<PAGE>
Registration No. 33-58911
Rule 424(b)(4)
Rule 424(b)(5)
PROSPECTUS $650,000,000
[LOGO]
UNITED STATES CELLULAR CORPORATION
LIQUID YIELD OPTION-TM- NOTES DUE 2015
(ZERO COUPON--SUBORDINATED)
-----------------
The Issue Price of each Liquid Yield Option-TM- Note ("LYON"-TM-) to be
issued by United States Cellular Corporation (the "Company") will be $306.46
(30.646% of principal amount at maturity) and there will be no periodic payments
of interest. The LYONs will mature on June 15, 2015. The Issue Price of each
LYON represents a yield to maturity of 6% per annum (computed on a semi-annual
bond equivalent basis) calculated from June 13, 1995. The LYONs will be
subordinated to all existing and future Senior Indebtedness of the Company. As
of March 31, 1995, the Company had approximately $329.5 million of indebtedness
outstanding which would have constituted Senior Indebtedness (which amount would
have been approximately $136.3 million after the application of the net proceeds
of this offering). The LYONs will also be effectively subordinated to all
liabilities, including trade payables, of subsidiaries of the Company, which as
of March 31, 1995 totalled approximately $69.9 million. See "Capitalization" and
"Description of LYONs--Subordination of LYONs; Effect of Corporate Structure."
Each LYON will be convertible at the option of the Holder at any time on or
prior to maturity, unless previously redeemed or otherwise purchased by the
Company. Upon conversion, the Company may elect the delivery of Common Shares,
par value $1.00 per share (the "Common Shares"), of the Company at a conversion
rate of 9.475 shares per LYON (the "Conversion Rate") or cash equal to the
market value of the Common Shares into which the LYONs are convertible. The
Conversion Rate will not be adjusted for accrued Original Issue Discount but
will be subject to adjustment upon the occurrence of certain events affecting
the Common Shares. Upon conversion, the Holder will not receive any cash payment
representing accrued Original Issue Discount; such accrued Original Issue
Discount will be deemed paid by the Common Shares or cash received on
conversion, unless such LYON remains outstanding pursuant to a Common Share
Delivery Arrangement entered into by the Company with a Standby Share Deliverer
in respect of such conversion. See "Description of LYONs--Conversion Rights."
The Company's Common Shares have less voting power than its Series A Common
Shares, par value $1.00 per share (the "Series A Common Shares"). The LYONs are
not convertible into Series A Common Shares, which have effective control of the
Company. On June 7, 1995, the last reported sale price of the Common Shares on
the American Stock Exchange was $28 1/8 per share.
The Company will purchase LYONs, at the option of the Holder, as of June 15,
2000 for a Purchase Price per LYON of $411.99 (Issue Price plus accrued Original
Issue Discount through such Purchase Date). The Company may also elect to offer
to purchase LYONs, at the option of the Holder, as of June 15, 2005 for a
Purchase Price per LYON of $553.68 (Issue Price plus accrued Original Issue
Discount through such Optional Purchase Date). If the Company elects to offer to
purchase LYONs as of the Optional Purchase Date it will notify the Holders of
such election prior to the Purchase Date. The Company, at its option, may elect
to pay the Purchase Price as of the Purchase Date or the Optional Purchase Date,
if applicable, in cash, Common Shares or publicly traded common equity
securities (the "TDS Common Equity Securities") of Telephone and Data Systems,
Inc. ("TDS") (the Company's parent), or any combination thereof. See
"Description of LYONs--Purchase of LYONs at the Option of the Holder." In
addition, as of 35 business days after the occurrence of any Change in Control
of the Company occurring on or prior to June 15, 2000 the Company will purchase
LYONs, at the option of the Holder, for a Change in Control Purchase Price, in
cash, equal to the Issue Price plus accrued Original Issue Discount through the
date set for such purchase. The Change in Control purchase feature of the LYONs
may in certain circumstances have an anti-takeover effect. See "Description of
LYONs--Change in Control Permits Purchase of LYONs at the Option of the Holder."
The LYONs are not redeemable by the Company prior to June 15, 2000.
Beginning on June 15, 2000, the LYONs are redeemable for cash at any time at the
option of the Company, in whole or in part, at Redemption Prices equal to the
Issue Price plus accrued Original Issue Discount through the date of redemption.
See "Description of LYONs--Redemption of LYONs at the Option of the Company."
For a discussion of certain United States Federal income tax consequences to
Holders of LYONs, see "Certain Tax Aspects."
The LYONs have been approved for listing on the American Stock Exchange upon
official notice of issuance under the symbol USM.A. The Common Shares are
currently listed on the American Stock Exchange under the symbol USM. The Common
Shares of TDS, par value $1.00 per share (the "TDS Common Shares"), are
currently listed on the American Stock Exchange under the symbol TDS.
SEE "RISK FACTORS" ON PAGE 12 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE LYONS.
---------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT PRICE TO UNDERWRITING PROCEEDS TO
AT MATURITY PUBLIC DISCOUNT COMPANY(1)
<S> <C> <C> <C> <C>
Per LYON......................... 100% 30.646% .919% 29.727%
Total (2)........................ $650,000,000 $199,199,000 $5,973,500 $193,225,500
<FN>
(1) Before deducting expenses payable by the Company estimated at $755,000.
(2) The Company has granted the Underwriter an option, exercisable within 30
days after the date of this Prospectus, to purchase up to an additional
$95,000,000 aggregate principal amount at maturity of LYONs on the same
terms as set forth above to cover over-allotments, if any. If the option
is exercised in full, the total Principal Amount at Maturity, Price to
Public, Underwriting Discount and Proceeds to Company will be
$745,000,000, $228,312,700, $6,846,550 and $221,466,150, respectively. See
"Underwriting."
</TABLE>
---------------------------
The LYONs are offered by the Underwriter, subject to prior sale, when, as
and if delivered to and accepted by the Underwriter, and subject to certain
other conditions. The Underwriter reserves the right to withdraw, cancel or
modify such offer and to reject orders in whole or in part. It is expected that
delivery of the LYONs will be made in New York, New York on or about June 13,
1995.
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), as
Standby Share Deliverer and at the request of the Company, may agree to acquire,
through the delivery of Common Shares, LYONs upon conversion by the Holders
thereof and Merrill Lynch may resell such LYONs. Any such sales may be made
directly to one or more purchasers at negotiated prices, at market prices
prevailing at the time of sale or at prices related to such market prices. This
Prospectus may be used by the Standby Share Deliverer in connection with such
transactions.
"Liquid Yield Option" and "LYONs" are Trademarks of Merrill Lynch & Co.,
Inc.
---------------------------
MERRILL LYNCH & CO.
------------
The date of this Prospectus is June 7, 1995.
<PAGE>
[MAP OMITTED]
[The map on the inside front cover of the Prospectus presents the Company's
managed markets, including markets in which it has the right to acquire an
interest.]
<PAGE>
IN CONNECTION WITH THE OFFERING OF THE LYONS, THE UNDERWRITER MAY OVER-ALLOT
OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE LYONS
OFFERED HEREBY OR OF THE COMMON SHARES, OR BOTH, AT LEVELS ABOVE THOSE WHICH
MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON
THE AMERICAN STOCK EXCHANGE, IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
AVAILABLE INFORMATION
The Company and TDS each is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information can be inspected at the public reference
facilities of the Commission at 450 Fifth Street, N.W., Judiciary Plaza,
Washington, D.C. 20549; New York Regional Office, Public Reference Room, Seven
World Trade Center, 13th Floor, New York, New York 10048; and Chicago Regional
Office, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of
such material can be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. The Company's Common Shares and the TDS Common Shares are listed on the
American Stock Exchange, and reports, proxy statements and other information
concerning the Company or TDS may be inspected at the office of the American
Stock Exchange, Inc., 86 Trinity Place, New York, New York 10006.
The Company has filed with the Commission a Registration Statement on Form
S-3 under the Securities Act of 1933, as amended (the "Securities Act"), with
respect to the securities offered by this Prospectus. This Prospectus does not
contain all of the information set forth in such Registration Statement, certain
parts of which have been omitted in accordance with the rules and regulations of
the Commission. Reference is made to such Registration Statement and to the
exhibits thereto for further information with respect to the Company and the
securities offered hereby.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Commission are incorporated herein by
reference:
(1) The Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1994.
(2) The Company's Current Reports on Form 8-K dated March 15, 1995 and April
27, 1995.
(3) The Company's Quarterly Report on Form 10-Q for the quarter ended March
31, 1995.
(4) The description of the Company's Common Shares included in the Company's
Report on Form 8-A/A-2 dated December 20, 1994.
All reports and other documents filed by the Company with the Commission
pursuant to Section 13(a), 13(c), 14 and 15(d) of the Exchange Act subsequent to
the date of this Prospectus and prior to the termination of the offerings made
by this Prospectus shall be deemed to be incorporated by reference in this
Prospectus and to be a part hereof from the date of filing of such documents.
Any statement contained in a document incorporated or deemed to be incorporated
herein by reference shall be deemed to be modified or superseded for purposes of
this Prospectus to the extent that a statement contained herein or in any other
subsequently filed document which also is or is deemed to be incorporated herein
by reference modifies or supersedes such statement. Any statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus.
The Company will furnish without charge to each person, including any
beneficial owner, to whom this Prospectus is delivered, upon his written or oral
request, a copy of any and all of the documents described above, other than
exhibits to such documents (unless such exhibits are specifically incorporated
by reference into such documents). Requests should be directed to:
UNITED STATES CELLULAR CORPORATION
SUITE 700
8410 WEST BRYN MAWR
CHICAGO, ILLINOIS 60631
ATTENTION: EXTERNAL REPORTING
(312) 399-8900
2
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PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED BY THE DETAILED INFORMATION AND FINANCIAL
STATEMENTS INCLUDED ELSEWHERE OR INCORPORATED BY REFERENCE INTO THIS PROSPECTUS.
UNLESS OTHERWISE INDICATED, THE INFORMATION IN THIS PROSPECTUS ASSUMES THAT THE
UNDERWRITER'S OVER-ALLOTMENT OPTION IS NOT EXERCISED.
THE COMPANY
United States Cellular Corporation owns, operates and invests in cellular
telephone systems throughout the United States. As of March 31, 1995, the
Company provided cellular telephone service to 478,000 customers through 135
majority-owned and managed cellular systems serving approximately 17% of the
geographic area and approximately 9% of the population of the contiguous United
States. The Company's operations consist of nine regional market clusters, five
of which each have a total population of more than two million, and each of
which have a total population of more than one million, plus other unclustered
markets. Overall, 84% of the Company's 25.2 million population equivalents are
in markets which are or will be majority-owned and managed ("consolidated"), 1%
are in managed but not consolidated markets and 15% are in markets in which the
Company holds an investment interest.
The Company is the seventh largest cellular telephone company in the United
States, based on the aggregate number of population equivalents it owns or has
the right to acquire. The Company's corporate development strategy is to acquire
controlling interests in MSA and RSA licensees in areas adjacent to or in
proximity to its other markets in order to build and expand market clusters.
Customers benefit from larger service areas which provide longer uninterrupted
service and the ability to make outgoing calls and receive incoming calls within
the designated area without special roaming arrangements. In addition, the
Company anticipates that clustering will continue to provide the Company certain
economies in its capital and operating costs.
The Company is building a substantial presence in selected geographic areas
throughout the United States where it believes it can efficiently integrate and
manage cellular telephone systems. Its cellular interests include regional
market clusters in the following areas: Virginia/North Carolina/South Carolina,
the Midwest, the Northwest, Indiana/Kentucky, Texas/Oklahoma/Missouri/Kansas,
the Northeast, Eastern Tennessee/Western North Carolina, the Southeast and
Southwestern Texas.
Since 1985, when the Company began providing cellular service, the Company
has expanded its cellular networks and customer service operations to cover 147
markets in 33 states as of March 31, 1995. Over the last five years, the
Company's customer base has grown at a compound annual growth rate of 63% to
478,000 customers at March 31, 1995. The average penetration rate in the
Company's consolidated markets was 2.17% at March 31, 1995, and the percentage
of customers who terminate service each month (the "churn rate") in all of its
consolidated markets averaged 2.1% per month for the quarter ended March 31,
1995.
The Company is a majority-owned subsidiary of TDS. TDS owns 81.1% of the
combined total of the outstanding Common Shares and Series A Common Shares of
the Company and controls 95.9% of the combined voting power of both classes of
common stock. The Company benefits from the extensive telecommunications
industry experience of TDS. At March 31, 1995, TDS, through its wholly owned
subsidiary, TDS Telecommunications Corporation, served approximately 410,000
access lines through 100 local exchange telephone subsidiaries in 29 states and,
through American Paging, Inc., its 82.5%-owned subsidiary, had approximately
705,100 pagers in service. In March 1995, American Portable Telecommunications,
Inc., TDS's wholly owned subsidiary, was the successful bidder for eight
broadband Personal Communications Services ("PCS") licenses at an auction
conducted by the FCC, substantially all of which are for markets other than
those in which the Company operates cellular systems.
CERTAIN DEFINITIONS
As used in this Prospectus, population equivalents, unless otherwise
indicated, means the Donnelley Marketing Service estimate of the 1994 population
of a Metropolitan Statistical Area ("MSA") or Rural Service Area ("RSA")
multiplied by the percentage interest that the Company owns or has the right to
acquire in an entity licensed, designated to receive a license or expected to
receive a construction permit
3
<PAGE>
("licensee") from the Federal Communications Commission (the "FCC") to construct
or operate a cellular telephone system in that MSA or RSA. The number of
population equivalents should not be confused with the current number of users
of cellular services and is not necessarily indicative of the number of users of
cellular services in the future. MSAs and RSAs which the Company owns or has a
right to acquire are sometimes collectively referred to herein as its "markets"
or "systems." As used in this Prospectus, unless the context indicates
otherwise, (i) references to the "Company" refer to United States Cellular
Corporation and its subsidiaries and (ii) references to "TDS" refer to Telephone
and Data Systems, Inc. and its subsidiaries.
RISK FACTORS
Prospective purchasers of the securities offered hereby should carefully
consider the factors discussed under "Risk Factors."
THE OFFERING
<TABLE>
<S> <C>
LYONs............................. $650,000,000 aggregate principal amount at maturity
(excluding $95,000,000 aggregate principal amount at
maturity subject to the Underwriter's over-allotment
option) of LYONs due June 15, 2015. There will be no
periodic interest payments on the LYONs. Each LYON will
have an Issue Price of $306.46 and a principal amount
due at maturity of $1,000.
Yield to Maturity of LYONs........ 6% per annum (computed on a semi-annual bond equivalent
basis) calculated from June 13, 1995.
Conversion Rights................. Each LYON will be convertible, at the option of the
Holder, at any time on or prior to maturity. Upon
conversion of a LYON, the Company may elect the delivery
of Common Shares, at a Conversion Rate of 9.475 shares
per LYON, or cash equal to the market value of the
Common Shares into which the LYONs are convertible. In
connection with the conversion of any LYON, the Company
may enter into a Common Share Delivery Arrangement with
a Standby Share Deliverer, initially Merrill Lynch,
Pierce, Fenner & Smith Incorporated ("Merrill Lynch"),
whereby, upon the agreement of the Standby Share
Deliverer to so act in connection with such conversion,
it will deliver the Common Shares (and any cash payment
in lieu of a fractional Common Share) deliverable to the
Holder upon such conversion. As a result of such a Com-
mon Share Delivery Arrangement, the converted LYON will
not be retired or cancelled, but shall remain
outstanding with the Standby Share Deliverer becoming
the Holder thereof. The Conversion Rate will not be
adjusted for accrued Original Issue Discount, but will
be subject to adjustment upon the occurrence of certain
events affecting the Common Shares. Upon conversion, the
Holder will not receive any cash payment representing
accrued Original Issue Discount; such accrued Original
Issue Discount will be deemed paid by the Common Shares
or cash received on conversion unless such LYON remains
outstanding pursuant to a Common Share Delivery
Arrangement. See "Description of LYONs--Conversion
Rights." The Company's Common Shares have less voting
power than its Series A Common Shares. The LYONs are not
convertible into Series A Common Shares, which have
effective control of the Company. TDS owns more than 81%
of the combined total of the outstanding Common Shares
and Series A Common Shares of the Company
</TABLE>
4
<PAGE>
<TABLE>
<S> <C>
and controls more than 95% of their combined voting
power. As a result, TDS is effectively able to elect all
of the Company's seven directors.
Subordination..................... The LYONs will be subordinated to all existing and
future Senior Indebtedness of the Company. As of March
31, 1995, the Company had approximately $329.5 million
of indebtedness outstanding which would have constituted
Senior Indebtedness (which amount would have been
approximately $136.3 million after the application of
the net proceeds of this offering). The LYONs will also
be effectively subordinated to all liabilities,
including trade payables, of subsidiaries of the
Company, which as of March 31, 1995 totalled
approximately $69.9 million. See "Capitalization" and
"Description of LYONs--Subordination of LYONs; Effect of
Corporate Structure."
Original Issue Discount........... Each LYON is being offered at an Original Issue Discount
for United States Federal income tax purposes equal to
the excess of the principal amount at maturity of the
LYON over the amount of its Issue Price. Prospective
purchasers of LYONs should be aware that, although there
will be no periodic payments of interest on the LYONs,
accrued Original Issue Discount will be includable
periodically in a Holder's gross income for United
States Federal income tax purposes prior to conversion,
redemption, other disposition or maturity of such
Holder's LYONs, whether or not such LYONs are ultimately
converted, redeemed, sold (to the Company or otherwise)
or paid at maturity. See "Certain Tax Aspects."
Sinking Fund...................... None.
Optional Redemption............... The LYONs will not be redeemable by the Company prior to
June 15, 2000. Beginning on June 15, 2000, the LYONs are
redeemable for cash at any time at the option of the
Company, in whole or in part, at Redemption Prices equal
to the Issue Price plus accrued Original Issue Discount
through the date of redemption. See "Description of
LYONs--Redemption of LYONs at the Option of the
Company."
Purchase at the Option of the The Company will purchase LYONs, at the option of the
Holder............................ Holder, as of June 15, 2000 (the "Purchase Date") for a
Purchase Price per LYON of $411.99 (Issue Price plus
accrued Original Issue Discount through such Purchase
Date). The Company may also elect to offer to purchase
LYONs, at the option of the Holder, as of June 15, 2005
(the "Optional Purchase Date") for a Purchase Price per
LYON of $553.68 (Issue Price plus accrued Original Issue
Discount through such Optional Purchase Date). If the
Company elects to also offer to purchase LYONs as of the
Optional Purchase Date it will notify the Holders of
such election prior to the Purchase Date. The Company,
at its option, may elect to pay the Purchase Price as of
the Purchase Date or the Optional Purchase Date, as
applicable, in cash, Common Shares or TDS Common Equity
Securities, or any combination thereof. TDS has not
waived any rights that it may have under an agreement
between TDS and the Company to purchase Common Shares if
the Company elects to pay the Purchase Price (or a
portion thereof) in Common Shares (as of the Purchase
Date or Optional Purchase Date, as applicable). As a
result, in such event, TDS may
</TABLE>
5
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<TABLE>
<S> <C>
notify the Company that it intends to exercise any such
rights to acquire additional Common Shares up to an
amount equal to TDS's percentage ownership of Common
Shares at that time (assuming that all outstanding
securities that are or may become convertible into
Common Shares, including LYONs, were converted into
Common Shares), at a price per share payable in cash
equal to the Market Price per Common Share. Because the
Market Price of any Common Shares or TDS Common Equity
Securities to be delivered in payment, in whole or in
part, of a Purchase Price is determined as of the third
Business Day prior to the applicable Purchase Date or
Optional Purchase Date, Holders of LYONs bear the market
risk with respect to the value of the Common Shares or
TDS Common Equity Securities to be received from the
date such Market Price is determined to the applicable
Purchase Date or Optional Purchase Date. See
"Description of LYONs--Purchase of LYONs at the Option
of the Holder" and "Description of Capital
Stock--Preemptive and Similar Rights." In addition, as
of 35 business days after the occurrence of a Change in
Control of the Company occurring on or prior to June 15,
2000, the Company will purchase LYONs, at the option of
the Holder, at a Change in Control Purchase Price, in
cash, equal to the Issue Price plus accrued Original
Issue Discount through the date set for such purchase.
The LYONs will not, however, be subject to purchase by
the Company at the option of the Holder in connection
with (i) certain transactions involving TDS, the Company
or LeRoy T. Carlson and certain members of his family
that would otherwise constitute a Change in Control or
(ii) the disposition of Common Shares or Series A Common
Shares by TDS in the absence of a Rating Decline. The
Change in Control purchase feature of the LYONs may in
certain circumstances have an anti-takeover effect. See
"Description of LYONs--Change in Control Permits
Purchase of LYONs at the Option of the Holder" for a
summary of this provision and the definition of "Change
in Control" and related terms.
Use of Proceeds................... The net proceeds to the Company from the initial sale of
the LYONs will be applied to the repayment of the
Company's outstanding indebtedness to TDS under a
revolving credit agreement (the "Revolving Credit
Agreement"). If the Underwriter's over-allotment option
is exercised, the additional net proceeds will also be
used to repay such indebtedness to TDS, with any excess
additional net proceeds to be used for general corporate
purposes and, on an interim basis, such excess
additional net proceeds may be invested with TDS under
an affiliated cash management program. See "Use of
Proceeds."
Listing........................... The LYONs have been approved for listing on the American
Stock Exchange upon official notice of issuance under
the symbol USM.A. The Common Shares are currently listed
on the American Stock Exchange under the symbol USM. TDS
Common Shares are currently listed on the American Stock
Exchange under the symbol TDS.
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
SUBSEQUENT SALES OF SECURITIES
Resales of LYONs.................. In connection with the conversion of any LYON, the
Company may enter into a Common Share Delivery
Arrangement with a third party Standby Share Deliverer,
initially Merrill Lynch, whereby, upon the agreement of
the Standby Share Deliverer to so act in connection with
such conversion, it will deliver the Common Shares (and
any cash payment in lieu of a fractional Common Share)
deliverable to the Holder upon such conversion, through
the Conversion Agent, in the same amounts and within the
same time periods as for conversions in respect of which
the Company were to deliver the Common Shares. As a
result of such a Common Share Delivery Arrangement, the
converted LYON will not be retired or cancelled, but
shall remain outstanding with the Standby Share
Deliverer becoming the Holder thereof. The Standby Share
Deliverer may resell such LYONs. This Prospectus covers
the delivery of Common Shares (acquired pursuant to the
Securities Loan Agreement described below, or otherwise)
by the Standby Share Deliverer in connection with any
Common Share Delivery Arrangement and any resales of
LYONs by the Standby Share Deliverer.
Securities Loan Agreement......... In connection with the offering of the LYONs, TDS and
Merrill Lynch intend to enter into a Securities Loan
Agreement, which provides that, subject to certain
restrictions, Merrill Lynch may, with the agreement of
TDS, from time to time borrow, return and reborrow from
TDS up to 750,000 Common Shares, which number of Common
Shares may be reduced from time to time by TDS. The
Securities Loan Agreement is intended to facilitate
ordinary trading and market-making activity in the LYONs
by Merrill Lynch and may also be used by Merrill Lynch,
as Standby Share Deliverer, to obtain Common Shares
deliverable by it in connection with any Common Share
Delivery Arrangement entered into with the Company, as
described above. The availability of Common Shares under
the Securities Loan Agreement, if any, at any time is,
as described above, not assured and any such
availability does not assure market-making activity in
the LYONs by Merrill Lynch. This Prospectus may be used
by Merrill Lynch in connection with the sale of Common
Shares borrowed by Merrill Lynch from TDS under the
Securities Loan Agreement.
Merrill Lynch is not under any obligation to engage in
market-making activity with respect to the LYONs, or to
agree to any Common Share Delivery Arrangement, and any
market-making, or activity as a Standby Share Deliverer,
actually engaged in by Merrill Lynch may cease at any
time.
</TABLE>
7
<PAGE>
SUMMARY OPERATING DATA
The following table is a summary of the Company's markets and consolidated
operations.
<TABLE>
<CAPTION>
THREE MONTHS YEAR ENDED DECEMBER 31,
ENDED MARCH ------------------------------------------------------
31, 1995 1994 1993 1992 1991 1990
------------- --------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
MAJORITY-OWNED AND MANAGED (CONSOLIDATED) MARKETS:(1)
Population equivalents (in thousands)(2)............ 18,266 18,204 18,464 14,475 10,572 5,172
Customers........................................... 478,000 421,000 261,000 150,800 97,000 57,300
Market penetration at end of period(3).............. 2.17% 1.98% 1.35% 1.00% 0.84% 0.91%
Markets in operation................................ 135 130 116 92 67 32
Cell sites in service............................... 841 790 522 320 186 107
Average monthly revenue per customer*............... $ 71 $ 80 $ 85 $ 88 $ 84 $ 87
Churn rate per month................................ 2.1% 2.3% 2.3% 2.4% 2.2% 1.9%
Marketing cost per net customer addition............ $ 646 $ 667 $ 677 $ 765 $ 710 $ 686
MINORITY-OWNED AND MANAGED MARKETS:(4)
Population equivalents (in thousands)(2)............ 686 1,191 1,157 2,039 1,783 1,310
Markets in operation................................ 11 15 20 24 24 12
MARKETS TO BE MANAGED, NET OF MARKETS TO BE
DIVESTED:(5)
Population equivalents (in thousands)(2)............ 2,477 2,187 1,018 1,836 3,139 4,896
Markets............................................. 3 5 8 13 21 44
TOTAL MARKETS MANAGED AND TO BE MANAGED BY THE
COMPANY:
Population equivalents (in thousands)(2)............ 21,429 21,582 20,639 18,350 15,494 11,378
Markets............................................. 149 150 144 129 112 88
MARKETS MANAGED BY OTHERS:(6)
Population equivalents (in thousands)(2)............ 3,816 3,619 3,429 3,517 3,274 3,480
Markets in operation................................ 61 57 61 64 65 67
TOTAL MARKETS:
Population equivalents (in thousands)(2)............ 25,245 25,201 24,068 21,867 18,768 14,858
Markets............................................. 210 207 205 193 177 155
<FN>
- ------------
* 1993-1990 average monthly revenue per customer has been restated to conform
to 1994 presentation.
(1) Includes one market managed by third parties in 1995, two in 1994 and one
in 1993 and 1992, and one wholly owned reseller operation in 1992, 1991 and
1990.
(2) 1994 Donnelley Marketing Service estimates are used for all years. Includes
population equivalents relating to interests which are acquirable in the
future.
(3) The decrease from 1990 to 1991 is due to the addition of 32 majority-owned
and managed RSAs in 1991. Market penetration for majority-owned and managed
MSAs was 1.48% in 1991 and 1.07% in 1990.
(4) Includes markets where the Company has the right to acquire an interest but
did not own an interest at the respective dates (two markets in 1995, four
in 1994, two in 1993, six in 1992, seven in 1991 and four in 1990);
excludes one market in 1995 which will become a market managed by others.
(5) "Markets to be Managed" represents markets which are managed by third
parties until the Company acquires a majority interest in the markets. In
1995, represents the net of 15 markets to be managed and 12 markets which
are currently majority-owned and managed and will be divested.
(6) Represents markets in which the Company owns or has the right to acquire a
minority interest and which are managed by others.
</TABLE>
8
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
Set forth below is summary consolidated financial information for the
Company as of and for the periods indicated. The following information should be
read in conjunction with the consolidated financial statements and related notes
of the Company included in its reports filed under the Exchange Act that are
incorporated by reference herein. See "Incorporation of Certain Documents by
Reference."
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
---------------------- -----------------------------------------------------
1995 1994 1994 1993 1992 1991 1990
----------- --------- --------- --------- --------- --------- ---------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING FINANCIAL DATA
Service revenues(1)................. $ 96,400 $ 63,361 $ 318,649 $ 203,800 $ 130,666 $ 77,456 $ 47,099
Equipment sales revenues............ 3,348 2,872 13,755 10,510 9,263 7,500 7,522
Operating income (loss) before
depreciation and amortization and
minority share..................... 27,758 13,714 82,839 36,371 16,934 2,438 2,509
Depreciation and amortization
expense(2)......................... 19,694 14,718 65,454 45,027 29,639 19,269 11,650
Operating income (loss) before
minority share..................... 8,064 (1,004) 17,385 (8,656) (12,705) (16,831) (9,141)
Minority share of operating
income............................. (1,888) (1,118) (5,152) (3,496) (2,615) (1,467) (155)
Operating income (loss)............. 6,176 (2,122) 12,233 (12,152) (15,320) (18,298) (9,296)
Investment income, net of related
amortization expense............... 9,485 4,947 25,627 16,005 11,859 6,871 6,153
Gain on sale of cellular
interests(3)....................... 18,517 -- 3,321 4,851 31,396 557 842
Interest expense.................... 7,705 3,991 21,883 33,190 20,095 16,421 11,492
Income (loss) before income taxes... 26,795 (851) 21,310 (22,749) 8,181 (24,357) (14,641)
Net income (loss) before cumulative
effect of a change in accounting
principle.......................... 23,598 (1,830) 16,393 (25,441) 6,194 (24,373) (14,723)
Cumulative effect of a change in
accounting principle(4)............ -- -- -- -- -- (10,269) --
Net income (loss)................... $ 23,598 $ (1,830) $ 16,393 $ (25,441) $ 6,194 $ (34,642) $ (14,723)
Weighted Average Common and Series A
Common Shares (000s)............... 82,131 75,140 79,514 57,152 57,778 38,715 28,644
Earnings (loss) per Common and
Series A Common Share:
Before cumulative effect of a
change in accounting principle... $ .29 $ (.02) $ .21 $ (.45) $ .11 $ (.63) $ (.51)
Cumulative effect of a change in
accounting principle............. -- -- -- -- -- (.26) --
Net income (loss)................. .29 (.02) .21 (.45) .11 (.89) (.51)
Additions to property, plant and
equipment.......................... $ 38,203 $ 18,444 $ 148,058 $ 91,501 $ 56,122 $ 59,469 $ 16,084
Ratio of earnings to fixed
charges(5)......................... 3.35x .83x 1.49x .17x 1.24x -- --
Pro forma ratio of earnings to fixed
charges(5)......................... 4.28x -- 1.76x -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, --------------------------------------------------------------
1995 1994 1993 1992 1991 1990
------------ ------------ ------------ ---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Working capital.................... $ (23,754) $ (33,813) $ (28,386) $ (17,827) $ (614) $ (979)
Property, plant and equipment,
net............................... 404,677 368,181 246,414 158,948 109,305 44,334
Investments--
Cellular partnerships............ 105,702 99,495 90,104 86,406 75,089 56,489
Licenses, net of amortization.... 1,014,408 947,399 824,491 547,171 386,489 141,107
Marketable equity securities..... 20,742 20,145 17,584 18,210 -- --
Total assets....................... 1,653,392 1,534,787 1,245,396 855,579 616,786 279,844
Long-term debt, excluding current
portion........................... 119,597 57,691 51,130 56,645 26,959 10,703
Revolving Credit Agreement--TDS.... 183,921 232,954 141,524 265,766 166,501 129,005
Common shareholders' equity........ $ 1,207,163 $ 1,093,967 $ 940,128 $ 450,984 $ 360,749 $ 112,380
<FN>
- ------------
(1) The Company changed its financial reporting presentation for outbound, or
pass-through, roaming revenue during 1994. Pass- through roaming revenue is
now treated as an offset to the expense charged by other cellular carriers,
with the net amount included in system operations expense. Prior years'
amounts have been reclassified to conform to the 1994 presentation.
</TABLE>
9
<PAGE>
<TABLE>
<S> <C>
(2) Represents Depreciation and amortization expense included in Total Costs
and Expenses in the Consolidated Statements of Operations.
(3) Gain on sale of cellular interests of $18.5 million in the first quarter of
1995 reflects the sale of one majority-owned market and the sale of two
minority interests. The gain of $3.3 million in 1994 reflects the gain on
the exchange of cellular interests with another cellular company. The gain
of $4.9 million in 1993 reflects the sale of two minority interests. The
gain of $31.4 million in 1992 includes a $17.1 million gain on the sale of
a majority-owned market, an $11.4 million gain on the exchange of cellular
interests with another cellular company and a $2.9 million gain from the
sale of a minority interest.
(4) Effective January 1, 1991, the Company changed its method of accounting for
sales commissions from capitalizing and amortizing these costs to expensing
as incurred. In addition, two of the Company's equity-method investees made
a similar change. The cumulative effect of the Company's and the investees'
change on all prior years has been reflected in 1991 results of operations.
Financial information for 1990 has not been restated.
(5) For the computation of the earnings ratio: (i) earnings consist of net
income from continuing operations before income taxes, distributions from
minority subsidiaries, minority share in income of subsidiaries that have
fixed charges and amortization of capitalized interest, less equity in
undistributed earnings of unconsolidated investments and minority share of
losses; and (ii) fixed charges consist of interest expense and estimated
interest portion of rentals. For the years ended December 31, 1991 and
1990, the Company's earnings before fixed charges were insufficient to
cover fixed charges. The amounts of such deficiencies were $27,837,000 and
$16,543,000 for the years ended December 31, 1991 and 1990, respectively.
For the computation of the pro forma earnings ratio, the only adjustments
made to the historical ratio were to give effect to the net decrease in
interest expense resulting from the pro forma initial issuance of the LYONs
offered hereby and the corresponding repayment of the Revolving Credit
Agreement-TDS from the net proceeds thereof.
</TABLE>
10
<PAGE>
RECENT DEVELOPMENTS
Service revenues totaled $96.4 million for the three months ended March 31,
1995, a 52% increase over the $63.4 million reported for 1994. Growth in the
number of customers and strong inbound roaming revenue were the principal
factors behind this improvement. The customer base in the Company's 135
majority-owned and managed markets totaled 478,000 customers at March 31, 1995,
a 63% increase over the 294,000 customers in service at March 31, 1994.
Excluding acquisitions, the Company's distribution channels added 43,000 new
customers during the first quarter, a 59% increase over the 27,000 net new
customers added during the same quarter in 1994. Acquisitions and divestitures
netted an additional 14,000 customers in the first quarter of 1995 compared to
6,000 during the first quarter of 1994. Inbound roaming revenue increased 50% to
$29.6 million for the quarter.
Average monthly service revenue per customer totaled $71 during the first
quarter of 1995, down from $76 for the same period in 1994 and from the $78
generated in the fourth quarter of 1994. This decline primarily reflects the
effect of additional customers generating fewer local minutes of use and roaming
revenues growing more slowly. Local retail revenue from the Company's customers
averaged $43 during the first quarter of 1995 compared to $46 in the same
quarter of 1994, while inbound, or keeper, roaming revenue per customer averaged
$22 in the most recent quarter compared to $24 in 1994. These decreases were
expected and were outweighed by the effect of the increase in customers.
Total operating expenses, excluding depreciation and amortization, increased
37% to $72.0 million in the first quarter of 1995 from $52.5 million in 1994.
Marketing expenses, including losses on equipment sales, rose 45%, or $8.6
million, due to a 59% increase in net customer activations. The cost to add a
net customer in 1995 decreased 9% to $646 from $711 in 1994. The Company's churn
rate was 2.1% in the first quarter of 1995, down from 2.3% in the same quarter
last year and from 2.4% in the fourth quarter of 1994.
Growth in revenues, coupled with continued cost efficiencies, resulted in a
$14.0 million, or 102%, increase in operating cash flow compared to the first
quarter of 1994. Operating cash flow margin improved to 29% in 1995 from 22% in
1994. Cash flow, including operating cash flow and $1.8 million of cash flow
from minority cellular investments, increased 61% to $29.6 million. Depreciation
and amortization increased 34% to $19.7 million due to a 14% increase in license
costs and a 57% rise in fixed assets since March 31, 1994. The Company's network
consisted of 841 cell sites serving 135 consolidated markets at March 31, 1995,
compared to 566 cell sites serving 120 such markets at March 31, 1994.
Operating income before minority share totaled $8.1 million in the most
recent quarter compared to a loss of $1.0 million in the same period of 1994.
Investment income increased 87% to $9.7 million, mostly as a result of an
increase in investment income from markets managed by others which the Company
accounts for using the equity method. Interest expense increased $3.7 million,
or 93%, as average debt balances increased 39% from the first quarter of 1994
and as interest rates increased. The Company recorded pretax gains totaling
$18.5 million on the sales of its interests in three markets during the quarter.
One market was 100%-owned and managed and the Company had investment interests
in the other two markets.
The Company generated net income of $23.6 million in the first quarter of
1995, or $.29 per share, compared to a net loss of $1.8 million, or $.02 per
share, in 1994. Excluding the net-of-tax effect of the gains on the sales of
cellular interests, net income for the first quarter of 1995 was $6.4 million,
or $.08 per share.
11
<PAGE>
RISK FACTORS
PRIOR TO DECIDING TO INVEST IN THE SECURITIES OFFERED HEREBY, POTENTIAL
INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS, TOGETHER WITH OTHER
INFORMATION CONTAINED OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS, IN
EVALUATING THE COMPANY AND ITS BUSINESS.
OPERATING AND FINANCIAL PERFORMANCE
The Company has only recently achieved profitability and has previously
incurred significant start-up costs and operating losses. The Company
anticipates increasing growth in cellular units in service and revenues as it
continues its expansion and development programs. Marketing and system
operations expenses associated with this expansion will most likely reduce the
rate of growth in operating cash flow and operating income over the next several
quarters. In addition, the Company anticipates that the seasonality of revenue
streams and operating expenses may affect the Company's operating and net
results over the next several quarters.
While there are numerous cellular systems operating in the United States and
other countries, the industry has only a limited operating history. While the
Company produced operating income and net income during 1994, changes in any of
several factors could reduce the Company's growth in operating income and net
income over the next few years. These factors include: (i) the growth rate in
the Company's customer base; (ii) the usage and pricing of cellular services;
(iii) the churn rate; (iv) the cost of providing cellular services, including
the cost of attracting new customers; (v) the introduction of competition from
PCS and other emerging technologies; and (vi) continuing technological advances
which may provide additional competitive alternatives to cellular service.
COMPETITION AND NEW TECHNOLOGIES
Currently, the Company's only competitor for cellular telephone service in
each market is the licensee of the second cellular system in that market. Since
each competitor operates its cellular system on a 25 megahertz ("MHz") frequency
block licensed by the FCC using comparable technology and facilities,
competition for customers between the two systems in each market is principally
on the basis of quality, price, size of area covered, services offered and
responsiveness of customer service. The competing entities in many of the
markets in which the Company has an interest have financial resources which are
substantially greater than those of the Company and its partners in such
markets.
In addition to competition from the other cellular licensee in each market,
there is also competition from, among other technologies, conventional mobile
telephone and Specialized Mobile Radio ("SMR") systems, both of which are able
to connect with the landline telephone network. The Company believes that
conventional mobile telephone systems and conventional SMR systems are
competitively disadvantaged because of technological limitations on the capacity
of such systems. The FCC has recently given approval, through waivers of its
rules, to Enhanced Specialized Mobile Radio ("ESMR"). ESMR systems may have
cells and frequency reuse like cellular, thereby potentially eliminating any
current technological limitation. The first ESMR systems were implemented in
1993 in Los Angeles. Although less directly a substitute for cellular service,
wireless data services and one-way paging service (and, in the future, two-way
paging services) may be adequate for those who do not need full two-way voice
service.
The FCC has completed the auction of two of the three 30 MHz frequency
blocks allocated to broadband PCS. The Company anticipates that the FCC may
begin issuing PCS licenses during the second quarter of 1995. PCS trials are in
process throughout the United States. PCS may become a significant source of
competition in the Company's markets once PCS systems have been built and
developed. One or more PCS providers are expected to begin offering digital,
wireless communications services in markets served by the Company beginning as
early as 1996. Similar technological advances or regulatory changes in the
future may make available other alternatives to cellular service, thereby
creating additional sources of competition.
Continuing technological advances in the communications field make it
difficult to predict the extent of additional future competition for cellular
systems. For example, the FCC has allocated radio channels to a mobile satellite
system in which transmissions from mobile units to satellites would augment or
replace transmissions to cell sites, and several consortia have been formed to
provide such service. Such a system is
12
<PAGE>
designed primarily to serve the communications needs of remote locations and a
mobile satellite system could provide viable competition for land-based cellular
systems in such areas. It is also possible that the FCC may in the future assign
additional frequencies to cellular telephone service to provide for more than
two cellular telephone systems per market.
REGULATION
The licensing, construction, operation, acquisition and sale of cellular
systems are regulated by the FCC. In addition, certain aspects of cellular
system operations may be subject to public utility regulation in the states in
which service is provided. Changes in the regulation of cellular operators or
their activities and of other mobile service providers could have a material
adverse effect on the Company's operations. In addition, FCC licenses to provide
cellular service are subject to renewal. There may be competition for licenses
upon the expiration of their initial ten-year terms and there is no assurance
that any license will be renewed. See "Business--Regulation" and "--Regulatory
Proceedings."
VALUE OF FCC LICENSES
The Company's assets consist principally of intangible assets in the form of
investments in licenses. In many cases the transfer of such interests is
restricted and subject to prior FCC or state regulatory approval. In some cases
the transfer of the Company's interests is subject to rights of first refusal.
In addition, the future value of all cellular interests will depend
significantly upon the success of the Company's business. While there is a
current market for cellular licenses, such a market may not exist in the future
or the values obtainable may be significantly lower than at present. In
addition, the value of licenses may be affected by the level of supply and
demand for such licenses and therefore awards of additional licenses for
competitive wireless technologies, such as those awarded by the auction for PCS
recently completed by the FCC, may adversely affect the value of cellular
licenses.
MARKETS
Many of the Company's markets or market clusters are located in areas which
are not densely populated and may not benefit from operating efficiencies
available to systems operated in metropolitan areas and larger market clusters.
Typically, smaller and less densely populated markets take longer to reach
profitability and positive cash flow than larger individual markets or larger
market clusters. Due to the fact that the FCC issued cellular licenses for MSAs
in order of market size, most of the Company's MSAs were placed in service later
than larger MSAs served by other cellular operators. RSAs are several years
behind the typical MSA in their development and thus may be at least several
years behind typical MSAs in achieving profitability and positive cash flow.
LIQUIDITY AND CAPITAL RESOURCES
The construction of a cellular telephone system is capital-intensive and
requires substantial investment prior to operation. The initial operation of a
cellular system also requires additional investment to cover start-up, operating
and marketing expenses. The Company intends to continue to pursue opportunities
to acquire cellular interests, including additional interests in cellular
systems in which it owns or has rights to acquire an interest. The Company may
require additional funds to build and operate systems with respect to any such
acquired interests and to pursue the acquisition of new interests.
Since the Company has only recently begun to generate positive operating
income and cash flows from operating activities, it requires outside financing
to provide the funds necessary for investment. The timing and amount of the
Company's funding requirements will depend on the number of licensees acquired
by the Company, the plans for the construction and operation of individual
cellular systems, and other relevant factors. The Company anticipates that
during 1995 it will require external financing to fund acquisitions and to fund
capital requirements for markets which the Company currently owns or has the
right to acquire pursuant to definitive agreements. These requirements may be
met through additional borrowings from TDS, the issuance of equity or debt
securities, vendor financing, bank financing, the sale of assets, or a
combination thereof.
There can be no assurance that sufficient funds will be available to the
Company on terms or at prices acceptable to the Company. If sufficient funding
is not available to the Company on terms and prices
13
<PAGE>
acceptable to the Company, the Company would have to reduce its construction,
development and acquisition programs. In the long term, reduction of the
Company's construction, development and acquisition programs would have a
negative impact on the ability of the Company to increase its consolidated
revenues and cash flows.
RADIOFREQUENCY EMISSION CONCERNS
Media reports have suggested that certain radio frequency ("RF") emissions
from portable cellular telephones might be linked to cancer. The Company is not
aware of any authoritative evidence linking the usage of portable cellular
telephones with cancer. The FCC currently has a rulemaking proceeding pending to
update the guidelines and methods it uses for evaluating RF emissions in radio
equipment, including cellular telephones. While the proposal would impose more
restrictive standards on RF emissions from low-power devices such as portable
cellular telephones, it is anticipated that all cellular telephones currently
marketed and in use will comply with those standards.
CONTROL BY PRINCIPAL SHAREHOLDER; ANTI-TAKEOVER PROVISIONS
As of March 31, 1995, TDS owned 81.1% of the combined total of both classes
of common stock of the Company, including a majority of the outstanding Common
Shares, and had 95.9% of their combined voting power. As a result, TDS is
effectively able to elect all of the Company's seven directors and otherwise
control the management and operations of the Company. See "Description of
Capital Stock."
The control of the Company by TDS and various provisions of the Company's
Restated Certificate of Incorporation, as amended, may tend to deter
non-negotiated tender offers or other efforts to obtain control of the Company
and thereby deprive shareholders of opportunities to sell shares at prices
higher than those prevailing in the market. See "Description of Capital Stock."
RELATIONSHIP WITH TDS; CONFLICTS OF INTEREST
Directors and officers of TDS and its subsidiaries who are also directors
and officers of the Company, and TDS as the Company's controlling shareholder,
are in positions involving the possibility of conflicts of interest with respect
to certain transactions concerning the Company. When the interests of TDS and
the Company diverge, TDS may exercise its influence in its own best interests.
See "Description of Capital Stock--Corporate Opportunity Arrangements."
The Company and TDS have entered into contractual arrangements governing
certain transactions and relationships between them. These agreements were
executed prior to the initial public offering of the Company's Common Shares and
were not the result of arm's-length negotiations. Accordingly, there is no
assurance that the terms and conditions of these agreements are as favorable to
the Company as it could have obtained from unaffiliated third parties. See
"Certain Relationships and Related Transactions" in the Company's Annual Report
on Form 10-K for the year ended December 31, 1994, which is incorporated herein
by reference.
In the future, the Company expects to resolve any potential conflicts of
interest with TDS on a case by case basis, taking into consideration relevant
factors including its existing agreements with TDS, the requirements of the
American Stock Exchange and prevailing corporate practices.
14
<PAGE>
USE OF PROCEEDS
The net proceeds from the initial sale of LYONs offered by this Prospectus
are estimated to be approximately $193,225,500 ($221,466,150 if the
Underwriter's over-allotment option is exercised in full). The net proceeds of
such offering will be applied to the repayment of the Company's outstanding
indebtedness to TDS under its Revolving Credit Agreement, which indebtedness was
incurred to fund the Company's acquisitions, working capital requirements and
construction and operations of its cellular systems. If the Underwriter's
over-allotment option is exercised, the additional net proceeds will also be
used to repay such indebtedness to TDS, with any excess additional net proceeds
to be used for general corporate purposes and, on an interim basis, such excess
additional net proceeds may be invested with TDS under an affiliated cash
management program. As of May 31, 1995, the Company's outstanding indebtedness
to TDS under the Revolving Credit Agreement totaled $204.2 million. All of such
indebtedness was issued at an interest rate of 1 1/2% above the prime rate
announced from time to time by LaSalle National Bank of Chicago, which resulted
in an interest rate at May 31, 1995, of 10.5% per annum. The entire balance
under the Revolving Credit Agreement is scheduled to become due and payable on
July 1, 1996. Giving effect to the repayment of debt from the net proceeds of
such offering, as of May 31, 1995, the Company's outstanding indebtedness to TDS
would have been approximately $11.0 million and the total line of credit under
the Revolving Credit Agreement would have been approximately $100 million,
subject to change from time to time by agreement between the Company and TDS.
The Company anticipates drawing down funds under the Revolving Credit Agreement
as appropriate to meet its financial needs. See "Risk Factors--Liquidity and
Capital Resources."
The Company will not receive any of the cash proceeds from any resale of
LYONs by the Standby Share Deliverer or from any sale by Merrill Lynch of Common
Shares acquired from TDS under the Securities Loan Agreement. See
"Underwriting."
15
<PAGE>
CAPITALIZATION
The Company has entered into a number of transactions in which it will issue
securities in addition to those issued pursuant to the offering of the LYONs.
The following table sets forth (A) the capitalization of the Company as of March
31, 1995, (B) the Pro Forma capitalization of the Company reflecting (i) the
Company's obligation to issue an aggregate of 297,173 Common Shares to third
parties in connection with certain acquisitions pending at March 31, 1995; (ii)
the Company's obligation to issue an aggregate of 765,316 Common Shares to
reimburse TDS for the value of TDS Common Shares to be issued in connection with
certain acquisitions pending at March 31, 1995; and (iii) an increase in the
balance under the Revolving Credit Agreement to TDS of an estimated $15.5
million to fund cash payments in connection with such pending acquisitions, and
(C) the Pro Forma as Adjusted capitalization reflecting the Pro Forma
adjustments described in (B) and (i) the sale by the Company of the LYONs
initially offered hereby (assuming no exercise of the Underwriter's
over-allotment option) and (ii) the application of the estimated net proceeds of
such sale (before deducting expenses of the offering) to the repayment of the
Company's outstanding indebtedness to TDS under its Revolving Credit Agreement.
See "Use of Proceeds" and "Description of Capital Stock."
<TABLE>
<CAPTION>
MARCH 31, 1995
----------------------------------------------
PRO FORMA AS
ACTUAL PRO FORMA ADJUSTED
------------ --------------- ---------------
(Dollars in thousands)
<S> <C> <C> <C>
Current portion of long-term debt................................ $ 10,092 $ 10,092 $ 10,092
------------ --------------- ---------------
------------ --------------- ---------------
Long-term Debt:
Revolving Credit Agreement--TDS................................ $ 183,921 $ 199,373(1) $ 6,147(2)
Long-term debt, excluding current portion(3)................... 119,597 119,597 119,597
LYONs offered hereby........................................... -- -- 199,199(4)
------------ --------------- ---------------
Total Long-term Debt....................................... 303,518 318,970 324,943
------------ --------------- ---------------
Redeemable Preferred Stock, $1.00 par value, outstanding 95,972
shares(5)....................................................... 9,597 9,597 9,597
Minority Interest................................................ 35,934 35,934 35,934
Common Shareholders' Equity(6):
Common Shares, $1.00 par value, authorized 140,000,000 shares,
issued and outstanding 48,775,305 shares...................... 48,775 48,775 48,775
Common Shares issuable, 541,780 shares; Pro Forma and Pro Forma
as Adjusted 1,604,269 shares(7)(8)............................ 11,633 43,320 43,320
Series A Common Shares, $1.00 par value, authorized 50,000,000
shares; issued and outstanding 33,005,877 shares(7)(8)........ 33,006 33,006 33,006
Additional paid-in capital..................................... 1,174,809 1,174,809 1,174,809
Retained (deficit)............................................. (61,060) (61,060) (61,060)
------------ --------------- ---------------
Total Common Shareholders' Equity.......................... 1,207,163 1,238,850 1,238,850
------------ --------------- ---------------
Total Capitalization....................................... $ 1,556,212 $ 1,603,351 $ 1,609,324
------------ --------------- ---------------
------------ --------------- ---------------
<FN>
- ---------
(1) Reflects the actual amount outstanding under the Revolving Credit Agreement
at March 31, 1995, plus the estimated aggregate increase in the amount
outstanding under the Revolving Credit Agreement to occur from time to time
to fund cash payments in connection with acquisitions pending at March 31,
1995.
(2) Reflects the estimated amount that would have been outstanding under the
Revolving Credit Agreement if all of the pending acquisitions had been
consummated at March 31, 1995, after the application of the net proceeds of
the LYONs offering to reduce the Revolving Credit Agreement.
</TABLE>
16
<PAGE>
<TABLE>
<S> <C>
(3) Reflects the actual amount outstanding at March 31, 1995 under an Amended
and Restated Term Loan Agreement dated December 22, 1994 (the "Vendor
Financing Agreement") between the Company and NTFC Capital Corporation
("NTFC"). The Vendor Financing Agreement is an amendment and restatement of
a similar 1991 agreement with NTFC under which the Company borrowed
approximately $56.0 million in principal, plus capitalized interest in the
amount of approximately $3.3 million. Pursuant to the 1994 agreement, NTFC
agreed to lend additional amounts of up to approximately $81.9 million (of
which approximately $72.2 million had been drawn down through March 31,
1995), plus capitalized interest in an amount not to exceed approximately
$6.8 million.
The loans from NTFC to the Company are evidenced by either construction and
equipment notes or refinancing notes. The original principal amount of the
1991 construction and equipment notes totals $52 million. The original
principal amount of the 1994 construction and equipment notes totals $75
million. The balance of the original principal amounts borrowed or
available for borrowing is evidenced by refinancing notes.
Loans under the 1991 agreement bear interest at a rate equal to a 90-day
commercial paper rate plus 2.307%. Each advance under the 1991 notes is
scheduled to be repaid in substantially equal monthly installments of
principal, plus the interest thereon, over a seven-year period commencing,
in the case of the 1991 construction and equipment notes, after the
deferral of interest for the first year.
Loans under the 1994 agreement bear interest at a rate equal to a 90-day
commercial paper rate plus 2.25%. Each advance under the 1994 construction
and equipment notes is scheduled to be repaid in substantially equal
monthly installments of principal, plus the interest thereon, over a
six-year period commencing after the deferral of interest for the first
year. The 1994 refinancing notes have shorter amortization periods and do
not have a deferred interest period.
Under this arrangement with NTFC, the Company is permitted to borrow money
from NTFC on a quarterly basis and relend the proceeds to affiliates that
hold licenses issued by the FCC to construct or operate cellular radio
communications systems for the purposes of financing, refinancing or
reimbursing the payment of the costs of constructing or equipping such
systems. Each loan from the Company to its affiliate (i) is secured by a
security interest in all of the affiliate's personal property and fixtures,
other than (a) accounts receivable, (b) FCC licenses and (c) instruments or
general intangibles representing or evidencing ownership interests in any
other entity holding a license or permit from the FCC to construct or
operate a cellular radio communications system and (ii) together with the
documentation and security therefor, is assigned to NTFC as security for
the loans from NTFC to the Company.
(4) Net of unamortized discount of $450,801,000.
(5) Reflects Redeemable Preferred Stock held by TDS at its liquidation
preference of $100 per share. The Preferred Stock is redeemable in 1996 by
the delivery to TDS of an aggregate of 621,904 Common Shares of the
Company.
(6) The LYONs are initially convertible into 6,158,750 Common Shares of the
Company (assuming no exercise of the Underwriter's over-allotment option).
Common Shareholders' Equity Pro Forma as Adjusted does not reflect any such
conversion of LYONs into Common Shares of the Company.
(7) The following table details the number of Common Shares and Series A Common
Shares to be issued by the Company in the future pursuant to existing
arrangements for the acquisition of cellular interests. Such existing
arrangements relate to the Company's acquisitions of additional interests
in cellular licensees or systems representing 403,000 of the 25.2 milion
population equivalents which the Company owned or had the right to acquire
at March 31, 1995. The table does not reflect any conversion of LYONs into
Common Shares of the Company.
TDS owned an aggregate of 66,284,155 shares of common stock of the Company
at March 31, 1995, representing 81.1% of the combined total of the
Company's outstanding Common and Series A Common Shares and 95.9% of their
combined voting power. Assuming the Company's Common Shares are issued in
all instances in which the Company has the choice to issue its Common
Shares or other consideration and assuming all issuances of the Company's
common stock to TDS and third parties for
</TABLE>
17
<PAGE>
<TABLE>
<S> <C>
completed and pending acquisitions and redemptions of the Company's
Preferred Stock and TDS's Preferred Shares had been completed at March 31,
1995, TDS would have owned 79.9% of the total outstanding common stock of
the Company and controlled 95.6% of the combined voting power of both
classes of its common stock.
</TABLE>
<TABLE>
<CAPTION>
SERIES A COMMON
COMMON SHARES SHARES
--------------- ---------------
<S> <C> <C>
Shares outstanding at March 31, 1995................................ 48,775,305 33,005,877
Shares to be issued in the future for acquisitions pursuant to
definitive agreements:
Shares issuable to third parties at March 31, 1995................ 541,780 --
Shares to be issued to third parties pursuant to acquisition
agreements entered into through March 31, 1995................... 297,173 --
Shares estimated to be issued to TDS in reimbursement for TDS
Common Shares to be issued for acquisitions...................... 765,316 --
--------------- ---------------
Pro forma issuable shares at March 31, 1995....................... 1,604,269 --
--------------- ---------------
Total............................................................... 50,379,574 33,005,877
--------------- ---------------
--------------- ---------------
The above table does not include Common Shares to be issued upon redemption of the Company's
Redeemable Preferred Stock (see note 5 above).
<FN>
(8) Does not include 1,092,967 Common Shares and 55,000 Series A Common Shares
reserved for issuance pursuant to certain employee benefit plans.
</TABLE>
18
<PAGE>
DIVIDEND POLICY
The Company has not paid any cash dividends and, except for cash dividends
payable on any future series of Preferred Stock, intends to retain all earnings
for use in the Company's business. In addition, the Revolving Credit Agreement
with TDS prohibits the payment of dividends on the Company's Common Shares and
Series A Common Shares, except to the extent of one-half of the cumulative
consolidated net income, if any, of the Company for the period after July 1,
1989, which currently prevents the Company from paying dividends. The Vendor
Financing Agreement also restricts the payment of dividends if certain financial
requirements under such agreement would be violated. See "Description of Capital
Stock."
PRICE RANGE OF COMMON SHARES
The Company's Common Shares are listed on the American Stock Exchange under
the symbol "USM" and in THE WALL STREET JOURNAL as "US Cellu." The following
table sets forth, for the periods indicated, the high and low sale prices of the
Common Shares as reported by the American Stock Exchange:
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
1993:
First Quarter................................................................... $24 5/8 $20 3/4
Second Quarter.................................................................. 28 1/2 23
Third Quarter................................................................... 34 7/8 27 1/2
Fourth Quarter.................................................................. 39 1/4 30 1/8
1994:
First Quarter................................................................... $35 1/4 $24 5/8
Second Quarter.................................................................. 29 5/8 24 1/2
Third Quarter................................................................... 33 1/8 22 3/8
Fourth Quarter.................................................................. 34 30
1995:
First Quarter................................................................... $33 3/8 $29 1/2
Second Quarter (through June 7, 1995)........................................... 30 1/2 28
</TABLE>
On June 7, 1995, the closing price of the Common Shares as reported on the
American Stock Exchange was $28 1/8 per share.
On February 28, 1995, there were 463 record holders of the Company's Common
Shares. All of the Company's Series A Common Shares are held by TDS. No public
trading market exists for the Series A Common Shares, but the Series A Common
Shares are convertible on a share-for-share basis into Common Shares.
19
<PAGE>
BUSINESS
GENERAL
United States Cellular Corporation owns, operates and invests in cellular
telephone systems throughout the United States. As of March 31, 1995, the
Company provided cellular telephone service to 478,000 customers through 135
majority-owned and managed cellular systems serving approximately 17% of the
geographic area and approximately 9% of the population of the contiguous United
States. The Company's operations consist of nine regional market clusters, five
of which each have a total population of more than two million, and each of
which have a total population of more than one million, plus other unclustered
markets. Overall, 84% of the Company's 25.2 million population equivalents are
in markets which are or will be consolidated, 1% are in managed but not
consolidated markets and 15% are in markets in which the Company holds an
investment interest.
The Company is the seventh largest cellular telephone company in the United
States, based on the aggregate number of population equivalents it owns or has
the right to acquire. The Company's corporate development strategy is to acquire
controlling interests in MSA and RSA licensees in areas adjacent to or in
proximity to its other markets in order to build and expand market clusters.
Customers benefit from larger service areas which provide longer uninterrupted
service and the ability to make outgoing calls and receive incoming calls within
the designated area without special roaming arrangements. In addition, the
Company anticipates that clustering will continue to provide the Company certain
economies in its capital and operating costs.
The Company is building a substantial presence in selected geographic areas
throughout the United States where it believes it can efficiently integrate and
manage cellular telephone systems. Its cellular interests include regional
market clusters in the following areas: Virginia/North Carolina/South Carolina,
the Midwest, the Northwest, Indiana/Kentucky, Texas/Oklahoma/Missouri/Kansas,
the Northeast, Eastern Tennessee/Western North Carolina, the Southeast and
Southwestern Texas.
Since 1985, when the Company began providing cellular service, the Company
has expanded its cellular networks and customer service operations to cover 147
markets in 33 states as of March 31, 1995. Over the last five years, the
Company's customer base has grown at a compound annual growth rate of 63% to
478,000 customers at March 31, 1995. The average penetration rate in the
Company's consolidated markets was 2.17% at March 31, 1995, and the churn rate
in all of its consolidated markets averaged 2.1% per month for the quarter ended
March 31, 1995.
The Company is a majority-owned subsidiary of TDS. TDS owns 81.1% of the
combined total of the outstanding Common Shares and Series A Common Shares of
the Company and controls 95.9% of the combined voting power of both classes of
common stock. The Company benefits from the extensive telecommunications
industry experience of TDS. At March 31, 1995, TDS, through its wholly owned
subsidiary, TDS Telecommunications Corporation, served approximately 410,000
access lines through 100 local exchange telephone subsidiaries in 29 states and,
through American Paging, Inc., its 82.5%-owned subsidiary, had approximately
705,100 pagers in service. In March 1995, American Portable Telecommunications,
Inc., TDS's wholly owned subsidiary, was the successful bidder for eight
broadband PCS licenses at an auction conducted by the FCC, substantially all of
which are for markets other than those in which the Company operates cellular
systems. The Company was incorporated in Delaware in 1983. The Company's
executive offices are located at 8410 West Bryn Mawr, Suite 700, Chicago,
Illinois 60631. Its telephone number is 312-399-8900.
CELLULAR TELEPHONE INDUSTRY
Cellular telephone technology provides high-quality, high-capacity
communications services to in-vehicle and hand-held portable cellular
telephones. Cellular technology is a major improvement over earlier mobile
telephone technologies. Cellular telephone systems are designed for maximum
mobility of the customer. Access is provided through system interconnections to
local, regional, national and world-wide telecommunications networks. Cellular
telephone systems also offer a full range of ancillary services such as
conference calling, call-waiting, call-forwarding, voice mail, facsimile and
data transmission.
20
<PAGE>
Cellular telephone systems divide each service area into smaller geographic
areas or "cells." Each cell is served by radio transmitters and receivers
operating on discrete radio frequencies licensed by the FCC. All of the cells in
a system are connected to a computer-controlled Mobile Telephone Switching
Office ("MTSO") which is connected to the conventional ("landline") telephone
network and potentially other MTSOs. Each conversation on a cellular phone
involves a transmission over a specific set of radio frequencies from the
cellular phone to a transmitter/receiver at a cell site. The transmission is
forwarded from the cell site to the MTSO and from there may be forwarded to the
landline telephone network to complete the call. As the cellular telephone moves
from one cell to another, the MTSO determines radio signal strength and
transfers ("hands off") the call from one cell to the next. This hand-off is not
noticeable to either party on the phone call.
The FCC currently grants only two licenses to provide cellular telephone
service in each market. However, competition for customers includes other
communications technologies such as conventional landline and mobile telephone,
SMR systems and radio paging. PCS is expected to be competitive with cellular
service in the future in many of the Company's markets, and emerging
technologies such as ESMR and mobile satellite communication systems may prove
to be competitive with cellular service in the future in some or all of the
markets where the Company has operations.
The services available to cellular customers and the sources of revenue
available to cellular system operators are similar to those provided by
conventional landline telephone companies. Customers may be charged a separate
fee for system access, airtime, long-distance calls, and ancillary services.
Cellular system operators often provide service to customers of other operators'
cellular systems while the customers are temporarily located within the
operators' service areas. Customers using service away from their home system
are called "roamers." Roaming is available because technical standards require
that analog cellular telephones be compatible in all market areas in the United
States. The system that provides the service to these roamers will generate
usage revenue. Many operators, including the Company, charge premium rates for
this roaming service.
There are a number of recent technical developments in the cellular
industry. Currently, while most of the MTSOs process information digitally, most
of the radio transmission is done on an analog basis. During 1992, a new digital
transmission technique was approved for implementation by the cellular industry.
Time Division Multiple Access ("TDMA") technology was selected as one industry
standard by the cellular industry and has been deployed in several markets,
including the Company's operations in Tulsa, Oklahoma. Another digital
technology, Code Division Multiple Access ("CDMA"), is expected to be in a
commercial trial by the end of 1995. The Company also expects to deploy some
CDMA digital radio channels in other markets on a trial basis in the near
future. Digital radio technology offers advantages, including greater privacy,
less transmission noise, greater system capacity, and potentially lower
incremental costs for additional customers. The conversion from analog to
digital radio technology is expected to be an industry-wide process that will
take a number of years.
The cellular telephone industry is characterized by high initial fixed
costs. Accordingly, if and when revenues less variable costs exceed fixed costs,
incremental revenues should yield an operating profit. The amount of operating
profit, if any, under such circumstances is dependent on, among other things,
prices and variable marketing costs which in turn are affected by the amount and
extent of competition. Until technological limitations on total capacity are
approached, additional cellular system capacity can normally be added in
increments that closely match demand and at less than the proportionate cost of
the initial capacity.
THE COMPANY'S OPERATIONS
From its inception in 1983 until very recently, the Company has principally
been in a start-up phase. The Company's activities have been concentrated
significantly on the acquisition of interests in entities licensed or designated
to receive a license ("licensees") from the FCC to provide cellular service and
on the construction and initial operation of cellular systems. The development
of a cellular system is capital-intensive and requires substantial investment
prior to and subsequent to initial operation. The Company has experienced
operating losses and net losses from its inception until the past few quarters.
The Company anticipates increasing growth in cellular units in service and
revenues as the Company continues its expansion and development programs.
Marketing and system operations expenses associated with this expansion
21
<PAGE>
will most likely reduce the rate of growth in operating cash flow and operating
income over the next several quarters. In addition, the Company anticipates that
the seasonality of revenue streams and operating expenses may affect the
Company's operating and net results over the next several quarters.
While the Company produced operating income and net income during 1994,
changes in any of several factors could reduce the Company's growth in operating
income and net income over the next few years. These factors include: (i) the
growth rate in the Company's customer base; (ii) the usage and pricing of
cellular services; (iii) the churn rate; (iv) the cost of providing cellular
services, including the cost of attracting new customers; (v) the introduction
of competition from PCS and other emerging technologies; and (vi) continuing
technological advances which may provide additional competitive alternatives to
cellular service.
The following table is a summary of the Company's markets and consolidated
operations.
<TABLE>
<CAPTION>
THREE MONTHS YEAR ENDED DECEMBER 31,
ENDED MARCH -----------------------------------------------------
31, 1995 1994 1993 1992 1991 1990
------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
MAJORITY-OWNED AND MANAGED (CONSOLIDATED) MARKETS:(1)
Population equivalents (in thousands) (2)............ 18,266 18,204 18,464 14,475 10,572 5,172
Customers............................................ 478,000 421,000 261,000 150,800 97,000 57,300
Market penetration at end of period (3).............. 2.17% 1.98% 1.35% 1.00% 0.84% 0.91%
Markets in operation................................. 135 130 116 92 67 32
Cell sites in service................................ 841 790 522 320 186 107
Average monthly revenue per customer*................ $ 71 $ 80 $ 85 $ 88 $ 84 $ 87
Churn rate per month................................. 2.1% 2.3% 2.3% 2.4% 2.2% 1.9%
Marketing cost per net customer addition............. $ 646 $ 667 $ 667 $ 765 $ 710 $ 686
MINORITY-OWNED AND MANAGED MARKETS: (4)
Population equivalents (in thousands) (2)............ 686 1,191 1,157 2,039 1,783 1,310
Markets in operation................................. 11 15 20 24 24 12
MARKETS TO BE MANAGED, NET OF MARKETS TO BE
DIVESTED:(5)
Population equivalents (in thousands) (2)............ 2,477 2,187 1,018 1,836 3,139 4,896
Markets.............................................. 3 5 8 13 21 44
TOTAL MARKETS MANAGED AND TO BE MANAGED BY THE COMPANY:
Population equivalents (in thousands) (2)............ 21,429 21,582 20,639 18,350 15,494 11,378
Markets.............................................. 149 150 144 129 112 88
MARKETS MANAGED BY OTHERS: (6)
Population equivalents (in thousands) (2)............ 3,816 3,619 3,429 3,517 3,274 3,480
Markets in operation................................. 61 57 61 64 65 67
TOTAL MARKETS:
Population equivalents (in thousands) (2)............ 25,245 25,201 24,068 21,867 18,768 14,858
Markets.............................................. 210 207 205 193 177 155
<FN>
- ------------
* 1993-1990 average monthly revenue per customer has been restated to conform
to 1994 presentation.
(1) Includes one market managed by third parties in 1995, two in 1994 and one
in 1993 and 1992, and one wholly owned reseller operation in 1992, 1991 and
1990.
(2) 1994 Donnelley Marketing Service estimates are used for all years. Includes
population equivalents relating to interests which are acquirable in the
future.
(3) The decrease from 1990 to 1991 is due to the addition of 32 majority-owned
and managed RSAs in 1991. Market penetration for majority-owned and managed
MSAs was 1.48% in 1991 and 1.07% in 1990.
(4) Includes markets where the Company has the right to acquire an interest but
did not own an interest at the respective dates (two markets in 1995, four
in 1994, two in 1993, six in 1992, seven in 1991 and four in 1990);
excludes one market in 1995 which will become a market managed by others.
(5) "Markets to be Managed" represents markets which are managed by third
parties until the Company acquires a majority interest in the markets. In
1995, represents the net of 15 markets to be managed and 12 markets which
are currently majority-owned and managed and will be divested.
(6) Represents markets in which the Company owns or has the right to acquire a
minority interest and which are managed by others.
</TABLE>
22
<PAGE>
CELLULAR SYSTEMS DEVELOPMENT
ACQUISITIONS. The Company has acquired its cellular interests through the
wireline application process (22%), including settlements and exchanges with
other applicants, and through acquisitions (78%), including acquisitions from
TDS and third parties. During the last five years, the Company has expanded its
size, particularly in contiguous or adjacent markets through an ongoing
acquisition program aimed at strengthening the Company's position in the
cellular industry. This growth has resulted primarily from acquisitions of
interests in RSAs and has been based on obtaining interests with rights to
manage the underlying market.
During the past five years, the Company has more than doubled its population
equivalents to approximately 25.2 million at March 31, 1995. Markets managed or
to be managed by the Company have increased from 50 markets at December 31,
1989, to 149 markets at March 31, 1995. Additionally, as of March 31, 1995,
almost 85% of the Company's population equivalents represented interests in
markets the Company manages or expects to manage compared to 65% at December 31,
1989.
Recently, the pace of acquisitions has slowed as industry-wide consolidation
has reduced the number of markets available for acquisition. The Company's
population equivalents grew at a compound annual rate of over 22% over the last
five years, but only 5% in 1994.
The Company plans to acquire additional cellular interests through
acquisitions or trades in markets that further strengthen its market clusters
and in other attractive markets. The Company also seeks to acquire minority
interests in markets where it already owns (or has the right to acquire) the
majority interest. While the Company believes that it will be successful in
making additional acquisitions or trades, there can be no assurance that the
Company, or TDS for the benefit of the Company, will be able to negotiate
additional acquisitions or trades on terms acceptable to it or that regulatory
approvals, where required, will be received. The Company presently plans to
retain minority interests in certain cellular markets which it believes will
earn a favorable return on investment. Other minority interests may be traded
for interests in markets which enhance the Company's market clusters or may be
sold for cash or other consideration. The Company also continues to evaluate the
disposition of certain managed interests which are not essential to its
corporate development strategy.
The Company, or TDS for the benefit of the Company, ordinarily makes
acquisitions using securities or cash or by exchanging cellular interests it
already owns. Historically, the Company, or TDS for the benefit of the Company,
has negotiated acquisitions of cellular interests from third parties primarily
in consideration for the Company's or TDS's equity securities. Cellular
interests acquired by TDS are generally assigned to the Company. At that time,
the Company reimburses TDS for the value of TDS securities or other
consideration issued in such transactions, generally by issuing Common Shares to
TDS or by increasing the balance due TDS under the Company's Revolving Credit
Agreement in amounts equal to the value of TDS securities or other consideration
delivered at the time the acquisitions are closed. In connection with agreements
that require the delivery of TDS equity securities, the fair market value of the
Company's securities issued to TDS as reimbursement is equal to the fair market
value of the TDS securities delivered in the transactions and is determined at
the time the transactions are closed.
COMPLETED ACQUISITIONS. During 1994 and the first quarter of 1995, the
Company completed the acquisition of controlling interests in 15 markets and
several additional minority interests representing in total approximately 2.3
million population equivalents for an aggregate consideration of $220.7 million.
The consideration consisted of 6.3 million of the Company's Common Shares, an
increase of $9.9 million in the debt to TDS under the Revolving Credit
Agreement, $11.0 million in cash and a $1.4 million cancellation of a note
receivable. The debt under the Revolving Credit Agreement and 6.2 million of the
Company's Common Shares were issued to TDS to reimburse TDS for TDS Common
Shares issued and issuable and cash paid to third parties in connection with
these acquisitions.
23
<PAGE>
PENDING ACQUISITIONS. At March 31, 1995, the Company, or TDS for the
benefit of the Company, had entered into agreements to acquire controlling
interests in four markets and one minority interest representing in total
approximately 403,000 population equivalents for an aggregate consideration
estimated to be approximately $47.1 million. If all of the pending acquisitions
are completed as planned, the Company will issue approximately 297,000 of its
Common Shares and pay $15.5 million in cash and TDS will pay approximately $23.0
million in TDS Common Shares and cash. Any interests acquired by TDS in these
transactions are expected to be assigned to the Company and, at that time, the
Company will reimburse TDS for TDS's consideration delivered and costs incurred
in such acquisitions in the form of Common Shares of the Company or increases in
the balance under the Revolving Credit Agreement. Based on the estimated value
of the consideration at the time the agreements were entered into, the Company
expects to reimburse TDS by issuing approximately 765,000 of the Company's
Common Shares to TDS. The Company also expects to increase the balance due TDS
under the Revolving Credit Agreement by $15.5 million to fund cash payments for
the acquisitions. The Company has also entered into agreements to exchange
markets with five other cellular operators. Pursuant to the exchange agreements,
the Company will receive majority interests in 13 new markets in exchange for
majority interests in 11 markets and three market partitions the Company
currently owns.
The Company maintains shelf registration of its Common Shares and Preferred
Stock under the Securities Act for issuance specifically in connection with
acquisitions.
TDS owned an aggregate of 66,284,155 shares of common stock of the Company
at March 31, 1995, representing 81.1% of the combined total of the Company's
outstanding Common and Series A Common Shares and 95.9% of their combined voting
power. Assuming the Company's Common Shares are issued in all instances in which
the Company has the choice to issue its Common Shares or other consideration and
assuming all other issuances of the Company's common stock to TDS and third
parties for completed and pending acquisitions and redemptions of the Company's
Preferred Stock and TDS's Preferred Shares had been completed at March 31, 1995,
TDS would have owned 79.9% of the total outstanding common stock of the Company
and controlled 95.6% of the combined voting power of both classes of its common
stock.
CELLULAR INTERESTS AND CLUSTERS
The Company operates clusters of adjacent cellular systems wherever
feasible, enabling its customers to benefit from larger service areas than
otherwise possible. Where the Company offers wide-area coverage, its customers
enjoy uninterrupted service within the designated area. Customers may also make
outgoing calls and receive incoming calls within this area without special
roaming arrangements. In addition to benefits to customers, clustering has
provided to the Company certain economies in its capital and operating costs.
These economies are made possible through increased sharing of facilities,
personnel and other costs and have resulted in a reduction of the Company's per
customer cost of service. The extent to which the Company benefits from these
revenue enhancements and economies of operation is dependent on market
conditions, population size of each cluster and engineering considerations.
The Company anticipates that it will continue to pursue strategic
acquisitions and trades which will complement its established market clusters.
From time to time, the Company may also consider trading or selling its
interests in markets which do not fit well with its long-term strategies.
The following table details the Company's cellular interests, including
those it owned or had the right to acquire as of March 31, 1995. The table lists
clusters of markets that the Company manages or anticipates managing. The
Company's market clusters show the areas in which the Company is currently
focusing its development efforts. These clusters have been devised with a
long-term goal of allowing delivery of cellular service to areas of economic
interest and along corridors of economic activity. See the map on the inside
24
<PAGE>
front cover of this Prospectus. The number of population equivalents represented
by the Company's cellular interests may have no direct relationship to the
number of potential cellular customers or the revenues that may be realized from
the operation of the related cellular systems.
<TABLE>
<CAPTION>
TOTAL CURRENT
1994 POPULATION AND ACQUIRABLE
OF LICENSED POPULATION
CLUSTER/MAJOR SERVICE AREA SERVICE AREA EQUIVALENTS
- --------------------------------------------------------------------------------- --------------- --------------
<S> <C> <C>
MARKETS MANAGED BY THE COMPANY:
Virginia/North Carolina/South Carolina Regional Market Cluster:
Eastern North Carolina/Virginia/South Carolina................................. 3,238,000 3,170,000
West Virginia/Pennsylvania/Maryland............................................ 1,398,000 1,398,000
Other Markets.................................................................. 502,000 376,000
--------------- --------------
Subtotal..................................................................... 5,138,000 4,944,000
--------------- --------------
Midwest Regional Market Cluster:
Iowa........................................................................... 2,706,000 2,461,000
Wisconsin/Illinois/Minnesota................................................... 1,819,000 1,700,000
Missouri....................................................................... 564,000 564,000
--------------- --------------
Subtotal..................................................................... 5,089,000 4,725,000
--------------- --------------
Northwest Regional Market Cluster:
Oregon/California.............................................................. 1,005,000 937,000
Washington/Oregon.............................................................. 974,000 746,000
Other Markets.................................................................. 441,000 441,000
--------------- --------------
Subtotal..................................................................... 2,420,000 2,124,000
--------------- --------------
Indiana/Kentucky Regional Market Cluster:
Indiana/Kentucky............................................................... 1,552,000 1,226,000
Other Markets.................................................................. 658,000 658,000
--------------- --------------
Subtotal..................................................................... 2,210,000 1,884,000
--------------- --------------
Texas/Oklahoma/Missouri/Kansas Regional Market Cluster:
Oklahoma/Missouri/Kansas....................................................... 1,406,000 954,000
Missouri....................................................................... 341,000 341,000
Texas/Oklahoma................................................................. 685,000 490,000
--------------- --------------
Subtotal..................................................................... 2,432,000 1,785,000
--------------- --------------
Northeast Regional Market Cluster:
Maine/New Hampshire/Vermont.................................................... 1,472,000 1,397,000
Other Markets.................................................................. 375,000 327,000
--------------- --------------
Subtotal..................................................................... 1,847,000 1,724,000
--------------- --------------
Eastern Tennessee/Western North Carolina Market Cluster.......................... 1,934,000 1,600,000
--------------- --------------
Southeast Regional Market Cluster:
Northern Florida/Georgia....................................................... 1,206,000 1,206,000
Other Markets.................................................................. 279,000 137,000
--------------- --------------
Subtotal..................................................................... 1,485,000 1,343,000
--------------- --------------
Southwestern Texas Market Cluster................................................ 1,172,000 1,160,000
--------------- --------------
Other Operations................................................................. 140,000 140,000
--------------- --------------
TOTAL MANAGED MARKETS........................................................ 23,867,000 21,429,000
--------------- --------------
MARKETS MANAGED BY OTHERS........................................................ 3,816,000
--------------
TOTAL POPULATION EQUIVALENTS................................................... 25,245,000
--------------
--------------
</TABLE>
25
<PAGE>
SYSTEM DESIGN AND CONSTRUCTION. The Company designs and constructs its
systems in a manner it believes will permit it to provide high-quality service
to mobile, transportable and portable cellular telephones, generally based on
market and engineering studies which relate to specific markets. Engineering
studies are performed by Company personnel or independent engineering firms. The
Company's switching equipment is digital, which reduces noise and crosstalk and
is capable of interconnecting in a manner which reduces costs of operation.
While digital microwave interconnections are typically made between the MTSO and
cell sites, primarily analog radio transmission is used between cell sites and
the cellular telephones themselves.
In accordance with its strategy of building and strengthening market
clusters, the Company has selected high capacity digital cellular switching
systems that are capable of serving multiple markets through a single MTSO. The
Company's cellular systems are designed to facilitate the installation of
equipment which will permit microwave interconnection between the MTSO and each
cell site. The Company has implemented such microwave interconnection in most of
the cellular systems it manages. In other systems in which the Company owns or
has an option to purchase a majority interest and where it is believed to be
cost-efficient, such microwave technology is intended to be implemented.
Otherwise, such systems will rely upon landline telecommunications connections
or microwave links owned by others to link cell sites with the MTSO. Although
the installation of microwave network interconnection equipment requires a
greater initial capital investment, a microwave network enables a system
operator to avoid the current and future charges associated with leasing
communications lines from the landline telephone company or others, while
generally improving system reliability. In addition, microwave facilities can be
used to connect separate cellular systems to allow shared switching, which
reduces the aggregate cost of the equipment necessary to operate such systems.
The Company has continued to expand its internal network in 1994 to
encompass over 100 markets in the United States. This network provides automatic
call delivery for the Company's customers and handoff between adjacent markets.
The network has also been extended through links with certain systems operated
by several other carriers, including GTE, US West, Ameritech, BellSouth,
Centennial Cellular, Southwestern Bell, McCaw Cellular Communications, Vanguard
Cellular Systems and others. Additionally, the Company has implemented two
Signal Transfer Points which will allow it to interconnect efficiently with
network providers such as Independent Telephone Network and the North American
Cellular Network.
During 1995, the Company intends to extend the network for its customers
through interconnection with one or more network providers as well as additional
"point to point" connections required for hand-off. This expanded network will
increase the area in which customers can automatically receive incoming calls
and should also reduce the incidence of fraud due to the pre-call validation
feature capability of networked systems.
The Company believes that currently available technologies will allow
sufficient capacity on the Company's networks to meet anticipated demand over
the next few years.
COSTS OF SYSTEM CONSTRUCTION AND FINANCING. Construction of cellular
systems is capital-intensive, requiring substantial investment for land and
improvements, buildings, towers, MTSOs, cell site equipment, microwave
equipment, engineering and installation. The Company, consistent with FCC
control requirements, uses primarily its own personnel to engineer and oversee
construction of each cellular system where it owns or has the right to acquire a
controlling interest. In so doing, the Company expects to improve the overall
quality of its systems and to reduce the expense required to make them
operational.
The costs (exclusive of license costs) to construct and develop the
operational systems in which the Company owns or has the right to acquire an
interest are generally financed through capital contributions or intercompany
loans from the Company to the partnerships or subsidiaries owning the systems,
and through certain vendor financing.
MARKETING
The Company's marketing plan is designed to continue rapid penetration of
its market clusters and to increase consumer awareness of cellular service. The
marketing plan stresses the quality of the Company's service offerings and
incorporates rate plans which are designed to meet the needs of a variety of
customer
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usage patterns. The Company's distribution channels include direct sales
personnel and agents and the Company has recently added retail service centers
in many of its markets. These Company-owned and managed locations are designed
to market cellular service to the consumer segment in a retail setting which is
attractive to these potential customers.
The Company manages each of its major service areas out of one
administrative office with a local staff, including marketing, customer service,
engineering and in some cases installation personnel. Direct sales consultants
market cellular service to potential customers throughout each major service
area. Retail associates work out of the retail locations and market cellular
service to the consumer segment. The Company maintains an ongoing training
program to improve the effectiveness of sales consultants and retail associates
by focusing their efforts on obtaining customers and maximizing the sale of
high-user packages. These packages commit customers to pay for a minimum amount
of usage at discounted rates per minute, even if usage falls below a defined
monthly minimum amount.
The Company also relies on agents, dealers and non-Company retailers to
obtain customers. Agents and dealers are independent business people who obtain
customers for the Company on a commission basis. The Company's agents are
generally in the business of selling cellular telephones, cellular service
packages and other related products. The Company's dealers include car stereo
companies and other companies whose customers are also potential cellular
customers. The non-Company retailers include car dealers, major appliance
dealers, office supply dealers and mass merchants.
The Company opened its own retail locations in late 1993, expanding to over
140 locations by the end of 1994. These Company-owned and operated businesses
utilize rental facilities located in high-traffic areas. The Company is working
toward a uniform appearance in these stores, with all having similar displays
and layouts. The retail centers' hours of business match those of the retail
trade in the local marketplace, often staying open on weekends and later in the
evening than a typical business supplier. Additionally, to fully serve customer
needs, these stores sell accessories to complement the phones and services the
Company has traditionally provided.
In addition to its own retail centers, the Company actively pursues national
retail accounts, as agents of the Company, which may potentially yield new
customer additions in multiple markets. Agreements have been entered into with
such national distributors as Chrysler Corporation, Ford Motor Company, General
Motors, AT&T, Radio Shack, Best Buy and Sears, Roebuck & Co. in certain of the
Company's markets. Upon the sale of a cellular telephone by one of these
national distributors, the Company receives, often exclusively within the
territories served, the resulting cellular customer.
The Company uses a variety of direct mail, billboard, radio, television and
newspaper advertising to stimulate interest by prospective customers in cellular
service and to establish familiarity with the Company's name. Advertising is
directed at gaining customers, increasing usage by existing customers and
increasing the public awareness and understanding of the cellular services
offered by the Company. The Company attempts to select the advertising and
promotion media that are most appealing to the targeted groups of potential
customers in each local market. The Company utilizes local advertising media and
public relations activities and establishes programs to enhance public awareness
of the Company, such as providing telephones and service for public events and
emergency uses.
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The following table summarizes, by major service area, the total population,
the Company's customers and penetration for the Company's majority-owned and
managed markets that were operational as of March 31, 1995.
<TABLE>
<CAPTION>
MAJOR SERVICE AREAS POPULATION CUSTOMERS PENETRATION
- -------------------------------------------------------------------------- ------------ ----------- -------------
<S> <C> <C> <C>
Eastern North Carolina/Virginia/South Carolina............................ 2,454,000 42,000 1.71%
West Virginia/Pennsylvania/Maryland....................................... 1,143,000 18,700 1.64%
Iowa...................................................................... 1,710,000 45,700 2.67%
Wisconsin/Illinois/Minnesota.............................................. 1,819,000 32,400 1.78%
Missouri.................................................................. 976,000 14,500 1.49%
Oregon/California......................................................... 1,005,000 18,000 1.79%
Washington/Oregon......................................................... 701,000 14,600 2.08%
Indiana/Kentucky.......................................................... 1,248,000 31,400 2.52%
Oklahoma/Missouri/Kansas.................................................. 1,146,000 55,300 4.83%
Texas/Oklahoma............................................................ 1,126,000 27,100 2.41%
Maine/New Hampshire/Vermont............................................... 1,472,000 32,200 2.19%
Eastern Tennessee/Western North Carolina.................................. 1,693,000 45,100 2.66%
Northern Florida/Georgia.................................................. 1,117,000 25,000 2.24%
Southwestern Texas........................................................ 798,000 12,800 1.60%
Other Operations.......................................................... 3,653,000 63,200 1.73%
------------ ----------- ------
22,061,000 478,000 2.17%
------------ ----------- ------
------------ ----------- ------
</TABLE>
CUSTOMERS AND SYSTEM USAGE
Cellular customers come from a wide range of occupations. They typically
include a large proportion of individuals who work outside of their offices such
as people in the construction, real estate, wholesale and retail distribution
businesses and professionals. Most of the Company's customers use in-vehicle
cellular telephones. However, more customers are selecting portable cellular
telephones as these units become more compact and fully featured as well as more
attractively priced.
In addition to revenue from local retail customers, the Company generates
revenue from roaming customers and other services. The Company's roaming service
allows a customer to place or receive a call in a cellular service area away
from the customer's home service area. The Company has entered into "roaming
agreements" with operators of other cellular systems covering virtually all
systems in the United States and Canada. These agreements offer customers the
opportunity to roam in these systems. These reciprocal agreements automatically
pre-register the customers of the Company's systems in the other carriers'
systems. Also, a customer of a participating system roaming (i.e. travelling) in
a Company market where this arrangement is in effect is able to make and receive
calls on the Company's system. The charge for this service is typically at
premium rates and is billed by the Company to the customer's home system, which
then bills the customer. The Company has entered into agreements with other
cellular carriers to transfer roaming usage at agreed-upon rates. In some
instances, based on competitive factors, the Company may charge a lower amount
to its customers than the amount actually charged to the Company by another
cellular carrier for roaming.
The Company's cellular systems are used most extensively during normal
business hours between 7:00 am and 6:00 pm. On average, the local retail
customers in the Company's majority-owned and managed systems used their
cellular systems approximately 95 minutes per unit each month and generated
retail revenue of approximately $47 per month during 1994, compared to 103
minutes and $49 per month in 1993. Average local minutes of use and average
monthly retail revenue per retail customer were 86 and $43, respectively, during
the first quarter of 1995, and 89 and $46, respectively, during the first
quarter of 1994. Revenue generated by roamers, together with local, toll and
other revenues, brought the Company's average monthly service revenue per
customer in majority-owned and managed markets to $80 during 1994 compared to
$85 in 1993. This decrease of approximately 6% reflects both the decline in
average local minutes per customer and slower growth in roaming revenues. The
Company anticipates that average monthly service revenue per customer will
continue to decline as its distribution channels provide additional customers
who generate fewer local minutes of use and as roaming revenues grow more
slowly.
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PRODUCTS AND SERVICES
CELLULAR TELEPHONES AND INSTALLATION. There are a number of different types
of cellular telephones, all of which are currently compatible with cellular
systems nationwide. The Company offers a full range of vehicle-mounted,
transportable and hand-held portable cellular telephones. Features offered in
some of the cellular telephones include hands-free calling, repeat dialing, horn
alert and others.
The Company negotiates volume discounts from its cellular telephone
suppliers. The Company discounts cellular telephones in most markets to meet
competition or to stimulate sales by reducing the cost of becoming a cellular
customer. In these instances, where permitted by law, customers are generally
required to sign an extended service contract with the Company. The Company also
cooperates with cellular equipment manufacturers in local advertising and
promotion of cellular equipment.
The Company has established service and/or installation facilities in many
of its local markets to ensure quality installation and service of the cellular
telephones it sells. These facilities allow the Company to improve its service
by promptly assisting customers who experience equipment problems.
CELLULAR SERVICES. The Company's customers are able to choose from a
variety of packaged pricing plans which are designed to fit different calling
patterns. The Company's customer bills typically show separate charges for
custom-calling features, airtime in excess of the packaged amount, and toll
calls. Custom-calling features provided by the Company include wide-area call
delivery, call forwarding, call waiting, three-way calling and no-answer
transfer. The Company also offers a voice message service in many of its
markets. This service, which functions like a sophisticated answering machine,
allows customers to receive messages from callers when they are not available to
take calls.
REGULATION
The operations of the Company are subject to FCC and state regulation. The
licenses held by the Company are granted by the FCC for the use of radio
frequencies and are an important component of the overall value of the assets of
the Company. The construction, operation and transfer of cellular systems in the
United States are regulated to varying degrees by the FCC pursuant to the
Communications Act of 1934 (the "Communications Act"). The FCC has promulgated
regulations governing construction and operation of cellular systems, and
licensing (including renewal of licenses) and technical standards for the
provision of cellular telephone service.
For licensing purposes, the FCC divided the United States into separate
geographic markets (MSAs and RSAs). In each market, the allocated cellular
frequencies are divided into two equal 25 MHz blocks. During the application
process, the FCC reserved one block of frequencies for nonwireline applicants
and another block for wireline applicants. Subject to FCC approval, a cellular
system may be sold to either a wireline or nonwireline entity, but no entity
which controls a cellular system may own an interest in another cellular system
in the same MSA or RSA.
The completion of acquisitions involving the transfer of control of a
cellular system requires prior FCC approval. Acquisitions of minority interests
generally do not require FCC approval. Whenever FCC approval is required, any
interested party may file a petition to dismiss or deny the Company's
application for approval of the proposed transfer.
When the first cell of a cellular system has been constructed, the licensee
is required to notify the FCC that construction has been completed. The licensee
is then said to have "operating authority." Initial operating licenses are
granted for ten-year periods. The FCC must be notified each time an additional
cell is constructed which enlarges the service area of a given market.
The FCC's rules also generally require persons or entities holding cellular
construction permits or licenses to coordinate their proposed frequency usage
with other cellular users and licensees in order to avoid electrical
interference between adjacent systems. The height and power of base stations in
the cellular system are regulated by FCC rules, as are the types of signals
emitted by these stations. In addition to regulation by the FCC, cellular
systems are subject to certain Federal Aviation Administration regulations with
respect to the siting and construction of cellular transmitter towers and
antennas.
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In a series of actions, most recently on July 7, 1994, the FCC has
established standards for conducting comparative renewal proceedings between a
cellular licensee seeking renewal of its license and challengers filing
competing applications. The FCC: (i) established criteria for comparing the
renewal applicant to challengers, including the standards under which a "renewal
expectancy" will be granted to the applicant seeking license renewal; (ii)
established basic qualifications standards for challengers; and (iii) provided
procedures for preventing possible abuses in the comparative renewal process.
The FCC has concluded that it will award a renewal expectancy if the licensee
has (i) provided "substantial" performance, which is defined as "sound,
favorable and substantially above a level of mediocre service just minimally
justifying renewal," and (ii) complied with FCC rules, policies and the
Communications Act. If a renewal expectancy is awarded to an existing licensee,
its license is renewed and competing applications are not considered. The
Company's Tulsa and Knoxville renewal applications filed in 1994 were unopposed
and the Company expects its licenses in these markets to be renewed. The
Company's next renewal applications are due to be filed in 1996. See "Regulatory
Proceedings" below.
The Company conducts and plans to conduct its operations in accordance with
all relevant FCC rules and regulations and anticipates being able to qualify for
a renewal expectancy, if applicable. Accordingly, the Company believes that
current regulations will have no significant effect on its operations and
financial condition. However, changes in the regulation of cellular operators or
their activities and of other mobile service providers could have a material
adverse effect on the Company's operations.
The FCC has also provided that five years after the initial licenses are
granted, unserved areas within markets previously granted to licensees may be
applied for by both wireline and nonwireline entities and by third parties.
Accordingly, many unserved area applications have been filed by the Company and
others. The Company's strategy with respect to system construction in its
markets has been and will be to build cells covering areas within such markets
that the Company considers economically feasible to serve or might conceivably
wish to serve and to do so within the five-year period following issuance of the
license.
The Company is also subject to state and local regulation in some instances.
In 1981, the FCC pre-empted the states from exercising jurisdiction in the areas
of licensing, technical standards and market structure. In addition, Congress
and the FCC have taken action which restricts the ability of states to regulate
intrastate cellular rates. However, certain states require cellular system
operators to go through a state certification process to serve communities
within their borders. All such certificates can be revoked for cause. In
addition, certain state authorities regulate several aspects of a cellular
operator's business, including the resale of intra-state long-distance service
to its customers, the technical arrangements and charges for interconnection
with the landline network and the transfer of interests in cellular systems. The
siting and construction of the cellular facilities, including transmitter
towers, antennas and equipment shelters may also be subject to state or local
zoning, land use and other local regulations. Public utility or public service
commissions (or certain of the commissioners) in several states have expressed
an interest in examining whether the cellular industry should be more closely
regulated by such states.
Recent Congressional legislation, legislative proposals under consideration
and FCC regulatory proceedings may have significant impact on some or all of the
Company's operations by altering FCC and state regulatory responsibilities for
mobile service, the procedures for the award by the FCC of licenses to conduct
existing and new mobile services, the terms and conditions of business
relationships between mobile service providers and Local Exchange Carriers
("LECs") and the scope of the competitive opportunities available to mobile
service providers. In general, the trend of these developments is toward an
increase in the number of competitors and of competitive services. For the most
part, FCC regulations which implement changes in the law have not yet been
adopted, or are subject to requests for reconsideration, and the Company is
therefore not able to predict the extent of such impact.
The Omnibus Reconciliation Act of 1993 (the "Budget Act") amended the
Communications Act by eliminating legislatively enacted distinctions affecting
FCC and state regulation of common carrier and private carrier mobile operations
and directed the FCC to classify all mobile services, including cellular,
paging, SMR and other services under two categories: Commercial Mobile Radio
Services ("CMRS"), subject to common carrier regulation; or Private Mobile Radio
Services ("PMRS"), not subject to common carrier regulation. In 1994 the FCC
released a decision classifying mobile service offerings as CMRS
30
<PAGE>
operations if they include a service offering to the public, for a fee, which is
interconnected to the public switched network. Cellular, SMR and paging, among
other services, will be classified as CMRS if they fit this definition. The
Company anticipates that most of its service offerings will be classified as
CMRS. The FCC decision also states that it would forebear from requiring that
CMRS providers comply with a number of statutory provisions, otherwise
applicable to common carriers, such as the filing of tariffs. It requires LECs
to provide reasonable and fair interconnection to all CMRS providers, subject to
mutual compensation, reasonable charges for interstate interconnection and
reasonable forms of interconnection. Numerous petitions for reconsideration of
this decision were filed and remain pending.
The Budget Act also amended the Communications Act to authorize the FCC to
use a system of competitive bidding to issue initial licenses for the use of
radio frequencies for which there are mutually exclusive applications and where
the principal use of the license will be to offer service in return for
compensation from customers. In response, the FCC adopted generic rules for
competitive bidding, defined eligibility criteria for small businesses,
minority- and female-owned businesses and rural telephone companies which
qualify for preferential bidding treatment, as required under the Budget Act,
and described the bidding mechanisms to be used by businesses qualifying for
preferential treatment in future spectrum auctions.
Under other amendments to the Communications Act included in the Budget Act,
states will generally be prohibited from regulating the entry of, or the rates
charged by, any CMRS provider. The new law does not, however, prohibit a state
from regulating other terms and conditions of CMRS offerings and permits states
to petition the FCC for authority to continue rate regulation. These new
statutory provisions took effect in August 1994, and eight states filed
petitions.
The FCC has allocated a total of 140 MHz to broadband PCS, 20 MHz to
unlicensed operations and 120 MHz to licensed operations. The 120 MHz for
licensed operations consists of two 30 MHz frequency blocks in each of the 51
Rand McNally Major Trading Areas, and one 30 MHz frequency block and three 10
MHz frequency blocks in each of 493 Rand McNally Basic Trading Areas. Cellular
operators are permitted to participate in the award of these new PCS licenses,
except for licenses reserved for rural, small, minority- and female-owned
businesses and licenses for markets in which such cellular operator owns a 20%
or greater interest in a cellular licensee which holds a license covering 10% or
more of the population of the respective PCS licensed area. In the latter case,
the cellular licensee is limited to one 10 MHz PCS frequency block. Numerous
requests for reconsideration of the FCC's decision have been filed and remain
pending before the FCC and at least one appeal was filed. On March 15, 1995, the
U.S. Court of Appeals for the District of Columbia issued an order delaying the
commencement of the auction of the 30 MHz frequency block for Basic Trading
Areas pending a resolution of a challenge to the FCC's rules giving bidding
preferences to certain participants. A September 1995 hearing is presently
scheduled but settlement negotiations are underway and it is possible that such
auction may take place in the near future. The FCC has classified PCS as CMRS.
PCS technology is currently under development and is expected to be similar
in some respects to cellular technology. When it becomes commercially available,
this technology is expected to offer increased capacity for wireless two-way and
one-way voice, data and multimedia communications services and is expected to
result in increased competition in the Company's operations. The ability of
these future PCS licensees to complement or compete with existing cellular
licensees will be affected by future FCC rule-making. These and other future
technological developments in the wireless telecommunications industry and the
enhancement of current technologies will likely create new products and services
that are competitive with the services currently offered by the Company. There
can be no assurance that the Company will not be adversely affected by such
technological developments.
Media reports have suggested that certain RF emissions from portable
cellular telephones might be linked to cancer. The Company is not aware of any
authoritative evidence linking the usage of portable cellular telephones with
cancer. The FCC currently has a rulemaking proceeding pending to update the
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guidelines and methods it uses for evaluating RF emissions in radio equipment,
including cellular telephones. While the proposal would impose more restrictive
standards on RF emissions from low-power devices such as portable cellular
telephones, it is anticipated that all cellular telephones currently marketed
and in use will comply with those standards.
REGULATORY PROCEEDINGS
LA STAR AND WISCONSIN RSA 8 APPLICATIONS. The Company indirectly owns 49%
of La Star Cellular Telephone Company ("La Star"), which was an applicant for a
construction permit for a cellular system in the New Orleans MSA. In June 1992,
the FCC affirmed an Administrative Law Judge's order which had granted the
application of another applicant and dismissed La Star's application. The basis
for the FCC's action was its finding that the Company improperly controlled La
Star. In a footnote to its decision, the FCC stated that questions regarding the
conduct of the Company in that proceeding may be revisited in future
proceedings. As a result of that footnote, FCC authorizations in uncontested FCC
proceedings have been granted to TDS and its subsidiaries subject to any
subsequent action the FCC might take concerning its findings and conclusions in
the La Star decision.
La Star, TDS and the Company appealed the FCC's decision in the La Star
proceeding. On March 29, 1994, the United States Court of Appeals for the
District of Columbia Circuit vacated the FCC's decision in the La Star
proceeding and remanded the matter to the FCC for further proceedings. On
remand, the FCC affirmed the dismissal of the La Star application but did not
address the subject matter of its footnote in the original La Star decision. As
a result, the Wisconsin RSA 8 case, discussed below, now constitutes the only
FCC expression calling for conditions on authorizations to TDS and its
subsidiaries.
On February 1, 1994, in a proceeding involving a license originally issued
to TDS for Wisconsin RSA 8, the FCC instituted a hearing to determine whether in
the La Star case the Company had misrepresented facts to, lacked candor in its
dealings with or attempted to mislead the FCC, and, if so, whether TDS possesses
the requisite character qualifications to hold that Wisconsin license. The FCC
stated in its decision that, pending resolution of the issues in the Wisconsin
proceeding, subsequent authorizations to TDS and its subsidiaries would be
conditioned on the outcome of that proceeding. TDS was granted interim authority
to continue to operate that Wisconsin system pending completion of the hearing.
Following extensive discovery by the FCC and other parties, TDS and the
Company have reached preliminary and definitive settlement agreements with
parties to the proceeding contemplating a summary decision finding TDS and its
affiliates fully qualified to be FCC licensees. Pending the negotiation of a
definitive settlement agreement with a group of Wisconsin telephone companies
who are parties to the proceeding, the hearing has been postponed. Final
settlement will also be subject to the action of the judge presiding in the
proceeding.
COMPETITION
Currently, the Company's only competitor for cellular telephone service in
each market is the licensee of the second cellular system in that market. Since
each competitor operates its cellular system on a 25 MHz frequency block
licensed by the FCC using comparable technology and facilities, competition for
customers between the two systems in each market is principally on the basis of
quality of service, price, size of area covered, services offered and
responsiveness of customer service. The competing entities in many of the
markets in which the Company has an interest have financial resources which are
substantially greater than those of the Company and its partners in such
markets.
The FCC's rules require all operational cellular systems to provide, on a
nondiscriminatory basis, cellular service to resellers which purchase blocks of
mobile telephone numbers from an operational system and then resell them to the
public.
In addition to competition from the other cellular licensee in each market,
there is also competition from, among other technologies, SMR systems which are
able to connect with the landline telephone network. The Company believes that
conventional mobile telephone systems and conventional SMR systems are
competitively disadvantaged because of technological limitations on the capacity
of such systems. The FCC has recently given approval, through waivers of its
rules, to ESMR, an enhanced SMR system. ESMR
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systems may have cells and frequency reuse like cellular, thereby potentially
eliminating any current technological limitation. The first ESMR systems were
implemented in 1993 in Los Angeles and are beginning to be constructed in
several other cities across the United States. Although less directly a
substitute for cellular service, wireless data services and one-way paging
service (and, in the future, two-way paging services) may be adequate for those
who do not need full two-way voice service.
The FCC has completed the auction of two of the three 30 MHz frequency
blocks allocated to broadband PCS. The Company anticipates that the FCC may
begin issuing PCS licenses during the second quarter of 1995. PCS trials are in
process throughout the United States. PCS may become a significant source of
competition in the Company's markets once PCS systems have been built and
developed. One or more PCS providers are expected to begin offering digital,
wireless communications services in markets served by the Company beginning as
early as 1996. Similar technological advances or regulatory changes in the
future may make available other alternatives to cellular service, thereby
creating additional sources of competition.
Continuing technological advances in the communications field make it
difficult to predict the extent of additional future competition for cellular
systems. For example, the FCC has allocated radio channels to a mobile satellite
system in which transmissions from mobile units to satellites would augment or
replace transmissions to cell sites, and several consortia have been formed to
provide such service. Such a system is designed primarily to serve the
communications needs of remote locations and a mobile satellite system could
provide viable competition for land-based cellular systems in such areas. It is
also possible that the FCC may in the future assign additional frequencies to
cellular telephone service to provide for more than two cellular telephone
systems per market.
See "Description of Capital Stock--Corporate Opportunity Arrangements" for a
discussion of certain limitations on the Company's ability to enter into
non-cellular activities.
DESCRIPTION OF LYONS
The LYONs are to be issued under an indenture to be dated as of June 1, 1995
(the "Indenture"), between the Company and Harris Trust and Savings Bank, as
trustee (the "Trustee"). A copy of the form of Indenture is filed as an exhibit
to the Registration Statement of which this Prospectus is a part. The following
summaries of certain provisions of the LYONs and the Indenture do not purport to
be complete and are subject to, and are qualified in their entirety by reference
to, all the provisions of the LYONs and the Indenture, including the definitions
therein of certain terms which are not otherwise defined in this Prospectus.
Wherever particular provisions or defined terms of the Indenture (or of the Form
of LYON which is a part thereof) are referred to, such provisions or defined
terms are incorporated herein by reference. References herein are to sections in
the Indenture and paragraphs in the Form of LYON. As used in this "Description
of LYONs," the "Company" refers to United States Cellular Corporation and does
not include its subsidiaries, other affiliates, partners or entities in which it
holds an investment.
GENERAL
The LYONs will be unsecured obligations of the Company limited to
$650,000,000 aggregate principal amount at maturity ($745,000,000 aggregate
principal amount at maturity if the Underwriter's over-allotment option is
exercised in full) and will mature on June 15, 2015. The principal amount at
maturity of each LYON is $1,000 and will be payable at the office of the Paying
Agent, initially the Trustee. (Section 2.03 and Form of LYON, paragraph 3.)
The LYONs are being offered at a substantial discount from their principal
amount at maturity. See "Certain Tax Aspects--Original Issue Discount." There
will be no periodic payments of interest. The calculation of the accrual of
Original Issue Discount (the difference between the Issue Price and the
principal amount at maturity of a LYON) in the period during which a LYON
remains outstanding will be on a semi-annual bond equivalent basis using a
360-day year composed of twelve 30-day months; such accrual will commence from
the Issue Date of the LYONs. (Form of LYON, paragraph 1.) Maturity, conversion
(other than pursuant to a Common Share Delivery Arrangement (as defined below)),
purchase by the Company at the option of a Holder, or redemption of a LYON will
cause Original Issue Discount and
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interest, if any, to cease to accrue on such LYON, under the terms and subject
to the conditions of the Indenture. (Section 2.08.) The Company may not reissue
a LYON that has matured or been converted, purchased by the Company at the
option of a Holder, redeemed or otherwise cancelled (except for registration of
transfer, exchange or replacement thereof), provided that a LYON converted
pursuant to a Common Share Delivery Arrangement shall remain outstanding as
described in "Conversion Rights" below. (Section 2.10.)
The LYONs will be issued only in fully registered form, without coupons, in
denominations of $1,000 of principal amount at maturity or an integral multiple
thereof. (Form of LYON, paragraph 11.) LYONs may be presented for conversion at
the office of the Conversion Agent and for exchange or registration of transfer
at the office of the Registrar, each such agent initially being the Trustee.
(Section 2.03.) The Company will not charge a service charge for any
registration of transfer or exchange of LYONs; however, the Company may require
payment by a Holder of a sum sufficient to cover any tax, assessment or other
governmental charge payable in connection therewith. (Section 2.06.)
The Company will maintain in the Borough of Manhattan, the City of New York,
an office or agency of the Trustee, Registrar, Paying Agent and Conversion Agent
where LYONs may be presented or surrendered for payment, where LYONs may be
surrendered for registration of transfer, exchange, purchase, redemption or
conversion and where notices and demands to or upon the Company in respect of
the LYONs and the Indenture may be served, which shall initially be the
corporate trust office of the Trustee in such Borough. (Section 4.05.)
SUBORDINATION OF LYONS; EFFECT OF CORPORATE STRUCTURE
Indebtedness evidenced by the LYONs will be subordinated in the right of
payment, as set forth in the Indenture, to the prior payment in full of all
existing and future Senior Indebtedness of the Company. (Section 10.01 and Form
of LYON, paragraph 8.) Senior Indebtedness is defined in the Indenture as the
principal of (and premium, if any) and interest on (including interest accruing
after the filing of a petition initiating any proceeding pursuant to any
Bankruptcy Law (including, with respect to the Vendor Financing Agreement (and
any other Debt if the instrument creating or evidencing the same expressly
provides therefor), such interest whether or not allowed as a claim in such
proceeding, but, with respect to all other Debt, only to the extent allowed or
permitted to the holder of such Debt against the bankruptcy or any other
insolvency estate of the Company in such proceeding)) and other amounts due on
or in connection with any Debt incurred, assumed or guaranteed by the Company,
whether outstanding on the date of the Indenture or thereafter incurred, assumed
or guaranteed, and all deferrals, renewals, extensions and refundings of, or
amendments, modifications or supplements to, any such Debt. Excluded from the
definition of Senior Indebtedness are the following: (a) any Debt which
expressly provides (i) that such Debt shall not be senior in right of payment to
the LYONs, or (ii) that such Debt shall be subordinated to any other Debt of the
Company, unless such Debt expressly provides that such Debt shall be senior in
right of payment to the LYONs; and (b) any Debt of the Company in respect of the
LYONs. (Section 10.01.)
By reason of such subordination, in the event of dissolution, insolvency,
bankruptcy or other similar proceedings, upon any distribution of assets, (i)
the Holders of LYONs will be required to pay over their share of such
distribution to the trustee in bankruptcy, receiver or other person distributing
the assets of the Company for application to the payment of all Senior
Indebtedness remaining unpaid, to the extent necessary to pay all holders of
Senior Indebtedness in full (Section 10.02.); and (ii) unsecured creditors of
the Company who are not Holders of LYONs or holders of Senior Indebtedness may
recover less, ratably, than holders of Senior Indebtedness and may recover more,
ratably, than the Holders of LYONs.
In the event that the LYONs are declared due and payable prior to their
Stated Maturity by reason of the occurrence of an Event of Default, then the
Company is obligated to notify promptly holders of Senior Indebtedness of such
acceleration. The Company may not pay the LYONs until 120 days have passed after
such notice is given and may thereafter pay the LYONs if the terms of the
Indenture otherwise permit payment at that time. (Section 10.03.)
No payment of the principal amount at maturity, Issue Price plus accrued
Original Issue Discount, Redemption Price, Change in Control Purchase Price or
interest, if any, with respect to any LYONs may be
34
<PAGE>
made, nor may the Company pay cash in respect of the Purchase Price (or any
portion thereof) or upon conversion of any LYON (other than for fractional
interests in Common Shares) or otherwise acquire any LYONs except as set forth
in the Indenture, if any default with respect to Senior Indebtedness occurs and
is continuing that permits the acceleration of the maturity thereof and either
such default is the subject of judicial proceedings or the Company receives
notice of the default, unless (a) in the case of defaults on Senior Indebtedness
other than payment defaults, 120 days pass after notice of the default is given
and such default is not then the subject of judicial proceedings or (b) the
default with respect to the Senior Indebtedness is cured or waived and, in each
case, the terms of the Indenture otherwise permit the payment or acquisition of
the LYONs at that time. (Section 10.04.)
The LYONs are obligations exclusively of the Company. Since the current
operations of the Company are primarily conducted through subsidiaries, the cash
flow and the consequent ability to service debt, including the LYONs, of the
Company are primarily dependent upon the earnings of its subsidiaries and the
distribution of those earnings to, or upon loans or other payments of funds by
those subsidiaries to, the Company. The subsidiaries are separate and distinct
legal entities and have no obligation, contingent or otherwise, to pay any
amounts due pursuant to the LYONs or to make any funds available therefor,
whether by dividends, loans or other payments. In addition, the payment of
dividends and the making of loans and advances to the Company by its
subsidiaries may be subject to statutory or contractual restrictions, are
contingent upon the earnings of those subsidiaries and are subject to various
business considerations.
Any right of the Company to receive assets of any of its subsidiaries upon
their liquidation or reorganization (and the consequent right of the Holders of
the LYONs to participate in those assets) will be effectively subordinated to
the claims of that subsidiary's creditors (including trade creditors), except to
the extent that the Company is itself recognized as a creditor of such
subsidiary, in which case the claims of the Company would still be subordinate
to any security interest in the assets of such subsidiary and any indebtedness
of such subsidiary senior to that held by the Company.
As of March 31, 1995, the Company and its subsidiaries had outstanding
approximately $389.6 million of Debt or other liabilities ($196.4 million after
application of the net proceeds of this offering) which would have constituted
either Senior Indebtedness or liabilities of the subsidiaries of the Company
which would not have constituted Senior Indebtedness but to which the LYONs
would have been effectively subordinated. See "Use of Proceeds" and
"Capitalization." There are no restrictions in the Indenture on the creation of
additional Senior Indebtedness (or any other indebtedness).
Under the Vendor Financing Agreement, which constitutes Senior Indebtedness
of the Company, the Company has agreed not to create, incur, assume or suffer to
exist any indebtedness (including capital lease obligations) that would cause
the sum of such indebtedness plus certain operating lease obligations to exceed
an amount equal to $40 per population equivalent for all of the then existing
cellular markets owned by the Company, excluding indebtedness under the Vendor
Financing Agreement and subordinated indebtedness (as defined in such
agreement). The Vendor Financing Agreement provides that indebtedness evidenced
by a LYON will be treated as subordinated indebtedness for purposes of such
agreement only to the extent such LYON has not been accelerated, and that no
cash payment is made, or required to be made, by the Company thereunder (whether
at maturity, upon a change in control, upon early redemption or otherwise).
CONVERSION RIGHTS
A Holder of a LYON may convert it at any time before the close of business
on June 15, 2015; provided, however, that if a LYON is called for redemption,
the Holder may convert it only until the close of business on the Redemption
Date. On conversion of a LYON, the Company may elect to deliver (or, with
respect to Common Shares, arrange for a Standby Share Deliverer (as defined
below) to deliver) Common Shares or an amount of cash determined as described
below. A LYON in respect of which a Holder has delivered a Purchase Notice or a
Change in Control Purchase Notice exercising the option of such Holder to
require the Company to purchase such LYON may be converted only if such notice
is withdrawn in accordance with the terms of the Indenture. (Form of LYON,
paragraph 9.) A Holder may convert a portion of such Holder's LYONs so long as
such portion is $1,000 principal amount at maturity or an integral multiple
thereof. (Section 11.01.)
35
<PAGE>
The initial Conversion Rate is 9.475 Common Shares per LYON, subject to
adjustment upon the occurrence of certain events described below. (Form of LYON,
paragraph 9.) See "Price Range of Common Shares." A Holder otherwise entitled to
a fractional Common Share shall receive cash equal to the then current market
value of such fractional share. (Section 11.03.)
On conversion of a LYON, a Holder must (i) complete and manually sign the
conversion notice on the back of the LYON (or complete and manually sign a
facsimile thereof) and deliver such notice to the Conversion Agent, (ii)
surrender the LYON to the Conversion Agent, (iii) if required, furnish
appropriate endorsements and transfer documents, and (iv) if required, pay all
transfer or similar taxes. Pursuant to the Indenture, the date on which all of
the foregoing requirements have been satisfied is the Conversion Date. (Sections
11.02 and 11.04 and Form of LYON, paragraph 9.)
On conversion of a LYON, a Holder will not receive any cash payment
representing accrued Original Issue Discount. The Company's delivery, in
connection with conversions not involving a Common Share Delivery Arrangement
(as defined below), to the Holder of the fixed number of Common Shares (or cash
in the applicable amount as provided below) into which the LYON is convertible
(together with the cash payment, if any, in lieu of a fractional Common Share)
will be deemed to satisfy the Company's obligation to pay the principal amount
of such LYON including the accrued Original Issue Discount attributable to the
period from the Issue Date through the Conversion Date. Thus, the accrued
Original Issue Discount of such LYON is deemed to be paid in full rather than
cancelled, extinguished or forfeited. The Conversion Rate will not be adjusted
at any time during the term of the LYONs for such accrued Original Issue
Discount.
In lieu of the delivery of Common Shares upon notice of conversion of any
LYON, the Company may elect to pay the Holder surrendering a LYON an amount in
cash equal to the Sale Price of a Common Share on the Trading Day immediately
prior to the Conversion Date multiplied by the Conversion Rate in effect on such
Trading Day, as adjusted for certain events described below; provided, that if
such payment of cash is not permitted pursuant to the provisions of the
Indenture or otherwise, the Company will deliver (or, pursuant to a Common Share
Delivery Arrangement, arrange for the delivery of) Common Shares (and cash in
lieu of fractional Common Shares) as set forth below. Upon conversion of any
LYON, the Company shall inform the Holder through the Conversion Agent, no later
than two business days following the Conversion Date, (i) of its election of the
delivery of Common Shares or to pay cash in lieu of delivery of such shares and
(ii) whether or not any such delivery of Common Shares may be a taxable event to
such Holder as a result of such delivery being made by means of a Common Share
Delivery Arrangement. If the Company elects the delivery of Common Shares, such
shares (and cash in lieu of fractional Common Shares) will be delivered through
the Conversion Agent as soon as practicable following the Conversion Date. If
the Company elects to pay cash, such cash payment will be made to the Holder
surrendering such LYON no later than the fifth business day following such
Conversion Date. (Sections 11.01 and 11.02.) For a discussion of the tax
treatment of a Holder receiving cash or Common Shares, see "Certain Tax
Aspects--Dispositions."
The Company may not pay cash upon conversion of any LYON (other than cash in
lieu of fractional Common Shares) (i) if there has occurred and is continuing an
Event of Default described under "Events of Default; Notice and Waiver" below
(other than a default in such payment on such LYON) and (ii) unless the Common
Shares are listed or admitted to trading on a United States national or regional
securities exchange or reported on The Nasdaq Stock Market ("NASDAQ"). (Section
11.1.)
The "Sale Price" on any Trading Day means the closing sale price per share
for the Common Shares (or, if no closing price is reported, the average of the
bid and ask prices or, if more than one in either case, the average of the
average bid and the average ask prices) on such date as reported in the
composite transactions for the principal United States securities exchange on
which the Common Shares are traded or, if the Common Shares are not listed on a
United States national or regional securities exchange, as reported by NASDAQ. A
"Trading Day" means each day on which the securities exchange or quotation
system which is used to determine the Sale Price is open for trading or
quotation.
In connection with the conversion of any LYON, the Company may enter into an
arrangement (a "Common Share Delivery Arrangement") with a third party (the
"Standby Share Deliverer"), initially Merrill Lynch, whereby, upon the agreement
of the Standby Share Deliverer to so act in connection with such conversion, it
will deliver the Common Shares (and any cash payment in lieu of a fractional
Common
36
<PAGE>
Share) deliverable to the Holder upon such conversion, through the Conversion
Agent, in the same amounts and within the same time periods set forth above for
conversions in respect of which the Company were to deliver the Common Shares.
As a result of such a Common Share Delivery Arrangement, the converted LYON will
not be retired or cancelled, but shall remain outstanding with the Standby Share
Deliverer becoming the Holder thereof. It is anticipated that the Standby Share
Deliverer will resell LYONs it obtains pursuant to a Common Share Delivery
Arrangement, although there can be no assurance in this regard, and that this
Prospectus will be available to be used by the Standby Share Deliverer to meet
any prospectus delivery requirements it then has under the Securities Act in
connection with (i) the delivery of Common Shares to the converting Holder
pursuant to any Common Share Delivery Arrangement and (ii) any such resales of
LYONs. The Standby Share Deliverer may (with the agreement of TDS), but is not
obligated to, obtain Common Shares to be so delivered by it in connection with
such a Common Share Delivery Arrangement from TDS pursuant to the Securities
Loan Agreement described in "Underwriting." For a discussion of the tax
treatment of a Holder receiving Common Shares from the Standby Share Deliverer,
rather than the Company, upon conversion, see "Certain Tax
Aspects--Dispositions."
The Conversion Rate will be adjusted for dividends or distributions on
Common Shares payable in Common Shares or other Capital Stock; subdivisions,
combinations or certain reclassifications of Common Shares; distributions to all
Holders of Common Shares; distributions to all Holders of Common Shares of
certain rights to purchase Common Shares for a period expiring within 60 days at
less than the Quoted Price at the time; and distributions to such holders of
assets or debt securities of the Company or certain rights to purchase
securities of the Company (excluding cash dividends or other cash distributions
from current or retained earnings other than any Extraordinary Cash Dividend).
However, no adjustment need be made (i) if Holders may participate in the
transaction, (ii) for rights to purchase Common Shares pursuant to a Company
dividend or interest reinvestment plan, (iii) for changes in the par value of
the Common Shares or (iv) unless such adjustment, together with any other
adjustments similarly deferred, equals at least 1% of the then current
Conversion Rate. In cases where the fair market value (per Common Share) of the
assets, debt securities or certain rights, warrants or options to purchase
securities of the Company distributed to stockholders equals or exceeds the
Average Quoted Price of the Common Shares, or such Average Quoted Price exceeds
the fair market value (per Common Share) of such assets, debt securities or
rights, warrants or options so distributed by less than $1.00, rather than being
entitled to an adjustment in the Conversion Rate, the Holder of a LYON upon
conversion thereof will be entitled to receive, in addition to the Common Shares
(or cash in lieu thereof, as set forth above) into which such LYON is
convertible, the kind and amount of assets, debt securities or rights, warrants
or options comprising the distribution that such Holder would have received if
such Holder had converted such LYON immediately prior to the record date for
determining the stockholders entitled to receive the distribution. The Indenture
permits the Company to increase the Conversion Rate from time to time at its
discretion. (Sections 11.06, 11.07, 11.08, 11.10, 11.12, 11.14 and 11.17 and
Form of LYON, paragraph 9.)
If the Company is party to a consolidation, merger or binding share exchange
or a transfer of all or substantially all of its assets, the right to convert a
LYON into Common Shares may be changed into a right to convert it into the kind
and amount of securities, cash or other assets of the Company or another person
which the Holder would have received if the Holder had converted such Holder's
LYONs immediately prior to the transaction. (Section 11.14.)
In the event of a taxable distribution to holders of Common Shares that
results in an adjustment of the Conversion Rate or in the event the Conversion
Rate is increased at the discretion of the Company, the Holders of the LYONs
may, in certain circumstances, be deemed to have received a distribution subject
to Federal income tax as a dividend. See "Certain Tax Aspects--Constructive
Dividend."
REDEMPTION OF LYONS AT THE OPTION OF THE COMPANY
No sinking fund is provided for the LYONs. Prior to June 15, 2000, the LYONs
will not be redeemable at the option of the Company. Beginning on June 15, 2000,
the Company may redeem the LYONs for cash at any time as a whole, or from time
to time in part. (Sections 3.01 and 3.03 and Form of LYON, paragraph 5.) Not
less than 30 days' nor more than 60 days' notice of redemption shall be given by
mail to Holders of LYONs. (Section 3.03 and Form of LYON, paragraph 7.)
37
<PAGE>
The table below shows Redemption Prices of a LYON on June 15, 2000, at each
June 15 thereafter prior to maturity and at maturity on June 15, 2015, which
prices reflect the accrued Original Issue Discount calculated through each such
date. The Redemption Price of a LYON redeemed between such dates would include
an additional amount reflecting the additional Original Issue Discount accrued
from the next preceding date in the table through the actual Redemption Date.
(Form of LYON, paragraph 5.)
<TABLE>
<CAPTION>
(2)
ACCRUED
ORIGINAL (3)
(1) ISSUE REDEMPTION
LYON ISSUE DISCOUNT AT PRICE
REDEMPTION DATE PRICE 6% (1) + (2)
- ------------------------------------------------------------------------ ------------ ------------ ------------
<S> <C> <C> <C>
June 15, 2000........................................................... $ 306.46 $ 105.53 $ 411.99
June 15, 2001........................................................... 306.46 130.62 437.08
June 15, 2002........................................................... 306.46 157.24 463.70
June 15, 2003........................................................... 306.46 185.48 491.94
June 15, 2004........................................................... 306.46 215.44 521.90
June 15, 2005........................................................... 306.46 247.22 553.68
June 15, 2006........................................................... 306.46 280.94 587.40
June 15, 2007........................................................... 306.46 316.71 623.17
June 15, 2008........................................................... 306.46 354.66 661.12
June 15, 2009........................................................... 306.46 394.92 701.38
June 15, 2010........................................................... 306.46 437.63 744.09
June 15, 2011........................................................... 306.46 482.95 789.41
June 15, 2012........................................................... 306.46 531.03 837.49
June 15, 2013........................................................... 306.46 582.03 888.49
June 15, 2014........................................................... 306.46 636.14 942.60
At maturity............................................................. 306.46 693.54 1,000.00
</TABLE>
If less than all of the outstanding LYONs are to be redeemed, the Trustee
shall select the LYONs to be redeemed in principal amounts at maturity of $1,000
or integral multiples thereof by lot, pro rata or by another method the Trustee
considers fair and appropriate. If a portion of a Holder's LYONs is selected for
partial redemption and such Holder converts a portion of such LYONs after such
selection and prior to such redemption, such converted portion shall be deemed
to be of the portion selected for redemption. (Section 3.02.)
PURCHASE OF LYONS AT THE OPTION OF THE HOLDER
On June 15, 2000 (the "Purchase Date"), the Company will become obligated,
and the Company may also elect to become obligated on June 15, 2005 (the
"Optional Purchase Date") to purchase, at the option of the Holder thereof, any
outstanding LYON for which a written Purchase Notice has been delivered by the
Holder to the Paying Agent at any time from the opening of business on the date
that is 20 Business Days prior to such Purchase Date or Optional Purchase Date,
as applicable, until the close of business on such Purchase Date or Optional
Purchase Date, and for which such Purchase Notice has not been withdrawn,
subject to certain additional conditions. The Purchase Price payable in respect
of a LYON shall be equal to the Issue Price plus accrued Original Issue Discount
through the Purchase Date or Optional Purchase Date, as applicable. The Company,
at its option, may elect to pay the Purchase Price with respect to the Purchase
Date or the Optional Purchase Date, as applicable, in cash, Common Shares or TDS
Common Equity Securities, or any combination thereof. TDS has not waived any
rights that it may have under an agreement between TDS and the Company to
purchase Common Shares if the Company elects to pay the Purchase Price (or a
portion thereof) in Common Shares (as of the Purchase Date or Optional Purchase
Date, as applicable). As a result, in such event, TDS may notify the Company
that it intends to exercise any such rights to acquire additional Common Shares
up to an amount equal to TDS's percentage ownership of Common Shares at that
time (assuming that all outstanding securities that are or may become
convertible into Common Shares, including LYONs, were converted into Common
Shares), at a price per share payable in cash equal to the Market Price per
Common Share. See "Description of Capital Stock--Preemptive and
38
<PAGE>
Similar Rights." (Section 3.08 and Form of LYON, paragraph 6.) For a discussion
of the tax treatment of a Holder receiving cash, Common Shares, TDS Common
Equity Securities or any combination thereof, see "Certain Tax
Aspects--Dispositions."
The Company will be required to give notice (the "Company Notice") on a date
not less than 20 Business Days prior to the Purchase Date or the Optional
Purchase Date, as applicable, to all Holders at their addresses shown in the
register of the Registrar (and to beneficial owners as required by applicable
law) stating, among other things, (i) whether the Company will pay the Purchase
Price of LYONs in cash, Common Shares or TDS Common Equity Securities
(identifying such TDS Common Equity Securities) or any combination thereof
(specifying the percentages of each); (ii) if the Company elects to pay in
Common Shares or TDS Common Equity Securities, in whole or in part, the method
of calculating the Market Price of such Common Shares or TDS Common Equity
Securities; and (iii) the procedures that Holders must follow to require the
Company to purchase LYONs from such Holders. In addition, the Company Notice
with respect to the Purchase Date shall notify Holders of whether or not the
Company is electing to become obligated to purchase LYONs, at the option of the
Holders thereof, on the Optional Purchase Date. (Section 3.08.)
The Purchase Notice given by each Holder electing to require the Company to
purchase LYONs shall state (i) the certificate numbers of the LYONs to be
delivered by such Holder for purchase by the Company; (ii) the portion of the
principal amount at maturity of LYONs to be purchased, which portion must be
$1,000 or an integral multiple thereof; (iii) that such LYONs are to be
purchased by the Company pursuant to the applicable provisions of the LYONs; and
(iv) in the event the Company elects, pursuant to the Company Notice, to pay the
Purchase Price with respect to the Purchase Date or Optional Purchase Date, as
applicable, in Common Shares or specified TDS Common Equity Securities, in whole
or in part, but such Purchase Price (or portion(s) thereof) is ultimately to be
paid to such Holder entirely in cash because any of the conditions to payment of
the Purchase Price (or such portion(s) thereof) in Common Shares or such
specified TDS Common Equity Securities is not satisfied prior to the close of
business on such Purchase Date or Optional Purchase Date, as described below,
whether such Holder elects (a) to withdraw such Purchase Notice as to some or
all of the LYONs to which it relates (stating the principal amount at maturity
and certificate numbers of the LYONs as to which such withdrawal shall relate),
or (b) to receive cash in respect of the entire Purchase Price (or such
portion(s) thereof) for all LYONs subject to such Purchase Notice. Unless the
Holder indicates, in the Purchase Notice or in any written notice of withdrawal,
such Holder's choice with respect to the election described in clause (iv) above
as it relates to the applicable portion(s) of such Purchase Price, such Holder
shall be deemed to have elected to receive cash in respect of the entire
Purchase Price (or such applicable portion(s) thereof) for all LYONs subject to
such Purchase Notice in such circumstances. (Section 3.08.) For a discussion of
the tax treatment of a Holder receiving cash instead of Common Shares or TDS
Common Equity Securities, see "Certain Tax Aspects--Dispositions."
Any Purchase Notice may be withdrawn by the Holder by a written notice of
withdrawal delivered to the Paying Agent prior to the close of business on the
Purchase Date or Optional Purchase Date, as applicable. The notice of withdrawal
shall state the principal amount at maturity and the certificate numbers of the
LYONs as to which the withdrawal notice relates and the principal amount at
maturity, if any, which remains subject to the Purchase Notice. (Section 3.10.)
The table below shows the Purchase Price of a LYON as of the Purchase Date
and the Optional Purchase Date, if applicable:
<TABLE>
<CAPTION>
PURCHASE DATE PURCHASE PRICE
- ---------------------- --------------
<S> <C>
June 15, 2000 $ 411.99
OPTIONAL PURCHASE DATE PURCHASE PRICE
- ---------------------- --------------
June 15, 2005 $ 553.68
</TABLE>
If the Company elects to pay the Purchase Price, in whole or in part, in
Common Shares or TDS Common Equity Securities, the number of Common Shares or
shares of the specified TDS Common Equity Securities to be delivered in respect
of the portion of the Purchase Price to be paid in Common Shares or such
specified TDS Common Equity Securities shall be equal to such portion of the
Purchase Price divided
39
<PAGE>
by the Market Price (as defined below) of a Common Share or a share of such
specified TDS Common Equity Securities, as applicable. No fractional Common
Shares or fractional shares of TDS Common Equity Securities will be delivered
upon any purchase by the Company of LYONs through the delivery of Common Shares
or TDS Common Equity Securities in payment, in whole or in part, of the Purchase
Price. Instead, the Company will pay cash based on the Market Price for all
fractional Common Shares or TDS Common Equity Securities. (Section 3.08.) See
"Certain Tax Aspects--Dispositions."
The "Market Price" means the average of the Sale Prices of the Common Shares
or the specified TDS Common Equity Securities, as applicable, for the five
trading day period ending on (if the third Business Day prior to the Purchase
Date or Optional Purchase Date, as applicable, is a trading day or, if not, then
on the last trading day prior to) the third Business Day prior to the Purchase
Date or Optional Purchase Date, as applicable, appropriately adjusted to take
into account the occurrence, during the period commencing on the first of such
trading days during such five trading day period and ending on such Purchase
Date or Optional Purchase Date, of (i) certain events that would result in an
adjustment of the Conversion Rate with respect to the Common Shares or (ii)
certain similar events with respect to the specified TDS Common Equity
Securities, as applicable. The "Sale Price" of the Common Shares or the
specified TDS Common Equity Securities, as applicable, on any date means the
closing per share sale price (or if no closing sale price is reported, the
average of the bid and ask prices or, if more than one in either case, the
average of the average bid and the average ask prices) on such date as reported
in composite transactions for the principal United States securities exchange on
which the Common Shares or the specified TDS Common Equity Securities, as
applicable, are traded or, if the Common Shares or the specified TDS Common
Equity Securities, as applicable, are not listed on a United States national or
regional securities exchange, as reported by NASDAQ. Because the Market Price of
the Common Shares or the specified TDS Common Equity Securities, as applicable,
is determined prior to the Purchase Date or Optional Purchase Date, as
applicable, Holders of LYONs bear the market risk with respect to the value of
the Common Shares or the specified TDS Common Equity Securities, as applicable,
to be received from the date such Market Price is determined to the Purchase
Date or Optional Purchase Date, as applicable. The Company may pay the Purchase
Price (or any portion thereof) in Common Shares or the specified TDS Common
Equity Securities only if the information necessary to calculate the applicable
Market Price is published in a daily newspaper of national circulation and only
if the Common Shares or the specified TDS Common Equity Securities, as
applicable, are listed or admitted to trading on a United States national or
regional securities exchange or reported by NASDAQ. (Section 3.08).
Upon determination of the actual number of Common Shares or of the specified
TDS Common Equity Securities in accordance with the foregoing provisions, the
Company will publish such determination in a daily newspaper of national
circulation. (Section 3.08.)
The Company's right to purchase LYONs, in whole or in part, with Common
Shares or with TDS Common Equity Securities is subject to the satisfaction of
various conditions, including; (i) the registration of the Common Shares or the
specified TDS Common Equity Securities, as applicable, under the Securities Act
and the Exchange Act, if required; and (ii) any necessary qualification or
registration under applicable state securities law or the availability of an
exemption from such qualification and registration. If such conditions are not
satisfied with respect to a Holder or Holders prior to the close of business on
the Purchase Date or Optional Purchase Date, as applicable, the Company will pay
the Purchase Price of the LYONs of such Holder or Holders entirely in cash.
(Section 3.08.) See "Certain Tax Aspects--Dispositions." The Company may not
change the form of consideration (or components or percentages of components
thereof) to be paid once the Company has given its Company Notice to Holders of
LYONs except as described in the second sentence of this paragraph. (Section
3.08).
The Company will comply with the provisions of Rule 13e-4, Rule 14e-1 and
any other tender offer rules under the Exchange Act which may then be applicable
and will file Schedule 13E-4 or any other schedule required thereunder in
connection with any offer by the Company to purchase LYONs at the option of
Holders. (Section 3.13.)
Payment of the Purchase Price for a LYON for which a Purchase Notice has
been delivered and not validly withdrawn is conditioned upon delivery of such
LYON (together with necessary endorsements) to the
40
<PAGE>
Paying Agent at any time (whether prior to, on or after the Purchase Date or
Optional Purchase Date, as applicable) after delivery of such Purchase Notice.
(Section 3.08.) Payment of the Purchase Price for such LYON will be made
promptly following the later of (i) the Purchase Date or Optional Purchase Date,
as applicable, and (ii) the time of delivery of such LYON. (Section 3.08.) If
the Paying Agent holds, in accordance with the terms of the Indenture, money or
securities sufficient to pay the Purchase Price of such LYON on the Business Day
following the Purchase Date or Optional Purchase Date, as applicable, then,
immediately after such Purchase Date or Optional Purchase Date, such LYON will
cease to be outstanding and Original Issue Discount on such LYON will cease to
accrue, whether or not such LYON is delivered to the Paying Agent, and all other
rights of the Holder shall terminate (other than the right to receive the
Purchase Price upon delivery of the LYON). (Section 2.08.)
The Company's ability to purchase LYONs with cash may be limited by the
terms of its then-existing borrowing agreements. No LYONs may be purchased at
the option of Holders for cash if there has occurred (prior to, on, or after the
giving, by the Holders of such LYONs, of the required Purchase Notice) and is
continuing an Event of Default with respect to the LYONs described under "Events
of Default; Notice and Waiver" below (other than a default in the payment of the
Purchase Price with respect to such LYONs). (Section 3.10.)
CHANGE IN CONTROL PERMITS PURCHASE OF LYONS AT THE OPTION OF THE HOLDER
In the event of any Change in Control (as defined below) of the Company
occurring on or prior to June 15, 2000, each Holder of LYONs will have the
right, at the Holder's option, subject to the terms and conditions of the
Indenture, to require the Company to purchase all or any portion (provided that
the principal amount at maturity must be $1,000 or an integral multiple thereof)
of the Holder's LYONs as of the date that is 35 Business Days after the
occurrence of such Change in Control (a "Change in Control Purchase Date") at a
cash price equal to the Issue Price plus accrued Original Issue Discount through
the Change in Control Purchase Date (the "Change in Control Purchase Price").
(Section 3.09 and Form of LYON, paragraph 6.)
Within 15 Business Days after the occurrence of a Change in Control, the
Company is obligated to mail to the Trustee and to all Holders of LYONs at their
addresses shown in the register of the Registrar (and to beneficial owners as
required by applicable law) a notice regarding the Change in Control, which
notice shall include a form of Change in Control Purchase Notice (a "Change in
Control Purchase Notice") to be completed by the Holder and shall state, among
other things: (i) the events causing a Change in Control and the date of such
Change in Control, (ii) the last date on which the purchase right may be
exercised, (iii) the Change in Control Purchase Price, (iv) the Change in
Control Purchase Date, (v) the name and address of the Paying Agent and the
Conversion Agent, (vi) the Conversion Rate and any adjustments thereto, (vii)
that LYONs with respect to which a Change in Control Purchase Notice is given by
the Holder may be converted only if the Change in Control Purchase Notice has
been withdrawn in accordance with the terms of the Indenture, and (viii) the
procedures that Holders must follow to exercise these rights. The Company will
cause a copy of such notice to be published in a daily newspaper of national
circulation. (Section 3.09.)
To exercise this right, the Holder must deliver the Change in Control
Purchase Notice to the Paying Agent (initially the Trustee) prior to the close
of business on the Change in Control Purchase Date. The Change in Control
Purchase Notice shall state (i) the certificate numbers of the LYONs to be
delivered by the Holder thereof for purchase by the Company; (ii) the portion of
the principal amount at maturity of LYONs to be purchased, which portion must be
$1,000 or any integral multiple thereof; and (iii) that such LYONs are to be
purchased by the Company pursuant to the applicable provisions of the LYONs.
(Section 3.09.)
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Any Change in Control Purchase Notice may be withdrawn by the Holder by a
written notice of withdrawal delivered to the Paying Agent prior to the close of
business on the Change in Control Purchase Date. The notice of withdrawal shall
state the principal amount at maturity and the certificate numbers of the LYONs
as to which the withdrawal notice relates and the principal amount at maturity,
if any, which remains subject to a Change in Control Purchase Notice. (Section
3.10.)
Payment of the Change in Control Purchase Price for a LYON for which a
Change in Control Purchase Notice has been delivered and not validly withdrawn
is conditioned upon delivery of such LYON (together with necessary endorsements)
to the Paying Agent at any time (whether prior to, on or after the Change in
Control Purchase Date) after the delivery of such Change in Control Purchase
Notice. (Section 3.09.) Payment of the Change in Control Purchase Price for such
LYON will be made promptly following the later of the Change in Control Purchase
Date or the time of delivery of such LYON. (Section 3.10.) If the Paying Agent
holds, in accordance with the terms of the Indenture, money sufficient to pay
the Change in Control Purchase Price of such LYON on the Business Day following
the Change in Control Purchase Date, then, immediately after such Change in
Control Purchase Date, Original Issue Discount on such LYON will cease to
accrue, whether or not such LYON is delivered to the Paying Agent, and all other
rights of the Holder shall terminate (other than the right to receive the Change
in Control Purchase Price upon delivery of the LYON). (Section 2.08).
Under the Indenture, a "Change in Control" of the Company is deemed to have
occurred at such time as (i) any person, including its Affiliates and Associates
(other than TDS, the Company, their Subsidiaries, their employee stock ownership
plans or any of their other employee benefit plans, the Carlson Family (meaning
LeRoy T. Carlson, his family members (meaning his spouse, siblings and lineal
descendants), estate and heirs and any trust or other investment vehicle for the
primary benefit of any of such persons or their respective family members or
heirs (collectively, the "Carlson Family"))) files a Schedule 13D or 14D-1 (or
any successor schedule, form or report under the Exchange Act) disclosing that
such person has become the beneficial owner of 50% or more of the combined
voting power of all of the Company's then outstanding equity securities (of all
classes or series) or such other Capital Stock of the Company into which such
equity securities are reclassified or changed, with certain exceptions, (ii) the
number of outstanding Common Shares (or such other class or series of Capital
Stock of the Company into which the Common Shares are reclassified or changed)
the beneficial owners of which are not Affiliates of the Company is at any time
reduced to less than 10 million Common Shares (appropriately adjusted to reflect
the impact of any stock dividend, subdivision or combination) as a result of
acquisitions of Common Shares (or such other Capital Stock) by, or in concert
with, the Company, TDS, any of their Subsidiaries, Affiliates, employee stock
ownership plans or employee benefit plans, or the Carlson Family, (iii) there
shall be consummated any consolidation or merger of the Company (a) in which the
Company is not the continuing or surviving corporation or (b) pursuant to which
the Common Shares would be converted into cash, securities or other property, in
each case other than a consolidation or merger of the Company in which the
holders of the Common Shares and Series A Common Shares immediately prior to the
consolidation or merger have, directly or indirectly, 50% or more of the
combined voting power of the common equity securities of the continuing or
surviving corporation immediately after such consolidation or merger; or (iv)
TDS and its Subsidiaries cease to collectively be beneficial owners of at least
50% of (x) the total of the Common Shares and Series A Common Shares (or such
other classes or series of Capital Stock of the Company into which such Common
Shares or Series A Common Shares are reclassified or changed) then outstanding
or (y) the combined voting power of all of the Company's then outstanding equity
securities (of all classes or series) or such other Capital Stock of the Company
into which such equity securities are reclassified or changed (the event or
transaction giving rise to such circumstances described in (x) or (y) of item
(iv) being referred to as the "Designated Transaction") and, in either case (x)
or (y) of item (iv), there shall occur a Rating Decline (as defined below)
within the time period described below in the definition of Rating Decline and
with a Reference Date (as defined below) occurring on or prior to June 15, 2000.
The Indenture does not permit the Board of Directors of the Company to waive the
Company's obligation to purchase LYONs at the option of Holders in the event of
a Change in Control of the Company. (Section 3.09.)
Under the Indenture a "Rating Decline" will be deemed to have occurred if,
on any date within the period (the "Rating Period") beginning on the date (the
"Reference Date") of the earlier to occur of (a) the
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first public announcement by TDS, the Company or any other person of an
intention to effect the Designated Transaction and (b) the occurrence of such
Designated Transaction and ending on the date that is 60 days after the later to
occur of (A) the occurrence of such Designated Transaction and (B) the first
public announcement by TDS, the Company or any other person of the occurrence of
such Designated Transaction, either of the following events has occurred: (i)
the LYONs shall be rated by any Rating Agency at any time during the Rating
Period at a rating which is lower than the rating of the LYONs by such Rating
Agency on the Rating Date by more than one gradation (including gradations
within Rating Categories as well as between Rating Categories) or (ii) any
Rating Agency shall have withdrawn its rating of the LYONs during the Rating
Period.
"Rating Agency" is defined in the Indenture as Standard & Poor's Corporation
and its successors ("S&P"), and Moody's Investors Service, Inc. and its
successors ("Moody's"), or, if S&P or Moody's, or both, shall not make a rating
of the LYONs publicly available, a nationally recognized United States
statistical rating agency or agencies, substituted by the Company, with written
notice to the Trustee, for S&P or Moody's, or both, as the case may be.
"Rating Category" is defined in the Indenture as each major rating category
symbolized by (x) in the case of S&P, AAA, AA, A, BBB, BB, B, CCC, CC and C and
each such Rating Category shall include pluses or minuses ("gradations")
modifying such capital letters; (y) in the case of Moody's, Aaa, Aa, A, Baa, Ba,
B, Caa, Ca and C and each such Rating Category shall include added numerals such
as 1, 2 or 3 ("gradations") modifying such letters; and (z) with respect to any
other Rating Agency, comparable or equivalent symbols. "Rating Date" is defined
as the date that is 60 days prior to the Reference Date.
The Company will comply with the provisions of Rule 13e-4, Rule 14e-1 and
any other tender offer rules under the Exchange Act which may then be applicable
and will file Schedule 13E-4 or any other schedule required thereunder in
connection with any offer by the Company to purchase LYONs at the option of
Holders upon a Change in Control. (Section 3.13.) The Change in Control purchase
feature of the LYONs may in certain circumstances make more difficult or
discourage a takeover of the Company. The Change in Control purchase feature,
however, is not the result of management's knowledge of any specific effort to
accumulate Common Shares or Series A Common Shares or to obtain control of the
Company by means of a merger, tender offer, solicitation or otherwise, or part
of a plan by management to adopt a series of anti-takeover provisions. See
"Description of Capital Stock." Instead, a change in control purchase feature is
a standard term contained in other LYONs offerings that have been marketed by
the Underwriter, and the terms of such feature result from negotiations between
the Company and the Underwriter.
The Company could, in the future, enter into certain transactions, including
certain recapitalizations of the Company, that would not constitute a Change in
Control with respect to the Change in Control purchase feature of the LYONS, but
that would increase the amount of Senior Indebtedness outstanding at such time.
No LYONs may be purchased at the option of Holders upon a Change in Control of
the Company if there has occurred (prior to, on or after the giving, by the
Holders of such LYONs, of the required Change in Control Purchase Notice) and is
continuing an Event of Default with respect to the LYONs described under "Events
of Default; Notice and Waiver" below (other than a default in the payment of the
Change in Control Purchase Price with respect to such LYONs). (Sections 3.10 and
10.03.) Further, the LYONs are subordinated to the prior payment of Senior
Indebtedness as described under "Subordination of LYONs; Effect of Corporate
Structure" above.
The Vendor Financing Agreement does not include any provision accelerating
the debt incurred thereunder upon a change in control, but does include
covenants prohibiting the Company from entering into certain transactions,
including a merger, consolidation or sale of substantially all of the Company's
assets, unless the Company is the surviving entity or obtains the consent of
NTFC.
MERGERS AND SALES OF ASSETS BY THE COMPANY
The Company may not consolidate with or merge into any other person or
convey, transfer or lease all or substantially all of its properties and assets
to another person, unless, among other items, (i) the resulting, surviving or
transferee person (if other than the Company) is organized and existing under
the laws of the United States, any state thereof or the District of Columbia and
such person assumes all obligations of the
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Company under the LYONs and the Indenture, and (ii) the Company or such
successor person shall not immediately thereafter be in default under the
Indenture. Upon the assumption of the Company's obligations by such a person in
such circumstances, subject to certain exceptions, the Company shall be
discharged from all obligations under the LYONs and the Indenture. (Section
5.01.) Although such transactions are permitted under the Indenture, certain of
the foregoing transactions occurring on or prior to June 15, 2000 could
constitute a Change in Control of the Company permitting each Holder to require
the Company to purchase the LYONs of such Holder as described above. (Section
3.09.)
EVENTS OF DEFAULT; NOTICE AND WAIVER
The Indenture provides that, if an Event of Default specified therein shall
have happened and be continuing, either the Trustee or the Holders of not less
than 25% in aggregate principal amount at maturity of the LYONs then outstanding
may declare the Issue Price of the LYONs plus the Original Issue Discount on the
LYONs accrued through the date of such declaration to be immediately due and
payable. In the case of certain events of bankruptcy or insolvency, the Issue
Price of the LYONs plus the Original Issue Discount accrued thereon through the
occurrence of such event shall automatically become and be immediately due and
payable. Upon acceleration, as described in either of the preceding sentences,
the subordination provisions of the Indenture preclude any payment being made to
Holders of LYONs for at least 120 days. (Section 10.03.) See "Subordination of
LYONs; Effect of Corporate Structure." Under certain circumstances, the Holders
of a majority in aggregate principal amount at maturity of the outstanding LYONs
may rescind any such acceleration with respect to the LYONs and its
consequences. (Section 6.02.) Interest shall, to the extent permitted by law,
accrue and be payable on demand upon a default in the payment of the principal
amount at maturity, Issue Price plus accrued Original Issue Discount, cash in
respect of a conversion, or any Redemption Price, Purchase Price or Change in
Control Purchase Price with respect to any LYON and such interest shall be
compounded semi-annually. The accrual of such interest on overdue amounts shall
be in lieu of, and not in addition to, the continued accrual of Original Issue
Discount. (Form of LYON, paragraph 1.)
Under the Indenture, Events of Default are defined as: (i) default in
payment of the principal amount at maturity, Issue Price plus accrued Original
Issue Discount, Redemption Price, Purchase Price or Change in Control Purchase
Price with respect to any LYON when such becomes due and payable or default in
payment of cash upon conversion of any LYON (in each case whether or not payment
is prohibited by the provisions of the Indenture); (ii) failure by the Company
to deliver Common Shares (or cash in lieu of fractional Common Shares) when such
Common Shares (or cash in lieu of fractional Common Shares) are required to be
delivered following conversion of a LYON and the continuance of such default for
10 days; (iii) failure by the Company to comply with any of its other agreements
in the LYONs or the Indenture upon receipt by the Company of notice of such
default by the Trustee or by Holders of not less than 25% in aggregate principal
amount at maturity of the LYONs then outstanding and the Company's failure to
cure (or obtain a waiver of) such default within 60 days after receipt by the
Company of such notice; (iv) default under any bond, debenture, note or other
evidence of indebtedness for money borrowed by the Company having an aggregate
outstanding principal amount of in excess of $25,000,000, which default shall
have resulted in such indebtedness being accelerated, without such indebtedness
being discharged or such acceleration having been rescinded or annulled within
twenty days after receipt of notice thereof by the Company from the Trustee or
the Company and the Trustee from the Holders of not less than 25% in aggregate
principal amount at maturity of the LYONs then outstanding (unless such default
has been cured or waived); or (v) certain events of bankruptcy or insolvency.
(Section 6.01.)
The Trustee shall give notice to Holders of the LYONs of any continuing
default known to the Trustee within 90 days after the occurrence thereof;
provided, that the Trustee may withhold such notice, as to any default other
than a payment default, if it determines in good faith that withholding the
notice is in the interests of the Holders. (Section 7.05.)
The Holders of a majority in aggregate principal amount at maturity of the
outstanding LYONs may direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee or exercising any trust or
power conferred on the Trustee, provided that such direction shall not be in
conflict with any law or the Indenture and subject to certain other limitations.
(Section 6.05.) Before proceeding to
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exercise any right or power under the Indenture at the direction of such
Holders, the Trustee shall be entitled to receive from such Holders reasonable
security or indemnity satisfactory to it against the costs, expenses and
liabilities which might be incurred by it in complying with any such direction.
(Section 7.01.) No Holder of any LYON will have any right to pursue any remedy
with respect to the Indenture or the LYONs, unless (i) such Holder shall have
previously given the Trustee written notice of a continuing Event of Default;
(ii) the Holders of at least 25% in aggregate principal amount at maturity of
the outstanding LYONs shall have made a written request to the Trustee to pursue
such remedy; (iii) such Holder or Holders have offered to the Trustee reasonable
security or indemnity satisfactory to the Trustee; (iv) the Holders of a
majority in aggregate principal amount at maturity of the outstanding LYONs have
not given the Trustee a direction inconsistent with such request within 60 days
after receipt of such request; and (v) the Trustee shall have failed to comply
with the request within such 60-day period. (Section 6.06.)
However, the right of any Holder (x) to receive payment of the principal
amount at maturity, Issue Price plus accrued Original Issue Discount, cash in
respect of a conversion, Redemption Price, Purchase Price or Change in Control
Purchase Price with respect to any LYON and any interest in respect of a default
in the payment of any such amounts on such LYON, on or after the due date
expressed in such LYON, (y) to convert LYONs or (z) to institute suit for the
enforcement of any such payments or conversion shall not be impaired or
adversely affected without such Holder's consent. (Section 6.07.) The Holders of
at least a majority in aggregate principal amount at maturity of the outstanding
LYONs may waive an existing default and its consequences, other than (i) any
default in any payment on the LYONs, (ii) any default which constitutes a
failure to convert any LYON in accordance with its terms or (iii) any default in
respect of certain covenants or provisions in the Indenture which may not be
modified without the consent of the Holder of each LYON as described in
"Modification" below. (Section 6.04.)
The Company will be required to furnish to the Trustee annually a statement
as to any default by the Company in the performance and observance of its
obligations under the Indenture. (Section 4.03.)
MODIFICATION
Without the consent of any Holder of LYONs, the Company and the Trustee may
amend the Indenture to cure any ambiguity, omission, defect or inconsistency, to
provide for the assumption by a successor person of the obligations of the
Company under the Indenture, to provide for uncertificated LYONs in addition to
certificated LYONs (so long as any uncertificated LYONs are in registered form
for purposes of the Internal Revenue Code), to eliminate the Company's option to
pay cash in lieu of delivering Common Shares upon conversion of LYONs (other
than cash in lieu of fractional Common Shares and except with respect to such
elections already made) or to eliminate the Company's option to enter into
Common Share Delivery Arrangements in respect of conversions of LYONs (except
for those already entered into), to make any change that does not adversely
affect the rights of any Holder of LYONs or to comply with any requirement of
the Commission in connection with the qualification of the Indenture under the
Trust Indenture Act of 1939. (Section 9.01.) No amendment may be made to the
subordination provisions of the Indenture that adversely affects the rights of
any holder of Senior Indebtedness then outstanding, unless the holders of such
Senior Indebtedness (as required pursuant to the terms of such Senior
Indebtedness) consent to such change. (Section 9.02.)
Modification and amendment of the Indenture or the LYONs may be effected by
the Company and the Trustee with the consent of the Holders of not less than a
majority in aggregate principal amount at maturity of the LYONs then
outstanding. However, without the consent of each Holder affected thereby, no
amendment may, among other things: (i) reduce the principal amount at maturity,
Issue Price, amount of cash to be paid by the Company in respect of a conversion
of LYONs, Purchase Price, Change in Control Purchase Price or Redemption Price
with respect to any LYON, or extend the stated maturity of any LYON or alter the
manner or rate of accrual of Original Issue Discount or interest, or make any
LYON payable in money or securities other than that stated in the LYON; (ii)
make any reduction in the principal amount at maturity of LYONs whose Holders
must consent to an amendment or any waiver under the Indenture or modify the
Indenture provisions relating to such amendments or waivers; (iii) make any
change that adversely affects the right to convert any LYON or the right to
require the Company to purchase a LYON (including the right to receive cash in
lieu of Common Shares upon conversion or cash or TDS Common Equity Securities in
lieu
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of, or in combination with, Common Shares upon purchase by the Company at the
option of Holders of LYONs, other than elimination of the Company's option to
pay cash in lieu of delivering Common Shares upon conversion of LYONs as
described above); (iv) modify the provisions of the Indenture relating to the
subordination of the LYONs in a manner adverse to the Holders of the LYONs; or
(v) impair the right to institute suit for the enforcement of any payment with
respect to, or conversion of, the LYONs. (Section 9.02.)
LIMITATIONS OF CLAIMS IN BANKRUPTCY
If a bankruptcy proceeding is commenced in respect of the Company, the claim
of the Holder of a LYON is, under Title 11 of the United States Code, limited to
the Issue Price of the LYON plus that portion of the Original Issue Discount
that has accrued from the date of issue to the commencement of the proceeding.
In addition, the Holders of the LYONs will be subordinated in right of payment
to Senior Indebtedness and effectively subordinated to the indebtedness and
other obligations of the Company's subsidiaries. See "Subordination of LYONs;
Effect of Corporate Structure."
TAXATION OF LYONS
See "Certain Tax Aspects" for a discussion of certain United States Federal
income tax aspects that will apply to Holders of LYONs.
INFORMATION CONCERNING THE TRUSTEE
Harris Trust and Savings Bank will initially be the Trustee, Registrar,
Paying Agent and Conversion Agent under the Indenture and custodian in
connection with the Securities Loan Agreement. Harris Trust and Savings Bank is
also the transfer agent and registrar for the Company's Common Shares.
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 140,000,000 Common
Shares, $1.00 par value; 50,000,000 Series A Common Shares, $1.00 par value; and
5,000,000 shares of Preferred Stock, $1.00 par value, issuable in series. As of
March 31, 1995, the Company had outstanding 48,775,305 Common Shares, 33,005,877
Series A Common Shares and 95,972 shares of Preferred Stock.
PREFERRED STOCK
Pursuant to the Company's Restated Certificate of Incorporation, as amended,
the Board of Directors is authorized to establish and designate one or more
series of Preferred Stock, without further authorization of the Company's
shareholders, and to fix the number of shares and the relative rights,
preferences and limitations of any such series, except that so long as not less
than 500,000 shares of Series A Common Shares are outstanding, no shares of any
series of Preferred Stock may have more than one vote per share, have the right
to vote as a separate class with respect to elections of directors or (subject
to any requirements of applicable law) any other matter, or be issued for
consideration of less than $100 per share. The shares of any series of Preferred
Stock need not be identical in any respect with the shares of any other series.
VOTING RIGHTS
Each Series A Common Share is entitled to ten votes on all matters, and each
Common Share is entitled to one vote on all matters. The Company's Restated
Certificate of Incorporation, as amended, provides that the number of directors
shall be not less than three, and that the directors shall be divided into three
classes serving staggered three-year terms. The holders of Common Shares, voting
as a separate class, are entitled to elect 25% of the directors (rounded up to
the nearest whole number), and the holders of Series A Common Shares and
Preferred Stock, voting together, are entitled to elect the remaining directors.
However, if at the time of an election of directors the outstanding Series A
Common Shares represent less than 12.5% of the total outstanding shares of
common stock of the Company, then the holders of Series A Common Shares and the
Preferred Stock do not have class voting rights in the election of directors,
and the holders of Common Shares, Series A Common Shares, and Preferred Stock
vote together for the election of the remaining 75% of the directors (rounded
down to the nearest whole number). See "Risk Factors--Control by Principal
Shareholder; Antitakeover Provisions."
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Except as mentioned above and except for matters where applicable law
requires the approval by one or more classes of stock voting as separate
classes, all classes of stock of the Company vote as a single class.
DIVIDEND RIGHTS
Subject to the payment of all dividends accumulated and unpaid on
outstanding shares of Preferred Stock, the holders of Common Shares are entitled
to receive such dividends as may be declared from time to time by the Board of
Directors. Unless the same or greater dividends, on a per share basis, are
declared and paid at the same time on Common Shares, no dividends may be
declared or paid on the Series A Common Shares.
In the case of stock dividends, the Board of Directors is authorized to
distribute shares of a particular class of the Company's capital stock only as
follows: (i) Common Shares may be paid to the holders of Common Shares and
proportionately to holders of Series A Common Shares; (ii) Series A Common
Shares may be paid to the holders of Common Shares and proportionately to the
holders of Series A Common Shares; or (iii) Common Shares may be paid to the
holders of Common Shares and Series A Common Shares may be paid proportionately
to the holders of Series A Common Shares. The Board of Directors also is
authorized to distribute to Common and Series A Common Shareholders shares of
any subsidiary that has two classes of common stock with each class possessing
respective rights, preferences and limitations similar to the respective rights,
preferences and limitations of the Common and Series A Common Shares. Thus,
although it has no present intention to do so, the Company could recapitalize
any of its subsidiaries and then spin the subsidiary off to the Company's
shareholders, with the holders of Series A Common Shares receiving the
subsidiary's Series A Common Shares and the holders of Common Shares receiving
the subsidiary's Common Shares.
The Revolving Credit Agreement and the Vendor Financing Agreement impose
certain restrictions on the payment of dividends. See "Dividend Policy."
CONVERSION RIGHTS
The Common Shares have no conversion rights. The Series A Common Shares are
convertible, on a share-for-share basis, into Common Shares. The Series A Common
Shares which are converted may not be reissued.
LIQUIDATION RIGHTS
Upon liquidation, the holders of Common Shares and Series A Common Shares
are entitled to receive a pro rata share of all assets available to shareholders
after payment of the aggregate liquidation preference of any Preferred Stock
then outstanding.
PREEMPTIVE AND SIMILAR RIGHTS
Under the Company's Restated Certificate of Incorporation, as amended, TDS,
as the holder of Series A Common Shares, has preemptive rights to purchase any
additional Series A Common Shares issued or sold by the Company, including
treasury shares other than Series A Common Shares not sold for cash.
In addition to the preemptive rights granted to TDS as a holder of Series A
Common Shares of the Company pursuant to the Restated Certificate of
Incorporation, as amended, of the Company, TDS has the right under an Exchange
Agreement between the Company and TDS to subscribe to any issuance of Common
Shares or any other voting securities of the Company, or of any securities
convertible into or exchangeable for, or carrying a right to subscribe to or
acquire, Common Shares or any other voting securities of the Company. To the
extent an issuance is made for consideration other than cash, the fair market
value of the non-cash consideration will be determined by resolution of the
Board of Directors of the Company. The proportion of each such issuance that TDS
has the right to subscribe to (which right may be exercisable in full or in
part) is equal to the proportion of the Common Shares that TDS would own
immediately before the issuance if all securities of the Company that are
convertible into Common Shares (including securities convertible into another
class that is convertible into Common Shares and including securities that in
the future will become convertible) were converted (successively, if necessary)
into Common Shares. The rights of TDS to subscribe to Common Shares may be
transferred to any one or more transferees from TDS of any Common Shares, Series
A Common Shares, or any securities convertible into
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or exchangeable for, or carrying a right to subscribe to or acquire, shares of
either such class. In connection with the offering of LYONs, TDS has waived its
right under the Exchange Agreement to purchase LYONs (which are convertible into
Common Shares) and any Common Shares deliverable upon conversion thereof.
However, TDS has expressly not waived any rights it might have under the
Exchange Agreement to acquire Common Shares in the event the Company determines
to deliver Common Shares in connection with the election of holders to cause the
Company to purchase LYONs on the Purchase Date or Optional Purchase Date. TDS
has agreed, in the event it has such rights, that the fair market value of the
consideration paid for the Common Shares for purposes of any such purchase
right, will be equal to the Market Price of the Common Shares as determined for
such Purchase Date or Optional Purchase Date under the Indenture. TDS has also
waived any rights it may have permitting it to transfer its rights to subscribe
for and purchase such Common Shares on the Purchase Date or Optional Purchase
Date. See "Description of LYONs-- Purchase of LYONs at the Option of the
Holder."
Pursuant to a Common Stock Purchase Agreement, dated April 24, 1987, between
the Company and S.A. Coditel, an affiliate of Coditel Brabant S.A. and
Codiservices S.A. (collectively, "Coditel"), as a result of the transfer of the
rights of S.A. Coditel to Coditel, for a period of 10 years after the closing
date of such agreement, Coditel has the right to subscribe to any issuance of
the Company's common stock or of securities convertible into such common stock
except for issuance to employees and directors of the Company or its
subsidiaries or any issuance made in connection with the acquisition of an
interest in any other entity. To the extent an issuance is made for
consideration other than cash, the fair market value of the non-cash
consideration will be determined by resolution of the Board of Directors of the
Company. The amount of common stock of each of such issue to which Coditel may
subscribe shall not exceed such proportion of such issue as (i) the amount of
the Company's common stock held by Coditel immediately prior to the time of such
issuance bears to (ii) the sum of the amount of issued and outstanding common
stock of the Company and the amount of such common stock issuable upon
conversion of all of the Company's issued and outstanding securities, warrants
and options (regardless of whether such securities, warrants and options are
then convertible), immediately prior to the time of such issuance. In connection
with the offering of LYONs, Coditel has waived its right to purchase LYONs
(which are convertible into Common Shares) and any Common Shares deliverable
upon conversion thereof.
REDEMPTION BY COMPANY
The Company may redeem stock (other than Series A Common Shares) from any
holder at the lesser of (i) fair market value, or (ii) such holder's purchase
price if purchased within a year of such redemption, to prevent the loss, or
permit the reinstatement of any license or franchise from any governmental
agency, where such loss is based upon such holder failing to possess
qualifications prescribed by such governmental agency. This right of redemption
could be applicable to a person receiving Common Shares upon the conversion of
LYONS by the Holder thereof or upon purchase by the Company of LYONs at the
option of the Holder thereof if such person falls within such category of
holders based on qualifications prescribed by any such governmental agency at
the time.
CORPORATE OPPORTUNITY ARRANGEMENTS
The Company's Restated Certificate of Incorporation, as amended, provides
that, so long as at least 500,000 Series A Common Shares are outstanding, the
Company may not, without the written consent of TDS, engage in any non-cellular
activities. The Company has been informed that TDS intends to give its consent
to the acquisition of any non-cellular interest that is incidental to the
acquisition of a cellular interest. However, TDS could impose conditions on any
such consent, including a requirement that the Company resell any non-cellular
interest to TDS or that the Company give TDS the right of first refusal with
respect to such sale.
The Restated Certificate of Incorporation, as amended, also restricts the
circumstances under which the Company is entitled to claim that an opportunity,
transaction, agreement or other arrangement to which TDS, or any person in which
TDS has or acquires a financial interest, is or should be the property of the
Company or its subsidiaries. In general, so long as at least 500,000 Series A
Common Shares are outstanding, the Company will not be entitled to any such
"corporate opportunity" unless it relates solely to the construction of, the
ownership of interests in, and/or the management of, cellular telephone systems,
and
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then only if such corporate opportunity did not arise in any way as a result of
the rights otherwise retained by TDS. The Restated Certificate of Incorporation
allows the Company to pursue future opportunities to provide cellular service
and design, consulting, engineering and construction management services for
cellular telecommunications systems located outside the United States.
GENERAL
All issued and outstanding shares of Preferred Stock, Common Shares and
Series A Common Shares are fully paid and nonassessable, and all Common Shares
issued by the Company upon conversion of LYONs or upon purchase of LYONs by the
Company at the option of the Holders thereof will be fully paid and
nonassessable when issued.
The transfer agent and registrar for the Company's Common Shares is Harris
Trust and Savings Bank, Chicago, Illinois. The Company serves as transfer agent
and registrar for shares of Preferred Stock and Series A Common Shares.
The Company will distribute annual reports to its shareholders which will
contain its audited financial statements.
CERTAIN TAX ASPECTS
The following summary of material United States Federal income tax
considerations is for general information only. The summary is based upon the
Internal Revenue Code of 1986, as amended (the "Code"), its legislative history,
existing and proposed regulations thereunder, administrative rulings and court
decisions, all as in effect and existing on the date hereof and all of which are
subject to change at any time. The tax treatment of a Holder of LYONs may vary
depending upon the Holder's particular situation. Certain Holders (including
insurance companies, tax-exempt organizations, individual retirement and other
tax-deferred accounts, financial institutions, broker-dealers, foreign
corporations, and individuals who are not citizens or residents of the United
States) may be subject to special rules not discussed below. This summary does
not discuss the tax considerations of subsequent purchasers of LYONs, including
those who purchase LYONs resold by the Standby Share Deliverer, and is limited
to investors who hold LYONs as capital assets. Accordingly, purchasers of LYONs,
including such subsequent purchasers, should consult their own tax advisors as
to the particular tax consequences to them of acquiring, holding, converting or
otherwise disposing of the LYONs, including the applicability and the effect of
any state, local or foreign tax laws and any changes in applicable tax laws.
The Company has been advised by its counsel, Sidley & Austin, that in the
opinion of such counsel the LYONs will be treated as indebtedness for United
States Federal income tax purposes. The following discussion of tax
considerations assumes that the LYONs will be so treated.
ORIGINAL ISSUE DISCOUNT
The LYONs are being issued at a substantial discount from their principal
amount at maturity. For Federal income tax purposes, the difference between the
issue price (the first price at which a substantial amount of the LYONs are sold
for money) and the principal amount at maturity of each LYON constitutes
Original Issue Discount. Holders of the LYONs will be required to include
Original Issue Discount in income periodically over the term of the LYONs before
the receipt of the cash, Common Shares, TDS Common Equity Securities or other
payments attributable to such income.
A Holder of a LYON must include in gross income for Federal income tax
purposes the sum of the daily portions of Original Issue Discount with respect
to the LYON for each day during the taxable year or portion of a taxable year on
which such Holder holds the LYON (for purposes of this tax discussion, "Accrued
Original Issue Discount"). The daily portion is determined by allocating to each
day of the accrual period a pro rata portion of an amount equal to the adjusted
issue price of the LYON at the beginning of the accrual period multiplied by the
yield to maturity of the LYON (determined by compounding at the close of each
accrual period and adjusted for the length of the accrual period). The accrual
period will generally be each six month period which ends on the day in each
calendar year corresponding to the maturity date of the LYON or the date six
months before such maturity date. The information returns provided to holders
and the Internal Revenue Service (the "Service") by the Company regarding the
accrual of Original Issue Discount will be based on these
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six month accrual periods. Treasury regulations, however, permit a Holder to
select an accrual period of any length and to vary the length of the accrual
period over the term of the debt instrument, provided that each accrual period
is no longer than one year and each scheduled payment of principal or interest
occurs on the final day of an accrual period or on the first day of an accrual
period. The adjusted issue price of the LYON at the start of any accrual period
will be the issue price of the LYON increased by the Accrued Original Issue
Discount for each prior accrual period. Under these rules, Holders will have to
include in gross income increasingly greater amounts of Original Issue Discount
in each successive accrual period. The Company will be required to furnish
annually to the Service and to certain noncorporate Holders information
regarding the amount of Original Issue Discount attributable to that year.
DISPOSITIONS
GENERAL. A Holder's basis for determining gain or loss on the sale,
redemption, retirement, conversion, purchase by the Company or other disposition
of a LYON (any such event, a "Disposition") will be increased by any Accrued
Original Issue Discount includable in such Holder's gross income. Gain or loss
recognized upon a Disposition under the rules described below will generally be
capital gain or loss, and will be long-term capital gain or loss if the LYON has
been held for more than one year. A Holder's obligation to include in gross
income the daily portions of Original Issue Discount with respect to a LYON will
prospectively terminate on the date of a Disposition.
SALE, REDEMPTION, RETIREMENT OR PURCHASE BY THE COMPANY FOR CASH. Upon the
sale, redemption, retirement or purchase by the Company of a LYON for cash
(including pursuant to a Purchase Notice or a Change in Control Purchase
Notice), a Holder will recognize capital gain or loss equal to the difference
between the amount of cash received and such Holder's adjusted tax basis in the
LYON.
CONVERSION. The tax treatment of a Holder who elects to convert a LYON will
depend on whether the Company chooses (i) to deliver cash, (ii) to deliver
Common Shares (other than through a Standby Share Deliverer) or (iii) to arrange
for a Standby Share Deliverer to deliver Common Shares. In no event will a
combination of cash and Common Shares be delivered to a Holder with respect to
the conversion of any given LYON (except with respect to cash received in lieu
of a fractional Common Share).
If the Company delivers cash, a Holder will recognize capital gain or loss
equal to the difference between the amount of cash received and such Holder's
adjusted tax basis in the LYON.
If the Company delivers Common Shares (other than through a Standby Share
Deliverer), a Holder will not recognize gain or loss (except with respect to
cash received in lieu of a fractional Common Share), and the Holder's tax basis
in the Common Shares received will be the same as the Holder's tax basis in the
LYON on the date of conversion (exclusive of any tax basis allocable to a
fractional Common Share). The holding period for the Common Shares received will
include the holding period for the LYON tendered to the Company in exchange
therefor, except that the holding period of Common Shares allocable to Accrued
Original Issue Discount may commence on the day following the date of
conversion.
If the Company arranges for a Standby Share Deliverer to deliver Common
Shares, a Holder will recognize capital gain or loss equal to the difference
between the fair market value of such Common Shares (plus any cash received in
lieu of a fractional Common Share) and such Holder's adjusted tax basis in the
LYON. The Holder's tax basis in the Common Shares received will be equal to
their fair market value at the time of conversion, and the holding period for
such Common Shares will begin on the day following the date of conversion.
As a result of these rules, a Holder's receipt of Common Shares upon
conversion of a LYON will either be taxable or tax-free, depending on the source
of the Common Shares. Because the source of the Common Shares will depend on
whether the Company, at its option (with the agreement of a Standby Share
Deliverer in the case of a Common Share Delivery Arrangement), chooses to
deliver the Common Shares or arranges for a Standby Share Deliverer to do so, a
Holder will have no control over whether its receipt of Common Shares upon
conversion is taxable or tax-free. The Company will notify each converting
Holder, through the Conversion Agent, of the source of the Common Shares on or
prior to the delivery thereof, at which time the Holder will be able to
determine whether its receipt of the Common Shares is taxable or tax-free.
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PURCHASE AT THE OPTION OF THE HOLDER. The tax treatment of a Holder that
elects to have a LYON purchased by the Company with respect to the Purchase Date
or, if applicable, the Optional Purchase Date will depend on the type of
consideration the Company elects to deliver.
If the Company elects to pay the Purchase Price in cash, TDS Common Equity
Securities or any combination thereof, a Holder will recognize capital gain or
loss equal to (i) the sum of any cash received and the fair market value of any
TDS Common Equity Securities received, minus (ii) such Holder's adjusted tax
basis in the LYON. The Holder's tax basis in any TDS Common Equity Securities
received will be equal to their fair market value upon receipt following the
Purchase Date (or Optional Purchase Date), and the Holder's holding period for
the TDS Common Equity Securities will begin on the day following such receipt.
If the Company elects to pay the Purchase Price in Common Shares, a Holder
will not recognize gain or loss (except with respect to cash received in lieu of
a fractional Common Share), and the Holder's tax basis in the Common Shares
received will be the same as the Holder's tax basis in the LYON exchanged
therefor (exclusive of any tax basis allocable to a fractional Common Share).
The holding period for the Common Shares received will include the holding
period for the LYON tendered to the Company in exchange therefor, except that
the holding period of Common Shares allocable to Accrued Original Issue Discount
may commence on the day following such exchange.
If the Company elects to pay the Purchase Price partly in cash and/or TDS
Common Equity Securities and partly in Common Shares, a Holder will recognize
capital gain (but not loss) equal to the lesser of (i) the sum of any cash
received and the fair market value of any TDS Common Equity Securities received
and (ii) such sum plus the fair market value of the Common Shares received minus
such Holder's adjusted tax basis in the LYON. The Holder's tax basis in any TDS
Common Equity Securities received will be equal to their fair market value upon
receipt following the Purchase Date (or Optional Purchase Date), and the
Holder's holding period for the TDS Common Equity Securities will begin on the
day following such receipt. The Holder's tax basis in the Common Shares received
will be the same as the Holder's tax basis in the LYON exchanged therefor,
decreased by the sum of any cash received and the fair market value of any TDS
Common Equity Securities received and increased by the amount of gain
recognized. The holding period for the Common Shares received will include the
holding period for the LYON tendered to the Company in exchange therefor, except
that the holding period of Common Shares allocable to Accrued Original Issue
Discount may commence on the day following such exchange.
CASH IN LIEU OF FRACTIONAL SHARES. Cash received in lieu of a fractional
Common Share upon a Disposition of a LYON should be treated as a payment in
exchange for the fractional interest in such Common Share. Accordingly, the
receipt of cash in lieu of a fractional Common Share should generally result in
capital gain or loss, if any (measured by the difference between the cash
received for the fractional Common Share and the Holder's tax basis in the
fractional Common Share).
CONSTRUCTIVE DIVIDEND
If at any time the Company makes a distribution of property to stockholders
that would be taxable to such stockholders as a dividend for United States
Federal income tax purposes (for example, distributions of evidences of
indebtedness or assets of the Company, but generally not stock dividends or
rights to subscribe for Common Shares) and, pursuant to the antidilution
provisions of the LYONs, the Conversion Rate of the LYONs is increased, such
increase will likely result in taxable income for the Holders of the LYONs.
Similarly, if the Conversion Rate is increased at the discretion of the Company,
such increase will likely result in taxable income for the Holders of the LYONs.
TELEPHONE AND DATA SYSTEMS, INC.
TDS owned all of the 33,005,877 Series A Common Shares which were
outstanding and all of the 95,972 shares of Preferred Stock which were
outstanding as of March 31, 1995. TDS also owned 33,278,278 or 68.2% of the
48,775,305 Common Shares which were outstanding as of March 31, 1995. This
Prospectus covers 750,000 of such Common Shares owned by TDS in connection with
the transactions contemplated by
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the Securities Loan Agreement described under "Underwriting." Since TDS is only
lending such Common Shares to Merrill Lynch under the Securities Loan Agreement,
Merrill Lynch is obligated to return such borrowed Common Shares to TDS.
UNDERWRITING
Merrill Lynch (the "Underwriter") has agreed, subject to the terms and
conditions of the Purchase Agreement, to purchase $650,000,000 aggregate
principal amount at maturity of the LYONs from the Company. The Purchase
Agreement provides that the Underwriter will be obligated to purchase all such
LYONs if any are purchased. The Underwriter has advised the Company that it
proposes to offer the LYONs directly to the public at the offering price set
forth on the front cover page of this Prospectus. After the initial public
offering, the offering price may be changed. The LYONs are offered subject to
receipt and acceptance by the Underwriter and to certain other conditions,
including the right to reject orders in whole or in part.
The Company has granted the Underwriter an option for 30 days after the date
of this Prospectus to purchase up to an additional $95,000,000 aggregate
principal amount at maturity of the LYONs to cover over-allotments, if any, at
the initial public offering price less the underwriting discount, plus accrued
Original Issue Discount, if any, accrued from the Issue Date, computed on a
semi-annual bond equivalent basis.
The Company has agreed to indemnify the Underwriter against certain civil
liabilities, including liabilities under the Securities Act, and to contribute
to payments the Underwriter may be required to make in respect thereof.
The Company has agreed with the Underwriter not to sell, offer to sell,
grant any option for the sale of, or otherwise dispose of or transfer any
securities similar to the LYONs, any Common Shares or any Series A Common Shares
or any securities convertible into or exercisable or exchangeable for such
securities, Common Shares or Series A Common Shares for a period of 90 days
after the date of this Prospectus without the prior written consent of the
Underwriter other than Common Shares issuable upon the conversion of LYONs
offered hereby, Common Shares issued or sold pursuant to employee benefit plans
and dividend reinvestment plans, Common Shares issued upon exercise of currently
outstanding options or warrants, or Common Shares issued in connection with
acquisitions of interests in cellular licenses or systems. In addition, TDS has
agreed with the Underwriter, except pursuant to the Securities Loan Agreement
described below, not to sell, offer to sell, grant any option for the sale of,
or otherwise dispose of or transfer any Common Shares or Series A Common Shares
or any securities convertible into or exercisable or exchangeable for Common
Shares or Series A Common Shares for a period of 90 days after the date of this
Prospectus without the prior written consent of the Underwriter.
In connection with the offering of the LYONs, TDS and Merrill Lynch intend
to enter into a securities loan agreement (the "Securities Loan Agreement"),
which provides that, subject to certain restrictions and with the agreement of
TDS, Merrill Lynch may from time to time borrow, return and reborrow Common
Shares from TDS; provided, however, that the number of Common Shares borrowed
under the Securities Loan Agreement at any time may not exceed 750,000 (which
number of Common Shares may be reduced from time to time by TDS). Merrill Lynch
shall be obligated generally to return borrowed securities on three business
days' notice from TDS. The obligation of Merrill Lynch to return borrowed
securities shall be secured by cash, an irrevocable letter of credit or U.S.
Government Obligations, in form satisfactory to Harris Trust and Savings Bank,
as custodian, in an amount not less than 102% of the market value of the
borrowed securities. If the market value of the borrowed securities falls or
rises over time, Merrill Lynch may be required to provide additional collateral
or may be entitled to the return of collateral. The recalculation of the market
value of the borrowed securities will be done on a daily basis. Any fees payable
by Merrill Lynch under the Securities Loan Agreement will be paid directly to
Harris Trust and Savings Bank, as custodian. The Securities Loan Agreement is
intended to facilitate ordinary trading and market-making activity in the LYONs
by Merrill Lynch and may also be used by Merrill Lynch, as Standby Share
Deliverer, to obtain Common Shares deliverable by it in connection with any
Common Share Delivery Arrangement entered into with the Company, as described in
"Description of LYONs--Conversion Rights." The availablility of Common Shares
under the Securities Loan Agreement, if any, at any time is, as described above,
not assured and any such availability does not assure market-making activity in
the LYONs by Merrill Lynch. This Prospectus may be used by Merrill Lynch in
connection with the sale of Common Shares borrowed by
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Merrill Lynch from TDS under the Securities Loan Agreement. Merrill Lynch is not
under any obligation to engage in market-making activity with respect to the
LYONs, or to agree to any such Common Share Delivery Arrangement, and any
market-making, or activity as a Standby Share Deliverer, actually engaged in by
Merrill Lynch may cease at any time.
The Underwriter has previously marketed (and anticipates continuing to
market) securities of issuers under the trademark "LYONs." The LYONs offered by
the Company hereby contain certain terms and provisions which are different from
such other previously marketed LYONs, the terms and provisions of which also
vary. See "Description of LYONs."
From time to time the Underwriter and certain of its affiliates have
performed, and may in the future perform, investment banking or financial
advisory services for the Company and TDS.
Merrill Lynch, as Standby Share Deliverer and at the request of the Company,
may agree to acquire, through the delivery of Common Shares, LYONs upon
conversion by the Holders thereof and Merrill Lynch may resell such LYONs. Any
such sales may be made directly to one or more purchasers at negotiated prices,
at market prices prevailing at the time of sale or at prices related to such
market prices. This Prospectus may be used by the Standby Share Deliverer in
connection with such transactions.
Merrill Lynch may from time to time offer Common Shares borrowed from TDS
under the Securities Loan Agreement directly to one or more purchasers at
negotiated prices, at market prices prevailing at the time of sale or at prices
related to such market prices.
LEGAL MATTERS
Certain legal matters with respect to the securities of the Company offered
hereunder will be passed upon by Sidley & Austin, Chicago, Illinois. Stephen P.
Fitzell and Sherry S. Treston, Secretary and Assistant Secretary, respectively,
of the Company, are partners of Sidley & Austin. Walter C.D. Carlson, a director
of the Company and TDS, and a trustee and beneficiary of the voting trust which
controls TDS and the Company, is a partner of Sidley & Austin. Michael G. Hron,
and William S. DeCarlo, the Secretary and Assistant Secretary of TDS,
respectively, are partners of Sidley & Austin. Mayer, Brown & Platt, Chicago,
Illinois, is acting as counsel for the Underwriter in connection with certain
legal matters relating to the initial sale of the LYONs offered hereby. Mayer,
Brown & Platt from time to time acts as counsel in certain matters for the
Company, TDS and members of the Carlson family. Debora de Hoyos, the spouse of
Walter C. D. Carlson and a director of American Paging, Inc., a publicly traded
subsidiary of TDS, is a partner of Mayer, Brown & Platt.
EXPERTS
The audited consolidated financial statements and schedule of United States
Cellular Corporation incorporated by reference in this Prospectus have been
audited by Arthur Andersen LLP, independent public accountants, as indicated in
their reports incorporated by reference herein. Reference is made to the above
said report on the consolidated financial statements of United States Cellular
Corporation which includes explanatory paragraphs that describe uncertainties
discussed in Note 14 of the Notes to Consolidated Financial Statements and the
change in the method of accounting for income taxes in 1993 as discussed in Note
9 of the Notes to Consolidated Financial Statements. In their report, that firm
states that with respect to certain limited partnership interests, their opinion
is based on the reports of other independent accountants, namely Coopers &
Lybrand L.L.P. The text of these reports is incorporated by reference in this
Prospectus. The combined financial statements incorporated by reference in this
Prospectus have been reviewed for compilation by Arthur Andersen LLP, as
indicated in their report incorporated by reference herein. Reference is made to
this report which includes an explanatory paragraph with respect to
uncertainties discussed in Note 7 of the Notes to Unaudited Combined Financial
Statements. The reports of other independent accountants on the underlying
financial statements which have been combined are incorporated by reference
herein. The financial statements referred to above have been incorporated by
reference in reliance upon the authority of such firms as experts in accounting
and auditing in giving said reports.
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NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY, TDS OR THE UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE SECURITIES OFFERED
HEREBY IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO
MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR THE
AFFAIRS OF THE COMPANY OR TDS SINCE THE DATE HEREOF.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Available Information.......................... 2
Incorporation of Certain Documents By
Reference..................................... 2
Prospectus Summary............................. 3
Risk Factors................................... 12
Use of Proceeds................................ 15
Capitalization................................. 16
Dividend Policy................................ 19
Price Range of Common Shares................... 19
Business....................................... 20
Description of LYONs........................... 33
Description of Capital Stock................... 46
Certain Tax Aspects............................ 49
Telephone and Data Systems, Inc................ 51
Underwriting................................... 52
Legal Matters.................................. 53
Experts........................................ 53
</TABLE>
$650,000,000
[LOGO]
UNITED STATES
CELLULAR CORPORATION
LIQUID YIELD OPTION-TM- NOTES
DUE 2015
(ZERO COUPON--SUBORDINATED)
-----------------
PROSPECTUS
-----------------
MERRILL LYNCH & CO.
JUNE 7, 1995
"LIQUID YIELD OPTION" AND "LYONS" ARE
TRADEMARKS OF MERRILL LYNCH & CO., INC.
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