s stock price is followed by lawsuits against the company and its officers and directors alleging securities fraud |
| The defense and eventual settlement of or judgment rendered in any such actions could result in substantial costs |
| Also, the defense of any such actions could divert management’s attention and resources |
| Both the costs and the diversion of management could materially and adversely affect our business, financial condition, and operating results |
| In addition, any material adverse judgment could trigger an event of default under our indebtedness |
| We have a significant amount of debt and preferred stock, which may limit our ability to meet our debt service and dividend obligations, obtain future financing, make capital expenditures in support of our business plan, react to a downturn in our business, or otherwise conduct necessary corporate activities |
| As of December 31, 2005, we had approximately dlra1dtta8 billion of long-term liabilities (which includes dlra465dtta3 million of senior and junior exchangeable preferred stock), and approximately dlra171dtta0 million of Class M preferred stock, and shareholders’ deficit of approximately dlra652dtta0 million |
| Of the outstanding preferred stock, dlra514dtta3 million can be exchanged, at our option, subject to compliance with certain leverage ratios under our credit facility and the indentures related to our outstanding notes, for senior subordinated indebtedness |
| 30 _________________________________________________________________ [65]Table of Contents The current levels of our debt and preferred stock entail a number of risks, including the following: • we must use a substantial portion of our cash flows from operations to make interest payments on our debt, thereby reducing funds that would otherwise be available to us for working capital, capital expenditures, future business opportunities, and other purposes; • we may not be able to obtain additional financing for working capital, capital expenditures, and other purposes on terms favorable to us or at all; • borrowings under our floating rate notes and our revolving credit facility are at variable interest rates, making us vulnerable to increases in interest rates; • we may have more debt than many of our competitors, which may place us at a competitive disadvantage; • we may have limited flexibility to react to changes in our business; and • we may not be able to refinance our indebtedness or preferred stock on terms that are commercially reasonable or at all |
| Our ability to generate sufficient cash flow from operations to pay the principal or liquidation preference of, and interest or preferred dividends on, our indebtedness and preferred stock is not certain |
| In particular, if we do not meet our anticipated revenue growth and operating expense targets, our future debt and preferred stock service obligations could exceed the amount of our available cash |
| The restrictive covenants in our existing debt and preferred stock instruments and agreements may limit our ability to operate our business |
| The instruments governing our debt and the certificates of designation governing our preferred stock impose significant operating and financial restrictions on us |
| These restrictions limit, among other things, our ability and the ability of certain of our subsidiaries to: • incur additional debt; • pay cash dividends on capital stock; • repay junior debt and preferred stock prior to stated maturities; • allow the imposition of dividend restrictions on certain subsidiaries; • sell assets; • make investments; • engage in transactions with shareholders and affiliates; • create liens; and • engage in some types of mergers or acquisitions |
| Our failure to comply with these restrictions could lead to a default under the terms of the relevant debt or a violation of the terms of the preferred stock even if we are able to meet debt service and dividend obligations |
| Our revolving credit facility requires us to maintain specified financial ratios if we draw against it |
| Substantially all our assets are subject to liens securing indebtedness under our revolving credit facility and senior secured notes |
| These restrictions could limit our ability to obtain future financing, make needed capital expenditures, withstand a downturn in our business, or otherwise conduct necessary corporate activities |
| If there were an event of default under our revolving credit facility or other debt, the holders of the affected debt could elect to declare all of that debt to be due and payable, which, in turn, could cause all of our other debt to become due and payable |
| We might not have sufficient funds available, and we might be unable to obtain sufficient funds from alternative sources on terms favorable to us or at all |
| If the amounts outstanding under our revolving credit facility were accelerated and we could not obtain sufficient funds to satisfy our obligations, our lenders could proceed against our assets and the stock and assets of our subsidiaries that guarantee our revolving credit facility and senior secured notes |
| 31 _________________________________________________________________ [66]Table of Contents Our failure to pay the cash dividends on our senior exchangeable preferred stock may affect our ability to incur additional debt or refinance our existing indebtedness |
| We are required to pay dividends on our senior exchangeable preferred stock |
| Beginning in August 2003, we did not declare or pay cash dividends on our senior exchangeable preferred stock |
| Because, as of November 15, 2004, we had failed to pay six or more quarterly dividends, a “Voting Rights Triggering Event,” as defined in the certificate of designation for the senior exchangeable preferred stock, existed |
| While a Voting Rights Triggering Event exists certain terms of our senior exchangeable preferred stock, if enforceable, may prohibit incurrence of additional indebtedness, including borrowing under our revolving credit facility and the refinancing of existing indebtedness |
| On October 26, 2005, we paid four quarterly dividends on our outstanding senior exchangeable preferred stock |
| These quarterly dividends totaled dlra118dtta69 per share, including accrued interest |
| The aggregate total dividends of approximately dlra17dtta8 million were paid from existing cash |
| The payment of these dividends reduced the number of unpaid quarterly dividends to five and eliminated the then existing “Voting Rights Triggering Event” and any uncertainty regarding our ability to incur indebtedness, including under the revolving credit facility, allowing us to draw dlra58 million under the revolving credit facility and issue dlra175 million in new senior subordinated floating rate notes |
| Subsequent to the issuance of the new notes and borrowing under our credit facility, we elected not to pay cash dividends in November 2005 or February 2006 on our senior exchangeable preferred stock and a “Voting Rights Triggering Event” again exists |
| Management does not anticipate paying additional dividends in the foreseeable future |
| Our failure to pay the cash dividends on our junior exchangeable preferred stock may result in changes in our board of directors and affect our ability to incur additional debt |
| Since May 2005, we have not declared or paid cash dividends on our junior exchangeable preferred stock |
| If we do not pay any of the future dividends on our junior exchangeable preferred stock, a “Voting Rights Triggering Event,” as defined in the certificate of designation for the junior exchangeable preferred stock, will occur in August 2006 |
| At that time, the holders of the junior exchangeable preferred stock will be entitled to elect the lesser of two directors or the number of directors equal to 25prca of our board of directors |
| In addition, should a “Voting Rights Triggering Event” exist under the junior exchangeable preferred stock, our ability to incur indebtedness may be impaired |
| We have shareholders who could exercise significant influence on management |
| The holders of our Class M convertible preferred stock currently are able to elect two members to our board of directors and can vote, on an as-converted basis, approximately 2cmam181cmam241 shares of our Class A common stock, which represented, as of December 31, 2005, approximately 10dtta9prca of the voting power of our common stock |
| Our Board of Directors also includes two directors elected by our senior exchangeable preferred stockholders |
| If any of these holders were to disagree with decisions made by management or the board of directors about our plans or operations, they might be able to bring significant pressure to change such plans or operations |
| The holders of our junior exchangeable preferred stock, under certain circumstances, may also be able to elect members of our board of directors in the future |
| Antitakeover provisions could adversely affect the price of our Class A common stock |
| Some of the provisions of our Articles of Incorporation, Amended and Restated Bylaws, and Minnesota law could delay or prevent a change of control or a change in management that may be beneficial to shareholders |
| These provisions include: • provisions for a classified board of directors; • provisions for advance notice for director nominations and shareholder proposals; • provisions allowing holders of our Class B common stock ten votes per share as compared to one vote per share for our Class A common stock; • provisions for supermajority votes to approve mergers or amend specified provisions of the Articles and Bylaws; and • statutory limits regarding share acquisitions and business combinations |
| We also have adopted a rights plan that could discourage, delay, or prevent someone from acquiring us at a premium price |
| The rights plan provides that preferred stock purchase rights attached to each share of our common stock become exercisable to purchase shares of common stock at 50prca of market value, causing substantial dilution to a person or group acquiring 15prca or more of our common stock if the acquisition is not approved by our board of directors |
| 32 _________________________________________________________________ [67]Table of Contents In addition, the documents governing our indebtedness contain limitations on our ability to enter into a change of control transaction |
| Under these documents, the occurrence of a change of control transaction, in some cases after notice and grace periods, would constitute an event of default permitting acceleration of the indebtedness |