FORM 8-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): June 4, 1996
AMERICAN PORTABLE TELECOM, INC.
(Exact name of registrant as specified in its charter)
Delaware 0-28262 39-1706857
-------- ------- ----------
(State or other (Commission (IRS Employer
jurisdiction of File Number) Identification No.)
incorporation)
8410 West Bryn Mawr, Suite 1100, Chicago, Illinois 60631
- - -------------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (312) 399-4200
Not Applicable
--------------
(Former name or former address, if changed since last report)
<PAGE>
Item 5. Other Events.
This Current Report on Form 8-K is being filed for the purpose of
updating the Company's financial statements, which were included in the
Company's Registration Statement on Form S-1, as amended, (Registration No.
333-1514). A revision have been made to Footnote 2(i) resulting from changing
the accounting policy of amortizing PCS licenses effective January 1, 1996 to
amortizing the licenses upon commencement of service, which is expected in early
1997. The revision was made to conform to the industry standard of beginning
amortization of license costs upon commencement of service.
Item 7. Financial Statements and Exhibits
(c) Exhibits
The exhibits accompanying this report are listed in the accompanying
Exhibit Index.
2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereto duly authorized.
Date: June 5, 1996
American Portable Telecom, Inc.
(Registrant)
By: /s/ J. CLARKE SMITH
--------------------
J. Clarke Smith
Vice President - Finance and Administration,
Chief Financial Officer and Treasurer
3
<PAGE>
EXHIBIT INDEX
Exhibit Number Description of Exhibit
99 1995 Consolidated Financial Statements of
American Portable Telecom, Inc. and Subsidiaries
4
<PAGE>
Exhibit 99
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of
American Portable Telecom, Inc.:
We have audited the accompanying consolidated balance sheets of
American Portable Telecom, Inc. (a Delaware Corporation in the development stage
and a wholly owned subsidiary of Telephone and Data Systems, Inc.) and
Subsidiaries as of December 31, 1995 and 1994, and the related consolidated
statements of operations, changes in shareholders' equity and cash flows for
each of the three years in the period ended December 31, 1995, and for the
period from inception (July 23, 1991) to December 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of American Portable
Telecom, Inc. and Subsidiaries as of December 31, 1995 and 1994, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1995, and for the period from inception to December
31, 1995, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Chicago, Illinois
February 20, 1996
(except with respect to Note 2.(i),
as to which the date is June 4, 1996)
<PAGE>
AMERICAN PORTABLE TELECOM, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF OPERATIONS
Cumulative
Year Ended December 31. July 23, 1991 to
1993 1994 1995 December 31, 1995
---- ---- ---- -----------------
(Dollars in thousands, except per share amounts)
OPERATING EXPENSES:
Development costs-affiliate $ 60 $ 856 $ 1,221 $ 2,247
Development costs-other -- 1,119 2,767 3,963
General and administrative 5 2 3,574 3,586
-------- -------- -------- --------
OPERATING (LOSS) (65) (1,977) (7,562) (9,796)
Other income-affiliate 2 2 49 57
-------- -------- -------- --------
(LOSS) BEFORE INTEREST
AND INCOME TAXES (63) (1,975) (7,513) (9,739)
Interest expense-affiliate 40 50 1,051 1,156
-------- -------- -------- --------
(LOSS) BEFORE INCOME TAXES (103) (2,025) (8,564) (10,895)
Income tax (benefit) (36) (742) (2,096) (2,943)
-------- -------- -------- --------
NET (LOSS) $ (67) $ (1,283) $ (6,468) $ (7,952)
======== ======== ======== ========
PRO FORMA-See Note 2(k):
WEIGHTED AVERAGE
COMMON SHARES 59,086 59,086 59,086 59,086
(LOSS) PER COMMON SHARE $ -- $ (.02) $ (.11) $ (.13)
======== ======== ======== ========
The accompanying notes to consolidated financial statements are an
integral part of these statements.
6
<PAGE>
<TABLE>
<CAPTION>
AMERICAN PORTABLE TELECOM, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cumulative
Year Ended December 31, July 23, 1991 to
1993 1994 1995 December 31, 1995
---- ---- ---- -----------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES
Net (loss) $ (67) $ (1,283) $ (6,468) $ (7,952)
Add (Deduct) adjustments to
reconcile net (loss) to net cash
provided (used) by
operating activities:
Depreciation -- -- 47 47
Change in cash-restricted -- -- (416) (416)
Change in accounts payable-affiliates
and accrued interest-affiliate 28 47 2,676 2,781
Change in accounts payable-other (55) -- 6,401 6,401
Change in income tax refund
receivable-affiliate -- (112) (12,320) (12,502)
Change in deferred tax asset/
liability-net (35) (630) 10,407 9,742
Change in deferred charges (70) 414 -- --
Change in other assets -- -- (201) (201)
------- ------- -------- ---------
(199) (1,564) 126 (2,100)
CASH FLOWS FROM FINANCING
ACTIVITIES
Change in revolving credit
agreement - TDS 200 22,009 297,937 320,596
Issuance of common stock -- -- -- 40
------- ------- -------- ---------
200 22,009 297,937 320,636
CASH FLOWS FROM INVESTING
ACTIVITIES
Investment in PCS licenses -- (20,401) (285,417) (305,818)
Change in temporary cash and
other investments-affiliate (14) (38) (261) (323)
Additions to work in process
($945 affiliate in 1995) -- -- (8,058) (8,058)
Additions to property and equipment -- -- (4,076) (4,076)
------- ------- -------- ---------
(14) (20,439) (297,812) (318,275)
------- ------- -------- ---------
Net Increase (Decrease) in Cash and
Cash Equivalents (13) 6 251 261
Cash and Cash Equivalents -
Beginning of period 17 4 10 --
------- ------- -------- ---------
End of period $ 4 $ 10 $ 261 $ 261
======= ======= ======== =========
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these statements.
7
<PAGE>
AMERICAN PORTABLE TELECOM, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31,
--------------------
1994 1995
---- ----
(Dollars in thousands)
CURRENT ASSETS
Cash and cash equivalents-affiliate $ 10 $ 261
Cash-restricted -- 416
Temporary cash investments-affiliate 7 107
Other investments-affiliate 55 216
Note receivable-affiliate -- 28,836
Income tax refund receivable-affiliate 182 12,502
Other -- 201
--------- ---------
254 42,539
--------- ---------
FIXED ASSETS AND LICENSES
Property and equipment-net of accumulated
deprecation of $47 -- 4,029
Work in process ($945 affiliate in 1995) -- 8,058
Investment in PCS licenses 20,401 305,818
--------- ---------
20,401 317,905
--------- ---------
DEFERRED TAX ASSET-NET 665 --
--------- ---------
TOTAL ASSETS $ 21,320 $ 360,444
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable-affiliates $ -- $ 1,284
Accounts payable-other -- 6,401
Accrued interest-affiliate 105 1,497
--------- ---------
105 9,182
--------- ---------
REVOLVING CREDIT AGREEMENT-TDS 22,659 60,238
--------- ---------
DEFERRED TAX LIABILITY-NET -- 9,742
--------- ---------
COMMON SHAREHOLDERS' EQUITY
Common stock, $1.00 par value;
authorized 10,000 shares; issued
and outstanding 1,000 shares 1 1
Additional paid-in capital 39 289,233
Deficit accumulated during the
development stage (1,484) (7,952)
--------- ---------
(1,444) 281,282
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 21,320 $ 360,444
========= =========
The accompanying notes to consolidated financial statements are an
integral part of these statements.
8
<PAGE>
AMERICAN PORTABLE TELECOM, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Additional Total
Common Paid-In Retained Shareholders'
Stock Capital Deficit Equity
-------- ---------- -------- ------------
(Dollars in thousands)
Balance at July 23, 1990 $ -- $ -- $ -- $ --
Common Stock Issuance 1 39 -- 40
Net (loss) -- -- -- --
--------- --------- -------- ---------
Balance at December 31, 1991 1 39 -- 40
Net (loss) -- -- (134) (134)
--------- --------- -------- ---------
Balance at December 31, 1992 1 39 (134) (94)
Net (loss) -- -- (67) (67)
--------- --------- -------- ---------
Balance at December 31, 1993 1 39 (201) (161)
Net (loss) -- -- (1,283) (1,283)
--------- --------- -------- ---------
Balance at December 31, 1994 1 39 (1,484) (1,444)
Capital Contribution -- 289,194 -- 289,194
Net (loss) -- -- (6,468) (6,468)
--------- --------- -------- ---------
Balance at December 31, 1995 $ 1 $ 289,233 $ (7,952) $ 281,282
========= ========= ======== =========
The accompanying notes to consolidated financial statements are an
integral part of these statements.
9
<PAGE>
AMERICAN PORTABLE TELECOM, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995
1. ORGANIZATION OF BUSINESS
American Portable Telecom, Inc. (the "Company") is a wholly owned
subsidiary of Telephone and Data Systems, Inc. ("TDS"). The Company was
incorporated in Delaware on July 23, 1991, as American Portable
Telecommunications, Inc. and changed its name to American Portable Telecom, Inc.
effective December 14, 1995. The Company was formed to acquire Personal
Communications Services ("PCS") licenses, construct PCS networks in its
Metropolitan Trading Areas ("MTAs") and offer wireless PCS communications
services in these areas. The Company acquired its licenses in the Federal
Communications Commission ("FCC") broadband Block A and Block B PCS auction (the
"PCS auction") which concluded in March 1995. The Company is the fifth-largest
licensee of PCS in the United States in terms of population equivalents
("POPs"), with licenses in the Columbus (Ohio), Houston (Texas), Kansas City
(Missouri), Minneapolis (Minnesota), Pittsburgh (Pennsylvania), Tampa-St.
Petersburg-Orlando (Florida), Alaska and Guam MTAs. The Company currently has
plans to construct networks in its six primary MTAs, excluding Alaska and Guam
(See Note 7-Sale of Licenses), which include approximately 27.3 million POPs.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Development stage company
The Company was originally incorporated to conduct development
activities to obtain a Pioneer's Preference broadband PCS license from the FCC.
In 1994, the Company learned it would not be obtaining a Pioneer's Preference
and charged to expense the book value of all assets related to that activity.
Subsequent to that event, the Company devoted substantially all of its efforts
to planning for and participating in the PCS auction. Since its acquisition of
PCS licenses, the Company has been devoting substantially all of its efforts to
recruiting an experienced management team, developing and executing a business
plan, raising capital and designing and constructing a PCS network in each of
its six primary MTAs. Its planned principal operations have not yet commenced.
The Company expects to commence service in early 1997. Accordingly, the Company
is a development stage company as defined in Statement of Financial Accounting
Standards No. 7, "Accounting and Reporting by Development Stage Enterprises."
(b) Principles of consolidation
The accounting policies of the Company and its subsidiaries conform to
generally accepted accounting principles. The consolidated financial statements
include the accounts of American Portable Telecom, Inc. and its subsidiaries.
During 1995, the Company established the following subsidiaries which are wholly
owned and are therefore included in the consolidated financial statements: APT
Operating Company, Inc., which owns 100% of APT Columbus, Inc.; APT Kansas City,
Inc.; APT Tampa/Orlando, Inc.; APT Minneapolis, Inc.; APT Houston, Inc.; APT
Pittsburgh General Partner, Inc.; APT Alaska, Inc.; and APT Guam Inc.; and 46%
of APT Pittsburgh Limited Partnership. APT Pittsburgh General Partner, Inc. owns
the remaining 54% of APT Pittsburgh Limited Partnership. All significant
intercompany balances and transactions have been eliminated. The preparation of
the consolidated financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amount of
expenses during the reporting period. Actual results could differ from those
estimates.
10
<PAGE>
AMERICAN PORTABLE TELECOM, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(c) Pension plan
Effective July 1, 1995, the Company began participating in the United
States Cellular Corporation (a subsidiary of TDS) Employees' Pension Trust I
(the "Pension Trust"), a qualified noncontributory defined contribution pension
plan. The Pension Trust provides pension benefits for the Company's employees.
Under this plan, pension benefits and costs are calculated separately for each
participant and are funded currently. Pension costs were $11,000 in 1995.
(d) Cash and cash equivalents-affiliate
and Temporary cash investments-affiliate
Cash and cash equivalents consists of cash on hand and those short
term, highly liquid investments with original maturities of three months or
less. Those investments with original maturities of greater than three months to
twelve months are classified as temporary cash investments. The carrying amounts
reported in the balance sheet for cash and cash equivalents and temporary cash
investments approximate their fair values.
(e) Cash-restricted
Restricted cash consists of $400,000 deposited into a guarantee-related
escrow account in March 1995, plus accumulated interest. The interest-bearing
escrow account was established in connection with the acquisition of the license
for the Pittsburgh MTA. The escrow account must remain intact until March 1996,
at which time the Company will have discretionary control over the account.
(f) Other investments-affiliate
All of the Company's investments result from its participation in the
TDS cash management program (See Note 5-Related Party Transactions), and are
classified as held to maturity. At December 31, 1995, the amortized cost of the
current marketable securities and those with maturities between one and five
years approximated their aggregate fair value.
(g) Property and equipment
Property and equipment is stated at original cost and includes and will
include primarily computer equipment, office equipment, and leasehold
improvements during the development stage of the Company. Depreciation is
provided based on the straight-line method over the estimated useful lives of
the respective assets, generally three years for computer equipment and five
years for office equipment. Leasehold improvements are amortized over the
shorter of the lease term or the estimated useful lives of the improvements.
11
<PAGE>
AMERICAN PORTABLE TELECOM, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Property and equipment consists of:
1994 1995
---- ----
(in thousands)
Computer equipment $ -- $ 2,120
Office equipment -- 1,462
Leasehold improvements -- 494
----------- -----------
-- 4,076
Accumulated depreciation -- (47)
----------- -----------
Property and equipment-net $ -- $ 4,029
=========== ===========
(h) Work in process
Work in process includes and will include expenditures for the design,
construction and testing of the Company's PCS networks as well as the cost to
relocate dedicated private microwave links currently operating in the Company's
spectrum in its six primary MTAs. Work in process also includes the costs
associated with developing information systems. The Company will capitalize
interest where appropriate on certain of its work in process expenditures. When
the assets are placed in service, the Company will transfer the assets to the
appropriate property and equipment category and depreciate these assets over
their respective estimated useful lives, generally ten to twelve years for
network equipment, except for base station controllers which will be depreciated
over four years, and generally five to ten years for information systems. The
Company expects to commence PCS service in early 1997.
(i) Investment in PCS licenses
Investment in licenses is recorded at historical cost, which includes
the $289.2 million purchase price of the eight PCS licenses acquired by the
Company in the PCS auction plus capitalized interest of $16.6 million incurred
while readying the licenses in the Company's six primary MTAs for use. The
Company recorded capitalized interest through December 31, 1995, when TDS
contributed approximately $289.2 million in equity capital to the Company for
the original cost of its eight licenses. The Company did not capitalize interest
related to the Alaska and Guam licenses, which have a combined book value of
$1.5 million, because the Company is currently attempting to sell these two
licenses and is therefore not readying these assets for use. At December 31,
1995, the Company evaluated whether any impairment in value of the licenses had
occurred by comparing the estimated undiscounted future cash flows associated
with the licenses with the carrying amount. The Company concluded that no
impairment in value had occurred because the undiscounted future cash flows
exceed the carrying amount. The Company will begin amortizing these licenses
over 40 years upon commencement of service, which is expected in early 1997. The
December 31, 1994, balance represents a $20.4 million deposit made on November
18, 1994, which qualified the Company to bid on up to approximately 34 million
POPs in the PCS auction.
(j) Operating expenses
Costs incurred in the development and administration of the Company
which do not relate to the
12
<PAGE>
AMERICAN PORTABLE TELECOM, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
design or construction of specific identifiable assets have been charged to
operations as incurred.
(k) Pro forma (loss) per Common Share
Pro forma (loss) per Common Share was computed based on the weighted
average of Common and Series A Common Shares outstanding during the periods,
adjusted to give retroactive effect to the recapitalization in conjunction with
the Company's 1996 initial public offering, as if this transaction had occurred
at January 1, 1993. (See Note 9-Subsequent Events-Recapitalization.)
(l) Supplemental cash flow disclosures
During 1995, the Company incurred interest charges of $17.7 million
related to its Revolving Credit Agreement with TDS. Of this amount, the Company
capitalized $16.6 million relating to the development of its PCS licenses. The
remaining $1.1 million was charged to operations. The Company did not pay
interest during 1993, 1994 or 1995, but rather increased the amount payable to
TDS under the Revolving Credit Agreement by the amount of the accrued interest
on a quarterly basis.
Taxable losses generated by the Company in 1993 and 1994 resulted in
cash payments of $36,000 and $113,000, respectively, from TDS. Such payments
were received in 1995. (See Note 3-Income Taxes.)
Effective December 31, 1995, TDS contributed $289.2 million of equity
to the Company to cover the original cost of the eight PCS licenses by
converting approximately $260.4 million of the amount outstanding under the
Revolving Credit Agreement and issuing a note payable to the Company for
approximately $28.8 million. The Company received no cash in this conversion.
The Company received payment for the entire note receivable-affiliate by
February 14, 1996.
3. INCOME TAXES
For federal income tax purposes, the Company is included in the TDS
consolidated tax return. For financial reporting purposes, the Company computes
its federal income tax as if it were not a member of the TDS group but filed a
separate return. TDS currently reimburses the Company for the federal benefit of
any net operating loss generated by the Company and its subsidiaries which
reduces the provision for income taxes reflected in TDS's consolidated
statements of income. The Company has recorded these amounts in "Income tax
refund receivable-affiliate." See Note 2 (l)-Summary of Significant Accounting
Policies-Supplemental cash flow disclosures.
13
<PAGE>
AMERICAN PORTABLE TELECOM, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995
3. INCOME TAXES (Continued)
The Company records all deferred tax liabilities or assets for the
deferred tax consequences of all temporary differences. Income tax provisions
are summarized below:
1993 1994 1995
---- ---- ----
Federal income tax provision (benefit):
Current $ (36) $ (113) $ (12,502)
Deferred -- (629) 9,574
State income tax provision:
Current -- -- --
Deferred -- -- 832
-------- -------- --------
Income tax (benefit) $ (36) $ (742) $ (2,096)
======== ======== ========
The temporary differences which gave rise to significant portions of
the net deferred tax asset (liability) were as follows:
1994 1995
---- ----
Deferred tax asset:
Deferred charges $ 796 $ 3,974
State operating loss carryforwards 39 1,539
Less: valuation allowance (170) (1,291)
-------- --------
Total deferred tax asset $ 665 $ 4,222
======== ========
Deferred tax liability:
Deferred charges $ -- $ (6,956)
Licenses -- (7,008)
-------- --------
Total deferred tax liability $ -- $(13,964)
======== ========
Net deferred tax asset (liability) $ 665 $ (9,742)
======== ========
A valuation allowance is provided when it is more likely than not that
some portion of the deferred tax asset will not be realized. The Company has
established a valuation allowance primarily related to state net operating loss
carryforwards that may expire before they are utilized.
The statutory federal income tax rate is reconciled to the Company's
effective income tax rate below:
1993 1994 1995
---- ---- ----
Statutory federal income tax rate 35.0% 35.0% 35.0%
State income taxes, net of federal benefit -- -- (9.7)
Other -- -- (.8)
------- ------- -------
Effective income tax rate 35.0% 35.0% 24.5%
======= ======= =======
14
<PAGE>
AMERICAN PORTABLE TELECOM, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995
3. INCOME TAXES (Continued)
Subsequent to year end, the Company intends to amend its Tax Allocation
Agreement with TDS. (See Note 9-Subsequent Events-Tax Allocation Agreement.)
4. REVOLVING CREDIT AGREEMENT
The Company entered into a Revolving Credit Agreement with TDS on
August 1, 1995, which was last amended on December 31, 1995, under which all of
the outstanding obligations of the Company to TDS are incorporated. Pursuant to
the Revolving Credit Agreement, which matures on December 31, 1998, the Company
may borrow up to an aggregate of $250 million from TDS at an interest rate equal
to 1 1/2% above the prime lending rate announced from time to time by LaSalle
National Bank of Chicago until the principal amount becomes due (whether at
maturity, by acceleration or otherwise); and to pay on demand an interest rate
equal to 3 1/2% above such prime lending rate on any overdue principal or
overdue installment of interest. The advances made by TDS under the Revolving
Credit Agreement are unsecured. Interest on the balance due under the Revolving
Credit Agreement is payable quarterly and no principal is payable until its
maturity, which is December 31, 1998, or acceleration under certain
circumstances, at which time the entire principal balance under the Revolving
Credit Agreement then outstanding is scheduled to become due and payable. The
Company may prepay the balance due under the Revolving Credit Agreement at any
time, in whole or in part, without premium. Any principal so repaid is available
for the Company to borrow during the remaining term of the Revolving Credit
Agreement, subject to the satisfaction of certain conditions. The terms of the
Revolving Credit Agreement also include, among others, restrictions on incurring
additional indebtedness and on paying dividends.
The total amount advanced to the Company under the Revolving Credit
Agreement through December 31, 1995, aggregated $320.6 million. On December 31,
1995, TDS, the Company's sole current shareholder, contributed $289.2 million to
the equity capital of the Company. No cash was paid to the Company for the
equity contribution by TDS. Rather, the Company reduced the amount outstanding
under the Revolving Credit Agreement by $260.4 million and recorded a note
receivable-affiliate from TDS for the remaining $28.8 million. The Company
received payment of the entire note receivable from TDS by February 14, 1996.
Additionally, in connection with the equity contribution, the limit on the
Revolving Credit Agreement was reduced from $325 million to $250 million, the
maturity date was changed from August 1, 1997 to December 31, 1998, and a
condition was added which provided that if TDS's ownership of the Company falls
below 70%, the outstanding principal will become payable in full six months
after such date. The carrying value of the Company's borrowings under the
Revolving Credit Agreement approximates the fair value of the borrowings, as the
Revolving Credit Agreement is variable debt with the interest rate based on the
prime lending rate.
5. RELATED PARTY TRANSACTIONS
The Company is billed for all services it receives from TDS and its
subsidiaries, consisting primarily of general management services and
information services. Unless otherwise specified by written agreement, services
provided by TDS or any of its subsidiaries to another member of the consolidated
group are charged on the basis of time reports. The costs of such services and
any other expenses incurred jointly on behalf of a number of subsidiaries are
charged to those subsidiaries on the basis of the subsidiaries' relative
15
<PAGE>
AMERICAN PORTABLE TELECOM, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995
5. RELATED PARTY TRANSACTIONS (Continued)
operating revenues and total assets. The Company believes that this method of
allocation is reasonable.
TDS and certain of its affiliates provided the Company with centralized
management, accounting, commercial, engineering, and data processing services
aggregating $60,000, $.9 million and $1.2 million during 1993, 1994 and 1995,
respectively.
TDS is currently developing a new financial reporting system for all of
its subsidiaries, including the Company. The Company has recorded approximately
$945,000 related to this system as "Work in process" at December 31, 1995.
On December 31, 1995, the Company received additional equity funding of
$289.2 million from TDS. TDS is the Company's sole shareholder. The Company
recorded the $289.2 million in "Additional paid-in capital."
The Company deposits its excess cash through a cash management program
administered by TDS. Deposits made into the program are generally available to
the Company and bear interest each month equal to the daily weighted average
rate earned on all securities held on behalf of the participants of the program.
For financial reporting purposes, the Company reports its proportionate amount
of cash and cash equivalents, temporary cash investments and other investments
(primarily marketable securities) invested in the program.
6. COMMITMENTS
The costs of the Company's development, construction and initial
start-up activities will require substantial capital. As of December 31, 1995,
the Company had expended approximately $305.8 million for licenses, including
capitalized interest, approximately $12.1 million for other capital expenditures
and approximately $8.0 million for operations. The Company expects to incur
significant operating losses and to generate negative cash flow from operating
activities during the next several years, while it develops and constructs its
PCS network and builds a PCS customer base. The Company estimates that its
aggregate capital requirements for 1996, 1997 and 1998 will total approximately
$830 million, with $585 million needed for capital additions and $245 million
needed to fund operations.
The Company and its subsidiaries have leases for certain office
facilities and warehouses which are classified as operating leases. For the year
ended December 31, 1995, rent expense was $247,000 for term leases and $75,000
for cancelable leases. The Company incurred no rent expense in either 1993 or
1994. At December 31, 1995, the aggregate minimum rental commitments under
noncancelable operating leases for the years 1996 through 2000 and 2001 and
thereafter, are approximately $1.2 million, $1.2 million, $620,000, $493,000,
$487,000 and $409,000, respectively.
16
<PAGE>
AMERICAN PORTABLE TELECOM, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995
7. SALE OF LICENSES
On November 20, 1995, the Company entered into an agreement to sell its
license covering the Guam MTA to an unrelated third party, subject to FCC
approval. The FCC has not yet granted approval for this sale. The agreed-upon
sales price is in excess of its book value of approximately $142,000 and
therefore, no loss has been accrued in the December 31, 1995, financial
statements. The Company also intends to sell its license covering the Alaska MTA
for a price in excess of its book value of $1.4 million. There can be no
assurance that the Company will be able to complete these two transactions, but
the Company has no current plans to construct PCS networks in these two MTAs.
8. EMPLOYEE BENEFIT AND STOCK PLANS
The following table summarizes the TDS Common Shares issued to the
Company's employees for the employee stock ownership plans, adopted by the
Company effective July 1, 1995. The individual plans are described below:
Year Ended
December 31, 1995
-----------------
TDS Common Shares
Employee stock purchase plan 65
Tax-deferred savings plan 68
Employee stock options 36,780
---------------
36,913
===============
Under an Employee Benefit Plans Agreement relating to the following
employee stock plans, the Company has agreed to reimburse TDS in an amount equal
to the excess of the fair market value of the TDS Common Shares on the date of
purchase over the amount paid for such shares plus amounts paid or to be paid by
TDS for taxes, less any amounts paid by the Company's employees for withholding
taxes. See "Arrangements and Transactions with TDS -Employee Benefit Plans
Agreement."
Employee Stock Purchase Plan
The Company adopted the 1993 TDS Employee Stock Purchase Plan effective
July 1, 1995. TDS had reserved 72,823 common shares for sale to the employees of
TDS and its subsidiaries, including the Company, at $39.50 per share in
connection with the Employee Stock Purchase Plan.
Tax-Deferred Savings Plan
Effective July 1, 1995, the Company adopted the TDS Tax-Deferred
Savings Plan (the "Plan"), a qualified profit sharing plan pursuant to Sections
401(a) and 401(k) of the Internal Revenue Code. TDS has reserved 147,181 common
shares for issue under the Plan. Participating employees have the option of
investing their contributions in TDS Common Shares, United States Cellular
Corporation Common Shares or four other non-affiliated funds. Employer matching
contributions, equal to 20% of employee contributions
17
<PAGE>
AMERICAN PORTABLE TELECOM, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995
8. EMPLOYEE BENEFIT AND STOCK PLANS (Continued)
up to a certain limit, are made in TDS Common Shares.
Employee Stock Options
Effective July 1, 1995, the Company began providing a long-term
incentive plan for its senior managers by adopting the Telephone and Data
Systems, Inc. 1994 Long-Term Incentive Plan. TDS has reserved 1,327,221 common
shares for options granted. The options are exercisable over a specified period
not in excess of ten years from the date they vest. The options expire from 2005
to 2009, or the date of the employee's termination of employment, if earlier. At
December 31, 1995, the Company's employees had been granted 36,780 stock options
with a weighted average option price of $37.51 per share. These options vest
annually through December 15, 1999. Of these options, 7,570 are exercisable at
December 31, 1995. However, no options had been exercised by the end of 1995.
The Company's employee stock options were granted at fair market value.
Accordingly, no compensation expense was recorded related to these options. In
connection with the initial public offering, the Company plans to adopt its
own long-term incentive plan.
Postretirement/Postemployment Benefits
The Company currently does not provide postretirement benefits other
than pensions or postemployment benefits to its employees.
9. SUBSEQUENT EVENTS
Recapitalization
In order to effect a recapitalization of the Company (the
"Recapitalization"), TDS, the sole shareholder of the Company, will adopt a
Restated Certificate of Incorporation which will authorize (a) 60,000,000 Common
Shares, $1.00 par value per share; (b) 60,000,000 Series A Common Shares, $1.00
par value per share and (c) 60,000,000 Series B Common Shares, $1.00 par value.
In connection therewith, TDS plans to exchange, pursuant to an exchange
agreement, all of the outstanding common stock of the Company for 19,086,000
Common Shares and 40,000,000 Series A Common Shares.
The Recapitalization will be completed immediately prior to the
effectiveness of the Registration Statement on Form S-1, as amended,
(Registration No. 333-1514). The pro forma (loss) per common share for the three
years ended December 31, 1995, gives effect to the Recapitalization as if it
occurred on January 1, 1993.
The Series A Common Shares are convertible on a share-for-share basis
into Common Shares and are entitled to 15 votes per share.
18
<PAGE>
AMERICAN PORTABLE TELECOM, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995
9. SUBSEQUENT EVENTS (Continued)
Tax Allocation Agreement
The Company plans to enter into a Tax Allocation Agreement with TDS
under which the Company will continue to join in filing consolidated federal
income tax returns with the TDS affiliated group unless TDS's ownership of the
Company falls beneath 80%. For 1995, TDS will reimburse the Company for the
reduction in the provision for federal income taxes reflected in TDS's
consolidated statements of income resulting from the inclusion of the Company
and its subsidiaries in the TDS affiliated group. For tax years beginning after
December 31, 1995, TDS will no longer reimburse the Company on a current basis
for losses or credits used by the TDS affiliated group. Instead, the Company
will be compensated (by an offset to amounts the Company would otherwise be
required to pay to TDS for federal income taxes) for TDS's use of tax benefits
at such time as the Company could utilize such benefits on a separate return
basis. The Company will be required to pay TDS an amount equal to the greater of
the federal income tax liability of the Company, calculated as if it were a
separate affiliated group (including any minimum tax liability, notwithstanding
the absence of consolidated group liability for minimum tax), or the tax
calculated using the highest marginal tax rate (before taking into account tax
credits) of the TDS affiliated group. For financial reporting purposes,
effective January 1, 1996, the Company will record a deferred tax asset
associated with the net operating loss carryforwards and then assess the need
for any valuation allowance associated with those carryforwards.
10. CONSOLIDATED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
March 31 June 30 Sept 30 Dec 31
-------- ------- ------- ------
Quarter Ended
1995
Net (loss) $ (507) $ (412) $ (1,250) $ (4,299)
Pro forma (loss)
per Common Share $ (.01) $ (.01) $ (.02) $ (.07)
-------- -------- -------- --------
1994
Net (loss) $ (253) $ (220) $ (512) $ (298)
Pro forma
per Common Share $ -- $ -- $ (.01) $ (.01)
-------- -------- -------- --------
19
<PAGE>
