<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-9712
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UNITED STATES CELLULAR CORPORATION
(Exact name of Registrant as specified in its charter)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
DELAWARE 62-1147325
- ------------------------------ ------------------------------
(State or other jurisdiction (IRS Employer Identification
of incorporation or No.)
organization)
</TABLE>
8410 WEST BRYN MAWR, SUITE 700, CHICAGO, ILLINOIS 60631
(Address of principal executive offices) (Zip code)
REGISTRANT'S TELEPHONE NUMBER: (312) 399-8900
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<S> <C>
Name of each exchange
Title of each class on which registered
- ---------------------------- --------------------------
Common Shares, $1 par value American Stock Exchange
</TABLE>
Securities registered pursuant to Section 12(g) of the Act: None
-------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes _X_ No ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K._X_
As of February 29, 1996, the aggregate market value of registrant's Common
Shares held by nonaffiliates was approximately $589.1 million (based upon the
closing price of the Common Shares on February 29, 1996, of $36.00, as reported
by the American Stock Exchange).
The number of shares outstanding of each of the registrant's classes of
common stock, as of February 29, 1996, is 52,780,383 Common Shares, $1 par
value, and 33,005,877 Series A Common Shares, $1 par value.
DOCUMENTS INCORPORATED BY REFERENCE
Those sections or portions of the registrant's 1995 Annual Report to
Shareholders and of the registrant's Notice of Annual Meeting of Shareholders
and Proxy Statement for its Annual Meeting of Shareholders to be held May 15,
1996, described in the cross reference sheet and table of contents attached
hereto are incorporated by reference into Parts II and III of this report.
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<PAGE>
CROSS REFERENCE SHEET
AND
TABLE OF CONTENTS
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<TABLE>
<CAPTION>
PAGE NUMBER OR
REFERENCE (1)
------------
<S> <C> <C>
Item 1. Business................................................................................................. 3
Item 2. Properties............................................................................................... 23
Item 3. Legal Proceedings........................................................................................ 23
Item 4. Submission of Matters to a Vote of Security Holders...................................................... 23
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.................................... 24(2)
Item 6. Selected Financial Data.................................................................................. 24(3)
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.................... 24(4)
Item 8. Financial Statements and Supplementary Data.............................................................. 24(5)
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..................... 24
Item 10. Directors and Executive Officers of the Registrant....................................................... 25(6)
Item 11. Executive Compensation................................................................................... 25(7)
Item 12. Security Ownership of Certain Beneficial Owners and Management........................................... 25(8)
Item 13. Certain Relationships and Related Transactions........................................................... 25(9)
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K......................................... 26
</TABLE>
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(1) Parenthetical references are to information incorporated by reference from
Exhibit 13, which includes portions of the registrant's Annual Report to
Shareholders for the year ended December 31, 1995 ("Annual Report") and from
the registrant's Notice of Annual Meeting of Shareholders and Proxy
Statement for its Annual Meeting of Shareholders to be held on May 15, 1996
(the "Proxy Statement").
(2) Annual Report section entitled "United States Cellular Stock and Dividend
Information."
(3) Annual Report section entitled "Selected Consolidated Financial Data."
(4) Annual Report section entitled "Management's Discussion and Analysis of
Results of Operations and Financial Condition."
(5) Annual Report sections entitled "Consolidated Statements of Operations,"
"Consolidated Balance Sheets," "Consolidated Statements of Cash Flows,"
"Consolidated Statements of Changes in Common Shareholders' Equity," "Notes
to Consolidated Financial Statements," "Report of Independent Public
Accountants" and "Consolidated Quarterly Income Information (Unaudited)."
(6) Proxy Statement sections entitled "Election of Directors" and "Executive
Officers."
(7) Proxy Statement section entitled "Executive Compensation," except for the
information specified in Item 402(a)(8) of Regulation S-K under the
Securities Exchange Act of 1934, as amended.
(8) Proxy Statement section entitled "Security Ownership of Certain Beneficial
Owners and Management."
(9) Proxy Statement section entitled "Certain Relationships and Related
Transactions."
<PAGE>
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[LOGO]
UNITED STATES CELLULAR CORPORATION
8410 WEST BRYN MAWR - CHICAGO, ILLINOIS 60631
TELEPHONE (312) 399-8900
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PART I
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ITEM 1. BUSINESS
THE COMPANY
United States Cellular Corporation (the "Company") provides cellular
telephone service to 710,000 customers through 137 majority-owned and managed
("consolidated") cellular systems serving approximately 17% of the geography and
approximately 8% of the population of the United States. Since 1985, when the
Company began providing cellular service in Knoxville, Tennessee, the Company
has expanded its cellular networks and customer service operations to cover 147
markets in 29 states as of December 31, 1995. In total, the Company now operates
nine market clusters, of which five have a total population of more than two
million, and each of which has a total population of more than one million, plus
other unclustered markets. Overall, 83% of the Company's 24.5 million population
equivalents are in markets which are or will be consolidated, 1% are in managed
but not consolidated markets and 16% 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 cellular market 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 following table summarizes the status of the Company's interests in
cellular markets at December 31, 1995.
<TABLE>
<S> <C>
Owns Majority Interest and Manages.................................... 137
Majority-owned and Managed Markets to be Divested (net of markets to
be acquired) (1)..................................................... (6)
Owns Minority Interest and Manages.................................... 9
---
Total Markets Managed or to be Managed by the Company................. 140
Markets Managed by Others (2)......................................... 61
---
Total Markets......................................................... 201
---
---
</TABLE>
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(1) The Company expects to divest controlling interests in eight markets and
acquire controlling interests in two markets. One of the markets to be
acquired is being operated by a third party until the Company acquires a
controlling interest in that market.
(2) Represents markets in which the Company owns or has the right to acquire a
minority or other noncontrolling interest and which are managed by third
parties; as of December 31, 1995, the Company accounted for its interests in
21 of these markets using the equity method and accounted for the remaining
40 markets, all held for sale or exchange, using the cost method.
Cellular systems in the Company's 137 majority-owned and managed markets
served 710,000 customers at December 31, 1995, and contained 1,116 cell sites.
The average penetration rate in the Company's consolidated markets was 3.18% at
December 31, 1995, and the churn rate in all consolidated markets averaged 2.1%
per month for the twelve months ended December 31, 1995.
3
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The Company was incorporated in Delaware in 1983. The Company's executive
offices are located at 8410 West Bryn Mawr, Chicago, Illinois 60631. Its
telephone number is 312-399-8900. The Common Shares of the Company are listed on
the American Stock Exchange under the symbol "USM."
Unless the context indicates otherwise: (i) references to the "Company"
refer to United States Cellular Corporation and its subsidiaries; (ii)
references to "TDS" refer to Telephone and Data Systems, Inc. and its
subsidiaries; (iii) references to "MSA" or to a particular city refer to the
Metropolitan Statistical Area, as designated by the U.S. Office of Management
and Budget and used by the Federal Communications Commission ("FCC") in
designating metropolitan cellular market areas; (iv) references to "RSA" refer
to the Rural Service Area, as used by the FCC in designating non-MSA cellular
market areas; (v) references to cellular "markets" or "systems" refer to MSAs,
RSAs or both; (vi) references to "population equivalents" mean the population of
a market, based on 1995 Donnelley Marketing Service Estimates, multiplied by the
percentage interests 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 ("licensee") from the FCC to construct or operate a cellular
system in such market.
CELLULAR TELEPHONE OPERATIONS
THE 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.
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"). The MTSO 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 competing
communications technologies such as conventional landline and mobile telephone,
Specialized Mobile Radio ("SMR") systems and radio paging. Personal
communications service ("PCS") is expected to be competitive with cellular
service in the future in all of the Company's markets, and emerging technologies
such as Enhanced Specialized Mobile Radio ("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 are 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
transmission technique was approved for implementation by the cellular industry.
Time Division Multiple Access ("TDMA") technology was selected as one industry
standard by the
4
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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 deployed by the Company in
a commercial trial during 1996. 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 several 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 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 the last two
years, the Company has principally been in a start-up phase. Until that time,
the Company's activities had 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 experienced operating losses and net losses
from its inception until the past two years. During the past two years, the
Company generated operations-driven net income and has significantly increased
its operating cash flows during that time. Management anticipates increasing
growth in cellular units in service and revenues as the Company continues its
vigorous expansion and development programs. Marketing and system operations
expenses associated with this expansion may reduce the rate of growth in
operating cash flow and operating income during the period of accelerated
growth. 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 and
1995, changes in any of several factors may 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 Company is building a substantial presence in selected geographic areas
throughout the United States where it can efficiently integrate and manage
cellular telephone systems. Its cellular interests include regional market
clusters in the following areas: Iowa, Wisconsin/Illinois, Missouri, Eastern
North Carolina/South Carolina, Virginia, West Virginia/Pennsylvania/Maryland,
Oregon/California, Washington/Oregon/Idaho, Indiana/Kentucky, Eastern
Tennessee/Western North Carolina, Oklahoma/Missouri/Kansas, Texas/Oklahoma,
Maine/New Hampshire/Vermont, Florida/Georgia and Southwestern Texas. See "The
Company's Cellular Interests." 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.
CELLULAR SYSTEMS DEVELOPMENT
ACQUISITIONS. 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 mid-sized and rural markets and has been based on obtaining
interests with rights to manage the underlying market.
Including transfers of RSA interests from TDS, the Company has increased its
population equivalents by 63%, from approximately 15.0 million at December 31,
1990 to approximately 24.5 million at December 31, 1995. Markets managed or to
be managed by the Company have increased from 88
5
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markets at December 31, 1990 to 140 markets at December 31, 1995. As of December
31, 1995, 84% of the Company's population equivalents represented interests in
markets the Company manages or expects to manage compared to 77% at December 31,
1990.
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 10% over the last
five years, but decreased by 4% from 1994 to 1995 due to the increased number of
completed and pending divestitures.
The Company plans to acquire additional cellular interests through
acquisitions or exchanges 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 exchanges, there can be no assurance that the
Company, or TDS for the benefit of the Company, will be able to negotiate
additional acquisitions or exchanges on terms acceptable to it or that
regulatory approvals, where required, will be received. The Company plans to
retain minority interests in certain cellular markets which it believes will
earn a favorable return on investment. Other minority interests may be exchanged
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, has historically
negotiated acquisitions of cellular interests from third parties primarily in
consideration for the Company's Common Shares or TDS's Common or Preferred
Shares. Cellular interests acquired by TDS in these transactions have been
assigned to the Company. At that time, the Company reimbursed TDS for the value
of TDS securities 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 delivered at
the time the acquisitions were completed. The fair market value of the Company's
securities issued to TDS in connection with these transactions was equal to the
fair market value of the TDS securities delivered in the transactions and was
determined at the time the transactions were completed.
In the past two years, the Company, or TDS for the benefit of the Company,
has also negotiated divestitures and exchanges of cellular interests with third
parties. The consideration received from these divestitures of non-strategic
markets has primarily been cash, which has been used to reduce debt or for
general corporate purposes. The exchanges have included the divestiture of
controlling interests in non-strategic markets in exchange for controlling
interests in markets which further enhance the Company's clusters.
COMPLETED ACQUISITIONS. During 1995, the Company completed the acquisition
of controlling interests in eleven markets and several additional minority
interests representing approximately 1.7 million population equivalents for an
aggregate consideration of $151.0 million. The consideration consisted of 3.1
million of the Company's Common Shares, 456,000 of the Company's Common Shares
to be issued in the future, an increase of $14.6 million in the debt to TDS
under the Revolving Credit Agreement and $23.2 million in cash. The debt under
the Revolving Credit Agreement, 2.7 million of the Company's Common Shares and
the Common Shares issuable were issued or issuable to TDS to reimburse TDS for
TDS Common Shares issued and issuable and cash paid to third parties in
connection with these acquisitions.
COMPLETED DIVESTITURES AND EXCHANGES. During 1995, the Company completed
the divestiture of controlling interests in six markets and minority interests
in six other markets representing approximately 1.1 million population
equivalents for an aggregate consideration of $129.3 million, primarily cash.
Also during 1995, the Company completed six separate exchange transactions which
resulted in the acquisition of controlling interests in twelve markets,
representing 2.0 million population equivalents, and the divestiture of ten
markets plus three market partitions, representing 2.1 million population
equivalents.
PENDING ACQUISITIONS, DIVESTITURES AND EXCHANGES. At December 31, 1995, the
Company, or TDS for the benefit of the Company, had entered into agreements to
purchase a controlling interest in one market and several minority interests in
another market, representing approximately 302,000 population
6
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equivalents. Also at that date, the Company, or TDS for the benefit of the
Company, had entered into agreements to divest controlling interests in seven
markets, one minority interest and one market partition representing
approximately 870,000 population equivalents. The Company has entered into
another agreement to exchange markets with another cellular operator. Pursuant
to the exchange agreement, the Company will receive a majority interest in one
market, plus cash, in exchange for a majority interest in one market the Company
currently owns. The Company also has an agreement to settle litigation related
to an investment interest which was sold in 1995. Pursuant to the divestiture,
exchange and settlement agreements, the Company expects to receive approximately
$150 million in cash and $20 million of notes receivable due in three years. All
of these pending transactions are expected to be completed during 1996.
The Company maintains shelf registration of its Common Shares and Preferred
Stock under the Securities Act of 1933 for issuance specifically in connection
with acquisitions.
The Company is a majority-owned subsidiary of TDS. TDS owns 80.8% of the
combined total of the outstanding Common Shares and Series A Common Shares of
the Company and controls 95.8% of the combined voting power of both classes of
common stock. The Company benefits from the extensive telecommunications
industry experience of TDS, which also operates telephone and paging businesses
and is developing its PCS business.
CELLULAR INTERESTS AND CLUSTERS
The Company operates clusters of adjacent cellular systems in nearly all of
its markets, 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 also 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 exchanges which will complement its established market
clusters. From time to time, the Company may also consider exchanging or selling
its interests in markets which do not fit well with its long-term strategies.
The Company owned or had the right to acquire interests in cellular
telephone systems in 201 markets at December 31, 1995, representing 24.5 million
population equivalents. The following table summarizes the growth in the
Company's population equivalents in recent years and the development status of
these population equivalents.
<TABLE>
<CAPTION>
DECEMBER 31,
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1995 1994 1993 1992 1991
--------- --------- --------- --------- ---------
(THOUSANDS OF POPULATION EQUIVALENTS)(1)
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<S> <C> <C> <C> <C> <C>
Operational Markets:
Majority-Owned and Managed.................................. 19,755 18,365 18,619 14,597 10,651
Minority-Owned and Managed (2).............................. 511 1,195 1,166 2,049 1,788
Markets to be Managed, Net of Markets to be Divested: (3)
Majority-Owned.............................................. 269 2,200 1,015 1,847 3,046
Minority-Owned (2).......................................... -- -- 6 5 124
--------- --------- --------- --------- ---------
Total Markets Managed and to be Managed..................... 20,535 21,760 20,806 18,498 15,609
Minority Interests in Markets Managed by Others............... 3,916 3,703 3,505 3,606 3,334
--------- --------- --------- --------- ---------
Total....................................................... 24,451 25,463 24,311 22,104 18,943
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
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(1) Based on 1995 Donnelley Marketing Services estimates for all years.
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(2) Includes markets where the Company has the right to acquire an interest but
does not currently own an interest.
(3) Includes markets which are operational but which are currently managed by
third parties.
The following section details the Company's cellular interests, including
those it owned or had the right to acquire as of December 31, 1995. The table
presented therein 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. 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.
THE COMPANY'S CELLULAR INTERESTS
The table below sets forth certain information with respect to the interests
in cellular markets which the Company owned or had the right to acquire pursuant
to definitive agreements as of December 31, 1995.
<TABLE>
<CAPTION>
PERCENTAGE TOTAL
CHANGE CURRENT AND
CURRENT PURSUANT TO ACQUIRABLE
1995 PERCENTAGE DEFINITIVE POPULATION
CLUSTER/MARKET POPULATION INTEREST AGREEMENTS(1) TOTAL EQUIVALENTS
- -------------------------------------------- ----------- ----------- -------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
MARKETS MANAGED BY THE COMPANY:
MIDWEST REGIONAL MARKET CLUSTER:
IOWA:
Des Moines, IA.......................... 422,000 100.00% 100.00% 422,000
Davenport, IA-IL........................ 359,000 97.37 97.37 350,000
Humboldt (IA 10)........................ 183,000 100.00 100.00 183,000
Cedar Rapids, IA........................ 178,000 95.66 95.66 171,000
Muscatine (IA 4)........................ 155,000 100.00 100.00 155,000
Iowa (IA 6)............................. 154,000 100.00 100.00 154,000
Waterloo-Cedar Falls, IA................ 148,000 90.31 90.31 133,000
Hardin (IA 11).......................... 111,000 100.00 100.00 111,000
Jackson (IA 5).......................... 109,000 100.00 100.00 109,000
Kossuth (IA 14)......................... 108,000 100.00 100.00 108,000
Lyon (IA 16)............................ 104,000 100.00 100.00 104,000
Iowa City, IA........................... 101,000 100.00 100.00 101,000
Mitchell (IA 13)........................ 67,000 100.00 100.00 67,000
Dubuque, IA............................. 88,000 72.96 72.96 64,000
Mills (IA 1)............................ 61,000 100.00 100.00 61,000
Audubon (IA 7).......................... 55,000 100.00 100.00 55,000
Union (IA 2)............................ 50,000 100.00 100.00 50,000
Monroe (IA 3)........................... 91,000 49.00 49.00 45,000
Winneshiek (IA 12) *.................... 116,000 24.50 24.50 28,000
Ida (IA 9) *............................ 64,000 16.67 16.67 11,000
----------- -----------
2,724,000 2,482,000
----------- -----------
WISCONSIN/ILLINOIS:
Peoria, IL.............................. 345,000 100.00 100.00 345,000
Jo Daviess (IL 1)....................... 317,000 100.00 100.00 317,000
Wood (WI 7)#............................ 286,000 0.00 100.00% 100.00 286,000
Adams (IL 4) *(2)....................... 214,000 100.00 100.00 214,000
Mercer (IL 3)........................... 204,000 100.00 100.00 204,000
Vernon (WI 8) *......................... 233,000 74.00 74.00 172,000
Pierce (WI 5)........................... 94,000 100.00 100.00 94,000
Wausau, WI *............................ 121,000 71.76 71.76 87,000
Trempealeau (WI 6) (2).................. 82,000 100.00 100.00 82,000
LaCrosse, WI............................ 102,000 74.57 74.57 76,000
Rochester, MN * (3)..................... 114,000 100.00 (85.33) 14.67 17,000
----------- -----------
2,112,000 1,894,000
----------- -----------
</TABLE>
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<TABLE>
<CAPTION>
PERCENTAGE TOTAL
CHANGE CURRENT AND
CURRENT PURSUANT TO ACQUIRABLE
1995 PERCENTAGE DEFINITIVE POPULATION
CLUSTER/MARKET POPULATION INTEREST AGREEMENTS(1) TOTAL EQUIVALENTS
- -------------------------------------------- ----------- ----------- -------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
MISSOURI:
Columbia, MO*........................... 124,000 100.00% 100.00% 124,000
Stone (MO 15)........................... 114,000 100.00 100.00 114,000
Laclede (MO 16)......................... 96,000 100.00 100.00 96,000
Washington (MO 13)...................... 91,000 100.00 100.00 91,000
Callaway (MO 6) *....................... 85,000 100.00 100.00 85,000
Schuyler (MO 3)......................... 56,000 100.00 100.00 56,000
Shannon (MO 17) *....................... 55,000 100.00 100.00 55,000
Linn (MO 5) (4)......................... 54,000 100.00 100.00 54,000
Brown (KS 5)............................ (5) 100.00 (100.00)% 0.00 --
DeKalb (MO 4)........................... (5) 100.00 (100.00) 0.00 --
Atchison (MO 1)......................... (5) 100.00 (100.00) 0.00 --
----------- -----------
675,000 675,000
----------- -----------
TOTAL MIDWEST REGIONAL MARKET
CLUSTER.............................. 5,511,000 5,051,000
----------- -----------
MID-ATLANTIC REGIONAL MARKET CLUSTER:
EASTERN NORTH CAROLINA/SOUTH CAROLINA:
Northampton (NC 8)...................... 286,000 100.00 100.00 286,000
Rockingham (NC 7)....................... 282,000 100.00 100.00 282,000
Harnett (NC 10)......................... 278,000 100.00 100.00 278,000
Greene (NC 13).......................... 239,000 100.00 100.00 239,000
Greenville (NC 14)...................... 238,000 100.00 100.00 238,000
Hoke (NC 11)............................ 221,000 100.00 100.00 221,000
Ashe (NC 3)............................. 159,000 100.00 100.00 159,000
Chesterfield (SC 4)..................... 211,000 100.00 100.00 211,000
Sampson (NC 12)......................... 126,000 100.00 100.00 126,000
Chatham (NC 6).......................... 155,000 81.16 81.16 126,000
Camden (NC 9)........................... 119,000 100.00 100.00 119,000
----------- -----------
2,314,000 2,285,000
----------- -----------
VIRGINIA:
Roanoke, VA............................. 234,000 100.00 100.00 234,000
Bedford (VA 4).......................... 175,000 100.00 100.00 175,000
Lynchburg, VA........................... 159,000 100.00 100.00 159,000
Charlottesville, VA..................... 142,000 82.41 11.11 93.52 133,000
Buckingham (VA 7)....................... 89,000 100.00 100.00 89,000
Tazewell (VA 2) (2)..................... 83,000 100.00 100.00 83,000
Bath (VA 5)............................. 62,000 100.00 100.00 62,000
----------- -----------
944,000 935,000
----------- -----------
WEST VIRGINIA/PENNSYLVANIA/MARYLAND:
Monongalia (WV 3) *..................... 269,000 100.00 100.00 269,000
Raleigh (WV 7) *........................ 255,000 100.00 100.00 255,000
Grant (WV 4) *.......................... 169,000 100.00 100.00 169,000
Tucker (WV 5) *......................... 131,000 100.00 100.00 131,000
Hagerstown, MD *........................ 127,000 100.00 100.00 127,000
Cumberland, MD *........................ 101,000 100.00 100.00 101,000
Bedford (PA 10) (2) *................... 49,000 100.00 100.00 49,000
Garrett (MD 1) *........................ 30,000 100.00 100.00 30,000
Greene (PA 9)........................... (5) 100.00 (100.00) 0.00 --
----------- -----------
1,131,000 1,131,000
----------- -----------
TOTAL MID-ATLANTIC REGIONAL MARKET
CLUSTER.............................. 4,389,000 4,351,000
----------- -----------
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE TOTAL
CHANGE CURRENT AND
CURRENT PURSUANT TO ACQUIRABLE
1995 PERCENTAGE DEFINITIVE POPULATION
CLUSTER/MARKET POPULATION INTEREST AGREEMENTS(1) TOTAL EQUIVALENTS
- -------------------------------------------- ----------- ----------- -------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
NORTHWEST REGIONAL MARKET CLUSTER:
OREGON/CALIFORNIA:
Coos (OR 5)............................. 255,000 100.00% 100.00% 255,000
Del Norte (CA 1)........................ 208,000 100.00 100.00 208,000
Medford, OR *........................... 166,000 100.00 100.00 166,000
Mendocino (CA 9)........................ 140,000 100.00 100.00 140,000
Crook (OR 6) *.......................... 187,000 62.50 62.50 117,000
Modoc (CA 2)............................ 59,000 100.00 100.00 59,000
----------- -----------
1,015,000 945,000
----------- -----------
WASHINGTON/OREGON/IDAHO:
Clark (ID 6)............................ 290,000 100.00 100.00 290,000
Pacific (WA 6) *........................ 179,000 100.00 100.00 179,000
Richland-Kennewick-Pasco, WA *.......... 177,000 100.00 100.00 177,000
Butte (ID 5)............................ 156,000 100.00 100.00 156,000
Yakima, WA *............................ 212,000 54.55 54.55 115,000
Okanogan (WA 4)......................... 115,000 100.00 100.00 115,000
Umatilla (OR 3) *....................... 149,000 60.42 60.42 90,000
Kittitas (WA 5) (2) *................... 69,000 83.50 83.50 58,000
Hood River (OR 2) *..................... 71,000 30.32 30.32 22,000
Skamania (WA 7) *....................... 27,000 30.32 30.32 8,000
----------- -----------
1,445,000 1,210,000
----------- -----------
TOTAL NORTHWEST REGIONAL MARKET
CLUSTER.............................. 2,460,000 2,155,000
----------- -----------
INDIANA/KENTUCKY MARKET CLUSTER:
Meade (KY 3)............................ 311,000 100.00 100.00 311,000
Evansville, IN.......................... 321,000 78.13 78.13 251,000
Owen (IN 7)............................. 222,000 100.00 100.00 222,000
Elliott (KY 9).......................... 204,000 100.00 100.00 204,000
Fulton (KY 1)........................... 188,000 100.00 100.00 188,000
Clay (KY 11)............................ 171,000 100.00 100.00 171,000
Powell (KY 10).......................... 153,000 100.00 100.00 153,000
Union (KY 2)............................ 127,000 100.00 100.00 127,000
Ross (OH 9) *........................... 247,000 49.00 49.00 121,000
Owensboro, KY........................... 91,000 81.81 81.81 74,000
Warren (IN 5) *......................... 122,000 33.33 33.33 41,000
Miami (IN 4) *.......................... 180,000 0.00 14.29% 14.29 26,000
Williams (OH 1) *....................... (5) 75.00 (75.00) 0.00 0
----------- -----------
TOTAL INDIANA/KENTUCKY MARKET
CLUSTER.............................. 2,337,000 1,889,000
----------- -----------
EASTERN TENNESSEE/WESTERN NORTH CAROLINA
MARKET CLUSTER:
Knoxville, TN *......................... 546,000 96.03 96.03 524,000
Whitfield (GA 1)........................ 217,000 100.00 100.00 217,000
Asheville, NC *......................... 206,000 100.00 100.00 206,000
Henderson (NC 4) (2) *.................. 189,000 100.00 100.00 189,000
Bledsoe (TN 7) (2) *.................... 146,000 96.03 96.03 140,000
Hamblen (TN 4) (2) *.................... 130,000 100.00 100.00 130,000
Giles (TN 6) *.......................... 156,000 80.00 80.00 125,000
Macon (TN 3) *.......................... 334,000 16.67 16.67 56,000
Yancey (NC 2) (2) *..................... 31,000 100.00 100.00 31,000
----------- -----------
TOTAL EASTERN TENNESSEE/WESTERN
NORTH CAROLINA MARKET CLUSTER........ 1,955,000 1,618,000
----------- -----------
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE TOTAL
CHANGE CURRENT AND
CURRENT PURSUANT TO ACQUIRABLE
1995 PERCENTAGE DEFINITIVE POPULATION
CLUSTER/MARKET POPULATION INTEREST AGREEMENTS(1) TOTAL EQUIVALENTS
- -------------------------------------------- ----------- ----------- -------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
TEXAS/OKLAHOMA/MISSOURI/KANSAS REGIONAL
MARKET CLUSTER:
OKLAHOMA/MISSOURI/KANSAS:
Tulsa, OK *............................. 787,000 55.06% 55.06% 433,000
Elk (KS 15) *........................... 154,000 0.00 99.00% 99.00 153,000
Joplin, MO *............................ 143,000 100.00 100.00 143,000
Seminole (OK 6)......................... 218,000 55.06 55.06 120,000
Nowata (OK 4) (2) *..................... 103,000 55.06 55.06 57,000
----------- -----------
1,405,000 906,000
----------- -----------
TEXAS/OKLAHOMA:
Garvin (OK 9)........................... 201,000 100.00 100.00 201,000
Haskell (OK 10)......................... 83,000 100.00 100.00 83,000
Wichita Falls, TX *..................... 135,000 51.65 51.65 70,000
Lawton, OK *............................ 118,000 51.65 51.65 61,000
Jackson (OK 8) *........................ 96,000 51.65 51.65 50,000
Hardeman (TX 5) (2) *................... 38,000 51.65 51.65 20,000
Briscoe (TX 4) (2) *.................... 11,000 51.65 51.65 6,000
Beckham (OK 7) (2) *.................... 10,000 51.65 51.65 5,000
----------- -----------
692,000 496,000
----------- -----------
TOTAL TEXAS/OKLAHOMA/MISSOURI/KANSAS
REGIONAL MARKET CLUSTER.............. 2,097,000 1,402,000
----------- -----------
MAINE/NEW HAMPSHIRE/VERMONT MARKET
CLUSTER:
Manchester-Nashua, NH................... 349,000 87.95 87.95 307,000
Coos (NH 1) *........................... 222,000 100.00 100.00 222,000
Kennebec (ME 3)......................... 222,000 100.00 100.00 222,000
Somerset (ME 2)......................... 151,000 100.00 100.00 151,000
Bangor, ME.............................. 148,000 91.08 91.08 135,000
Addison (VT 2) (2) *.................... 107,000 100.00 100.00 107,000
Washington (ME 4) *..................... 85,000 100.00 100.00 85,000
Lewiston-Auburn, ME..................... 104,000 82.05 82.05 85,000
Oxford (ME 1)........................... 83,000 100.00 100.00 83,000
----------- -----------
TOTAL MAINE/NEW HAMPSHIRE/VERMONT
MARKET CLUSTER....................... 1,471,000 1,397,000
----------- -----------
FLORIDA/GEORGIA MARKET CLUSTER:
Tallahassee, FL......................... 275,000 100.00 100.00 275,000
Worth (GA 14)........................... 246,000 100.00 100.00 246,000
Gainesville, FL......................... 219,000 100.00 100.00 219,000
Toombs (GA 11).......................... 152,000 100.00 100.00 152,000
Fort Pierce, FL (6)*.................... 285,000 49.00 49.00 140,000
Walton (FL 10).......................... 111,000 100.00 100.00 111,000
Putnam (FL 5)........................... 70,000 100.00 100.00 70,000
Dixie (FL 6)............................ 54,000 100.00 100.00 54,000
Jefferson (FL 8)........................ 53,000 100.00 100.00 53,000
Calhoun (FL 9).......................... 40,000 100.00 100.00 40,000
----------- -----------
TOTAL FLORIDA/GEORGIA MARKET
CLUSTER.............................. 1,505,000 1,360,000
----------- -----------
SOUTHWESTERN TEXAS MARKET CLUSTER:
Corpus Christi, TX...................... 380,000 100.00 100.00 380,000
Atascosa (TX 19)........................ 224,000 100.00 100.00 224,000
Edwards (TX 18)......................... 211,000 100.00 100.00 211,000
Laredo, TX.............................. 169,000 93.74 93.74 158,000
Wilson (TX 20).......................... 137,000 100.00 100.00 137,000
Victoria, TX............................ 81,000 99.22 99.22 80,000
----------- -----------
TOTAL SOUTHWESTERN TEXAS MARKET
CLUSTER.............................. 1,202,000 1,190,000
----------- -----------
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE TOTAL
CHANGE CURRENT AND
CURRENT PURSUANT TO ACQUIRABLE
1995 PERCENTAGE DEFINITIVE POPULATION
CLUSTER/MARKET POPULATION INTEREST AGREEMENTS(1) TOTAL EQUIVALENTS
- -------------------------------------------- ----------- ----------- -------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
OTHER OPERATIONS:
Hawaii (HI 3)........................... 139,000 100.00% 100.00% 139,000
Poughkeepsie, NY........................ (5) 83.11 (83.11)% 0.00 --
Columbia (NY 6)......................... (5) 100.00 (100.00) 0.00 --
----------- -----------
139,000 139,000
----------- -----------
Total Managed Markets................. 23,066,000 20,552,000
----------- -----------
MARKETS MANAGED BY OTHERS:
Los Angeles/Oxnard, CA *................ 15,478,000 5.50 5.50 851,000
Nashville/Clarksville-Hopkinsville,
TN-KY *................................ 1,282,000 49.00 49.00 627,000
Baton Rouge, LA (7) *................... 565,000 52.00 (2.01) 49.99 282,000
Seattle-Everett/Tacoma/Bremerton, WA
*...................................... 3,019,000 7.01 7.01 212,000
Biloxi/Pascagoula, MS *................. 357,000 49.00 49.00 175,000
Oklahoma City, OK *..................... 989,000 14.60 14.60 144,000
Portland, ME *.......................... 283,000 49.00 49.00 139,000
McAllen, TX............................. 476,000 26.20 26.20 125,000
Portsmouth-Dover-Rochester, NH-ME *..... 277,000 40.00 40.00 111,000
Others (Fewer than 100,000 population
equivalents
each).................................. 1,233,000
-----------
Total Population Equivalents of
Markets Managed by Others............ 3,899,000
-----------
Total Population Equivalents.......... 24,451,000
-----------
-----------
<FN>
- ------------
* Designates wireline market.
# Designates operational market managed by a third party until the Company
acquires a controlling interest.
(1) Interests under these agreements are expected to be acquired or divested at
the various times specified therein following the satisfaction of customary
closing conditions.
(2) These markets have been or will be partitioned into more than one licensed
area. The 1995 population, percentage ownership and number of population
equivalents shown are for the licensed areas within the markets in which
the Company owns or has the right to acquire an interest.
(3) The Company has an agreement to divest a controlling interest in this
market and will retain an investment interest after the divestiture.
(4) The Company has an agreement to divest a partitioned area in this market.
The 1995 population, percentage ownership and number of population
equivalents shown is for the licensed area within the market which the
Company will own upon completion of the divestiture.
(5) The Company has agreements to divest its controlling interests in these
markets. The 1995 populations of these markets are not included in the
related cluster or group totals.
(6) The Company owns 80% of the entity which owns and operates this market but
has only a 49% interest in the earnings and profits.
(7) The Company owns a noncontrolling limited partnership interest in this
market.
</TABLE>
12
<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 the
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 will also be implemented. Otherwise,
such systems will rely upon landline telephone 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 telephone lines from the landline
telephone company, 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 both systems.
The Company has continued to expand its internal network in 1995 to
encompass nearly all of its managed markets. 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 Corp., Southwestern Bell, AT&T Wireless 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 the Independent Telephone Network and the North
American Cellular Network.
During 1996, 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 "tumbling" electronic serial number
fraud due to the pre-call validation feature of networked systems.
Management 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 and time
required to make them operational.
The costs (exclusive of license costs) of 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 customer awareness of cellular service. The
marketing plan stresses the quality of the Company's service offerings and
incorporates both rate plans and cellular telephone equipment which
13
<PAGE>
are designed to meet the needs of a variety of customer segments and their usage
patterns. The Company's distribution channels include direct sales personnel,
agents and retail service centers in the vast majority of its markets. These
Company-owned and managed locations are designed to market cellular service to
the consumer segment in a familiar setting.
The Company manages each cluster of markets from one administrative office
with a local staff, including sales, customer service, engineering and in some
cases installation personnel. Direct sales consultants market cellular service
to potential business customers throughout each cluster. 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 provide for customers to obtain a minimum amount of usage at discounted
rates per minute, at fixed prices which are charged even if usage falls below a
defined monthly minimum amount.
The Company also continues to expand its relationships with 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
170 locations by the end of 1995. These Company-owned and operated businesses
utilize rental facilities in high-traffic areas. The Company is working toward a
uniform appearance of 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 Wal-Mart, 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
purchasing the Company's cellular service and to establish familiarity with the
Company's name. Advertising is directed at gaining customers, increasing
existing customers' usage 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.
14
<PAGE>
The following table summarizes, by operating cluster, the total population,
the Company's customer units and penetration for the Company's majority-owned
and managed markets that were operational as of December 31, 1995.
<TABLE>
<CAPTION>
OPERATING CLUSTERS POPULATION CUSTOMERS PENETRATION
- -------------------------------------------------------------------------- ------------- ----------- -----------
<S> <C> <C> <C>
Iowa...................................................................... 2,453,000 91,000 3.71%
Wisconsin/Illinois........................................................ 1,826,000 42,000 2.30
Missouri.................................................................. 920,000 24,000 2.61
Eastern North Carolina/South Carolina..................................... 2,314,000 63,000 2.72
Virginia.................................................................. 944,000 26,000 2.75
West Virginia/Pennsylvania/Maryland....................................... 1,319,000 29,000 2.20
Indiana/Kentucky.......................................................... 1,916,000 57,000 2.97
Oregon/California......................................................... 1,015,000 28,000 2.76
Washington/Oregon/Idaho................................................... 1,347,000 45,000 3.34
Eastern Tennessee/Western North Carolina.................................. 1,621,000 63,000 3.89
Oklahoma/Missouri/Kansas.................................................. 1,251,000 69,000 5.52
Texas/Oklahoma............................................................ 692,000 22,000 3.18
Maine/New Hampshire/Vermont............................................... 1,471,000 46,000 3.13
Florida/Georgia........................................................... 1,505,000 54,000 3.59
Southwestern Texas........................................................ 1,202,000 32,000 2.66
Other Operations.......................................................... 513,000 19,000 3.70
------------- ----------- -----------
22,309,000 710,000 3.18%
------------- ----------- -----------
------------- ----------- -----------
</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. Increasingly, the Company is providing cellular
service to consumers and to customers who use their cellular telephones for
security purposes. Although many of the Company's customers use in-vehicle
cellular telephones, most new customers are selecting portable cellular
telephones, as these units have become more compact and fully featured as well
as more attractively priced.
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 $44 per month during 1995, compared to 95
minutes and $47 per month in 1994. Revenue generated by roamers, together with
local, toll and other revenues, brought the Company's total average monthly
service revenue per customer unit in majority-owned and managed markets to $72
during 1995. Average monthly service revenue per customer unit decreased
approximately 9% during 1995, related to the industry-wide trend of newer
customers tending to use fewer minutes per month, to per minute pricing
decreases, off-peak incentives and to declining contribution of inbound roaming
revenue per customer. The Company anticipates that average monthly service
revenue per customer unit will continue to decline as its distribution channels
provide additional customers who generate lower revenue per local minute of use
and as roaming revenues grow more slowly. However, this effect is more than
offset by the Company's increasing number of customers.
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
15
<PAGE>
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 following table summarizes certain information about customers and
market penetration in the Company's managed operations.
<TABLE>
<CAPTION>
YEAR ENDED OR AT DECEMBER 31,
-----------------------------------------------------
1995 1994 1993 1992 1991
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Majority-owned and managed markets:
Cellular markets in operation (1)..................... 137 130 116 92 67
Total population of markets in service (000s)......... 22,309 21,314 19,383 15,014 11,481
Customer Units:
at beginning of period (2).......................... 421,000 261,000 150,800 97,000 57,300
additions during period (2)......................... 426,000 250,000 165,300 88,600 59,800
disconnects during period (2)....................... 137,000 90,000 55,100 34,800 20,100
at end of period (2)................................ 710,000 421,000 261,000 150,800 97,000
Market penetration at end of period (3)............... 3.18% 1.98% 1.35% 1.00% 0.84%
</TABLE>
- ----------
(1) Represents the number of markets in which the Company owned at least a 50%
interest and which it managed, including its reseller operation in
1991-1992. The revenues and expenses of these cellular markets are included
in the Company's consolidated revenues and expenses.
(2) Represents the approximate number of revenue-generating cellular telephones
served by the cellular markets referred to in footnote (1). The revenue
generated by such cellular telephones is included in consolidated revenues.
(3) Computed by dividing the number of customer units at the end of the period
by the total population of markets in service as estimated by Donnelley
Marketing Service for the respective years.
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 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. Additionally,
the Company maintains a repair facility in Tulsa, Oklahoma, which handles more
complex service and repair issues.
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 Company's operations 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
16
<PAGE>
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. See "Telecommunications Act of
1996."
For licensing purposes, the FCC has divided the United States into separate
geographic markets (MSAs and RSAs). In each market, the allocated cellular
frequencies are divided into two equal blocks. During the application process,
the FCC reserved one block of frequencies for non-wireline applicants and
another block for wireline applicants. Subject to FCC approval, a cellular
system may be sold to either a wireline or non-wireline 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, FCC rules
authorize the licensee to offer commercial service to the public. The FCC must
be notified of the construction of that cell within fifteen days of the
completion of construction. 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 neighboring cellular 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.
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 has: (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 licenses were renewed in 1995. The Company's
next renewal applications are due to be filed in 1996, for Des Moines, Iowa;
Peoria, Illinois and Roanoke, Virginia.
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 in its upcoming renewal filings. 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 non-wireline 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. In cases where applications for unserved areas are filed which are
"mutually exclusive" and would result in overlapping service areas, the FCC will
decide between the competing applicants by an auction process.
17
<PAGE>
The Company is also subject to state and local regulation in some instances.
In 1981, the FCC preempted the states from exercising jurisdiction in the areas
of licensing, technical standards and market structure. In 1993, Congress
preempted states from regulating the entry of cellular systems into service and
the rates charged by cellular systems to customers. However, certain states
still 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 continue to 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, though it is uncertain whether states any longer
have the right to regulate transfers under current law. The siting and
construction of the cellular facilities, including transmitter towers, antennas
and equipment shelters are still subject to state or local zoning and land use
regulations. In addition, states may still regulate other "terms and conditions"
of cellular service.
Pursuant to 1993 amendments to the Communications Act, cellular service is
classified as a Commercial Mobile Radio Service ("CMRS"), in that it is service
offered to the public, for a fee, which is interconnected to the public switched
telephone network. The FCC has determined that it will forebear from requiring
CMRS carriers to comply with a number of statutory provisions otherwise
applicable to common carriers, such as the filing of tariffs.
There are two regulatory proceedings currently pending before the FCC which
are of particular importance to the cellular industry. In the first proceeding,
the FCC has sought comment on whether "enhanced 911" regulations should be
imposed on cellular carriers. "Enhanced 911" capabilities would enable cellular
systems to determine the precise location of the person making the emergency
call.
In the second proceeding, the FCC, in 1996, issued a Notice of Proposed
Rulemaking regarding the method by which cellular carriers and Local Exchange
Carriers ("LECs") shall compensate each other for interconnecting cellular and
local exchange facilities. The FCC has tentatively proposed a "bill and keep"
system, under which cellular and other CMRS carriers and LECs would simply keep
all revenues from calls originating on their systems and would not have to pay
special "interconnection" charges to each other. Since CMRS carriers now pay
more to interconnect with LECs than VICE VERSA, such a rule, if adopted, would
be favorable to the cellular industry. The FCC has also sought comment in this
proceeding on whether it should pre-empt all state regulations of
interconnection.
The FCC has also allocated a total of 140 megahertz ("MHz") to broadband
PCS, 20 MHz to unlicensed operations and 120 MHz to licensed operations,
consisting of two 30 MHz blocks in each of the 51 Major Trading Areas ("MTAs")
and one 30 MHz block and three 10 MHz blocks in each of 493 Basic Trading Areas
("BTAs"). Cellular operators and those entities under common ownership with them
are permitted to participate in the ownership of PCS licensees, except for those
PCS licenses reserved for small businesses, and licenses for PCS service areas
in which the cellular operator owns a 20% or greater interest in a cellular
licensee, the service area of which covers 10% or more of the population of the
PCS service area. In the latter case, the cellular license is limited to one 10
MHz PCS channel block.
The FCC licensed the first two 30 MHz MTA frequency blocks in 1995. The FCC
is currently holding an auction for the 30 MHz BTA block which is reserved for
small business entities. American Portable Telecom, Inc. ("APT"), a subsidiary
of TDS which is developing broadband PCS services, has been licensed in eight
MTAs for 30 MHz blocks. APT has entered into a definitive agreement to sell its
license covering the Guam MTA, subject to FCC approval, and is pursuing the sale
of its license for the Alaska MTA.
In compliance with FCC restrictions on common ownership of cellular and
broadband PCS interests in overlapping market areas, the Company entered into a
series of arrangements for the divestiture or restructuring of certain of its
cellular interests in market areas where APT was awarded broadband PCS licenses.
A number of these proposed arrangements required FCC approval of assignment or
transfer of control applications before they could be consummated. All of these
applications have been approved by the FCC and are either consummated or
awaiting consummation. APT believes that it has taken reasonable steps to comply
with the FCC's cross-interest policies. This is no assurance that the FCC might
not raise questions regarding these compliance efforts.
18
<PAGE>
PCS technology is currently under development and will 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-makings. 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 radio frequency ("RF") emissions
from portable cellular telephones might be linked to cancer. The Company has
reviewed relevant scientific information and, based on such information, is not
aware of any credible 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.
TELECOMMUNICATIONS ACT OF 1996
The Telecommunications Act of 1996 (the "1996 Act") was enacted on February
8, 1996. The 1996 Act mandates significant changes in existing
telecommunications rules and policies to promote competition, ensure the
availability of telecommunications services to all parts of the nation and to
streamline regulation of the telecommunications industry to remove regulatory
burdens.
The 1996 Act provides that implementing its legislative objectives will be
the task of the FCC, the state public utilities commissions and a federal-state
joint board. Much of this implementation must be completed in numerous,
virtually simultaneous, proceedings with short, 6-18 month, deadlines. These
proceedings are expected to address issues (and possibly even proposals) already
before the FCC in pending rulemaking proceedings affecting the telephone and
wireless industries, as well as additional areas of telecommunications policy
and regulation. The proceedings will also replace, modify or terminate existing
FCC and state policies and regulations that are inconsistent with the new law.
OPEN COMPETITION. The primary purpose and effect of the new law is to open
all telecommunications markets to competition -- including local telephone
service. The 1996 Act makes virtually all direct or indirect state and local
barriers to competition unlawful. It directs the FCC to preempt all inconsistent
state and local laws and regulations, after notice and comment proceedings. It
also enables electric and other utilities to engage in telecommunications
service through qualifying subsidiaries.
Only narrow powers over competitive entry are left to state and local
authorities. Each state retains the power to impose "competitively neutral"
requirements that are consistent with the 1996 Act's universal service provision
and necessary for universal services, public safety and welfare, continued
service quality and consumer rights. While a state may not impose requirements
that effectively function as barriers to entry, it retains limited authority to
regulate certain competitive practices in rural telephone company service areas.
Some specific provisions of the 1996 Act which are expected to affect local
exchange, wireless and interexchange providers are:
EXPANDED INTERCONNECTION OBLIGATIONS. The 1996 Act establishes a general
duty for all telecommunications carriers, including cellular and PCS providers,
to interconnect with other carriers.
Congress has also developed a somewhat more specific list of requirements
with respect to the interconnection obligations of LECs. These obligations
include resale, number portability, dialing parity, access to rights-of-way and
reciprocal compensation. These LEC obligations do not extend to wireless service
providers, unless the FCC decides to include them within the definition of a
LEC. However, the requirements apply to competitive providers of local exchange
or exchange access services, as well as the incumbent LECs.
19
<PAGE>
Unless exempted or granted suspension or modification, LECs designated
"incumbents" have additional obligations as follows: to negotiate in good faith;
to comply with more detailed interconnection terms, including non-discrimination
and unbundling their network and service components so competitors may provide
only those elements they choose to provide; to offer their retail services at
wholesale rates to facilitate resale by their competitors; and to allow other
carriers to place equipment necessary for interconnection or access on their
premises.
The 1996 Act establishes a framework for state commissions to mediate and
arbitrate interconnection negotiations between incumbent LECs and carriers
requesting interconnection, services or network elements. The 1996 Act
establishes deadlines, standards for state commission approval of
interconnection agreements and recourse to the FCC if a state commission fails
to act.
UNIVERSAL SERVICE. The 1996 Act establishes principles and a process for
implementing a strengthened "universal service" policy. This policy seeks
nationwide, affordable service and access to advanced telecommunications and
information services. It calls for reasonably comparable urban and rural rates
and services. The 1996 Act also requires universal service to schools, libraries
and rural health facilities at discounted rates.
Regulators must complete a major overhaul of current support mechanisms to
eliminate implicit subsidies. All long distance providers must provide urban and
rural long distance services essentially at averaged rates and must average long
distance calls from one state to another. To receive universal service support,
a carrier must obtain state designation as an "eligible telecommunications
carrier" and provide universal service throughout a state-designated service
area. The state must designate more than one requesting eligible carrier to
receive support in most areas, but can only do so in a rural telephone company's
area if it makes a public interest finding.
CARRIER SUPPORT OBLIGATIONS. The 1996 Act requires all interstate
telecommunications providers, including wireless service providers, to "make an
equitable and non-discriminatory contribution," to support the cost of providing
universal service, unless their contribution would be DE MINIMIS.
BELL OPERATING COMPANY PROVISIONS. The 1996 Act establishes the process for
eliminating all remaining line-of-business restrictions placed on the Bell
Operating Companies ("BOCs") by the AT&T divestiture consent decree. Subject to
specific safeguards, the BOCs may immediately provide long distance service
outside the area where that Bell group serves, as well as specified "incidental"
long distance services. For in-region long distance relief, the BOCs must obtain
an FCC public interest finding and show that they have met a strict list of
interconnection requirements and that there is a specified level of competition
in each in-region state to be relieved of the long distance ban.
PROHIBITION AGAINST CROSS-SUBSIDY. The 1996 Act prohibits a LEC from
subsidizing any competitive service (including voice mail, voice
storage/retrieval, live operator services and related ancillary services) from
its telephone exchange service or exchange access service.
TELEPHONE COMPANY PROVISION OF CABLE TELEVISION SERVICES. The 1996 Act
eliminates the ban on LEC provision of cable programming service directly to
subscribers within its telephone service area. However, most mergers,
acquisitions and joint ventures by LECs and cable systems in the same area
remain unlawful.
INFRASTRUCTURE SHARING. LECs with "eligible telecommunications carrier"
status that lack economies of scale may share features and functions of larger
neighboring incumbent LECs on non-common carrier terms.
USE OF CUSTOMER INFORMATION. The new law restricts the use of customer
information for purposes beyond the provision of service except subject to
prescribed safeguards, and requires LECs to provide directory listing
information to competing telephone directory providers.
ELIMINATION OF ALIEN OFFICER/DIRECTOR RESTRICTIONS. The current
restrictions on the numbers of alien officers and directors of FCC licensee
companies and companies controlling such licenses has been eliminated.
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<PAGE>
BOC COMMERCIAL MOBILE JOINT MARKETING. BOCs are permitted to market jointly
and sell wireless services in conjunction with telephone exchange service,
exchange access, intraLATA and interLATA telecommunications and information
services.
WIRELESS FACILITIES SITING. The 1996 Act limits the rights of states and
localities to regulate placement of wireless facilities so as to "prohibit" the
provision of wireless services or to "discriminate" among providers of such
services. It also eliminates environmental effects (provided that the wireless
system complies with FCC rules) as a basis for states and localities to regulate
the placement, construction or operation of wireless facilities.
EQUAL ACCESS. Section 332(c) of the Communications Act is amended to
provide that wireless providers are not required to provide equal access to
common carriers for toll services. The FCC is authorized to require unblocked
access subject to certain conditions.
DEREGULATION. The FCC is required to forbear from applying any statutory or
regulatory provision that is not necessary to keep telecommunications rates and
terms reasonable or to protect consumers. A state may not apply a statutory or
regulatory provision that the FCC decides to forbear from applying. In addition,
the FCC must review its telecommunications regulations every two years and
change any that are no longer necessary.
COMPETITION
The Company's principal 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, conventional mobile
telephone and 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 ESMR, an enhanced SMR system.
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 and are beginning to be
constructed in several other cities across the United States. In 1995, an ESMR
provider initiated service in Tulsa, Oklahoma, where the Company operates a
cellular system. 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.
PCS is anticipated to be competitive with cellular service in the future.
PCS providers are expected to offer digital, wireless communications services.
Similar technological advances or regulatory changes in the future may make
available other alternatives to cellular service, thereby creating additional
sources of competition. The first PCS system was initiated in Washington, D.C.
in 1995. The Company expects PCS operators to begin deployment of PCS in some of
its larger cellular markets like Tulsa, Oklahoma; Knoxville, Tennessee; and Des
Moines, Iowa in late 1996 or early 1997.
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 to provide such
service have been formed. Such a system is designed primarily to serve the
communications needs of remote locations and a
21
<PAGE>
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.
EMPLOYEES
The Company had 3,175 employees as of December 31, 1995. Of these, 2,791
were based at the various cellular markets operated or managed by the Company
with only 384 based at its corporate office in Chicago, Illinois. None of the
Company's employees is represented by a labor organization. The Company
considers its relationship with its employees to be good.
22
<PAGE>
- --------------------------------------------------------------------------------
ITEM 2. PROPERTIES
The property for mobile telephone switching offices and cell sites are
either owned or leased under long-term leases by the Company, one of its
subsidiaries or the partnership or corporation which holds the construction
permit or license. The Company has not experienced major problems with obtaining
zoning approval for cell sites or operating facilities and does not anticipate
any such problems in the future which are or will be material to the Company and
its subsidiaries as a whole. The Company's investment in property is small
compared to its investment in licenses and cellular system equipment.
The Company leases approximately 75,000 square feet of office space for its
headquarters in Chicago, Illinois.
The Company considers the properties owned or leased by it and its
subsidiaries to be suitable and adequate for their respective business
operations.
- --------------------------------------------------------------------------------
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in a number of legal proceedings before the FCC and
various state and federal courts. In some cases, the litigation involves
disputes regarding rights to certain cellular telephone systems and other
interests. The Company does not believe that any such proceeding should have a
material adverse impact on the Company.
- --------------------------------------------------------------------------------
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of securities holders during the fourth
quarter of 1995.
23
<PAGE>
- --------------------------------------------------------------------------------
PART II
- --------------------------------------------------------------------------------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Incorporated by reference from Exhibit 13, Annual Report section entitled
"United States Cellular Stock and Dividend Information."
- --------------------------------------------------------------------------------
ITEM 6. SELECTED FINANCIAL DATA
Incorporated by reference from Exhibit 13, Annual Report section entitled
"Selected Consolidated Financial Data," except for ratios of earnings to fixed
charges, which are incorporated herein by reference from Exhibit 12 to this
Annual Report on Form 10-K.
- --------------------------------------------------------------------------------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Incorporated by reference from Exhibit 13, Annual Report section entitled
"Management's Discussion and Analysis of Results of Operations and Financial
Condition."
- --------------------------------------------------------------------------------
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Incorporated by reference from Exhibit 13, Annual Report sections entitled
"Consolidated Statements of Operations," "Consolidated Balance Sheets,"
"Consolidated Statements of Cash Flows," "Consolidated Statements of Changes in
Common Shareholders' Equity," "Notes to Consolidated Financial Statements,"
"Report of Independent Public Accountants," and "Consolidated Quarterly Income
Information (Unaudited)."
- --------------------------------------------------------------------------------
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
24
<PAGE>
- --------------------------------------------------------------------------------
PART III
- --------------------------------------------------------------------------------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated by reference from Proxy Statement sections entitled "Election
of Directors" and "Executive Officers."
- --------------------------------------------------------------------------------
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference from Proxy Statement section entitled "Executive
Compensation," except for the information specified in Item 402(a)(8) of
Regulation S-K under the Securities Exchange Act of 1934, as amended.
- --------------------------------------------------------------------------------
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference from Proxy Statement section entitled "Security
Ownership of Certain Beneficial Owners and Management."
- --------------------------------------------------------------------------------
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference from Proxy Statement section entitled "Certain
Relationships and Related Transactions."
25
<PAGE>
- --------------------------------------------------------------------------------
PART IV
- --------------------------------------------------------------------------------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
The following documents are filed as a part of this report:
(a)(1) Financial Statements
<TABLE>
<S> <C>
Consolidated Statements of Operations............................................................................. Annual Report*
Consolidated Balance Sheets....................................................................................... Annual Report*
Consolidated Statements of Cash Flows............................................................................. Annual Report*
Consolidated Statements of Changes in Common Shareholders' Equity................................................. Annual Report*
Notes to Consolidated Financial Statements........................................................................ Annual Report*
Report of Independent Public Accountants.......................................................................... Annual Report*
Consolidated Quarterly Income Information (Unaudited)............................................................. Annual Report*
</TABLE>
- ----------
* Incorporated by reference from Exhibit 13.
<TABLE>
<CAPTION>
LOCATION
--------
<S> <C> <C>
(2) Schedules
Report of Independent Public Accountants on Financial Statement Schedule................................................ page 28
II. Valuation and Qualifying Accounts for each of the Three Years in the Period Ended December 31, 1995................ page 29
Los Angeles SMSA, Nashville/Clarksville MSA and Baton Rouge MSA Limited Partnership Combined Financial
Statements....................................................................................................... page 30
Compilation Report of Independent Public Accountants on Combined Financial Statements.............................. page 31
Reports of Other Independent Accountants........................................................................... page 32
Combined Statements of Operations (Unaudited)...................................................................... page 38
Combined Balance Sheets (Unaudited)................................................................................ page 39
Combined Statements of Cash Flows (Unaudited)...................................................................... page 40
Combined Statements of Changes in Partners' Capital (Unaudited).................................................... page 41
Notes to Unaudited Combined Financial Statements................................................................... page 42
</TABLE>
All other schedules have been omitted because they are not applicable or not
required or because the required information is shown in the financial
statements or notes thereto.
26
<PAGE>
(3) Exhibits
The exhibits set forth in the accompanying Index to Exhibits are filed as a
part of this Report. The following is a list of each management contract or
compensatory plan or arrangement required to be filed as an exhibit to this form
pursuant to Item 14(c) of this Report.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------------------------------------------------------------------------------------------------------------------------------
<C> <S>
10.1 Supplemental Benefit Agreement between the Company and H. Donald Nelson is hereby incorporated by reference to an exhibit
to the Company's Registration Statement on Form S-1 (Registration No. 33-16975).
10.10 Stock Option and Stock Appreciation Rights Plan is hereby incorporated by reference to Exhibit B to the Company's
definitive Notice of Annual Meeting and Proxy Statement dated April 15, 1991, as filed with the Commission on April 16,
1991.
10.11 Summary of 1995 Bonus Program for Senior Corporate Staff of the Company.
10.12(a) United States Cellular Corporation 1994 Long-Term Incentive Plan is hereby incorporated by reference to exhibit 99.1 to
the Company's Registration Statement on Form S-8 (Registration No. 33-57255).
10.12(b) Form of 1994 Long-Term Stock Option Agreement (Transferable Form) is hereby incorporated by reference to Exhibit 99.2 to
the Company's Registration Statement on Form S-8 (Registration No. 33-57255).
10.12(c) Form of 1994 Long-Term Stock Option Agreement (Nontransferable Form) is hereby incorporated by reference to Exhibit 99.3
to the Company's Registration Statement on Form S-8 (Registration No. 33-57255).
10.12(d) Form of 1995 Performance Stock Option Agreement (Transferable Form) is hereby incorporated by reference to Exhibit 99.4 to
the Company's Registration Statement on Form S-8 (Registration No. 33-57255).
10.12(e) Form of 1995 Performance Stock Option Agreement (Nontransferable Form) is hereby incorporated by reference to Exhibit 99.5
to the Company's Registration Statement on Form S-8 (Registration No. 33-57255).
10.13 Supplemental Executive Retirement Plan of TDS is hereby incorporated by reference to Exhibit 10.13 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1994.
</TABLE>
(b) Reports on Form 8-K filed during the quarter ended December 31, 1995.
The Company filed a Current Report on Form 8-K on October 3, 1995 dated
September 28, 1995, which included a press release that announced that an FCC
administrative law judge issued a ruling finding the Company fully qualified to
be an FCC licensee. The decision favorably resolved candor issues raised in the
La Star and Wisconsin RSA 8 (Vernon) matters.
27
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
To the Shareholders and Board of Directors of
UNITED STATES CELLULAR CORPORATION:
We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements included in United States Cellular
Corporation and Subsidiaries Annual Report to Shareholders incorporated by
reference in this Form 10-K, and have issued our report thereon dated February
6, 1996. Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The financial statement
schedule listed in Item 14(a)(2) is the responsibility of the Company's
management and is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic consolidated financial
statements. This financial statement schedule has been subjected to the auditing
procedures applied in the audits of the basic consolidated financial statements
and, in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic consolidated financial
statements taken as a whole.
ARTHUR ANDERSEN LLP
Chicago, Illinois
February 6, 1996
28
<PAGE>
UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C1 COLUMN C2 COLUMN D COLUMN E
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
FOR THE YEAR ENDED DECEMBER 31, 1995
Deducted from deferred federal tax asset:
For unrealized net operating losses............................ $ (23,761) $16,730 $(1,110) $ -- $ (8,141)
Deducted from deferred state tax asset:
For unrealized net operating losses............................ (14,203) 8,257 (6,023) -- (11,969)
Deducted from accounts receivable:
For doubtful accounts.......................................... (2,073) (12,532) -- 10,785 (3,820)
FOR THE YEAR ENDED DECEMBER 31, 1994
Deducted from deferred federal tax asset:
For unrealized net operating losses............................ $ (21,876) $ -- $(1,885) $ -- $ (23,761)
Deducted from deferred state tax asset:
For unrealized net operating losses............................ (8,441) 1,202 (6,964) -- (14,203)
Deducted from accounts receivable:
For doubtful accounts.......................................... (1,413) (7,314) -- 6,654 (2,073)
Deducted from marketable equity securities:
For unrealized loss............................................ (626) -- 626 -- --
FOR THE YEAR ENDED DECEMBER 31, 1993
Deducted from deferred federal tax asset:
For unrealized net operating losses............................ (13,831) -- (8,045) -- (21,876)
Deducted from deferred state tax asset:
For unrealized net operating losses............................ (5,985) -- (2,456) -- (8,441)
Deducted from accounts receivable:
For doubtful accounts.......................................... (1,276) (4,161) -- 4,024 (1,413)
Deducted from marketable equity securities:
For unrealized loss............................................ -- -- (626) -- (626)
</TABLE>
29
<PAGE>
LOS ANGELES SMSA LIMITED PARTNERSHIP
NASHVILLE/CLARKSVILLE MSA LIMITED PARTNERSHIP
BATON ROUGE MSA LIMITED PARTNERSHIP
COMBINED FINANCIAL STATEMENTS
The following financial statements are the combined financial statements of
the cellular system partnerships listed below which are accounted for by the
Company following the equity method. The combined financial statements were
compiled from financial statements and other information obtained by the Company
as a limited partner of the cellular limited partnerships listed below. The
cellular system partnerships included in the combined financial statements, the
periods each partnership is included, and the Company's ownership percentage of
each cellular system partnership at December 31, 1995 are set forth in the
following table.
<TABLE>
<CAPTION>
THE
PERIODS COMPANY'S
INCLUDED LIMITED
IN COMBINED PARTNERSHIP
CELLULAR SYSTEM PARTNERSHIP STATEMENTS INTEREST
- --------------------------------------------------------------------------------------- ------------ -------------
<S> <C> <C>
Los Angeles SMSA Limited Partnership................................................... 1993-95 5.5%
Nashville/Clarksville MSA Limited Partnership.......................................... 1993-95 49.0%
Baton Rouge MSA Limited Partnership.................................................... 1993-95 52.0%
</TABLE>
30
<PAGE>
COMPILATION REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of
UNITED STATES CELLULAR CORPORATION:
The accompanying combined balance sheets of the Los Angeles SMSA Limited
Partnership, the Nashville/Clarksville MSA Limited Partnership and the Baton
Rouge MSA Limited Partnership as of December 31, 1995 and 1994 and the related
combined statements of operations, changes in partners' capital, and cash flows
for each of the three years in the period ended December 31, 1995, have been
prepared from the separate financial statements, which are not presented
separately herein, of the Los Angeles SMSA, Nashville/Clarksville MSA and Baton
Rouge MSA limited partnerships, as described in Note 1. We have reviewed for
compilation only the accompanying combined financial statements, and, in our
opinion, those statements have been properly compiled from the amounts and notes
of the underlying separate financial statements of the Los Angeles SMSA,
Nashville/Clarksville MSA and Baton Rouge MSA limited partnerships, on the basis
described in Note 1.
The statements for the Los Angeles SMSA, Nashville/Clarksville MSA and Baton
Rouge MSA limited partnerships were audited by other auditors as set forth in
their reports included on pages 32 through 37. We have not been engaged to audit
either the separate financial statements of the aforementioned limited
partnerships or the related combined financial statements in accordance with
generally accepted auditing standards and to render an opinion as to the fair
presentation of such financial statements in accordance with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Chicago, Illinois
February 9, 1996
31
<PAGE>
REPORTS OF OTHER INDEPENDENT ACCOUNTANTS
To The Partners of
LOS ANGELES SMSA LIMITED PARTNERSHIP:
In our opinion, the balance sheet and the related statements of income,
partner's capital and of cash flows and the financial statement schedule II --
valuation and qualifying accounts present fairly, in all material respects, the
financial position of Los Angeles SMSA Limited Partnership at December 31, 1995,
and the results of its operations and its cash flows for the year in conformity
with generally accepted accounting principles. These financial statements, which
are not presented separately herein, are the responsibility of the Partnership's
management; our responsibility is to express an opinion on these financial
statements based on our audit. We conducted our audit of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
San Francisco, California
January 25, 1996
32
<PAGE>
REPORTS OF OTHER INDEPENDENT ACCOUNTANTS
To The Partners of
LOS ANGELES SMSA LIMITED PARTNERSHIP:
We have audited the balance sheets of Los Angeles SMSA Limited Partnership
as of December 31, 1994, and the related statements of operations, partners'
capital and cash flows for each of the two years in the period ended December
31, 1994; such financial statements are not included separately herein. These
financial statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Los Angeles SMSA Limited
Partnership as of December 31, 1994, and results of its operations and its cash
flows for each of the two years in the period ended December 31, 1994, in
conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Newport Beach, California
February 17, 1995
33
<PAGE>
REPORTS OF OTHER INDEPENDENT ACCOUNTANTS
To The Partners of
NASHVILLE/CLARKSVILLE MSA LIMITED PARTNERSHIP:
We have audited the balance sheet of Nashville/Clarksville MSA Limited
Partnership as of December 31, 1995, and the related statements of income,
changes in partners' capital and cash flows for the year then ended; such
financial statements are not included separately herein. These financial
statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Nashville/Clarksville MSA
Limited Partnership as of December 31, 1995, and the results of its operations
and its cash flows for the year then ended in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND L.L.P.
Atlanta, Georgia
February 9, 1996
To The Partners of
NASHVILLE/CLARKSVILLE MSA LIMITED PARTNERSHIP:
We have audited the balance sheet of Nashville/Clarksville MSA Limited
Partnership as of December 31, 1994, and the related statements of income,
changes in partners' capital and cash flows for the year then ended; such
financial statements are not included separately herein. These financial
statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Nashville/Clarksville MSA
Limited Partnership as of December 31, 1994, and the results of its operations
and its cash flows for the year then ended in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND L.L.P.
Atlanta, Georgia
February 10, 1995
34
<PAGE>
REPORTS OF OTHER INDEPENDENT ACCOUNTANTS
To The Partners of
NASHVILLE/CLARKSVILLE MSA LIMITED PARTNERSHIP:
We have audited the balance sheet of Nashville/Clarksville MSA Limited
Partnership as of December 31, 1993, and the related statements of income,
changes in partners' capital and cash flows for the year then ended; such
financial statements are not included separately herein. These financial
statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Nashville/Clarksville MSA
Limited Partnership as of December 31, 1993, and the results of its operations
and its cash flows for the year then ended in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND
Atlanta, Georgia
February 11, 1994
35
<PAGE>
REPORTS OF OTHER INDEPENDENT ACCOUNTANTS
To The Partners of
BATON ROUGE MSA LIMITED PARTNERSHIP:
We have audited the balance sheet of Baton Rouge MSA Limited Partnership as
of December 31, 1995, and the related statements of income, changes in partners'
capital and cash flows for the year then ended; such financial statements are
not included separately herein. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Baton Rouge MSA Limited
Partnership as of December 31, 1995, and the results of its operations and its
cash flows for the year then ended in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND L.L.P.
Atlanta, Georgia
February 9, 1996
To The Partners of
BATON ROUGE MSA LIMITED PARTNERSHIP:
We have audited the balance sheet of Baton Rouge MSA Limited Partnership as
of December 31, 1994, and the related statements of income, changes in partners'
capital and cash flows for the year then ended; such financial statements are
not included separately herein. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Baton Rouge MSA Limited
Partnership as of December 31, 1994, and the results of its operations and its
cash flows for the year then ended in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND L.L.P.
Atlanta, Georgia
February 10, 1995
36
<PAGE>
REPORTS OF OTHER INDEPENDENT ACCOUNTANTS
To The Partners of
BATON ROUGE MSA LIMITED PARTNERSHIP:
We have audited the balance sheet of Baton Rouge MSA Limited Partnership as
of December 31, 1993, and the related statements of income, changes in partners'
capital and cash flows for the year then ended; such financial statements are
not included separately herein. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Baton Rouge MSA Limited
Partnership as of December 31, 1993, and the results of its operations and its
cash flows for the year then ended in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND
Atlanta, Georgia
February 11, 1994
37
<PAGE>
LOS ANGELES SMSA LIMITED PARTNERSHIP
NASHVILLE/CLARKSVILLE MSA LIMITED PARTNERSHIP
BATON ROUGE MSA LIMITED PARTNERSHIP
COMBINED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1995 1994 1993
----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Revenues................................................................... $ 811,933 $ 648,896 $ 515,228
Expenses
Selling, general and administrative...................................... 460,048 370,938 296,499
Depreciation and amortization............................................ 71,748 66,234 57,357
----------- ----------- -----------
Total expenses........................................................... 531,796 437,172 353,856
----------- ----------- -----------
Operating income........................................................... 280,137 211,724 161,372
Other income............................................................... 985 573 272
----------- ----------- -----------
Net Income................................................................. $ 281,122 $ 212,297 $ 161,644
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
38
<PAGE>
LOS ANGELES SMSA LIMITED PARTNERSHIP
NASHVILLE/CLARKSVILLE MSA LIMITED PARTNERSHIP
BATON ROUGE MSA LIMITED PARTNERSHIP
COMBINED BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1995 1994
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Current Assets
Cash.................................................................................. $ 214 $ 38
Accounts receivable--customers, net................................................... 116,966 95,630
Accounts receivable--affiliates....................................................... 14,830 16,016
Notes receivable--affiliates.......................................................... 8,860 402
Other current assets.................................................................. 11,801 18,523
----------- -----------
152,671 130,609
Notes Receivable--Other................................................................. 3,184 --
Property, Plant and Equipment, net...................................................... 564,564 380,473
Other................................................................................... 23,715 1,640
----------- -----------
Total Assets............................................................................ $ 744,134 $ 512,722
----------- -----------
----------- -----------
LIABILITIES AND PARTNERS' CAPITAL
<CAPTION>
DECEMBER 31,
------------------------
1995 1994
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Current Liabilities
Accounts payable--other............................................................... $ 53,526 $ 58,210
Accounts payable--affiliates.......................................................... -- 1,431
Notes payable......................................................................... 5,084 692
Customer deposits..................................................................... 3,311 4,060
Other current liabilities............................................................. 50,191 39,323
----------- -----------
112,112 103,716
Other Liabilities....................................................................... 5,788 5,539
Partners' Capital....................................................................... 626,234 403,467
----------- -----------
Total Liabilities and Partners' Capital................................................. $ 744,134 $ 512,722
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
39
<PAGE>
LOS ANGELES SMSA LIMITED PARTNERSHIP
NASHVILLE/CLARKSVILLE MSA LIMITED PARTNERSHIP
BATON ROUGE MSA LIMITED PARTNERSHIP
COMBINED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1995 1994 1993
------------ ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income............................................................ $ 281,122 $ 212,297 $ 161,644
Add (Deduct) adjustments to reconcile net income to net cash provided
by operating activities
Depreciation and amortization....................................... 71,748 66,234 57,357
Deferred revenue and other credits.................................. (966) 1,387 497
Loss on asset dispositions.......................................... 3,021 3,542 3,838
Change in accounts receivable....................................... (19,523) (9) (37,422)
Change in accounts payable and accrued expenses..................... (3,587) 25,527 6,119
Change in other assets and liabilities.............................. 15,185 (2,069) 4,286
------------ ------------ ------------
347,000 306,909 196,319
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Change in notes payable............................................. 4,392 692 --
Change in notes receivable.......................................... (7,355) 3,354 (5)
Capital contribution................................................ 5,096 -- --
Capital distribution................................................ (72,017) (166,300) (111,461)
------------ ------------ ------------
(69,884) (162,254) (111,466)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment, net of retirements...... (254,629) (143,807) (86,011)
(Increases) decreases in other assets............................... (21,573) (44) 1,335
Change in deferred charges.......................................... (738) (827) (202)
Proceeds from sale of assets........................................ -- 34 26
------------ ------------ ------------
(276,940) (144,644) (84,852)
------------ ------------ ------------
NET INCREASE IN CASH.................................................... 176 11 1
CASH
Beginning of period................................................. 38 27 26
------------ ------------ ------------
End of period....................................................... $ 214 $ 38 $ 27
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
40
<PAGE>
LOS ANGELES SMSA LIMITED PARTNERSHIP
NASHVILLE/CLARKSVILLE MSA LIMITED PARTNERSHIP
BATON ROUGE MSA LIMITED PARTNERSHIP
COMBINED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
(UNAUDITED)
<TABLE>
<S> <C>
(DOLLARS IN THOUSANDS)
Balance at January 1, 1993...................................................... $ 307,287
Distributions................................................................. (111,461)
Net Income for the year ended December 31, 1993............................... 161,644
---------
Balance at December 31, 1993.................................................... 357,470
Distributions................................................................. (166,300)
Net Income for the year ended December 31, 1994............................... 212,297
---------
Balance at December 31, 1994.................................................... 403,467
Contributions................................................................. 13,662
Distributions................................................................. (72,017)
Net Income for year ended December 31, 1995................................... 281,122
---------
Balance at December 31, 1995.................................................... $ 626,234
---------
---------
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
41
<PAGE>
LOS ANGELES SMSA LIMITED PARTNERSHIP
NASHVILLE/CLARKSVILLE MSA LIMITED PARTNERSHIP
BATON ROUGE MSA LIMITED PARTNERSHIP
NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS
1. BASIS OF COMBINATION:
The combined financial statements and notes thereto were compiled from the
individual financial statements of cellular limited partnerships listed below in
which United States Cellular Corporation (AMEX symbol "USM") has a
non-controlling ownership interest and which it accounts for using the equity
method. The cellular partnerships, the period each partnership is included in
the combined financial statements and USM's ownership interest in each
partnership are set forth in the table below. The combined financial statements
and notes thereto present 100% of each partnership whereas USM's ownership
interest is shown in the table.
<TABLE>
<CAPTION>
PERIOD INCLUDED LIMITED
IN COMBINED PARTNERSHIP
STATEMENTS INTEREST
--------------- -------------
<S> <C> <C>
Los Angeles SMSA Limited Partnership................................................ 1993-95 5.5%
Nashville/Clarksville MSA Limited Partnership....................................... 1993-95 49.0%
Baton Rouge MSA Limited Partnership................................................. 1993-95 52.0%
</TABLE>
Profits, losses and distributable cash are allocated to the partners based
upon respective partnership interests. Distributions are made quarterly at the
discretion of the General Partner for one of the Partnerships.
Of the partnerships included in the combined financial statements, the Los
Angeles SMSA Limited Partnership is the most significant, accounting for
approximately 86% of the combined total assets at December 31, 1995, and
substantially all of the combined net income for the year then ended.
USM's investment in and advances to Los Angeles SMSA Limited Partnership
totaled $27,784,000 as of December 31, 1995, of which $29,282,000 represents its
proportionate share of net assets of the Partnership. USM's investment in and
advances to the Nashville/Clarksville MSA Limited Partnership totaled
$25,889,000 as of December 31, 1995, of which $29,957,000 represents its
proportionate share of net assets. USM's investment in and advances to the Baton
Rouge MSA Limited Partnership totaled $19,723,000 as of December 31, 1995,
$16,993,000 of which represents its proportionate share of net assets.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES FOR COMBINED ENTITIES:
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost. Depreciation is computed
using the straight-line method over the following estimated lives:
<TABLE>
<S> <C>
Buildings.............................................. 10-15 years
Equipment.............................................. 3-10 years
Furniture and Fixtures................................. 5-10 years
Leasehold Improvements................................. 10 years
</TABLE>
Effective January 1, 1995, one of the Partnerships changed its estimate of
the useful lives of certain telecommunications equipment from 7 to 10 years. The
change in estimate had the effect of reducing depreciation expense and
increasing net income by approximately $14,844,000 for 1995.
42
<PAGE>
LOS ANGELES SMSA LIMITED PARTNERSHIP
NASHVILLE/CLARKSVILLE MSA LIMITED PARTNERSHIP
BATON ROUGE MSA LIMITED PARTNERSHIP
NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Property, Plant and Equipment consists of:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1995 1994
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Land.................................................................................... $ 3,974 $ 2,987
Buildings and Leasehold Improvements.................................................... 149,644 100,312
Equipment............................................................................... 580,810 432,949
Furniture and Fixtures.................................................................. 58,580 33,602
Under Construction...................................................................... 80,665 55,176
----------- -----------
873,673 625,026
Less Accumulated Depreciation........................................................... 309,109 244,553
----------- -----------
$ 564,564 $ 380,473
----------- -----------
----------- -----------
</TABLE>
Included in buildings are costs relating to the acquisition of cell site
leases; such as legal, consulting, and title fees. Lease acquisition costs are
capitalized when incurred and amortized over the period of the lease. Costs
related to unsuccessful negotiations are expensed in the period the negotiations
are terminated.
Gains and losses on disposals are included in income at amounts equal to the
difference between net book value and proceeds received upon disposal.
On January 10, 1994, one of the Partnerships entered into an agreement with
its major supplier to purchase $77 million in equipment. At December 31, 1995,
approximately $22 million in equipment had been purchased by the Partnership
under the agreement.
OTHER CURRENT ASSETS
Other current assets includes inventory consisting primarily of cellular
phones and accessories held for resale stated at average cost. Consistent with
industry practice, losses on sales of cellular phones are recognized in the
period in which sales are made as a cost of acquiring subscribers.
REVENUE RECOGNITION
Revenues from operations primarily consist of charges to customers for
monthly access charges, cellular airtime usage, and roamer charges. Revenues are
recognized as services are rendered. Unbilled revenues, resulting from cellular
service provided from the billing cycle date to the end of each month and from
other cellular carriers' customers using the partnership's cellular systems for
the last half of each month, are estimated and recorded as receivables. Unearned
monthly access charges and bundled service packages relating to the periods
after month-end are deferred and netted against accounts receivable and
recognized the following month when services are provided.
INCOME TAXES
No provisions have been made for federal or state income taxes since such
taxes, if any, are the responsibility of the individual partners.
ADVERTISING
Advertising costs are expensed as incurred. The advertising expense for 1995
was $42,046,000.
ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from these estimates.
43
<PAGE>
LOS ANGELES SMSA LIMITED PARTNERSHIP
NASHVILLE/CLARKSVILLE MSA LIMITED PARTNERSHIP
BATON ROUGE MSA LIMITED PARTNERSHIP
NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS--(CONTINUED)
IMPAIRMENT OF LONG-LIVED ASSETS
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS 121").
Under SFAS 121, the Partnerships are required to evaluate long-lived assets and
certain identifiable intangible assets, including fixed assets, for impairment
whenever events or changes in circumstances indicate that the book value of an
asset may not be recoverable. An impairment loss should be recognized whenever
the review demonstrates that the book value of a long-lived asset is not
recoverable. The Partnerships do not expect the implementation of SFAS 121,
adopted effective January 1, 1996, to have a material impact on its financial
condition or results of operations.
RECLASSIFICATIONS
Certain reclassifications of the 1994 and 1993 financial statements of one
of the Partnerships have been made to conform to the 1995 presentation. The
reclassifications have not affected previously reported net income or partners'
capital.
3. LEASE COMMITMENTS:
Future minimum rental payments required under operating leases for real
estate that have initial or remaining noncancellable lease terms in excess of
one year as of December 31, 1995, are as follows:
<TABLE>
<S> <C>
(DOLLARS IN THOUSANDS)
1996............................................................. $ 20,063
1997............................................................. 18,723
1998............................................................. 17,992
1999............................................................. 16,563
2000............................................................. 13,409
Thereafter....................................................... 20,076
---------
$ 106,826
---------
---------
</TABLE>
The initial lease terms generally range from 5 to 25 years with the majority
of them having initial terms of 10 years and providing for one renewal option of
5 years and for rental escalation. Included in selling, general and
administrative expense are rental costs of $17,455,000, $17,750,000 and
$15,119,000 for the years ended December 31, 1995, 1994, and 1993, respectively.
One of the Partnerships leases office facilities under a ten-year lease
agreement which provides for free rent incentives for six months and rent
escalation over the ten-year period. The Partnership recognizes rent expense on
a straight-line basis and recorded the related deferred rent as a noncurrent
liability to be amortized as an adjustment to rental costs over the life of the
lease.
4. SUPPLEMENTAL CASH FLOW INFORMATION
On November 1, 1995, one of the Partners of one of the Partnerships
contributed a note receivable of $3,152,000 (Note 5) and other assets of
$104,000 and the assets and liabilities of other RSA interests totaling
$6,018,000. All assets and liabilities were recorded at their historical net
book value. The contribution of the note receivable and the combined properties
is reflected in the Statement of Changes in Partners' Capital.
During 1995, one of the Partnerships replaced and upgraded certain of its
cellular equipment with new cellular technology which supports both analog and
digital voice transmissions. In connection with this equipment upgrade, the
Partnership traded-in cellular equipment with a net book value of $3,704,000 for
new cellular equipment with a cost of $6,250,000. The remaining balance was
funded through the credit facility with its General Partner.
44
<PAGE>
LOS ANGELES SMSA LIMITED PARTNERSHIP
NASHVILLE/CLARKSVILLE MSA LIMITED PARTNERSHIP
BATON ROUGE MSA LIMITED PARTNERSHIP
NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS--(CONTINUED)
5. RELATED PARTY TRANSACTIONS:
Certain affiliates of these cellular limited partnerships provide services
for the system operations, legal, financial, management and administration of
these entities. These affiliates are reimbursed for both direct and allocated
costs (totaling $59.5 million in 1995, $57.6 million in 1994 and $57.1 million
in 1993) related to providing these services. In addition, certain affiliates
have established a credit facility with certain partnerships to provide working
capital to the partnership. One of the partnerships participates in a
centralized cash management arrangement with its general partner. At December
31, 1995 and 1994, the interest-bearing balance amounted to $14,830,000 and
$16,016,000, respectively. Effective January 1, 1989, the general partner pays
or charges the Partnership monthly interest, computed using the general
partner's average borrowing rate, on the amounts due to or from the Partnership.
Interest earned in 1995, 1994 and 1993 was $785,000, $1,480,000 and $1,294,000,
respectively.
One of the Partnerships has a note receivable from its General Partner with
a balance of $3,152,000 and accrued interest of $32,000 at December 31, 1995.
The note bears interest at 12% per annum, compounded quarterly with all
principal and interest due at maturity on May 10, 1997. The note was contributed
to the Partnership by its General Partner during 1995 (Note 4).
6. ACCOUNTS RECEIVABLE
Accounts receivable of one of the partnerships consists of:
<TABLE>
<CAPTION>
DECEMBER 31
----------------------
1995 1994
----------- ---------
<S> <C> <C>
Retail............................................................... $ 83,682 $ 63,626
Wholesale............................................................ 17,660 14,557
Intercarrier and other............................................... 9,437 9,280
----------- ---------
110,779 87,463
Allowance for doubtful accounts...................................... (8,719) (3,033)
----------- ---------
$ 102,060 $ 84,430
----------- ---------
----------- ---------
</TABLE>
Accounts receivable are derived from revenues earned from customers located
in the Partnership's metropolitan serving area. The Partnership performs ongoing
credit evaluations of its customers and in certain circumstances obtains
refundable deposits. The Partnership maintains reserves for potential credit
losses; historically, such losses have been within management's expectations.
The carrying value of accounts receivable approximates fair value.
Two of the Partnerships provide cellular service and sell cellular
telephones to diversified groups of consumers within concentrated geographical
areas. The general partner performs credit evaluations of the Partnerships'
customers and generally does not require collateral. Receivables are generally
due within 30 days. Credit losses related to customers have been within
management's expectations.
7. REGULATORY MATTERS:
On December 21, 1993, the California Public Utilities Commission ("CPUC")
issued an Order Instituting Investigation into the regulation of mobile
telephone service and wireless communications. The investigation proposes a
regulatory program which would encompass all forms of mobile telephone services.
In 1993, the U.S. Congress passed legislation prohibiting state and local
governments from regulating the rates for commercial mobile radio services
("CMRS"), including cellular service. States with rate regulation in place on
June 1, 1993, including California, were given the opportunity to petition the
Federal Communications Commission ("FCC") for continuation of such authority.
The CPUC filed such
45
<PAGE>
LOS ANGELES SMSA LIMITED PARTNERSHIP
NASHVILLE/CLARKSVILLE MSA LIMITED PARTNERSHIP
BATON ROUGE MSA LIMITED PARTNERSHIP
NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS--(CONTINUED)
a petition with the FCC. The FCC denied the CPUC's petition in an interim
decision issued in May 1995 and issued a final Order in August 1995 (the
"Order"), thereby preempting the CPUC's authority over rates. As a consequence,
one of the Partnerships withdrew its rate-related traiffs.
The CPUC is currently considering outstanding issues concerning its
remaining jurisdiction over CMRS providers in recognition of the changes in
federal law and the Order. Specifically, the CPUC is assessing changes to
existing regulation in light of the preemption of rate and entry regulation and
the scope of its residual authority to regulate "other terms and conditions" of
services. Until the CPUC completes its assessment of its remaining regulatory
authority, the effect, if any, of such regulation to the Partnership and its
operating activities cannot be determined.
8. CONTINGENCIES AND COMMITMENTS:
A class action complaint was filed in November 1993 naming a partner of one
of the partnerships as general partner of the Partnership. In April 1995, the
Partnership was named as a necessary party to the action. The plaintiff alleged
the Partnership conspired to fix the price of wholesale and retail cellular
service in its metropolitan serving area market. The plaintiff alleged damages
for the class "in a sum in excess of $100 million." The Partnership has answered
the complaint and intends to defend itself vigorously. This case has been
consolidated for purposes of discovery with two other class actions making
identical price-fixing allegations. The case has been removed to federal court.
The other cases have been stayed pending resolution of a motion to remand the
case to state court. In addition, three non-class action antitrust cases brought
by cellular agents making similar allegations were settled for immaterial
amounts. In April 1995, a Federal class action complaint was dismissed on a
motion for summary judgment. The dismissal was upheld on appeal. The Partnership
does not believe that these proceedings will have a material adverse effect on
the Partnership's financial position.
In September 1995, a class action lawsuit was brought on behalf of all
subscribers of the general partner of one of the Partnerships, including the
Partnership's subscribers, regarding customer notification of the Partnership's
practices with respect to billing for fractional minutes of service. No
dispositive motions have been filed in the proceeding and discovery has not yet
begun. The Partnership believes the lawsuit to be without merit.
One of the Partnerships is a party to various other lawsuits arising in the
ordinary course of business. Although the ultimate resolution of these
proceedings cannot be ascertained, the Partnership's management does not believe
they will have a materially adverse effect on the results of operations or
financial position of the Partnership.
46
<PAGE>
[LOGO]
8410 West Bryn Mawr
Suite 700
Chicago, Illinois, 60631
(312) 398-8900
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
UNITED STATES CELLULAR CORPORATION
By: /S/ H. DONALD NELSON
-----------------------------------
H. Donald Nelson
PRESIDENT (CHIEF EXECUTIVE OFFICER)
By: /S/ KENNETH R. MEYERS
-----------------------------------
Kenneth R. Meyers
VICE PRESIDENT--FINANCE AND TREASURER
(CHIEF FINANCIAL OFFICER)
By: /S/ PHILLIP A. LORENZINI
-----------------------------------
Phillip A. Lorenzini
CONTROLLER
(PRINCIPAL ACCOUNTING OFFICER)
Dated March 21, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------------------ --------- ------------------
<S> <C> <C>
/S/ H. DONALD NELSON DIRECTOR March 21, 1996
------------------------------------------
H. Donald Nelson
/S/ LEROY T. CARLSON, JR. DIRECTOR March 21, 1996
------------------------------------------
LeRoy T. Carlson, Jr.
/S/ LEROY T. CARLSON DIRECTOR March 21, 1996
------------------------------------------
LeRoy T. Carlson
/S/ WALTER C.D. CARLSON DIRECTOR March 21, 1996
------------------------------------------
Walter C. D. Carlson
/S/ MURRAY L. SWANSON DIRECTOR March 21, 1996
------------------------------------------
Murray L. Swanson
/S/ PAUL-HENRI DENUIT DIRECTOR March 21, 1996
------------------------------------------
Paul-Henri Denuit
/S/ ALLAN Z. LOREN DIRECTOR March 21, 1996
------------------------------------------
Allan Z. Loren
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
INDEX TO EXHIBITS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF DOCUMENT
- -------- --------------------------------------------------------------------------------------------------------------------
<C> <S>
3.1 Restated Certificate of Incorporation, as amended, is hereby incorporated by reference to an exhibit to the
Company's Amendment No. 2 on Form 8 dated December 28, 1992, to the Company's Report on Form 8-A.
3.2 Restated Bylaws, as amended, are hereby incorporated by reference to an exhibit to the Company's Amendment No. 2 on
Form 8 dated December 28, 1992, to the Company's Report on Form 8-A.
4.1 Restated Certificate of Incorporation, as amended, is hereby incorporated by reference to an exhibit to the
Company's Amendment No. 2 on Form 8 dated December 28, 1992 to the Company's Report on Form 8-A.
4.2 Restated by-laws, as amended, are hereby incorporated by reference to an exhibit to the Company's Amendment No. 2 on
Form 8 dated December 28, 1992 to the Company's Report on Form 8-A.
4.3(a) Amended and restated Term Loan Agreement between NTFC Capital Corporation and the Company dated December 22, 1994 is
hereby incorporated by reference to Exhibit 4.3 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1994.
4.3(b) First Amendment to Amended and Restated Term Loan Agreement between NTFC Capital Corporation and the Company dated
September 29, 1995.
4.4 Indenture dated June 1, 1995 between registrant and Harris Trust and Savings Bank, as Trustee, relating to the LYONs
is hereby incorporated by reference to the Company's Form 8-K dated June 16, 1995.
4.5 Form of Certificate for Liquid Yield Option Note (included in Exhibit 4.4).
9.1 Voting Trust Agreement, dated as of June 30, 1989, with respect to Series A Common Shares of TDS, is hereby
incorporated by reference to an exhibit to the Company's Registration Statement on Form S-1 (Registration No.
33-38644).
9.2 Amendment dated as of May 9, 1991, to the Voting Trust Agreement dated as of June 30, 1989, is hereby incorporated
by reference to Exhibit 9.2 to the Company's Annual Report on Form 10-K for the year ended December 31, 1991.
9.3 Amendment dated as of November 20, 1992, to the Voting Trust Agreement dated as of June 30, 1989, as amended is
hereby incorporated by reference to Exhibit 9.3 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1992.
10.1 Supplemental Benefit Agreement between the Company and H. Donald Nelson is hereby incorporated by reference to an
exhibit to the Company's Registration Statement on Form S-1 (Registration No. 33-16975).
10.2(a) Revolving Credit Agreement, between the Company and TDS, as amended, is hereby incorporated by reference to an
exhibit to Post-Effective Amendment No. 2 to the Company's Registration Statement on Form S-1 (Registration No.
33-23492).
10.2(b) Amendment dated as of June 29, 1995, to Revolving Credit Agreement between the Company and TDS.
10.3 Tax Allocation Agreement, between the Company and TDS, is hereby incorporated by reference to an exhibit to the
Company's Registration Statement on Form S-1 (Registration No. 33-16975).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF DOCUMENT
- -------- --------------------------------------------------------------------------------------------------------------------
<C> <S>
10.4 Cash Management Agreement, between the Company and TDS, is hereby incorporated by reference to an exhibit to the
Company's Registration Statement on Form S-1 (Registration No. 33-16975).
10.5 Registration Rights Agreement, between the Company and TDS, is hereby incorporated by reference to an exhibit to the
Company's Registration Statement on Form S-1 (Registration No. 33-16975).
10.6 Exchange Agreement, between the Company and TDS, as amended, is hereby incorporated by reference to an exhibit to
the Company's Registration Statement on Form S-1 (Registration No. 33-16975).
10.7 Intercompany Agreement, between the Company and TDS, is hereby incorporated by reference to an exhibit to the
Company's Registration Statement on Form S-1 (Registration No. 33-16975).
10.8 Employee Benefit Plans Agreement, between the Company and TDS, is hereby incorporated by reference to an exhibit to
the Company's Registration Statement on Form S-1 (Registration No. 33-16975).
10.9 Insurance Cost Sharing Agreement, between the Company and TDS, is hereby incorporated by reference to an exhibit to
the Company's Registration Statement on Form S-1 (Registration No. 33-16975).
10.10 Stock Option and Stock Appreciation Rights Plan, is hereby incorporated by reference to Exhibit B to the Company's
definitive Notice of Annual Meeting and Proxy Statement dated April 15, 1991, as filed with the Commission on April
16, 1991.
10.11 Summary of 1995 Bonus Program for the Senior Corporate Staff of the Company.
10.12(a) United States Cellular Corporation 1994 Long-Term Incentive Plan is hereby incorporated by reference to exhibit 99.1
to the Company's Registration Statement on Form S-8 (Registration No. 33-57255).
10.12(b) Form of 1994 Long-Term Stock Option Agreement (Transferable Form) is hereby incorporated by reference to Exhibit
99.2 to the Company's Registration Statement on Form S-8 (Registration No. 33-57255).
10.12(c) Form of 1994 Long-Term Stock Option Agreement (Nontransferable Form) is hereby incorporated by reference to Exhibit
99.3 to the Company's Registration Statement on Form S-8 (Registration No. 33-57255).
10.12(d) Form of 1995 Performance Stock Option Agreement (Transferable Form) is hereby incorporated by reference to Exhibit
99.4 to the Company's Registration Statement on Form S-8 (Registration No. 33-57255).
10.12(e) Form of 1995 Performance Stock Option Agreement (Nontransferable Form) is hereby incorporated by reference to
Exhibit 99.5 to the Company's Registration Statement on Form S-8 (Registration No. 33-57255).
10.13 Supplemental Executive Retirement Plan of TDS is hereby incorporated by reference to Exhibit 10.13 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1994.
10.14 Securities Loan Agreement, dated June 31, 1995, between TDS and Merrill Lynch & Co. is hereby incorporated by
reference to Exhibit 99.1 to the Company's Form 8-K dated June 16, 1995.
10.15 Registration Rights Agreement among TDS, Merrill Lynch & Co. and United States Cellular Corporation is hereby
incorporated by reference to Exhibit 99.2 to the Company's Form 8-K dated June 16, 1995.
10.16 Common Share Delivery Arrangement Agreement among TDS, Merrill Lynch & Co. and United States Cellular Corporation is
hereby incorporated by reference to Exhibit 99.3 to the Company's Form 8-K dated June 16, 1995.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF DOCUMENT
- -------- --------------------------------------------------------------------------------------------------------------------
<C> <S>
10.17 LYONs Offering Agreement between TDS and United States Cellular Corporation is hereby incorporated by reference to
Exhibit 99.4 to the Company's Form 8-K dated June 16, 1995.
11 Statement regarding computation of per share earnings.
12 Statement regarding computation of ratios.
13 Incorporated portions of 1995 Annual Report to Security Holders.
21 Subsidiaries of the Registrant.
23.1 Consent of independent public accountants.
23.2 Consent of independent accountants.
27 Financial Data Schedules.
</TABLE>
<PAGE>
EXHIBIT 4.3(b)
FIRST AMENDMENT TO
AMENDED AND RESTATED TERM LOAN AGREEMENT
THIS FIRST AMENDMENT TO AMENDED AND RESTATED TERM LOAN AGREEMENT
("AMENDMENT"), is dated as of September 29, 1995, between UNITED STATES
CELLULAR CORPORATION, a corporation formed under the laws of the State of
Delaware (the "Company"), and NTFC CAPITAL CORPORATION (formerly known as
Northern Telecom Finance Corporation), a corporation formed under the laws of
the State of Delaware (the "Lender").
RECITALS:
A. The Company and Lender are parties to that certain Term Loan
Agreement originally dated as of October 1, 1991, as amended by that certain
Amended and Restated Term Loan Agreement dated as of December 22, 1994 (as
amended, the "LOAN AGREEMENT").
B. Pursuant to the Loan Agreement, the Company executed, among other
things, the Equipment Note in the principal amount of $37,500,000 (plus
Capitalized Interest), dated as of December 22, 1994 (the "ORIGINAL 1994
EQUIPMENT NOTE"), and the Construction Note in the principal amount of
$37,500,000 (plus Capitalized Interest), dated as of December 22, 1994 (the
"ORIGINAL 1994 CONSTRUCTION NOTE").
C. In response to the Company's request, the Lender has agreed to
increase the maximum amount available under the Loan Agreement by $3,922,000,
on the terms and conditions set forth in this Amendment.
NOW, THEREFORE, in consideration of the premises and for other good and
valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the parties hereto agree as follows:
1. DEFINITIONS. All capitalized terms used herein which are not
otherwise defined shall have the meanings given to such terms in the Loan
Agreement.
2. AMENDMENTS TO SECTION 1.1 OF LOAN AGREEMENT. Section 1.1 of the Loan
Agreement is hereby amended by amending each of the following defined terms
to read in its entirety as follows:
"1994 CONSTRUCTION NOTE": that certain Amended and Restated
Construction Note executed by the Company in the form of EXHIBIT A-1 hereto,
payable to the Lender, in the original maximum principal amount of Thirty-
Nine Million Four Hundred Sixty-One Thousand Dollars ($39,461,000) plus
Capitalized Interest (as defined therein), as described in Section 2.2(b)
hereof, including all Note Schedules executed in connection therewith, and
all extensions, renewals, modifications and replacements thereof.
"1994 EQUIPMENT NOTE": that certain Amended and Restated Equipment
Note executed by the Company in the form of EXHIBIT A-2 hereto, payable
to the Lender, in the original maximum principal amount of Thirty-Nine
Million Four Hundred Sixty-One Thousand Dollars ($39,461,000) plus
Capitalized Interest (as defined therein), as described in Section
2.2(b) hereof, including all Note Schedules executed in connection
therewith, and all extensions, renewals, modifications and replacements
thereof.
<PAGE>
3. AMENDMENT TO SECTION 2.1 OF THE LOAN AGREEMENT. The first sentence
of Section 2.1 of the Loan Agreement is hereby amended in its entirety to
read as follows:
SECTION 2.1 COMMITMENT AND LOANS. Subject to the terms and
conditions herein provided, and so long as no Event of Default has occurred
and is continuing hereunder, Lender agrees to lend to Company during the
Commitment Period, an aggregate principal amount not to exceed Seventy-Eight
Million Nine Hundred Twenty-Two Thousand Dollars ($78,922,000) plus
Capitalized Interest (not to exceed $6,750,000 in the aggregate after the
Amendment Date), as set forth herein, to be allocated and provided only as
set forth in Sections 2.1(b) and (c), together with the amounts described
in Section 2.1(d) and (e) below (the "COMMITMENT").
4. AMENDMENT TO SECTION 2.1(B) OF THE LOAN AGREEMENT. The first
sentence of Section 2.1(b) of the Loan Agreement is hereby amended in its
entirety to read as follows:
(b) EQUIPMENT LOAN. Lender shall make Advances to the Company from
time to time until the Financing Termination Date, in principal amounts not
to exceed Thirty-Nine Million Four Hundred Sixty-One Thousand Dollars
($39,461,000) in the aggregate under the 1994 Equipment Note, and has
advanced $27,627,468.72 in the aggregate (including Capitalized Interest)
under the 1991 Equipment Note, in both cases to be used solely for the
purchase of NTI Equipment (exclusive of sales tax) for the Market Entities'
Systems, pursuant to the Supply Agreement or otherwise from NTI (or for
reimbursement for payments made to NTI for such purchases between January 1,
1993 and the Amendment Date) (collectively, the "EQUIPMENT LOAN").
5. AMENDMENT TO SECTION 2.1(C) OF THE LOAN AGREEMENT. The first
sentence of Section 2.1(c) of the Loan Agreement is hereby amended in its
entirety to read as follows:
(c) CONSTRUCTION LOAN. Lender shall make Advances to the Company
from time to time until the Financing Termination Date in principal amounts
not to exceed Thirty-Nine Million Four Hundred Sixty-One Thousand Dollars
($39,461,000), in the aggregate under the 1994 Construction Note, and has
advanced $27,688,172.48 in the aggregate (including Capitalized Interest)
under the 1991 Construction Note, in both cases to be used solely for direct
construction costs incurred by the Company and/or the applicable Market
Entity in the construction of the Systems or for payment of sales tax on any
NTI Equipment (or for reimbursement for payments made for such purposes
between January 1, 1991 and the Amendment Date) (collectively, the
"CONSTRUCTION LOAN").
-2-
<PAGE>
6. EXHIBITS A-1 AND A-2. The Loan Agreement is amended to replace
EXHIBITS A-1 AND A-2 thereto with the forms attached hereto as EXHIBITS A-1
AND A-2, respectively.
7. CONDITIONS TO AMENDMENT. Lender's obligations under this Amendment
are subject to the satisfaction of the following conditions on or before the
date of this Amendment, or before any funds are advanced hereunder, in
addition to all conditions in the Loan Agreement:
(a) AMENDED NOTES. The Lender shall have received each of the 1994
Construction Note and the 1994 Equipment Note (amending the Original 1994
Construction Note and the Original 1994 Equipment Note, respectively), each
conforming to the requirements hereof and executed by a duly authorized
officer of the Company. Lender shall mark each of the Original 1994
Construction Note and the Original 1994 Equipment Note with legend stating
that it has been so amended and restated.
(b) LEGAL OPINION. The Lender shall have received the opinion of
Sidley & Austin, counsel to the Company, dated the date of this Amendment,
with respect the due execution and delivery of, and enforceability of, this
Amendment and the 1994 Construction Note and the 1994 Equipment Note.
(c) PROCEEDINGS OF THE COMPANY. The Lender shall have received
copies, certified by a Secretary or Assistant Secretary of the Company on
the date of this Amendment, of evidence of all actions taken by the Company
authorizing the execution, delivery and performance by the Company of this
Amendment and authorizing the borrowings provided for herein.
(d) OTHER DOCUMENTS. The Lender shall have received such other
documents as Lender may reasonably request in connection with this
Amendment, and all documents and other items shall be in form and
substance satisfactory to Lender and its counsel.
8. FULL FORCE AND EFFECT. Except as specifically modified herein or
contemplated hereby, the Loan Agreement, the Notes and all other Basic
Agreements and Loan Documents shall continue in full force and effect as
written, and nothing herein is intended to, nor shall it, release, diminish
or waive the rights of Lender under the Loan Agreement or the other Basic
Agreements or the other Loan Documents.
-3-
<PAGE>
9. COUNTERPARTS. This Amendment may be executed by one or more of the
parties to this Amendment on any number of separate counterparts and all of
said counterparts taken together shall be deemed to constitute one and the
same instrument.
IN WITNESS WHEREOF, this First Amendment to Amended and Restated Term
Loan Agreement has been executed as of the date first above written by the
parties' authorized representatives.
NTFC CAPITAL CORPORATION UNITED STATES CELLULAR CORPORATION
By: /s/ Jerry E. Vaughn By: /s/ Kenneth R. Meyers
----------------------- -----------------------
Title: Vice President Title: Vice President-Finance
-4-
<PAGE>
EXHIBIT A-1
AMENDED AND RESTATED
1994 CONSTRUCTION NOTE
$39,461,000.00 Originally dated as of December 22, 1994
(Plus Capitalized Interest)
Amended and as of ________________, 1995
FOR VALUE RECEIVED, UNITED STATES CELLULAR CORPORATION, a corporation
organized under the laws of the State of Delaware (the "COMPANY"), promises
to pay to the order of NTFC CAPITAL CORPORATION (formerly known as Northern
Telecom Finance Corporation) (the "LENDER") at its offices located at 220
Athens Way, Nashville, Tennessee 37228-1399, in lawful money of the United
States of America and in immediately available funds the lesser of (i)
Thirty-Nine Million Four Hundred Sixty-One Thousand Dollars ($39,461,000.00),
and (ii) all amounts advanced pursuant to Section 2.1(c) of the Loan
Agreement (defined below), together with interest thereon and other amounts
due as provided below. This Note shall finally mature on December 1, 2003
(the "FINAL MATURITY DATE").
This Note has been made and delivered pursuant to that certain Amended
and Restated Term Loan Agreement dated as of December 22, 1994 by and between
the Company and the Lender, as amended by a First Amendment to Amended and
Restated Term Loan Agreement of even date herewith and as it may be further
modified, amended or supplemented from time to time (the "LOAN AGREEMENT"),
and is the 1994 Construction Note described in Section 2.2(b) thereof. Any
capitalized term not otherwise defined in this Note shall have the meaning
ascribed to it in the Loan Agreement. Reference is made to the Loan
Agreement, which among other things provides for the acceleration of the
maturity hereof upon the occurrence of certain events and for prepayments in
certain circumstances and upon certain terms and conditions. This Note may
be prepaid, in whole or in part, without premium or penalty, in accordance
with the Loan Agreement. This Note is secured by the Collateral described
in the Loan Agreement, the Security Agreement and the Assignments and is
entitled to the benefits thereof.
All Advances hereunder shall bear interest at the Base Rate, as defined
below, from the date of such Advance until such amount is due and payable
(whether at the Maturity Date, upon Required Prepayment, by acceleration, or
otherwise). The Base Rate shall be the adjustable interest rate per annum
(compounded monthly and computed on the basis of a year of 360 days for the
actual days elapsed) equal to the rate announced from time to time as the
ninety (90) day "Commercial Paper" rate (being defined as the rate paid on
high grade unsecured notes sold through major dealers by major corporations
in multiples of $1,000 for repurchase within 90 days) as reported in THE WALL
STREET JOURNAL, PLUS 2.25% per annum. The Base Rate in effect on the last
Business Day of each
<PAGE>
Calendar Quarter as reflected by the most recent THE WALL STREET JOURNAL
publication shall be the Base Rate for the following Calendar Quarter.
Each Advance made under this Note (except Advances for Capitalized
Interest) shall be evidenced by a separate Note Schedule to be attached to
this Note, each of which shall be consecutively numbered, beginning with
SCHEDULE 1. Each and all of the Note Schedules shall be deemed a part
hereof. The principal of and interest on each such Advance under the Note
shall be paid as follows:
During the period from the date of each Advance hereunder through the
first full twelve (12) months following the date of such Advance (the
"CAPITALIZED INTEREST PERIOD"), no principal payments shall be due, but
interest shall accrue at the Base Rate on the principal amount of such
Advance, and shall be capitalized and added to the outstanding principal
amount of such Advance, unless the Company elects, by writing delivered
to Lender no later than the fifteenth (15th) day of any calendar month,
to pay the accrued interest on such Advance for such month, in arrears,
on the first Business Day of the following calendar month. The sum of
the amount of Capitalized Interest added to this Note and the amount of
capitalized interest added to the 1994 Equipment Note shall not exceed
an aggregate of $6,750,000, and after that limit has been reached, the
Company shall thereafter pay accrued interest on the outstanding
principal amount hereof, in arrears, on the first Business Day of each
month during the balance of the Capitalized Interest Period.
After the expiration of the Capitalized Interest Period for each
Advance, all outstanding principal (including Capitalized Interest) of
such Advance shall be paid in seventy-two (72) equal consecutive monthly
installments of principal, in each case on the first Business Day of
each calendar month (each, a "PAYMENT DATE"), commencing on the first
Payment Date after the expiration of the Capitalized Interest Period for
such Advance and on each Payment Date thereafter until the Maturity Date
(as deemed below), on which date all outstanding principal (including
Capitalized Interest), interest and other charges with respect to such
Advance shall be paid in full. The "MATURITY DATE" for any Advance
shall be the first Business Day of the eighty-fourth (84th) calendar
month following the date of such Advance.
After the expiration of the Capitalized Interest Period for any Advance,
interest shall be paid monthly, in arrears, on each Payment Date, along
with the principal payments described above.
In any event, all outstanding principal of, interest on, and charges
with respect to this Note shall be due and payable in full on the Final
Maturity Date. Lender is authorized to make notations on the Note Schedules
(or on other schedules hereto) as to the amount of Capitalized Interest or
the principal and interest payments made by the Company, but the failure to
make any
-2-
<PAGE>
notations on any Note Schedule (or other schedule) shall not diminish the
obligation of the Company to pay all amounts due under this Note or any Note
Schedule hereto.
Notwithstanding the foregoing, if the Company shall fail to pay within
ten (10) days after when due any principal amount or interest or other amount
payable by the Company under the Loan Agreement or under this Note, such
amount shall bear interest at a rate per annum that is equal to the lesser of
three percent (3%) higher than the then applicable Base Rate or the maximum
permissible interest rate under applicable law, until such overdue principal
amount, interest or other amount are paid in full (both before and after
judgment) whether or not any notice of default in the payment thereof has
been delivered under the Loan Agreement.
Notwithstanding any provision of this Note or the Loan Agreement to the
contrary, it is the intent of the Lender and the Company that the Lender or
any subsequent holder of this Note shall never be entitled to receive,
collect, reserve or apply, as interest, any amount in excess of the maximum
rate of interest permitted to be charged by applicable law, as amended or
enacted from time to time. In the event Lender, or any subsequent holder of
this Note, ever receives, collects, reserves or applies, as interest, any
such excess, such amount which would be excessive interest shall be deemed a
partial prepayment of principal and treated as such, or, if the principal
indebtedness and all other amounts due are paid in full, any remaining excess
funds shall immediately be paid to the Company. In determining whether or
not the interest paid or payable, under any specific contingency, exceeds the
highest lawful rate, the Company and the Lender shall, to the maximum extent
permitted under applicable law, (a) exclude voluntary prepayments and the
effects thereof as it may relate to any fees charged by the Lender, and (b)
amortize, promote, allocate, and spread, in equal parts, the total amount of
interest throughout the entire term of the indebtedness; provided that if the
indebtedness is paid and performed in full prior to the end of the full
contemplated term hereof, and if the interest received for the actual period
of existence hereof exceeds the maximum lawful rate, the Lender or any
subsequent holder of this Note shall refund to the Company the amount of such
excess or credit the amount of such excess against the principal portion of
the indebtedness, as of the date it was received, and, in such event, the
Lender shall not be subject to any penalties provided by any laws for
contracting for, charging, reserving or receiving interest in excess of the
maximum lawful rate.
Upon the occurrence of any one or more of the Events of Default
specified in the Loan Agreement, all amounts then remaining unpaid on this
Note shall be, or may be declared to be, immediately due and payable as
provided in the Loan Agreement, without further notice, at the option of the
holder hereof. The holder may waive any Default before or after the same has
been declared and restore this Note to full force and effect without
impairing any rights hereunder, such right of waiver being a continuing one,
but any one waiver shall not imply any additional or subsequent waiver.
Demand, presentment, notice and protest are expressly waived, except for
notices otherwise required in the Loan Agreement.
-3-
<PAGE>
In the event this Note is placed in the hands of one or more attorneys
for collection or enforcement or protection of the holder's rights described
in the Loan Agreement, the Company agrees to pay all reasonable attorneys'
fees (which shall be due on demand) and all court and other costs incurred by
the holder hereof.
This Note is governed by and shall be construed in accordance with the
internal laws of the State of Illinois.
This Note may not be changed, extended or terminated except in writing.
This Note is an amendment and restatement of that certain Construction
Note in the maximum principal amount of $37,500,000, dated as of December 22,
1994, and is not intended as, and shall not be deemed to constitute, a
novation, release or discharge of such note or any indebtedness evidenced or
created thereby.
Executed as of ___________, 1995.
UNITED STATES CELLULAR CORPORATION
By: ______________________________
Title: ___________________________
-4-
<PAGE>
EXHIBIT A-2
AMENDED AND RESTATED
1994 EQUIPMENT NOTE
$39,461,000.00 Originally dated as of December 22, 1994
(Plus Capitalized Interest) Amended and Restated of ___________, 1995
FOR VALUE RECEIVED, UNITED STATES CELLULAR CORPORATION, a corporation
organized under the laws of the State of Delaware (the "COMPANY"), promises
to pay to the order of NTFC CAPITAL CORPORATION (formerly known as Northern
Telecom Finance Corporation) (the "LENDER") at its offices located at 220
Athens Way, Nashville, Tennessee 337228-1399, in lawful money of the United
States of America and in immediately available funds the lesser of (i)
Thirty-Nine Million Four Hundred Sixty-One Thousand Dollars ($39,461,000.00),
together with interest thereon and the other amounts due as provided below.
This Note shall finally mature on December 1, 2003 (the "FINAL MATURITY
DATE").
This Note has been made and delivered pursuant to that certain Amended
and Restated Term Loan Agreement dated as of December 22, 1994 by and between
the Company and the Lender, as amended by a First Amendment to Amended and
Restated Term Loan Agreement of even date herewith and as it may be further
modified, amended or supplemented from time to time (the "Loan Agreement")
and is the 1994 Equipment Note described in Section 2.2(b) thereof. Any
capitalized term not otherwise defined in this Note shall have the meaning
ascribed to it in the Loan Agreement. Reference is made to the Loan
Agreement, which among other things provides for the acceleration of the
maturity hereof upon the occurrence of certain events and for prepayments in
certain circumstances and upon certain terms and conditions. This Note may be
prepaid, in whole or in part, without premium or penalty, in accordance with
the Loan Agreement. This Note is secured by the Collateral described in the
Loan Agreement, the Security Agreement and the Assignments and is entitled to
the benefits thereof.
All Advances hereunder shall bear interest at the Base Rate, as defined
below, from the date of such Advance until such amount is due and payable
(whether at the Maturity Date, upon Required Prepayment, by acceleration, to
otherwise). The BAse Rate shall be the adjustable interest rate per annum
(compounded monthly and computed on the basis of a year of 360 days for the
actual days elapsed) equal to (a) the rate announced from time to time as the
ninety (90) day "Commercial Paper" rate (being defined as the rate paid on
high grade unsecured notes sold through major dealers by major corporations
in multiples of $1,000 for repurchase within 90 days) as reported in THE WALL
STREET JOURNAL, PLUS 2.25% per annum. The Base Rate in effect on the last
Business Day of each Calendar Quarter as reflected by the most recent THE
WALL STREET JOURNAL publication shall be the Base Rate for the following
Calendar Quarter.
<PAGE>
Each Advance made under this Note (except Advances for Capitalized
Interest) shall be evidenced by a separate Note Schedule to be attached to
this Note, each of which shall be consecutively numbered, beginning with
SCHEDULE 1. Each and all of the Note Schedules shall be deemed a part hereof.
The principal and interest on each such Advance under this Note shall be Paid
as follows:
During the period from the date of each Advance hereunder through the
first full twelve (12) months following the date of such Advance (the
"CAPITALIZED INTEREST PERIOD"), no principal payments shall be due, but
interest shall accrue at the Base Rate on the principal amount of such
Advance, and shall be capitalized and added to the outstanding principal
amount of such Advance, unless the Company elects, by writing delivered
to Lender no later than the fifteenth (15th) day of any calendar month,
to pay the accrued interest on such advance for such month, in arrears,
on the first Business Day of the following calendar month. The sum of
the amount of Capitalized Interest added to this Note and the amount of
capitalized interest added to the 1994 Construction Note shall not
exceed an aggregate of $6,750,000, and after that limit has been
reached, the Company shall thereafter pay accrued interest on the
outstanding principal amount hereof, in arrears, on the first Business
Day of each month during the balance of the Capitalized Interest Period.
After the expiration of the Capitalized Interest Period for each
Advance, all outstanding principal including Capitalized Interest) of
such Advance shall be paid in seventy-two (72) equal consecutive monthly
installments of principal, in each case on the first Business Day of
each calendar month (each, a "PAYMENT DATE"), commencing on the first
Payment Date after the expiration of the Capitalized Interest Period for
such Advance and on each Payment Date thereafter until the Maturity Date
(as deemed below), on which date all outstanding principal (including
Capitalized Interest), interest and other charges with respect to such
Advance shall be paid in full. The "MATURITY DATE" for any Advance shall
be the first Business Day of the eighty-fourth (84th) calendar month
following the date of such Advance.
After the expiration of the Capitalized Interest Period for any Advance,
interest shall be paid monthly, in arrears, on each Payment Date, along
with the principal payments described above.
In any event, all outstanding principal of, interest on, and charges
with respect to this Note shall be due and payable in full on the Final
Maturity Date. Lender is authorized to make notations on the Note Schedules
(or on other schedules hereto) as to the amount of Capitalized Interest or
the principal and interest payments made by the Company, but the failure to
make any notations on any Note Schedule (or other schedule) shall not
diminish the obligation of the Company to pay all amounts due under this Note
or any Note Schedule hereto.
-2-
<PAGE>
Notwithstanding the foregoing, if the Company shall fail to pay within
ten (10) days after when due any principal amount or interest or other amount
payable by the Company under the Loan Agreement or under this Note, such
amount shall bear interest at a rate per annum that is equal to the lesser of
three percent (3%) higher than the then applicable Base Rate or the maximum
permissible interest rate under applicable law, until such overdue principal
amount, interest or other amount are paid in full (both before and after
judgment) whether or not any notice of default in the payment thereof has
been delivered under the Loan Agreement.
Notwithstanding any provision of this Note or the Loan Agreement to the
contrary, it is the intent of the Lender and the Company that the Lender or
any subsequent holder of this Note shall never be entitled to received,
collect, reserve or apply, as interest, any amount in excess of the maximum
rate of interest permitted to be charged by applicable law, as amended or
enacted from time to time. In the event Lender, or any subsequent holder of
this Note, ever receives, collects, reserves or applies, as interest, any
such excess, such amount which would be excessive interest shall be deemed a
partial prepayment of principal and treated as such, or, if the principal
indebtedness and all other amounts due are paid in full, any remaining excess
funds shall immediately be paid to the Company. In determining whether or not
the interest paid or payable, under any specific contingency, exceeds the
highest lawful rate, the Company and th Lender shall, to the maximum extent
permitted under applicable law, (a) exclude voluntary prepayments and the
effects thereof as it may relate to any fees charged by the Lender, and (b)
amortize, prorate, allocate, and spread, in equal parts, the total amount of
interest throughout the entire term of the indebtedness; provided that if the
indebtedness is paid and performed in full prior to the end of the full
contemplated therm hereof, and if the interest received for the actual period
of existence hereof exceeds the maximum lawful rate, the Lender or any
subsequent holder of this Note shall refund to the Company the amount of such
excess or credit the amount of such excess against the principal portion of
the indebtedness, as of the date it was received, and, in such event, the
Lender shall not be subject to any penalties provided by any laws for
contracting for, charging, reserving or receiving interest in excess of the
maximum lawful rate.
Upon the occurrence of any one or more of the Events of Default
specified in the Loan Agreement, all amounts then remaining unpaid on this
Note shall be, or may be declared to be, immediately due and payable as
provided in the Loan Agreement, without further notice, at the option of the
holder hereof. The holder may waive any Default before or after the same has
been declared and restore this Note to full force and effect without
impairing any rights hereunder, such right of waiver being a continuing one,
but any one waiver shall not imply any additional or subsequent waiver.
Demand, presentment, notice and protest are expressly waived, except for
notices otherwise required in the Loan Agreement.
In the event this Note is placed in the hands of one or more attorneys
for collection or enforcement or protection of the holder's rights described
in the Loan Agreement, the Company agrees to pay all reasonable attorneys'
fees (which shall be due on demand) and all court and other costs incurred by
holder thereof.
-3-
<PAGE>
This Note is governed by and shall be construed in accordance with the
internal laws of the State of Illinois.
This Note may not be changed, extended or terminated except in writing.
This Note is an amendment and restatement of that certain Equipment Note
in the principal amount of $37,500,000, dated as of December 22, 1994, and is
not intended as, and shall not be deemed to constitute, a novation, release
or discharge of such note or any indebtedness evidenced or created thereby.
Executed as of _________________, 1995.
UNITED STATES CELLULAR CORPORATION
By: ________________________________
Title: _____________________________
-4-
<PAGE>
EXHIBIT 10.2(b)
June 29, 1995
United States Cellular Corporation
Suite 700
8410 West Bryn Mawr Avenue
Chicago, Illinois 60631-3415
Re: Revolving Credit Agreement, dated as of July 1, 1987, last amended
as of March 29, 1995 (the "Revolving Credit Agreement"), between
United States Cellular Corporation ("USCC") and Telephone and Data
Systems, Inc. ("TDS")
------------------------------------------------------------------
Gentlemen:
This letter will constitute TDS's agreement to amend the Revolving
Credit Agreement, as follows:
(i) all references to $300,000,000" in the Revolving Credit Agreement
shall be changed to "$100,000,000";
(ii) Section 3 of the Revolving Credit Agreement is amended to provide
for interest on the unpaid principal at a rate per annum equal to
3/4% above the Prime Lending Rate in effect from time to time,
and interest on any overdue amount of principal or interest at a
rate per annum equal to 2 3/4% above the Prime Lending Rate in
effect from time to time.
(iii) Section 5 of the Revolving Credit Agreement is amended to
establish a new Termination Date of January 2, 1998;
All of the other terms and conditions of the Revolving Credit
Agreement shall remain in full force and effect.
<PAGE>
United States Cellular Corporation
June 29, 1995
Page 2
Please acknowledge your agreement to this amendment by executing
the copy of this letter and return it to the undersigned.
Very truly yours,
TELEPHONE AND DATA SYSTEMS, INC.
By: /s/ Murray L. Swanson
--------------------------------
Murray L. Swanson
Executive Vice President/Finance
Accepted and agreed to as of the date set forth above.
UNITED STATES CELLULAR CORPORATION
By: /s/ Kenneth R. Meyers
--------------------------------
Kenneth R. Meyers
Vice President/Finance
<PAGE>
EXHIBIT 10.11
SUMMARY OF 1995 BONUS PROGRAM FOR
SENIOR CORPORATE STAFF OF
UNITED STATED CELLULAR CORPORATION
The objectives of the 1995 Bonus Program for Senior Corporate Staff (the
"1995 Bonus Plan") of United States Cellular Corporation ("USM") are: (i) to
provide suitable incentives for the senior corporate management of USM to
extend their best efforts to achieve superior results in relation to key
performance targets, (ii) to suitably reward USM's senior corporate management
team in relation to their success in meeting and exceeding these performance
targets, and (iii) to help USM attract and retain talented management
personnel in positions of critical importance to the success of USM. A team
performance award and an individual performance award are available under the
1995 Bonus Plan.
For target performance on the team and individual categories, the 1995
Bonus Plan was designed to generate a targeted 1995 bonus pool equal to the
total of 25% of the aggregate of the base salaries of the Company's executive
officers other than the President. Under the 1995 Bonus Plan, the size of the
target bonus pool is increased or decreased depending on USM's 1995
achievements with respect to the performance categories. No bonus pool is
paid under such plan if minimum performance levels are not achieved in
these categories. The maximum bonus pool that could be generated, which would
require exceptional performance in all areas, would equal the total of 40% of
the aggregate base salaries of the Company's executive officers. At target
performance, the bonus pool would be equal to 25% of the aggregate salaries
of the Company's executive officers other than the President. Of this
percentage, 7.5% represents a targeted individual performance award and a
total of 17.5% represents a targeted team bonus award. The targeted team
award includes a discretionary team award of 3.5% and an objective award of
14% for a total targeted team bonus award of 17.5%. The objective performance
categories include (i) cash flow (6.125% of the targeted award), (ii) service
revenue (5.25% of the targeted award) and (iii) quality improvement (2.625%
of the targeted award).
The discretionary team performance category, representing 3.5% of the
targeted award of 25%, permits the participants to earn bonus dollars through
USM's performance and their individual performance in areas not measured or
not adequately measured by objective team performance categories. The
President of USM determines a bonus percentage to award for discretionary
team performance and presents his recommendation to the Chairman for his
approval. This decision is based primarily on an assessment of the team
performance in general, considering all facts and circumstances. This award
may range from 40% of the targeted award for adequate performance on a team
level to 160% of the targeted award for outstanding performance on a teal
level.
The 1995 Bonus Plan also provides a discretionary individual performance
category, representing 7.5% of the targeted percentage of 25%, to permit the
participants to earn bonus dollars through USM's performance and their
individual performance in areas not measured or not adequately measured by
team performance categories. The President of USM determines a bonus
percentage to award for discretionary individual performance and presents his
recommendation to the Chairman for his approval. This decision is based
primarily on an assessment of the executive's personal performance. This
award may range from 40% of the targeted award for adequate performance on an
individual basis to 160% of the targeted award for outstanding performance on
an individual basis.
<PAGE>
EXHIBIT 11
UNITED STATES CELLULAR CORPORATION
COMPUTATION OF EARNINGS PER COMMON SHARE
YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<S> <C>
PRIMARY EARNINGS
Net Income Available to Common................................................. $ 99,742
---------
---------
PRIMARY SHARES
Weighted average number of Common and Series A Common Shares Outstanding....... 82,320
Additional shares assuming issuance of:
Options and Stock Appreciation Rights........................................ 66
Convertible Preferred Shares................................................. 661
Common Shares Issuable....................................................... 976
---------
Primary Shares................................................................. 84,023
---------
---------
PRIMARY EARNINGS PER COMMON SHARE
Net Income..................................................................... $ 1.19
---------
---------
FULLY DILUTED EARNINGS*
Net Income Available to Common, as reported.................................... $ 99,742
Interest Expense eliminated as a result of the pro forma conversion of
Convertible Debentures........................................................ 4,834
---------
Net Income Available to Common, as adjusted.................................... $ 104,576
---------
---------
FULLY DILUTED SHARES
Weighted average number of Common and Series A Common Shares Outstanding....... 82,320
Additional shares assuming issuance of:
Options and Stock Appreciation Rights........................................ 76
Convertible Preferred Shares................................................. 661
Common Shares Issuable....................................................... 976
Conversion of Convertible Debentures......................................... 3,849
---------
Fully Diluted Shares........................................................... 87,882
---------
---------
FULLY DILUTED EARNINGS PER COMMON SHARE
Net Income..................................................................... $ 1.19
---------
---------
</TABLE>
- ----------
* This calculation is submitted in accordance with Securities Act of 1934
Release No. 9083 although not required by footnote 2 to paragraph 14 of APS
Opinion No. 15 because it results in dilution of less than 3%.
<PAGE>
EXHIBIT 12
UNITED STATES CELLULAR CORPORATION
RATIOS OF EARNINGS TO FIXED CHARGES
FOR THE YEAR ENDED DECEMBER 31, 1995
(DOLLARS IN THOUSANDS, EXCEPT RATIO AMOUNTS)
<TABLE>
<S> <C>
EARNINGS:
Income from Continuing Operations before income taxes.................... $ 132,234
Add (Deduct):
Minority Share of Cellular Losses...................................... (158)
Earnings on Equity Method.............................................. (39,833)
Distributions from Minority Subsidiaries............................... 6,836
Amortization of Capitalized Interest................................... 4
Minority interest in income of majority-owned subsidiaries that have
fixed charges......................................................... 1,563
---------------
$ 100,646
Add fixed charges:
Consolidated interest expense.......................................... 27,287
Interest Portion (1/3) of Consolidated Rent Expense.................... 3,254
---------------
$ 131,187
FIXED CHARGES:
Consolidated interest expense............................................ $ 27,287
Interest Portion (1/3) of Consolidated Rent Expense...................... 3,254
---------------
$ 30,541
RATIO OF EARNINGS TO FIXED CHARGES......................................... 4.30
---------------
---------------
Tax-Effected Preferred Dividends......................................... $ 0
Fixed Charges............................................................ 30,541
---------------
Fixed Charges and Preferred Dividends.................................. $ 30,541
RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED DIVIDENDS................. 4.30
---------------
---------------
ADDITIONAL FUNDS REQUIRED TO COVER FIXED CHARGES AND PREFERRED DIVIDEND
PAYMENTS.................................................................. N/A
---------------
---------------
</TABLE>
<PAGE>
EXHIBIT 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
United States Cellular Corporation (the "Company" - AMEX symbol: USM) owns,
operates and invests in cellular markets throughout the United States. USM owns
or has the right to acquire both majority and minority interests in 201
cellular markets at December 31, 1995, representing 24,451,000 population
equivalents ("pops"). USM included the operations of 137 majority-owned and
managed cellular markets in consolidated operations ("consolidated markets") at
December 31, 1995. Noncontrolling interests in 29 markets, representing 3.4
million pops, were accounted for using the equity method and were included in
investment income at that date. Noncontrolling interests held for sale or trade
in 40 other markets, representing 887,000 pops, were accounted for using the
cost method. Following is a table of summarized operating data for USM's
consolidated operations.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
1995 1994 1993
-----------------------------
<S> <C> <C> <C>
Population equivalents (in thousands) (1) 19,755 18,365 18,619
Total market population (in thousands) (2) 22,309 21,314 19,383
Customers 710,000 421,000 261,000
Market penetration 3.18% 1.98% 1.35%
Markets in operation 137 130 116
Cell sites in service 1,116 790 522
Average monthly revenue per customer $ 72 $ 80 $ 85
Churn rate per month 2.1% 2.3% 2.3%
Marketing cost per net customer addition $ 555 $ 667 $ 677
</TABLE>
(1) 1995 Donnelley Marketing Service estimates are used for all years. Includes
population equivalents relating to interests which are acquirable or which are
to be divested in the future.
(2) Calculated using the respective Donnelley Marketing Service estimates for
each year.
The Company's consolidated revenues and expenses include 100% of the revenues
and expenses of the systems serving majority-owned and managed markets plus its
corporate office operations. Investment income includes the Company's share of
the net income or loss of each of the noncontrolling markets for which the
Company follows the equity method of accounting.
Operating results for 1995 primarily reflect improvement in the Company's more
established markets, a full year's operations from the 14 markets added to the
consolidated group in 1994, the acquisition of majority interests in 23
operational markets and the divestiture of majority interests in 16 operational
markets during 1995. Operating revenues, driven primarily by increases in
customers served, rose $160.0 million, or 48%. Operating expenses rose $134.6
million, or 43%. Operating cash flow increased $49.4 million, or 60%.
Investment and other income increased $93.7 million to $124.7 million, due
primarily to gains on the sales of cellular and other investments totaling
$83.5 million and an increase in investment income. Investment income increased
$13.3 million in 1995, mostly due to improved results in markets managed by
others. Interest expense increased $5.4 million, or 25%, in 1995 primarily due
to a 26% increase in average debt balances. Net income totaled $99.7 million in
1995 compared to $16.4 million in 1994, reflecting increased gains on the sales
of cellular and other investments, improved operating results, increased
investment income and increased interest expense. On a comparable basis,
excluding the effect of the gains on sales of cellular and other investments
(net of tax), net income increased to $43.9 million in 1995 compared to $13.1
million in 1994 and a loss of $30.3 million in 1993.
<PAGE>
The Company expects the number of markets included in consolidated operations
to be reduced by six during 1996, through the acquisition of majority interests
in two operational markets and the divestiture of eight markets currently
majority-owned and managed by the Company. At that time, the Company will
include 131 markets in its consolidated operations.
Management believes there exists a seasonality in both service revenues, which
tend to increase more slowly in the first and fourth quarters, and operating
expenses, which tend to be higher in the fourth quarter due to increased
marketing activities and customer growth, which may cause operating income to
vary from quarter to quarter.
OPERATING REVENUES
Operating revenues totaled $492.4 million in 1995, up $160.0 million, or 48%,
over 1994. Operating revenues totaled $332.4 million in 1994, up $118.1
million, or 55%, over 1993. Acquisitions increased operating revenues $44.2
million, or 13%, in 1995 and $25.5 million, or 12%, in 1994.
Service revenues primarily consist of: (i) charges for access, airtime and
value-added services provided to the Company's local retail customers who use
the local systems operated by the Company; (ii) charges to customers of other
systems who use the Company's cellular systems when roaming ("inbound
roaming"); and (iii) charges for long-distance calls made on the Company's
systems. Service revenues totaled $476.6 million in 1995, up $158.0 million, or
50%, over 1994. Service revenues totaled $318.6 million in 1994, up $114.8
million, or 56%, over 1993. The increase was primarily due to the growing
number of local retail customers and the growth in inbound roaming revenue
offset by declining monthly average revenue per customer. Service revenues in
1995 increased 65%, or $205.7 million, due to customer growth and declined 15%,
or $47.7 million, due to decreases in average monthly service revenue per
customer. Acquisitions increased service revenues $42.7 million, or 13%, in
1995 and $24.4 million, or 12%, in 1994.
Average monthly service revenue per customer totaled $72 in 1995 compared to
$80 in 1994 and $85 in 1993. The 9% decrease in average monthly service revenue
per customer in 1995 was primarily a result of a decrease in per customer
inbound roaming revenue and lower per customer revenue from local retail
customers. Inbound roaming revenue has been increasing at a slower rate than
the Company's own customer base, which is growing faster than that of the rest
of the industry. Although average monthly local minutes of use per retail
customer totaled 95 in both 1995 and 1994, the Company's use of incentive
programs to increase lower-revenue weekend and off-peak usage in 1995 resulted
in a decrease in average revenue per minute of use during the year. The 6%
decrease in average monthly service revenue per customer in 1994 was primarily
a result of a decrease in per customer inbound roaming revenue, for the same
reasons as in 1995, and the decline in average local minutes of use per retail
customer.
Revenue from local customers' usage of USM's systems increased $101.5 million,
or 54%, in 1994 and $70.4 million, or 60%, in 1994. Growth in the number of
customers in the systems serving the Company's consolidated markets was the
primary reason for the increase in local revenue. The number of customers
increased 69% to 710,000 at December 31, 1995 from 421,000 at December 31,
1994. The number of customers increased 61% in 1994, up from 261,000 at
December 31, 1993. Excluding the effect of acquisitions and dispositions, the
Company's consolidated markets added 255,000 customers in 1995 and 142,000
customers in
-2-
<PAGE>
1994. While the percentage increase in customer additions is expected to be
lower in the future, management anticipates that the total number of net
customer additions will continue to increase in 1996. Acquisitions increased
local revenue $26.3 million, or 14%, in 1995 and $12.4 million, or 11%, in 1994.
Average monthly local retail revenue per customer declined to $44 in 1995 from
$47 in 1994 and $49 in 1993. Monthly local retail minutes of use per customer
averaged 95 in both 1995 and 1994 compared to 103 in 1993. While there was no
decline in average local retail minutes of use from 1994 to 1995, average
revenue per minute of use decreased as a result of the incentive programs
stated previously. Management believes that local retail revenue will continue
to decrease due to the usage patterns of incrementally added customers. This is
part of an industry-wide trend and is believed to be related to the tendency of
the early customers in a market to be the heaviest users during peak business
hours. It also reflects the Company's and the industry's continued penetration
of the consumer market, which tends to include fewer peak business hour-usage
customers.
Inbound roaming revenue increased $44.0 million, or 42%, in 1995 and $33.9
million, or 48%, in 1994. This increase was attributable to the rise in the
number of customers from other systems using the Company's systems when
roaming. Also contributing were the increased number of Company-managed systems
and cell sites within those systems. Monthly inbound roaming revenue per
customer averaged $22 in 1995, $26 in 1994 and $29 in 1993. Acquisitions
increased inbound roaming revenue $13.6 million, or 13%, in 1995 and $10.1
million, or 14%, in 1994.
Long-distance revenue increased $12.4 million, or 55%, in 1995 and $8.8
million, or 63%, in 1994 as the volume of long-distance calls billed by the
Company increased. Monthly long-distance revenue per customer averaged $5 in
1995 and $6 in 1994 and 1993. Acquisitions increased long-distance revenue
$3.5 million, or 16%, in 1995 and $1.7 million, or 12%, in 1994.
Equipment sales revenues totaled $15.8 million in 1995, up $2.0 million, or
15%, over 1994. Equipment sales revenues totaled $13.8 million in 1994, up $3.3
million, or 31%, over 1993. Equipment sales reflect the sale of 296,000,
153,000 and 83,000 cellular telephone units in 1995, 1994 and 1993,
respectively, plus installation and accessories revenue. The average revenue
per unit was $53 in 1995 compared to $90 in 1994 and $127 in 1993. The average
revenue per unit decline partially reflects the Company's decision to reduce
sales prices on cellular telephones to increase the number of customers, to
maintain its market position and to meet competitive prices as well as to pass
through reduced manufacturers' prices to customers. Also, the Company uses
promotions which are based on increased equipment discounting. The success of
these promotions led to both an increase in units sold and a decrease in
average equipment sales revenue per unit. Acquisitions increased equipment
sales revenues $1.5 million, or 11%, in 1995 and $1.1 million, or 11%, in 1994.
OPERATING EXPENSES
Operating expenses totaled $449.6 million in 1995, up $134.6 million, or 43%,
over 1994. Operating expenses totaled $315.0 million in 1994, up $92.0 million,
or 41%, over 1993. Acquisitions increased expenses $40.7 million, or 13%, in
1995 and $30.9 million, or 14%, in 1994.
-3-
<PAGE>
System operations expenses increased $23.6 million, or 50%, in 1995 and $12.6
million, or 37%, in 1994, as a result of increases in customer usage expenses
and costs associated with operating the Company's increased number of cellular
systems and the growing number of cell sites within those systems. Costs are
expected to continue to increase as the number of cell sites within the
Company's systems grows.
Customer usage expenses represent charges from other telecommunications service
providers for USM's customers' use of their facilities as well as for the
Company's inbound roaming traffic on these facilities, offset somewhat by
pass-through roaming revenue. These expenses also include local interconnection
to the landline network, toll charges and roaming expenses from the Company's
customers' use of systems other than their local systems. Customer usage
expenses were $34.9 million in 1995 compared to $21.6 million in 1994 and $18.0
million in 1993, and represented 7% of service revenues in 1995 and 1994
compared to 9% in 1993.
Maintenance, utility and cell site expenses totaled $35.5 million in 1995
compared to $25.3 million in 1994 and $16.3 million in 1993, primarily
reflecting an increase in the number of cell sites in the systems serving all
majority-owned and managed markets, to 1,116 in 1995 from 790 in 1994 and 522
in 1993. Acquisitions increased system operations expenses $7.6 million, or
16%, in 1995 and $6.1 million, or 18%, in 1994.
Marketing and selling expenses increased $33.3 million, or 48%, in 1995 and
$25.6 million, or 59%, in 1994. Marketing and selling expenses primarily
consist of salaries, commissions and expenses of field sales and retail
personnel and offices; agent commissions; promotional expenses; local
advertising and public relations expenses. The 1995 increase was primarily due
to a 69% rise in the number of gross customer activations (excluding
acquisitions and divestitures), from 232,000 in 1994 to 392,000 in 1995. The
1994 increase was primarily due to a 64% rise in the number of gross customer
activations (excluding acquisitions and divestitures), from 141,700 in 1993 to
232,000 in 1994. Cost per gross customer addition, including losses on
equipment sales, decreased to $361 in 1995 from $408 in 1994 and $414 in 1993.
Excluding acquisitions and divestitures, the Company added 255,000 net new
customers in 1995 compared to 142,000 in 1994 and 86,600 in 1993, increases of
80% and 64% in 1995 and 1994, respectively. The churn rate was 2.1% in 1995 and
2.3% in 1994 and 1993. Acquisitions increased marketing and selling expenses
$9.0 million, or 13%, in 1995 and $6.3 million, or 15%, in 1994.
Cost of equipment sold increased $15.5 million, or 39%, in 1995 and $13.7
million, or 54%, in 1994. The increases reflect the growth in unit sales
related to the rise in gross customer activations made through the Company's
direct and retail distribution channels, offset somewhat by falling
manufacturer prices per unit. The average cost to the Company of a telephone
unit sold, including accessories and installation, was $186 in 1995 compared to
$258 in 1994 and $309 in 1993. Acquisitions increased cost of goods sold $6.3
million, or 16%, in 1995 and $3.4 million, or 13%, in 1994.
General and administrative expenses increased $38.2 million, or 41%, in 1995
and $19.7 million, or 26%, in 1994. These expenses include the costs of
operating the Company's local business offices and its corporate expenses.
These increases include the effects of an increase in the number of
consolidated markets, increases in expenses required to serve the growing
customer base in existing markets and an expansion of both local administrative
office and corporate staff, necessitated by growth in the Company's business.
The Company is using
-4-
<PAGE>
an ongoing clustering strategy to combine local operations wherever feasible in
order to gain operational efficiencies and reduce its administrative expenses.
Acquisitions increased direct field-related general and administrative expenses
$11.1 million, or 12%, in 1995 and $8.4 million, or 11%, in 1994.
Operating cash flow (operating income or loss before minority share plus
depreciation and amortization expense) increased $49.4 million, or 60%, to
$132.2 million in 1995 and increased $46.5 million, or 128%, to $82.8 million
in 1994. The improvement in 1995 and 1994 was primarily due to growth in
service revenues and a slower rate of increase in operating expenses resulting
from improved operational efficiencies.
Depreciation expense increased $17.8 million, or 45%, in 1995 and $13.9
million, or 54%, in 1994. These increases reflect rising average fixed asset
balances, which increased 48% in 1995 and 54% in 1994. Increased fixed asset
balances primarily result from the increase in cell sites built to improve
coverage in the Company's markets. Acquisitions increased depreciation expense
$4.6 million, or 12%, in 1995 and $2.9 million, or 11%, in 1994.
Amortization of intangibles increased $6.2 million, or 24%, in 1995 and $6.6
million, or 34%, in 1994. These increases are primarily due to increases in
license costs as a result of the acquisition of or the commencement of service
in 23 markets in 1995 and 14 markets in 1994. License costs related to
consolidated markets increased $69.0 million, or 7%, in 1995 and $163.9
million, or 20%, in 1994. Acquisitions increased amortization of intangibles
$2.2 million, or 9%, in 1995 and $3.8 million, or 20%, in 1994.
OPERATING INCOME (LOSS) BEFORE MINORITY SHARE
Operating income before minority share totaled $42.8 million in 1995 and $17.4
million in 1994 compared to a loss of $8.7 million in 1993. The operating
income margin (as a percent of service revenues) improved to 9% in 1995 and 5%
in 1994 from an operating (loss) margin of (4%) in 1993. The 1995 and 1994
operating income improvements reflect improved results in the more established
markets and increased revenues resulting from growth in the number of customers
served by the Company's systems. This was partially offset by costs associated
with the growth of the Company's operations and increased losses on equipment
sales. Acquisitions increased operating income before minority share $3.5
million in 1995 and decreased operating income before minority share $5.4
million in 1994.
The Company expects service revenues to continue to grow significantly during
1996 as it adds customers to its existing systems and realizes a full year of
revenues from customers added in 1995. Additionally, the Company expects
expenses to increase significantly during 1996 as it incurs costs for markets
and cell sites added in 1994 and 1995, incurs costs associated with customer
and system growth and continues to acquire markets. Management believes there
exists a seasonality in both service revenues, which tend to increase more
slowly in the first and fourth quarters, and operating expenses, which tend to
be higher in the fourth quarter due to increased marketing activities and
customer growth, which may cause operating income to vary from quarter to
quarter.
INVESTMENT AND OTHER INCOME
Investment and other income totaled $124.7 million in 1995, $31.0 million in
1994 and $22.6 million in 1993. Investment income was $39.8 million in 1995
compared to $26.5 million in 1994 and $16.9 million in 1993. Investment income
primarily represents the Company's share
-5-
<PAGE>
of net income from the markets managed by others that are accounted for by the
equity method.
Gain on sale of cellular interests totaled $83.5 million in 1995, $3.3 million
in 1994 and $4.9 million in 1993. The 1995 amount primarily reflects gains
totaling $64.6 million recorded on the sales of the Company's majority
interests in six markets; gains totaling $11.1 million recorded on the sales of
the Company's investment interests in six markets; a gain totaling $5.3 million
resulting from cash proceeds received in an exchange of markets; and a gain
totaling $2.5 million recorded on the sale of certain marketable equity
securities. The 1994 amount reflects gains recorded on the exchange of five of
the Company's investment interests with another cellular company for minority
interests in seven markets in which the Company owns controlling interests. The
1993 amount reflects gains recorded on the sales of two investment interests.
INTEREST AND INCOME TAXES
Total interest expense increased $5.4 million, or 25%, in 1995, on a 26%
increase in the average amount of debt outstanding. Total interest expense
decreased $11.3 million, or 34%, in 1994, on a 37% decrease in the average
amount of debt outstanding. Interest expense in 1995 is primarily related to
borrowings under the Revolving Credit Agreement with TDS, Liquid Yield OptionTM
Notes ("LYONsTM") (TM Trademark of Merrill Lynch & Co., Inc.) and borrowings
under a vendor financing agreement.
Interest expense relating to the Revolving Credit Agreement with TDS was $10.4
million in 1995, $17.8 million in 1994 and $29.1 million in 1993. The average
amount of debt outstanding under the Revolving Credit Agreement was $100.0
million in 1995, $204.7 million in 1994 and $372.8 million in 1993; however, no
borrowings were outstanding under the Revolving Credit Agreement as of December
31, 1995. The average interest rate on such debt was 10.4% in 1995, 8.6% in
1994 and 7.5% in 1993. Interest expense relating to the LYONs, which accrue
interest at 6%, was $7.4 million in 1995. The LYONs are zero coupon
convertible debentures which do not require current cash payments of interest;
therefore, this is a noncash expense. Interest expense related to the vendor
financing agreements was $9.2 million in 1995, $3.9 million in 1994 and $4.0
million in 1993. The average amount of debt under the vendor financing
agreements was $112.1 million in 1995, $58.1 million in 1994 and $66.4 million
in 1993. The average interest rate on such debt was 8.3% in 1995, 7.1% in 1994
and 5.7% in 1993.
Income tax expense was $32.5 million in 1995, $4.9 million in 1994 and $2.7
million in 1993. In 1995, $27.7 million of income tax expense related to the
gains on sales of cellular and other investments. Income tax expense for 1994
and 1993 primarily includes the federal income taxes of consolidated
subsidiaries not included in the TDS consolidated federal income tax return.
State income tax expense was primarily related to subsidiaries generating
taxable income after utilization of state net operating losses.
USM is included in a consolidated federal income tax return with other members
of the TDS consolidated group. TDS and USM are parties to a Tax Allocation
Agreement under which USM is able to carry forward its losses and credits and
use them to offset any current or future income tax liabilities to TDS. The
amount of the federal net operating loss carryforward available to offset
future taxable income aggregated approximately $74 million at December 31,
1995, and expires between 2002 and 2010. The amount of the state net operating
loss carryforward available to offset future taxable income aggregated
approximately $212 million
-6-
<PAGE>
at December 31, 1995, and expires between 1996 and 2010. Both the federal and
state loss carryforwards have been significantly reduced by the gains on the
sales of cellular and other investments during 1995, and more reductions are
anticipated from gains which may be recognized on sales of cellular interests
for which the Company has agreements as of December 31, 1995.
NET INCOME (LOSS)
Net income totaled $99.7 million in 1995 and $16.4 million in 1994 compared to
a net loss of $25.4 million in 1993. The improvement in 1995 resulted from
gains on the sales of cellular and other investments, improved operating
results in the established markets and increased investment income, partially
offset by increased income tax expense. The improvement in 1994 resulted from
improved operating results in the established markets, increased investment
income and decreased interest expense, partially offset by the effects of the
addition of new markets. On a comparable basis (net of tax), excluding gains on
the sales of cellular and other investments, net income totaled $43.9 million
in 1995 and $13.1 million in 1994 and net loss totaled $30.3 million in 1993.
Net income per share was $1.19 in 1995 and $.21 in 1994 and net loss per share
was $.45 in 1993. The improvements in 1995 and 1994 primarily reflects the
improvement in net income offset by the increase in weighted average Common and
Series A Common Shares outstanding. The weighted average number of Common and
Series A Common Shares outstanding for 1995 increased 6%, primarily due to the
issuance of Common Shares in connection with acquisitions. The weighted average
number of Common and Series A Common Shares outstanding for 1994 increased 39%
over the shares outstanding for 1993 primarily as a result of Common and Series
A Common Shares issued in connection with the 1993 rights offering, Common
Shares issued in connection with acquisitions, and the inclusion of dilutive
common stock equivalents in 1994 weighted average common shares outstanding as
a result of the 1994 net income.
INFLATION
Management believes that inflation affects the Company's business to no greater
extent than the general economy.
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
The Financial Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of," in March 1995, which
became effective in January 1996, requiring that long-lived assets and certain
identifiable intangibles to be held and used by any entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Management believes the
carrying amount of the Company's long-lived assets is not impaired.
FINANCIAL RESOURCES AND LIQUIDITY
The Company operates a capital- and marketing-intensive business. Rapid growth
in markets operated by the Company, capital expenditures and customers served
has caused financing requirements for acquisitions, construction and operations
to exceed internally generated cash flow. In recent years, the Company has
generated operating cash flows and received cash proceeds frin divestitures to
fund most of its construction and operating expenses. The Company has been
profitable for the last two years, but had 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.
-7-
<PAGE>
Marketing and system operations expenses associated with this expansion may
reduce the rate of growth in operating cash flow and operating income over the
next several quarters.
Cash flows from operating activities provided $115.9 million in 1995, $84.3
million in 1994 and $35.3 million in 1993. Operating cash flow (operating
income or loss before minority share plus depreciation and amortization
expense) provided cash totaling $132.2 million in 1995, $82.8 million in 1994
and $36.4 million in 1993. The 1995 and 1994 increases in operating cash flow
primarily reflect improvement in the more established markets. Acquisitions
increased operating cash flow $10.3 million, or 12%, in 1995 and $1.3 million,
or 4%, in 1994. Cash flows from other operating activities (investment and
other income, interest expense, changes in working capital and changes in other
assets and liabilities) required cash investments totaling $16.3 million in
1995 and $1.1 million in 1993 and provided cash totaling $1.5 million in 1994.
Cash flows from financing activities provided $19.3 million in 1995, $95.6
million in 1994 and $65.4 million in 1993. Cash flows from financing activities
include cash flows from the sale of LYONs, borrowings under the Revolving
Credit Agreement with TDS, vendor financing transactions and sales of Common
Shares. In 1995, the sale of LYONs provided cash totaling $221.5 million and
vendor financing transactions provided cash totaling $59.5 million. This cash
was used to repay amounts owed under the Revolving Credit Agreement with TDS
totaling $251.2 million and amounts owed under the vendor financing agreements
totaling $13.4 million. Borrowings under the Revolving Credit Agreement with
TDS totaling $75.4 million and $45.4 million provided a majority of the
Company's external financing requirements in 1994 and 1993, respectively.
Borrowings under one of the vendor financing agreements provided an additional
$18.0 million in 1994. The sale of Common Shares to parties other than TDS in
connection with the rights offering provided an additional $36.8 million of the
Company's external financing requirements in 1993.
Cash flows from investing activities required cash investments totaling $102.6
million in 1995, $180.4 million in 1994 and $98.6 million in 1993. Such cash
requirements primarily consisted of cash additions to property, plant, and
equipment and cash requirements for acquisitions and for investments in
cellular markets. In 1995, the Company received cash proceeds totaling $151.1
million relating to the sales of cellular and other investments. Cash
expenditures for property, plant and equipment totaled $208.7 million in 1995,
representing the construction of 292 cell sites and other plant additions.
Expenditures for property, plant and equipment totaled $158.2 million in 1994,
representing the construction of 225 cell sites and other plant additions.
Expenditures for property, plant and equipment totaled $84.9 million in 1993,
representing the construction of 138 cell sites and other plant additions.
Anticipated capital requirements for 1996 primarily reflect the Company's
construction and system expansion program. The Company's construction and
system expansion budget for 1996 is approximately $240 million, consisting
primarily of new cell sites to expand and enhance the Company's coverage in its
service areas and expansion of office systems.
The Company continues to expand its operations through acquisitions. Some of
the markets acquired during 1995, 1994 and 1993 were subject to acquisition
agreements which were entered into prior to the year in which the acquisitions
were completed. The following table summarizes the acquisitions completed
during the last three years and the consideration issued for these acquisitions.
-8-
<PAGE>
COMPLETED ACQUISITIONS
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1995 1994 1993
--------------------------
(in millions)
<S> <C> <C> <C>
Controlling Interests Acquired 11 9 25
Pops Acquired 1.7 1.3 3.8
Total Consideration $151.0 $140.3 $284.6
Details of Total Consideration:
USM Common Shares
Shares Issued to TDS 2.7 4.2 5.5
Shares Issued to third parties .4 .1 .2
Recorded Cost $ 98.7 $131.9 $155.0
USM Series A Common Shares
Shares Issued (all to TDS) - - .1
Recorded Cost $ - $ - $ .1
USM Common Shares to be issued
in the future (in 1994 and 1996)
Shares Issuable (all to TDS) .5 - .1
Recorded Cost $ 14.5 $ - $ 3.0
Revolving Credit Agreement - TDS 14.6 .3 101.5
Subsidiary Preferred Stock - - 2.9
Cancellation of Notes Receivable - 1.4 -
Equity Contribution from TDS - - 9.4
Cash $ 23.2 $ 6.7 $ 12.7
--------------------------
</TABLE>
Additionally, the Company had commitments at December 31, 1995, to issue
928,000 Common Shares in 1996 related to certain completed acquisitions.
The Company is continuing to assess its portfolio of cellular holdings in order
to maximize the benefits derived from clustering its markets. As the number of
opportunities for outright acquisitions has decreased over the last one or two
years, and as the Company's clusters have grown to realize greater economies of
scale, the Company's focus has shifted toward exchanges and divestitures of
managed and investment interests. Recently, the Company has completed exchanges
of controlling interests in its less strategic markets for controlling
interests in markets which better complement its clusters. The Company has also
completed outright sales of other less strategic markets. The proceeds from
these sales have been used to further the Company's growth.
At December 31, 1995, the Company had agreements pending to exchange a
controlling interest in one market, representing 96,000 population equivalents,
for a controlling interest in another market, representing 153,000 population
equivalents, plus cash consideration. The Company also had an agreement
pending to acquire a controlling interest in one market and several minority
interests in another market, representing 302,000 population equivalents. In
addition, the Company had agreements pending to divest controlling interests in
seven other markets, one minority interest and one market partition,
representing 870,000 population equivalents, and to settle litigation related
to an investment interest which was divested in 1995. If the exchange,
divestitures and litigation settlement are completed as planned, the Company
will receive consideration totaling approximately $170 million. All of the
pending exchange, acquisition, divestiture and litigation settlement agreements
discussed above are expected to be completed during 1996. Certain of the
divestitures and the litigation settlement are expected to generate substantial
gains for book and tax purposes.
-9-
<PAGE>
TDS has proposed the transfer of its minority ownership interests in certain
cellular markets acquired in conjunction with its prior acquisitions of
telephone companies to the Company. The minority interests subject to the
proposal represent approximately 675,000 population equivalents. The proposed
purchase price is approximately $116.7 million. The form of consideration to be
paid by USM is subject to negotiation and would likely consist of cash or USM
common stock or a combination thereof.
The TDS proposal is subject to negotiation and has been referred to a
previously established independent committee of the Company's Board of
Directors. The independent committee has retained Lazard Freres & Co. as its
financial advisor. The proposed transaction will be subject to approval by the
independent committee of the USM Board of Directors, to the completion of
definitive documentation and to compliance with regulatory requirements.
LIQUIDITY
The Company anticipates that the aggregate resources required for 1996 will
include approximately: (i) $240 million for capital spending and (ii) $21
million of scheduled debt repayments. Additionally, the Company anticipates it
will reimburse TDS, for a pending acquisition which is scheduled to be
completed during 1996, for TDS Common Shares to be issued to third parties. The
reimbursement to TDS is expected to be in the form of USM Common Shares. Not
included in the above amounts are those related to any acquisition agreements
that the Company may enter into in 1996. These potential acquisitions may
require substantial funding for both their acquisition and operation during
1996.
The Company had $38 million of cash and cash equivalents at December 31, 1995,
anticipates generating an increasing amount of positive cash flows from
operating activities and is scheduled to receive approximately $150 million in
cash proceeds from pending divestitures, an exchange and a litigation
settlement during 1996. The Company also has $100 million available under the
Revolving Credit Agreement with TDS and $4 million available under its primary
vendor financing agreement.
The Company sold $745 million principal amount at maturity of zero coupon
convertible debt in June 1995. This 20-year, 6% yield to maturity fixed rate
debt, in the form of LYONs, is subordinated to all senior indebtedness of the
Company. Each LYON is convertible at the option of the holder at any time on or
prior to maturity at a conversion rate of 9.475 Common Shares per LYON. Upon
conversion, USM may elect the delivery of its Common Shares or cash equal to
the market value of the Common Shares into which the LYONs are convertible.
Beginning five years after the date of issue, the LYONs may be redeemed at any
time for cash at the option of the Company at redemption prices equal to the
issue price plus accrued original issue discount through the date of
redemption. On the fifth anniversary of the issue date, USM will purchase
LYONs, at the option of the holder, at the issue price plus accrued original
issue discount through that date. At that time, USM will have the option of
purchasing such LYONs with cash, USM Common Shares or TDS common equity
securities, or any combination thereof.
Most of the net proceeds to the Company of approximately $221.5 million from
the sale of the LYONs were used to completely repay debt to TDS under the
Revolving Credit Agreement, and the excess proceeds were used for general
corporate purposes. In connection with the sale of the LYONs, on June 29, 1995,
the Company and TDS amended the Revolving Credit Agreement to reduce the
available line of credit thereunder to $100 million and to reduce the
-10-
<PAGE>
interest rate for borrowings to prime plus 0.75%. No borrowings were
outstanding under the Revolving Credit Agreement at December 31, 1995.
The Company has two arrangements for the financing of cellular system equipment
and construction costs with an equipment vendor. Terms of borrowings under the
first agreement are for seven years at interest rates of 2.25% or 2.31% over
the 90-day Commercial Paper Rate of high-grade, unsecured notes (for rates of
7.8% or 7.9%, respectively, at December 31, 1995). The Company also has an
agreement with the same equipment vendor which was assumed pursuant to a 1993
acquisition which is arranged through the individual entity acquired. The
interest rate for these borrowings is 2.25% over the 90-day Commercial Paper
Rate of high-grade, unsecured notes (for a rate of 7.8% at December 31, 1995).
In the aggregate, borrowings totaling $120.0 million were outstanding under
these vendor financing agreements at December 31, 1995, and approximately $4
million remained available under these agreements at that date.
Management believes that the Company's operating cash flows and cash proceeds
from scheduled market divestitures provide substantial financial flexibility.
The Company also has a line of credit and longer term financing commitments to
help meet its short-and long-term financing needs. Additionally, the Company
has access to public and private capital markets and anticipate issuing debt
and equity securities when capital requirements (including acquisitions),
financial market conditions and other factors warrant.
-11-
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS
OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------
1995 1994 1993
------------------------------------------------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C>
OPERATING REVENUES
Service $476,634 $318,649 $203,800
Equipment sales 15,761 13,755 10,510
------------------------------------------------
Total Operating Revenues 492,395 332,404 214,310
------------------------------------------------
OPERATING EXPENSES
System operations 70,442 46,869 34,301
Marketing and selling 102,361 69,072 43,478
Cost of equipment sold 54,948 39,431 25,688
General and administrative 132,431 94,193 74,472
Depreciation 57,302 39,520 25,665
Amortization of intangibles 32,156 25,934 19,362
------------------------------------------------
Total Operating Expenses 449,640 315,019 222,966
------------------------------------------------
OPERATING INCOME (LOSS)
BEFORE MINORITY SHARE 42,755 17,385 (8,656)
Minority share of operating income (7,902) (5,152) (3,496)
------------------------------------------------
OPERATING INCOME (LOSS) 34,853 12,233 (12,152)
------------------------------------------------
INVESTMENT AND OTHER INCOME
Investment income 39,833 26,540 16,922
Amortization of licenses
related to investments (1,089) (913) (917)
Interest income 5,008 3,380 2,652
Other (expense), net (2,578) (1,368) (915)
Gain on sale of cellular and other investments 83,494 3,321 4,851
------------------------------------------------
Total Investment and Other Income 124,668 30,960 22,593
------------------------------------------------
INCOME BEFORE INTEREST
AND INCOME TAXES 159,521 43,193 10,441
------------------------------------------------
Interest expense - affiliate 10,406 17,812 29,068
Interest expense - other 16,881 4,071 4,122
------------------------------------------------
Total Interest Expense 27,287 21,883 33,190
------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES 132,234 21,310 (22,749)
Income tax expense 32,492 4,917 2,692
------------------------------------------------
NET INCOME (LOSS) $ 99,742 $ 16,393 $(25,441)
------------------------------------------------
------------------------------------------------
WEIGHTED AVERAGE COMMON AND
SERIES A COMMON SHARES (000S) 84,023 79,514 57,152
EARNINGS PER COMMON AND
SERIES A COMMON SHARE $ 1.19 $ .21 $ (.45)
------------------------------------------------
------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
December 31,
------------------------------
1995 1994
------------------------------
(Dollars in thousands)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 8,462 $ 4,143
Affiliated cash investments 29,942 1,657
Accounts receivable
Customers, less allowance of
$3,820 and $2,073, respectively 42,934 23,609
Roaming 26,316 18,881
Affiliates 2,166 3,549
Other 5,761 3,150
Inventory 9,198 5,435
Prepaid and other current assets 5,007 4,136
------------------------------
129,786 64,560
------------------------------
PROPERTY, PLANT AND EQUIPMENT
In service 674,450 464,132
Less accumulated depreciation 144,423 95,951
------------------------------
530,027 368,181
------------------------------
INVESTMENTS
Cellular partnerships 134,421 99,495
Licenses, net of accumulated amortization of
$88,403 and $69,677, respectively 1,035,846 947,399
Marketable equity securities -- 20,145
Notes and interest receivable 16,376 14,535
------------------------------
1,186,643 1,081,574
------------------------------
DEFERRED CHARGES
Start-up costs, net of accumulated amortization
of $7,240 and $6,306, respectively 1,728 3,685
Other, net of accumulated amortization
of $6,817 and $2,782, respectively 31,960 16,787
------------------------------
33,688 20,472
------------------------------
TOTAL ASSETS $1,880,144 $1,534,787
------------------------------
------------------------------
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
<PAGE>
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
December 31,
------------------------------
1995 1994
------------------------------
(Dollars in thousands)
<S> <C> <C>
CURRENT LIABILITIES
Current portion of long-term debt and preferred stock $ 30,939 $ 20,804
Notes payable 1,375 637
Accounts payable
Affiliates 11,636 3,662
Other 62,046 49,114
Accrued interest, primarily to affiliates -- 5,880
Accrued taxes 20,753 2,430
Customer deposits and deferred revenues 11,332 5,933
Other current liabilities 17,028 9,913
------------------------------
155,109 98,373
------------------------------
REVOLVING CREDIT AGREEMENT - TDS -- 232,954
------------------------------
LONG-TERM DEBT, excluding current portion 98,656 57,691
------------------------------
6% ZERO COUPON CONVERTIBLE DEBENTURES 235,750 --
------------------------------
DEFERRED LIABILITIES AND CREDITS
Net deferred income tax liability 14,331 5,017
Other 1,541 3,636
------------------------------
15,872 8,653
------------------------------
REDEEMABLE PREFERRED STOCK, excluding current portion -- 9,597
------------------------------
MINORITY INTEREST 45,303 33,552
------------------------------
COMMON SHAREHOLDERS' EQUITY
Common Shares, par value $1 per share;
authorized 140,000,000 shares; issued and outstanding
49,965,718 and 45,584,028 shares, respectively 49,966 45,584
Series A Common Shares, par value $1 per share; authorized
50,000,000 shares; issued and outstanding 33,005,877 shares 33,006 33,006
Additional paid-in capital 1,206,614 1,083,698
Common Shares issuable, 928,009 and
802,802 shares, respectively 24,784 16,337
Retained earnings (deficit) 15,084 (84,658)
------------------------------
1,329,454 1,093,967
------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,880,144 $1,534,787
------------------------------
------------------------------
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS
OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------
1995 1994 1993
-------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 99,742 $ 16,393 $ (25,441)
Add (Deduct) adjustments to reconcile net income
(loss) to net cash provided by
operating activities
Depreciation and amortization 90,547 66,367 45,944
Investment income (39,833) (26,540) (16,922)
Gain on sale of cellular and
other investments (83,494) (3,321) (4,851)
Minority share of operating income 7,902 5,152 3,496
Other noncash expense 15,076 429 499
Change in accounts receivable (27,878) (12,538) (7,343)
Change in accounts payable 7,072 13,882 5,836
Change in accrued interest 10,123 17,774 29,009
Change in accrued taxes 18,236 1,575 177
Change in deferred taxes 8,660 1,611 --
Change in other assets and liabilities 9,781 3,524 4,899
-------------------------------------------------
115,934 84,308 35,303
-------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Long-term debt borrowings 59,460 18,611 64
Change in Convertible Debentures 221,466 -- --
Repayment of long-term debt (13,353) (12,091) (15,851)
Change in Revolving Credit Agreement (251,230) 75,414 45,446
Common Shares issued 1,563 1,135 36,813
Capital contributions (distributions)
from/to minority partners 1,411 12,504 (1,075)
-------------------------------------------------
19,317 95,573 65,397
-------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant
and equipment (208,713) (158,208) (84,889)
Investments in and advances to
nonconsolidated partnerships (18,807) (21,553) (16,279)
Distributions from nonconsolidated partnerships 8,679 16,395 11,265
Proceeds from sale of cellular and other investments 151,137 -- 6,750
Acquisitions, excluding cash acquired (29,315) (6,878) (9,964)
Other investments (5,628) (10,111) (5,439)
-------------------------------------------------
(102,647) (180,355) (98,556)
-------------------------------------------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 32,604 (474) 2,144
CASH AND CASH EQUIVALENTS--
Beginning of period 5,800 6,274 4,130
-------------------------------------------------
End of period $ 38,404 $ 5,800 $ 6,274
-------------------------------------------------
-------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES
IN COMMON SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------
1995 1994 1993
--------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
COMMON SHARES
Balance at beginning of period $ 45,584 $ 36,960 $ 25,219
Add
Acquisitions of cellular interests 3,455 8,493 5,718
Acquisition of RSA interests from TDS -- -- 31
Employee benefit plans 62 55 51
Redemption of Preferred Stock 865 76 --
Sales of Common Shares -- -- 1,119
Conversion of debt to TDS -- -- 4,822
--------------------------------------------------
Balance at end of period $ 49,966 $ 45,584 $ 36,960
--------------------------------------------------
--------------------------------------------------
SERIES A COMMON SHARES
Balance at beginning of period $ 33,006 $ 33,006 $ 27,430
Add
Acquisition of RSA interests from TDS -- -- 75
Conversion of debt to TDS -- -- 5,501
--------------------------------------------------
Balance at end of period $ 33,006 $ 33,006 $ 33,006
--------------------------------------------------
--------------------------------------------------
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of period $1,083,698 $ 867,947 $342,204
Add (Deduct)
Acquisitions of cellular interests 101,302 211,367 150,630
Acquisition of RSA interests from TDS -- -- (49)
Employee benefit plans 1,614 1,131 1,089
Capital contributions by TDS -- -- 9,468
Redemption of Preferred Stock 21,371 1,420 --
Sales of Common Shares -- -- 35,818
Conversion of debt to TDS -- -- 330,328
Net unrealized (loss) gain on available-for-sale
marketable equity securities (1,258) 1,884 (626)
Capital stock expense (113) (51) (915)
--------------------------------------------------
Balance at end of period $1,206,614 $1,083,698 $ 867,947
--------------------------------------------------
--------------------------------------------------
COMMON AND SERIES A
COMMON SHARES ISSUABLE
Balance at beginning of period $ 16,337 $ 103,266 $ 131,741
Add (Deduct)
Acquisitions of cellular interests 14,530 -- 2,996
TDS Common Shares issued for acquisitions -- -- (30,649)
Shares issued pursuant to acquisition agreements (6,083) (86,929) (822)
--------------------------------------------------
Balance at end of period $ 24,784 $ 16,337 $ 103,266
--------------------------------------------------
--------------------------------------------------
RETAINED EARNINGS (DEFICIT)
Balance at beginning of period $ (84,658) $ (101,051) $ (75,610)
Add (Deduct) net income (loss) 99,742 16,393 (25,441)
--------------------------------------------------
Balance at end of period $ 15,084 $ (84,658) $(101,051)
--------------------------------------------------
--------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
United States Cellular Corporation (the "Company" or "USM"), is an 80.8%-owned
subsidiary of Telephone and Data Systems, Inc. ("TDS").
NATURE OF OPERATIONS
USM owns, manages and invests in cellular systems throughout the United States
and is the nation's seventh largest cellular telephone company in terms of popu-
lation equivalents. The Company owns or has the right to acquire interests in
201 cellular markets, representing approximately 24.5 million population
equivalents as of December 31, 1995. USM's 137 majority-owned and managed
markets, primarily mid-sized and rural markets, covered 29 states and served
710,000 customers as of December 31, 1995.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of USM, its majority-
owned subsidiaries and partnerships in which USM has a controlling majority
partnership interest. There were 137 consolidated operating entities in 1995,
130 in 1994 and 116 in 1993. All material intercompany accounts and transactions
have been eliminated. Certain amounts reported in prior years have been
reclassified to conform to current period presentation.
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
period. Actual results could differ from those estimates.
REVENUES
Revenues from operations primarily consist of charges to customers for monthly
access, cellular airtime and data usage, roaming charges, long-distance charges
and vertical services. Revenues are recognized as services are rendered.
Unbilled revenues, resulting from cellular service provided from the billing
cycle date to the end of each month and from other cellular carriers' customers
using USM's cellular systems for the last half of each month, are estimated and
recorded. Equipment sales are recognized upon delivery to the customer and
reflect charges to customers for cellular telephone user equipment purchased.
PENSION PLAN
United States Cellular Corporation's Employees' Pension Trust I (the "Pension
Trust"), a qualified noncontributory defined contribution pension plan, was
adopted effective January 1, 1994. It provides pension benefits for the
employees of USM. Under this plan, pension benefits and costs are calculated
separately for each participant and are funded currently. Pension costs were
$1.2 million in 1995 and $1.0 million in 1994.
EARNINGS PER SHARE
Earnings per Common and Series A Common Share for the years ended December 31,
1995 and 1994 was computed by dividing Net Income by the weighted average number
of Common Shares, Series A Common Shares and dilutive common equivalent shares
outstanding during the year. Dilutive common stock equivalents consist of Common
Shares issuable upon conversion of preferred stock, Common Shares issuable in
the future to TDS and third parties in connection with completed acquisitions
and Common Share options and stock appreciation rights.
Earnings per Common and Series A Common Share for the year ended December 31,
1993 was computed by dividing Net (Loss) by the weighted average number of
Common Shares and Series A Common Shares outstanding during the year.
Pro forma Net (Loss) for the year ended December 31, 1993 would have been
reduced by $25.1 million for the interest expense eliminated by the pro forma
retirement, as of January 1, 1993, of the amount outstanding under the Revolving
Credit Agreement-TDS through the conversion of 4.8 million Common Shares and 5.5
million Series A Common Shares purchased by TDS in connection with the November
1993 rights offering ("Rights Offering") ($340.7 million) and the application of
the proceeds from the sale of 1.1 million Common Shares to parties other than
TDS in connection with the Rights Offering ($36.8 million). Under the above
circumstances, pro forma (Loss) per Common Share would have been reduced by $.45
to zero for the year ended December 31, 1993.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the plant assets.
The provision for depreciation as a percentage of average depreciable property,
plant and equipment was 10.0% in 1995 and 10.5% in 1994 and 1993.
<PAGE>
Property, plant and equipment in service consists of:
<TABLE>
<CAPTION>
December 31,
-----------------------
1995 1994
-----------------------
(Dollars in thousands)
<S> <C> <C>
Land $ 38,161 $ 31,573
Operating plant
and equipment 505,242 347,710
Office furniture
and equipment 49,941 32,310
Vehicles 4,963 3,551
Buildings and leasehold
improvements 76,143 48,988
-----------------------
$674,450 $464,132
-----------------------
</TABLE>
See Note 13 Lease Commitments for a discussion of property leased by USM.
NOTES AND INTEREST RECEIVABLE
Notes and interest receivable reflect primarily loans to other partners for
capital calls paid on their behalf. USM also has an outstanding loan to the
operators of another cellular company in which USM has no equity. See Note 14
Commitments and Contingencies - Collectibility of Note Receivable for a
discussion of this note receivable. The carrying amount reported in the balance
sheet for notes and interest receivable approximates their fair value.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash and those short-term, highly-liquid
investments with original maturities of three months or less. The carrying
amount reported in the balance sheet for cash and cash equivalents approximates
its fair value.
ACCOUNTS RECEIVABLE
Accounts receivable consists of amounts owed by customers for both service
provided and equipment sales, by other cellular carriers whose customers have
used USM's cellular systems, by affiliated entities and by other partners for
capital contributions and distributions.
INVENTORY
Inventory is stated at the lower of cost or market with cost determined on a
specific identification basis.
DEFERRED CHARGES
Deferred start-up costs represent expenses incurred prior to the commencement of
service in each individual market. These costs are capitalized and, upon
commencement of operations, amortized over five years. Deferred start-up costs
include expenses related to constructing the systems and expenses incurred in
preparing to market cellular service.
Other deferred charges primarily represent costs incurred for the development of
new systems, legal and other charges incurred relating to the preparation of
vendor financing agreements and the 6% zero coupon convertible debentures.
Capitalized costs of systems development are amortized over a five-year period
starting when the new system is placed in service. When vendor financing is
finalized, deferred charges recorded are amortized over the financing period.
The deferred charges for the convertible debentures are being amortized over the
twenty-year financing period.
SUPPLEMENTAL CASH
FLOW DISCLOSURES
USM acquired certain cellular licenses and other cellular interests during 1995,
1994 and 1993. In conjunction with these acquisitions, the following assets were
acquired, liabilities assumed, Common Shares issued and equity contributions
made by TDS.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1995 1994 1993
---------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Property, plant
and equipment, net $ 29,622 $ 13,638 $ 23,767
Cellular licenses 138,600 139,332 284,736
(Decrease) in
equity-method
investment in
cellular interests (5,921) (12,706) (13,069)
Accounts receivable 1,760 1,910 2,689
Long-term debt -- (212) (12,094)
Revolving Credit
Agreement-TDS (15,493) (309) (101,507)
Accounts payable (5,051) (1,375) (3,005)
Other assets and
liabilities, excluding
cash acquired (998) (1,518) (4,069)
Common Shares
issued and issuable (113,204) (131,882) (158,059)
Equity contributions
from TDS -- -- (9,425)
---------------------------------------
Decrease in cash due
to acquisitions $ 29,315 $ 6,878 $ 9,964
---------------------------------------
</TABLE>
Following are supplemental cash flow disclosures regarding interest and income
taxes paid and other noncash transactions.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1995 1994 1993
-------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Interest paid $ 4,112 $ 4,021 $ 3,007
Income taxes paid 3,035 1,968 2,237
Accrued interest
converted into debt
under the Revolving
Credit Agreement 14,432 17,579 28,154
Additions to Property,
Plant and Equipment
financed through
Accounts Payable-Other 1,929 (9,761) 6,612
Common Shares issued
by USM for redemption
of USM Preferred Stock
and TDS Preferred
Shares $22,236 $ 1,496 $ --
-------------------------------------
Depreciation and
amortization expense:
Depreciation $57,302 $39,520 $25,665
Amortization
- License 26,923 23,119 18,189
- Deferred
start-up 2,107 1,907 1,817
- Other 4,215 1,821 273
-------------------------------------
Total depreciation
and amortization
expense $90,547 $66,367 $45,944
-------------------------------------
</TABLE>
USM recorded a gain on the exchange of its minority interest in one market in
1995, and on the exchange of its minority interests in five markets in 1994,
which are not included in the table above. See Note 12 Gain on Sale of Cellular
and Other Investments for a discussion of the effects of these transactions.
During 1993, USM converted $340.7 million of debt under the Revolving Credit
Agreement into equity through the issuance of approximately 4.8 million Common
Shares and 5.5 million Series A Common Shares to TDS in connection with the
Rights Offering.
During 1993, USM recorded $40.3 million of additional borrowings under the
Revolving Credit Agreement as reimbursement to TDS for TDS Common Shares issued
and issuable in lieu of 1.7 million USM Common Shares that were to be issued in
1994 through 1996 in connection with completed acquisitions.
ACCOUNTING FOR THE
IMPAIRMENT OF LONG-LIVED ASSETS
The Financial Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards ("SFAS") No. 121, Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to Be Disposed Of, in March 1995, which
became effective in January 1996. SFAS No. 121 requires that long-lived assets
and certain identifiable intangibles to be held and used by any entity be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. SFAS No. 121 also
requires that long-lived assets and certain identifiable intangibles to be
disposed of be reported at the lower of carrying amount or fair value less cost
to sell. The carrying amount of the Company's long-lived assets at December 31,
1995 primarily represents the original amounts invested less recorded
depreciation and amortization. Management believes the carrying amount of these
investments is not impaired.
2. ACQUISITIONS AND DIVESTITURES
USM has acquired cellular interests for cash, promissory notes, USM and TDS
Common Shares, and shares of TDS Preferred Stock. USM has also divested cellular
interests for cash and notes receivable.
TDS made capital contributions totalling $9.4 million in 1993 pursuant to TDS's
agreement to fund certain cellular license investments made by USM.
INFORMATION WITH RESPECT
TO ACQUISITIONS AND DIVESTITURES
COMPLETED ACQUISITIONS. During 1995, USM completed the acquisition of
controlling interests in eleven markets and several minority interests
representing approximately 1.7 million population equivalents for a total
consideration of $151.0 million as shown in the following table.
<TABLE>
<CAPTION>
Consideration
-------------
(millions)
<S> <C>
2.7 million Common Shares to TDS (1) $85.9
422,000 Common Shares issued to third parties 12.8
Increase in Revolving Credit Agreement (1) 14.6
456,000 Common Shares issuable in 1996 14.5
Cash 23.2
------
Total $151.0
------
</TABLE>
(1) ISSUED TO REIMBURSE TDS FOR TDS SECURITIES AND CASH PAID TO THIRD PARTIES IN
CONNECTION WITH THE ACQUISITIONS.
During 1994, USM completed the acquisition of controlling interests in nine
markets and several minority interests representing approximately 1.3 million
population equivalents for a total consideration of $140.3 million as shown in
the following table.
<PAGE>
<TABLE>
<CAPTION>
Consideration
-------------
(millions)
<S> <C>
4.2 million Common Shares to TDS (1) $130.5
53,000 Common Shares issued to third parties 1.4
Increase in Revolving Credit Agreement (1) .3
Cancellation of note receivable 1.4
Cash 6.7
------
Total $140.3
------
</TABLE>
(1) ISSUED TO REIMBURSE TDS FOR TDS SECURITIES AND CASH PAID TO THIRD PARTIES IN
CONNECTION WITH THE ACQUISITIONS.
Assuming that the 1995 and 1994 acquisitions discussed above, which were
accounted for as purchases, had taken place on January 1, 1994, unaudited pro
forma results of operations would have been as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1995 1994
-------------------------
(Dollars in thousands,
except per share amounts)
<S> <C> <C>
Service Revenues $ 495,925 $ 380,727
Equipment Sales 16,997 17,130
Interest Expense
(including cost to
finance acquisitions) 27,446 5,173
Net Income (Loss) 83,756 (10,400)
Earnings per
Common Share $ .99 $ (.12)
-------------------------
</TABLE>
During 1995, the Company completed the divestiture of controlling interests in
six markets and investment interests in six markets. See Note 12 Gain on Sale of
Cellular and Other Investments for a discussion of these divestitures.
PENDING ACQUISITIONS AND DIVESTITURES. At December 31, 1995, USM had entered
into agreements with third parties to acquire a controlling interest in one
market and several minority interests in another market. USM also had entered
into an agreement with another cellular operator to exchange USM's controlling
interest in one market for a controlling interest in another market USM
currently manages, plus cash. Additionally, at December 31, 1995, USM had
agreements pending with third parties to sell its controlling interests in seven
markets plus one market partition and to settle litigation related to an
investment interest which was sold in 1995. Pursuant to the agreements, USM will
receive $170 million in cash and notes receivable. All of the pending agreements
are expected to be completed during 1996. Certain of the sales and the
litigation settlement will generate substantial gains for book and tax purposes.
3. INVESTMENT IN LICENSES
Investment in licenses consists of the costs incurred in acquiring Federal
Communications Commission ("FCC") licenses or interests in entities which have
filed for or have been awarded FCC licenses to provide cellular service. These
costs include amounts paid to license applicants and owners of interests in
cellular entities awarded licenses; amounts paid for legal, engineering and
consulting services; amounts incurred by USM and TDS in acquiring these
interests; and goodwill. These costs are being amortized over 40 years, upon
commencement of operations, or at the date of acquisition when USM acquires an
interest in an operating system. Costs applicable to unsuccessful license
applications and acquisitions are charged to expense. Included in cellular
license costs is approximately $363 million of goodwill which resulted from
various acquisitions structured to be tax-free.
Investment in licenses consists of the following:
<TABLE>
<CAPTION>
December 31,
--------------------------
1995 1994
--------------------------
(Dollars in thousands)
<S> <C> <C>
License acquisitions
and goodwill $1,099,558 $ 999,071
Professional services 15,014 14,196
USM and TDS costs 9,677 3,809
--------------------------
1,124,249 1,017,076
Less accumulated
amortization 88,403 69,677
--------------------------
$1,035,846 $ 947,399
--------------------------
</TABLE>
4. MARKETABLE EQUITY SECURITIES
The Company implemented SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," effective January 1, 1994.
During 1995 the Company sold all of its available-for-sale securities resulting
in a net realized gain of $2.5 million. Proceeds from the sale totaled $20.7
million.
At December 31, 1994 the Company held available-for-sale securities with a cost
basis of $18.2 million and an aggregate fair value of $20.1 million. The
Company's net unrealized holding gain on available-for-sale securities was $1.3
million (net of income taxes of $677,000) in 1994 and has been included as an
increase to Common Shareholders' Equity. No sales or transfers of these
securities occurred during 1994.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. REVOLVING CREDIT AGREEMENT
USM has the option to take out unsecured notes payable to TDS and
Telecommunications Technologies Fund, Inc. ("TTF"), a wholly owned subsidiary of
TDS, pursuant to a Revolving Credit Agreement. USM repaid approximately $206.5
million of debt under the Revolving Credit Agreement with the proceeds of its
1995 offering of 6% Zero Coupon Convertible Debentures. See Note 7 6% Zero
Coupon Convertible Debentures for a discussion of these debentures.
The terms of the Revolving Credit Agreement provide for borrowings with
interest, at the prime rate plus .75% (for a rate of 9.25% at December 31,
1995), due quarterly. The Revolving Credit Agreement has been amended by TDS
from time to time to change the size of the borrowing facility. Most recently,
the facility was amended effective June 29, 1995, to provide for borrowings up
to a maximum of $100 million. Any borrowing under the Revolving Credit Agreement
may be prepaid in whole or in part, without premium, with any prepayment
reinstating credit in the amount of such prepayment. No principal under the
Revolving Credit Agreement is due until January 2, 1998, on which date the
Revolving Credit Agreement terminates and all unpaid principal and accrued
interest thereon are due and payable. The terms of the Revolving Credit
Agreement also include, among others, restrictions on incurring additional
indebtedness and on paying dividends. As of December 31, 1995, no borrowings
were outstanding under the Revolving Credit Agreement. The carrying value of
USM's borrowings under the Revolving Credit Agreement at December 31, 1994
approximated their fair value, as the Revolving Credit Agreement is variable
debt with the interest rate based on the prime rate.
6. LONG-TERM DEBT
USM has two arrangements for the financing of cellular system equipment and
construction costs with an equipment vendor.
During 1994, USM consolidated the terms of its borrowings under previously
negotiated long-term financing agreements into one agreement. As provided for in
this new agreement, USM consolidated borrowings under certain other previously
negotiated agreements, those which were arranged through the individual entities
which USM manages, during 1995. All borrowings are collateralized by a secured
interest in the tangible assets (excluding customer accounts receivable) and
certain intangible assets of certain of USM's operating subsidiaries, excluding
any interest in such operating subsidiaries' Federal Communications Commission
licenses. Terms of the borrowings are for seven years at interest rates of
either 2.25% or 2.307% over the 90-day Commercial Paper Rate of high-grade,
unsecured notes (for rates of 7.8% and 7.9%, respectively, at December 31,
1995). Borrowings totaling $116.4 million were outstanding under this agreement
at December 31, 1995, and $3.9 million was available at that date for future
borrowings.
USM has another agreement which was assumed pursuant to a 1993 acquisition and
which is arranged through the individual entity acquired. The loans under this
agreement are secured by all of the assets of the individual entity and bear
interest at a rate of 2.25% over the 90-day Commercial Paper Rate of high-grade,
unsecured notes (for a rate of 7.8% at December 31, 1995). USM had completed
$3.6 million of borrowings outstanding under this agreement as of December 31,
1995 and there was no remaining availability at that date for future borrowings.
The carrying value of USM's current and long-term debt, $120.0 million, is
approximately equal to its estimated fair value at December 31, 1995. The
carrying value at December 31, 1994, $69.3 million, was more than its fair
value, estimated to be $64.3 million. The fair value was estimated using
discounted cash flow analysis.
As of January 1, 1996, the interest rate for outstanding and future borrowings
under both agreements was changed to 1.40% over the 90-day Commercial Paper Rate
of high-grade, unsecured notes.
Long-term debt is as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------
1995 1994
-----------------------
(Dollars in thousands)
<S> <C> <C>
Vendor financing arrangement
(including deferred interest)
due through 2002 $116,448 $64,954
Other long-term notes
issued in connection with
acquisitions, due through 1998 3,550 4,310
-----------------------
119,998 69,264
Less current portion 21,342 11,573
-----------------------
$ 98,656 $57,691
-----------------------
</TABLE>
Long-term debt principal payment requirements are $21.3 million, $23.3 million,
$23.3 million, $21.5 million and $16.2 million for the years 1996 through 2000,
respectively.
<PAGE>
7. 6% ZERO COUPON
CONVERTIBLE DEBENTURES
During 1995, the Company sold $745 million principal amount at maturity of zero
coupon 6% yield to maturity convertible debt with proceeds to the Company of
$221.5 million. This 20-year fixed rate debt, in the form of Liquid Yield
Option-TM- Notes ("LYONs"-TM-) (-TM-Trademark of Merrill Lynch & Co., Inc.), is
subordinated to all senior indebtedness of the Company. Each LYON is convertible
at the option of the holder at any time at a conversion rate of 9.475 Common
Shares per LYON. Upon conversion, USM may elect to deliver its Common Shares or
cash equal to the market value of the Common Shares. Beginning June 15, 2000,
the LYONs may be redeemed at any time for cash at the option of USM at the
issued price plus accrued original issue discount through the date of
redemption. USM will purchase LYONs, at the option of the holder, as of June 15,
2000, at the issue price plus accrued original issue discount through that date.
USM will have the option of purchasing such LYONs with cash, USM Common Shares
or TDS common equity securities, or any combination thereof. No LYONs have been
converted as of December 31, 1995.
The carrying value of USM's 6% Zero Coupon Convertible Debentures, $235.7
million, is less than its fair value, estimated to be $265.5 million. The fair
value was estimated using discounted cash flow analysis.
8. COMMON STOCK
COMMON SHARES ISSUABLE
Certain of the cellular acquisition agreements closed during 1995, 1992 and 1991
require USM to deliver Common Shares in the future. USM is required to issue
928,009 Common Shares to TDS and third parties in 1996.
EMPLOYEE BENEFIT PLANS
The following table summarizes Common Shares issued for the employee benefit
plans described below.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1995 1994 1993
---------------------------------------
<S> <C> <C> <C>
Tax-Deferred
Savings Plan 26,357 25,934 23,058
Employee Stock
Purchase Plan 25,000 20,244 21,584
Employee stock options
and stock appreciation
rights 10,713 8,365 6,210
---------------------------------------
62,070 54,543 50,852
---------------------------------------
</TABLE>
TAX-DEFERRED SAVINGS PLAN. USM has reserved 199,713 Common Shares for issuance
under the TDS Tax-Deferred Savings Plan, a qualified profit-sharing plan
pursuant to Sections 401(a) and 401(k) of the Internal Revenue Code.
Participating employees have the option of investing their contributions in TDS
Common Shares, USM Common Shares, American Paging, Inc. (a wholly owned
subsidiary of TDS) Common Shares or five other non-affiliated funds.
EMPLOYEE STOCK PURCHASE PLAN. USM sold 25,000 Common Shares to its employees at
$26.94 per share in connection with the 1994 Employee Stock Purchase Plan.
STOCK OPTION AND STOCK APPRECIATION RIGHTS PLAN. USM has reserved 983,572 Common
Shares and 55,000 Series A Common Shares for options granted to key employees.
USM has established two Stock Option plans as of February 1, 1991 and November
9, 1994, and a Stock Appreciation Rights Plan (as amended on February 1, 1991)
that provides for the grant of stock options and stock appreciation rights to
officers and employees. The options under the 1991 plan are exercisable from the
date of vesting through November 1, 1997, or thirty days following the date of
the employee's termination of employment, if earlier. At December 31, 1995,
54,196 stock options were outstanding at a price of $15.67 per share. The
options under the 1994 plan are exercisable from the date of vesting through
November 9, 2004, or thirty days following the date of the employee's
termination of employment, if earlier. At December 31, 1995, 128,131 stock
options were outstanding at a weighted average price of $30.96 per share.
Stock Appreciation Rights ("SARs") allow the grantee to receive an amount in
Common Shares or cash, or a combination thereof, equivalent to the difference
between the exercise price and the fair market value of the Common Shares on the
exercise date. At December 31, 1995, 42,300 Common Share SARs and 36,000 Series
A Common Share SARs were outstanding at $15.00 per share. These rights expire
from 1998 to 2003 or the date of the person's termination of employment, if
earlier. During 1994 and 1993, 1,200 and 1,800 Common Share SARs were exercised,
respectively. No SARs were exercised in 1995. Compensation expense, measured by
the difference between the SAR prices and the year-end market price of the
Common Shares, aggregated $168,000 in 1995, $71,000 in 1994 and $598,000 in
1993.
RIGHTS OFFERING
In the fourth quarter of 1993, USM completed a rights offering to holders of its
common stock. Pursuant to the rights offering, common shareholders received one
right for every five shares owned on October 22, 1993. Each right enabled the
holder to purchase one additional share of common stock at the exercise price of
$33.00 per share, which was a 10% discount from the closing market price
<PAGE>
of USM's Common Shares on October 22, 1993. USM issued approximately 5.9
million Common Shares and 5.5 million Series A Common Shares in connection
with the rights offering. Approximately 4.8 million Common Shares and all of
the Series A Common Shares were purchased by TDS.
SERIES A COMMON SHARES
Series A Common Shares are convertible on a share-for-share basis into Common
Shares. As of December 31, 1995, all of USM's outstanding Series A Common Shares
were held by TDS.
9. REDEEMABLE PREFERRED STOCK
Redeemable Preferred Stock, authorized 5,000,000 shares, has a stated
liquidation value of $100 per share, is not entitled to any dividends and is
redeemable in 1996. The Redeemable Preferred Stock is issuable in series by the
Board of Directors, who establish the terms of the issue. At December 31, 1995,
all shares of Redeemable Preferred Stock were held by TDS as reimbursement for
TDS Preferred Shares issued in connection with acquisitions. The fair value of
Redeemable Preferred Stock is estimated to be approximately $17.6 million using
the net present value of the Common Shares to be issued upon conversion, valued
at the December 31, 1995 quoted market price. The estimated fair value at
December 31, 1994 of USM's Redeemable Preferred Stock was $30.9 million, using
the net present value of the Common Shares to be issued upon conversion, valued
at December 31, 1994 quoted market price. At December 31, 1995 all of the
Redeemable Preferred Stock is redeemable by USM by the delivery of Common Shares
as shown in the following table.
<TABLE>
<CAPTION>
Number of Amount
Common Shares Outstanding Outstanding
Deliverable Upon Year of Preferred December 31,
Series Redemption Redemption Shares 1995 1994
- ---------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
B -- 1995 -- $ -- $ 828
C 354,565 1996 51,107 5,111 5,111
D 267,339 1996 44,865 4,486 4,486
E -- 1995 -- -- 8,403
- ---------------------------------------------------------------------------
621,904 95,972 9,597 18,828
Less current portion 9,597 9,231
---------------------
$ -- $ 9,597
- ---------------------------------------------------------------------------
</TABLE>
All of the preferred shares outstanding at December 31, 1995 were issued in
1991. During 1995 and 1994, 92,312 and 8,618 Series A Redeemable Preferred
Shares were redeemed for 471,224 and 55,213 USM Common Shares, respectively.
10. INCOME TAXES
USM is included in a consolidated federal income tax return with other members
of the TDS consolidated group.
TDS and USM entered into a Tax Allocation Agreement (the "Agreement") effective
July 1, 1987. The Agreement provides that USM and its subsidiaries be included
in a consolidated federal income tax return and in state income or franchise tax
returns in certain situations with the TDS affiliated group. USM and its
subsidiaries calculate their losses and credits as if they comprised a separate
affiliated group. Under the Agreement, USM is able to carry forward its losses
and credits and use them to offset any future income tax liabilities to TDS.
Federal income tax expense in 1995 primarily relates to the gain on the sale of
cellular and other investments. Federal income tax expense recorded in 1994 and
1993 primarily relates to consolidated subsidiaries not included in the TDS
consolidated federal income tax return. State income tax expense recorded in
1995, 1994 and 1993 was primarily related to subsidiaries generating taxable
income after utilization of state net operating losses. Income tax provisions
charged to net income are summarized below:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1995 1994 1993
---------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Federal income taxes
Current $14,882 $1,054 $1,491
Deferred 8,468 26 (109)
State income taxes
Current 8,306 2,252 840
Deferred 836 1,585 470
---------------------------------------
Total income tax expense $32,492 $4,917 $2,692
---------------------------------------
</TABLE>
The statutory federal income tax rate is reconciled to the Company's effective
income tax rate below.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1995 1994 1993
---------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Statutory federal income
tax rate 35.0% 35.0% 35.0%
State income taxes,
net of federal benefit 4.6 11.1 (3.1)
Amortization of
license costs 2.2 11.9 (6.8)
Effects of corporations not
included in consolidated
federal income tax return 1.1 3.7 (6.2)
Effects of valuation
allowance on
deferred tax asset (18.3) (38.6) (30.7)
---------------------------------------
Effective income tax rate 24.6% 23.1% (11.8)%
---------------------------------------
</TABLE>
<PAGE>
Deferred income taxes are provided for the temporary differences between the
amount of the Company's assets and liabilities for financial reporting purposes
and their tax basis.
USM had current deferred tax assets totaling $1.0 million at December 31, 1995,
and $926,000 at December 31, 1994, resulting primarily from the allowance for
customer receivables.
The temporary differences that gave rise to the noncurrent deferred tax assets
and liabilities as of December 31, 1995 and 1994, are as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------
1995 1994
-----------------------
(Dollars in thousands)
<S> <C> <C>
Deferred Tax Asset
Net operating loss carryforward $37,718 $73,407
Stock appreciation rights 67 221
Alternative minimum tax credit
carryforward 12,464 --
Other 188 139
-----------------------
50,437 73,767
Less valuation allowance 20,110 37,964
-----------------------
Total Deferred Tax Asset 30,327 35,803
-----------------------
Deferred Tax Liability
Property, plant and equipment 17,654 11,690
Equity investments 998 7,606
Partnership investments 11,010 11,981
Licenses 14,996 9,543
-----------------------
Total Deferred Tax Liability 44,658 40,820
-----------------------
Net Deferred Tax Liability $14,331 $ 5,017
-----------------------
</TABLE>
The amount of federal net operating loss carryforward available to offset future
taxable income aggregated approximately $74 million at December 31, 1995 and
expires between 2002 and 2010. The amount of state net operating loss
carryforward available to offset future taxable income aggregated approximately
$212 million at December 31, 1995 and expires between 1996 and 2010. At December
31, 1995, USM had $12.5 million of federal alternative minimum tax credit
carryforward available to offset regular income tax payable in future years.
A valuation allowance has been provided when it is more likely than not that
some portion of the deferred tax asset will not be realized. During 1995, the
valuation allowance decreased $17.9 million primarily due to USM's 1995 net
taxable income.
11. RELATED PARTIES
USM is billed for all services it receives from TDS, consisting primarily of
information processing and general management services. Such billings are based
on expenses specifically identified to USM and on allocations of common
expenses. Such allocations are based on the relationship of USM's assets and
revenues to the total assets and revenues of TDS. Management believes the method
used to allocate common expenses is reasonable. Billings to USM from TDS
amounted to $26.1 million in 1995, $22.1 million in 1994 and $22.9 million in
1993. Management believes that all expenses and costs applicable to USM are
reflected in the accompanying financial statements on a basis which is
representative of what they would have been if USM operated on
a stand-alone basis.
All markets managed by USM are billed for services they receive from USM
consisting primarily of accounting, billing and engineering services. Such
billings are based on expenses specifically identified to each market and on
allocations of common expenses. Such allocations are based on the relationships
of each market's assets and revenues to the total assets and revenues of all the
markets managed by USM. Billings to nonconsolidated, managed markets amounted to
$4.8 million in 1995, $5.6 million in 1994 and $7.6 million in 1993. Management
believes that all expenses and costs applicable to each market are
representative of what they would have been if each managed market operated on a
stand-alone basis.
Interest income primarily includes interest on loans to managed unconsolidated
markets used to fund these markets' ongoing construction and operating expenses.
Interest income from these markets amounted to $1.8 million in 1995 and $1.9
million in 1994 and 1993.
USM has a Cash Management Agreement with TDS under which USM may from time to
time deposit its excess cash with TDS for investment under TDS's cash management
program. Deposits made under the agreement are available to USM on demand and
bear interest each month at the 30-day Commercial Paper Rate as reported in The
Wall Street Journal, plus 1/4%, or such higher rate as TDS may at its discretion
offer on such deposits.
<PAGE>
12. GAIN ON SALE OF CELLULAR
AND OTHER INVESTMENTS
The gains recorded in 1995 reflect the sales and exchanges of minority- and
majority-owned cellular interests and the sale of certain marketable equity
securities as follows: (a) USM sold a majority interest in six markets for
$115.3 million in cash. A pretax gain of $64.6 million was recognized on the
sales; (b) USM sold its minority interests in six markets for $14.0 million in
cash and notes receivable. A pretax gain of $11.1 million was recognized on the
sales; (c) USM received cash proceeds totaling $5.5 million in an exchange of
cellular markets, recognizing a prextax gain of $5.3 million; and (d) certain
marketable equity securities were sold for $20.7 million in cash. A pretax gain
of $2.5 million was recognized on the sale, representing the excess of the fair
market value over the cost basis of the securities.
The gains recorded in 1994 reflect the exchange of USM's cost-basis investment
interests in five markets in exchange for additional interests in seven markets
controlled by USM. The exchange of the investment interests in the five markets
has been recorded at their fair market value of approximately $4.3 million. A
gain of $3.3 million, representing the excess of the fair market value of the
market interests exchanged over the book value of such interests, was included
in income for 1994.
The gains recorded in 1993 reflect primarily the sale of investment interests in
two markets. USM received $6.8 million cash consideration on the sales.
13. LEASE COMMITMENTS
USM and certain of its majority-owned partnerships and subsidiaries lease
certain office and cell site locations under operating leases. Future minimum
rental payments required under operating leases that have noncancelable lease
terms in excess of one year as of December 31, 1995 are as follows:
<TABLE>
<CAPTION>
Minimum
Future Rentals
----------------------
(Dollars in thousands)
<S> <C>
1996 $ 7,397
1997 6,179
1998 5,101
1999 4,098
2000 3,289
Thereafter 13,985
----------------------
$40,049
----------------------
</TABLE>
Rent expense totaled $9.8 million in 1995, $6.4 million in 1994 and $4.7 million
in 1993.
14. COMMITMENTS
AND CONTINGENCIES
The partnerships and corporations in which USM is a partner or shareholder are
in various stages of development. USM expects to spend approximately $240
million during 1996 for both enhancements to existing systems and construction
of new systems. Under the terms of certain partnership and shareholder
agreements, USM may be committed to funding other partners' or shareholders'
portions of construction and other costs, if sufficient financing is not
available to the individual entities. USM does not expect such individual
financing shortfalls to be material.
USM has an ongoing acquisition and divestiture program to maximize its
clustering strategy. See Note 2 Acquisitions and Divestitures for a discussion
of pending acquisitions and divestitures.
COLLECTIBILITY OF NOTE RECEIVABLE
As of December 31, 1995, USM loaned a total of $5.5 million to another cellular
company ("Cellular Co.") under a long-term financing agreement. Under the
agreement, USM will provide up to $6 million to finance Cellular Co.'s equipment
purchases and construction costs related to the operations in an RSA. Although
interest payments are current, USM has no assurance that Cellular Co. will have
sufficient assets at the time the principal payment is due in June 2000 to repay
the loans in full. No accrual has been made for this possibility and the note is
being carried on the balance sheet at the full loan amount as of December 31,
1995.
STANDBY LETTER OF CREDIT
The Company has entered into a standby letter of credit agreement effective July
20, 1994 with a financial institution. This standby letter of credit, which will
not exceed $10.0 million, provides supplemental security in support of a bank
loan to an entity minority-owned by the Company. In the event of default under
the minority-owned entity's bank loan agreement, the bank may call upon the
Company's standby letter of credit to satisfy any amounts still due under this
loan agreement.
<PAGE>
15. INVESTMENTS IN
CELLULAR PARTNERSHIPS
Investments in cellular partnerships consist of amounts invested in cellular
entities in which USM holds a minority or noncontrolling interest. Investments
in cellular partnerships consist of long-term investments and investments held
for sale or exchange, as follows:
<TABLE>
<CAPTION>
December 31,
------------------------
1995 1994
------------------------
(Dollars in thousands)
<S> <C> <C>
Long-term Investments:
Capital contributions,
loans and advances $ 65,402 $ 61,628
Cumulative share of
partnership income 121,456 81,824
Cumulative share of
partnership distributions (63,017) (57,237)
------------------------
123,841 86,215
Investments Held for
Sale or Exchange:
Capital contributions, net
of partnership distributions 10,580 13,280
------------------------
Total investment in
nonconsolidated partnerships $ 134,421 $ 99,495
------------------------
</TABLE>
USM follows the equity method of accounting for its long-term investments which
recognizes, on a current basis, USM's proportionate share of the incomes and
losses accruing to it under the terms of its partnership and shareholder
agreements. The equity method is followed for minority interests in markets that
are managed by USM and for certain markets managed by others.
USM follows the cost method of accounting for its investments in markets held
for sale or exchange, and such investments are recorded at the lower of cost or
market value. It is not practicable to estimate the fair value of USM's
investments in cellular partnerships held for sale or exchange due to the lack
of quoted market prices and the inability to estimate fair values without
incurring excessive costs. The $10.6 million carrying amount at December 31,
1995, represents primarily the original amounts invested, which management
believes are not impaired.
The following summarizes the unaudited balance sheets and results of operations
of the cellular system partnerships in which USM's investments are accounted for
by the equity method.
<TABLE>
<CAPTION>
December 31,
-------------------------
1995 1994
-------------------------
(Dollars in thousands)
<S> <C> <C>
Assets
Current $ 206,548 $168,444
Due from affiliates 24,459 19,667
Property and other 835,320 566,707
-------------------------
$1,066,327 $754,818
-------------------------
Liabilities and Partners' capital
Current liabilities $ 204,512 $170,337
Due to affiliates 29,687 30,377
Deferred credits 727 844
Long-term debt 15,072 16,067
Partners' capital 816,329 537,193
-------------------------
$1,066,327 $754,818
-------------------------
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
1995 1994 1993
----------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Results of Operations
Revenues $1,078,413 $846,377 $703,601
Costs and
expenses 730,873 613,235 518,142
Other income
(expense) 1,418 1,654 (14,246)
----------------------------------------
Net income
before cumulative
effect of accounting
changes 348,958 234,796 171,213
Cumulative effect
of accounting
changes -- -- 110
----------------------------------------
Net income $ 348,958 $234,796 $171,323
----------------------------------------
</TABLE>
A class action complaint was filed in November 1993 naming AirTouch Cellular as
general partner of the Partnership. In April 1995, Los Angeles Cellular
Telephone Company ("LACTC") was named as a necessary party to the action. The
plaintiff alleged LACTC and the Partnership conspired to fix the price of
wholesale and retail cellular service in the Los Angeles market. The plaintiff
alleged damages for the class "in a sum in excess of $100 million." The
Partnership has answered the complaint and intends to defend itself vigorously.
This case has been consolidated for purposes of discovery with two other class
actions making identical price-fixing allegations. The case has been removed to
federal court. The other cases have been stayed pending resolution of a motion
to remand the case to state court. In addition three non-class action antitrust
cases brought
<PAGE>
by cellular agents making similar allegations were settled for immaterial
amounts. In April 1995, a Federal class action complaint was dismissed on a
motion for summary judgment. The dismissal was upheld on appeal. The Partnership
does not believe that these proceedings will have a material adverse effect on
the Partnership's financial position.
In September 1995, a class action lawsuit was brought on behalf of all of
AirTouch Cellular's subscribers nationwide, including the Partnership's
subscribers, regarding customer notification of AirTouch Cellular's practices
with respect to billing for fractional minutes of service. No dispositive
motions have been filed in the proceeding and discovery has not yet begun. The
Partnership believes the lawsuit to be without merit.
16. LEGAL PROCEEDINGS
The Company is in involved in a number of legal proceedings before the FCC and
various state and federal courts. In some cases, the litigation involves
disputes regarding rights to certain cellular telephone systems and other
interests. Management does not believe that any of such proceedings should have
a material adverse impact on the financial position or results of operations of
the Company.
17. SUBSEQUENT EVENT
PROPOSED MINORITY
INTEREST TRANSFER
TDS has proposed the transfer of its minority ownership interests in certain
cellular markets (acquired in conjunction with its prior acquisitions of
telephone companies) to the Company. The minority interests subject to the
proposal represent approximately 675,000 population equivalents. The proposed
purchase price is approximately $116.7 million. The form of consideration to be
paid by USM is subject to negotiation and would likely consist of cash and USM
common stock or a combination thereof.
The TDS proposal is subject to negotiation and has been referred to a previously
established independent committee of the Company's Board of Directors. The
independent committee has retained Lazard Freres & Co. as its financial advisor.
The proposed transaction will be subject to approval by the independent
committee of the USM Board of Directors, to definitive documentation and to
compliance with regulatory requirements.
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE SHAREHOLDERS AND
BOARD OF DIRECTORS OF UNITED
STATES CELLULAR CORPORATION:
We have audited the accompanying consolidated balance sheets of United States
Cellular Corporation (a Delaware corporation and an 80.8%-owned subsidiary of
Telephone and Data Systems, Inc.) and Subsidiaries as of December 31, 1995 and
1994, and the related consolidated statements of operations, changes in common
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1995. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits. We did
not audit the financial statements of the Los Angeles SMSA, Baton Rouge MSA and
Nashville/Clarksville MSA limited partnerships. The Company's investment in
these partnerships is reflected in the accompanying financial statements using
the equity method of accounting. The investment in these limited partnerships
represented $73,396,000 and $45,694,000 (or 3.9% and 3.0%) of total consolidated
assets at December 31, 1995 and 1994, respectively, and the equity in their
income represents $29,084,000, $21,189,000 and $15,364,000 for the
years ended December 31, 1995, 1994 and 1993, respectively, and is included in
the consolidated net income (loss). The summarized financial information
contained in Note 15 of the Notes to Consolidated Financial Statements includes
financial information for the aforementioned partnerships. The financial
statements of those limited partnerships were audited by other auditors whose
reports have been furnished to us and our opinion, insofar as it relates to the
amounts included for those limited partnerships, is based solely on the reports
of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the reports of other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of United States Cellular Corporation and Subsidiaries as
of December 31, 1995 and 1994, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles.
/S/ ARTHUR ANDERSEN LLP
Chicago, Illinois
February 6, 1996
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
Year Ended or at December 31,
----------------------------------------------------------------------
1995 1994 1993 1992 1991
----------------------------------------------------------------------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
OPERATING DATA
Service Revenues $ 476,634 $ 318,649 $ 203,800 $ 130,666 $ 77,456
Equipment Sales 15,761 13,755 10,510 9,263 7,500
Operating Income (Loss) Before
Minority Share 42,755 17,385 (8,656) (12,705) (16,831)
Minority share of operating income (7,902) (5,152) (3,496) (2,615) (1,467)
Operating Income (Loss) 34,853 12,233 (12,152) (15,320) (18,298)
Investment income, net of related
amortization expense 38,744 25,627 16,005 11,859 6,871
Gain on sale of cellular and other investments 83,494 3,321 4,851 31,396 557
Income (Loss) Before Income Taxes 132,234 21,310 (22,749) 8,181 (24,357)
Net Income (Loss) Before Cumulative Effect
of a Change in Accounting Principle 99,742 16,393 (25,441) 6,194 (24,373)
Cumulative Effect of a Change
in Accounting Principle -- -- -- -- (10,269)
Net Income (Loss) $ 99,742 $ 16,393 $ (25,441) $ 6,194 $ (34,642)
Weighted Average Common and
Series A Common Shares (000s) 84,023 79,514 57,152 57,778 38,715
Earnings Per Common and
Series A Common Share:
Before Cumulative Effect of a Change
in Accounting Principle $ 1.19 $ .21 $ (.45) $ .11 $ (.63)
Cumulative Effect of a Change
in Accounting Principle -- -- -- -- (.26)
Net Income (Loss) $ 1.19 $ .21 $ (.45) $ .11 $ (.89)
BALANCE SHEET DATA
Working Capital $ (25,323) $ (33,813) $ (28,386) $ (17,827) $ (614)
Property, Plant and Equipment, net 530,027 368,181 246,414 158,948 109,305
Investments -
Cellular partnerships 134,421 99,495 90,104 86,406 75,089
Licenses, net of accumulated amortization 1,035,846 947,399 824,491 547,171 386,489
Marketable equity securities -- 20,145 17,584 18,210 --
Total Assets 1,880,144 1,534,787 1,245,396 855,579 616,786
Long-term Debt, excluding current portion 98,656 57,691 51,130 56,645 26,959
6% Zero Coupon Convertible Debentures 235,750 -- -- -- --
Revolving Credit Agreement-TDS -- 232,954 141,524 265,766 166,501
Redeemable Preferred Stock,
excluding current portion -- 9,597 18,828 19,690 19,690
Common Shareholders' Equity $1,329,454 $1,093,967 $ 940,128 $ 450,984 $ 360,749
</TABLE>
<PAGE>
CONSOLIDATED QUARTERLY INCOME INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
Quarter Ended
-----------------------------------------------------
March 31 June 30 Sept. 30 Dec. 31
-----------------------------------------------------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C>
1995
Service Revenues $96,400 $113,500 $134,554 $132,180
Equipment Sales 3,348 3,624 4,013 4,776
Operating Income Before Minority Share 8,064 10,852 17,967 5,872
Gain on Sale of Cellular and Other Investments 18,517 16,842 42,301 5,834
Net Income $23,598 $ 24,089 $ 32,263 $ 19,792
Weighted Average Common and
Series A Common Shares (000s) 82,131 83,937 84,561 84,576
Earnings Per Common and Series A Common Share $ .29 $ .29 $ .38 $ .23
1994
Service Revenues $63,361 $ 77,065 $ 86,675 $ 91,548
Equipment Sales 2,872 3,592 3,251 4,040
Operating (Loss) Income Before Minority Share (1,004) 5,523 11,095 1,771
Gain on Sale of Cellular Interests -- -- -- 3,321
Net (Loss) Income $(1,830) $ 6,185 $ 10,796 $ 1,242
Weighted Average Common and
Series A Common Shares (000s) 75,140 79,587 80,294 80,529
Earnings Per Common and Series A Common Share $ (.02) $ .08 $ .13 $ .02
</TABLE>
SHAREOWNERS' INFORMATION
UNITED STATES CELLULAR
STOCK AND DIVIDEND INFORMATION
The Company's Common Shares are listed on the American Stock Exchange under the
symbol "USM" and in the newspapers as "US Cellu." As of February 29, 1996, the
Company's Common Shares were held by 649 record owners. All of the Series A
Common Shares were held by TDS. No public trading market exists for the Series A
Common Shares. The Series A Common Shares are convertible on a share-for-share
basis into Common Shares.
The high and low sales prices of the Common Shares as reported by the American
Stock Exchange were as follows:
Calendar Period Common Shares
----------------------
High Low
----------------------
1995
First Quarter $33.38 $29.50
Second Quarter 30.50 27.75
Third Quarter 36.50 29.00
Fourth Quarter 36.38 32.88
1994
First Quarter $35.25 $24.63
Second Quarter 29.63 24.50
Third Quarter 33.13 22.38
Fourth Quarter 34.00 30.00
The Company has not paid any cash dividends and currently 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.
INVESTOR RELATIONS
Our Annual Report, Form 10-K, Quarterly Reports, Prospectuses and News Releases
are available to our investors, security analysts and other members of the
investment community. These reports are provided, without charge, upon request
to our Corporate Office. Our Corporate Office can also help with questions
regarding lost, stolen or destroyed certificates, consolidation of accounts,
transferring of shares and name or address changes. All inquiries should be
directed to:
United States Cellular Corporation
Attention: External Reporting
8410 West Bryn Mawr, Suite 700
Chicago, Illinois 60631
312/399-8900
312/399-8936 (fax)
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UNITED STATES CELLULAR CORPORATION EXHIBIT 21
LIST OF SUBSIDIARIES
AS OF DECEMBER 31, 1995
United States Cellular Operating Company
United States Cellular Investment Company
Carry Phone, Inc.
USCC Real Estate Corporation
CellVest, Inc.
ComVest, Inc.
ILP, Inc.
Arkansas RSA #9, Inc.
California Rural Service Area #1, Inc.
California RSA #2, Inc.
California RSA #9, Inc.
Florida RSA #8, Inc.
USCOC of Florida RSA #9, Inc.
Florida RSA #10, Inc.
USCOC of Georgia RSA #1, Inc.
USCOC of Georgia RSA #14, Inc.
USCOC of Hawaii 3, Inc.
USCOC of Idaho RSA #5, Inc.
USCOC of Illinois RSA #1, Inc.
Illinois RSA #3, Inc.
USCOC of Illinois RSA #4, Inc.
Indiana RSA #1, Inc.
USCOC of Indiana RSA #2, Inc.
Indiana RSA #4, Inc.
Indiana RSA #5, Inc.
USCOC of Indiana RSA #7, Inc.
USCOC of Iowa RSA #1, Inc.
Iowa RSA #3, Inc.
Ohio State Cellular Phone Company, Inc.
Iowa RSA #9, Inc.
United States Cellular Operating Company - Des Moines
Iowa RSA #12, Inc.
Iowa 13, Inc.
USCOC of Iowa RSA #16, Inc.
Kansas RSA #5, Inc.
Kentucky RSA #1, Inc.
Kentucky RSA #2, Inc.
Kentucky RSA #3, Inc.
Kentucky RSA #9-10, Inc.
Kentucky RSA #11, Inc.
Maine RSA #1, Inc.
Maine RSA #4, Inc.
Maine RSA No. 4 Limited Partnership
USCOC of Cumberland, Inc.
Michigan RSA #4, Inc.
1
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UNITED STATES CELLULAR CORPORATION EXHIBIT 21
LIST OF SUBSIDIARIES
AS OF DECEMBER 31, 1995
Mississippi RSA #9, Inc.
USCOC of Missouri RSA #1, Inc.
USCOC of Missouri RSA #5, Inc.
United States Cellular Operating Company of Columbia
USCOC of Missouri RSA #13, Inc.
Missouri #15 Rural Cellular, Inc.
Peace Valley Cellular Telephone Company
NH #1 Rural Cellular, Inc.
USCOC of New York RSA #6, Inc.
Hudson Cellular Limited Partnership
North Carolina RSA #4, Inc.
Randolph Cellular Telephone Company
North Carolina RSA No. 6, Inc.
USCOC of North Carolina RSA #7, Inc.
Ohio RSA #1, Inc.
USCOC of Ohio RSA #7, Inc.
United States Cellular Operating Company of Tulsa, Inc.
Oklahoma Opco. of RSA #8, Inc.
USCOC of Texahoma, Inc.
Texahoma Cellular Telephone Corporation
Texahoma Cellular Limited Partnership
Oklahoma #9 Rural Cellular, Inc.
USCOC of Oklahoma RSA #10, Inc.
Oregon RSA #2, Inc.
Oregon RSA #3, Inc.
Oregon RSA No. 3 Limited Partnership
USCOC of Oregon RSA #5, Inc.
Oregon RSA #6, Inc.
United States Cellular Operating Company of Williamsport
Canton Cellular Telephone Company
USCOC of Pennsylvania RSA #9, Inc.
Uniontown Cellular Telco, Inc.
Fayette-Greene Cellular Telco, Inc.
PA Rural Service Area No. 9 Limited Partnership
Block B Cellular Corporation
Laurel Highland Cellular Telephone Company
Tri-State Cellular Partnership
Pennsylvania RSA No. 10B (II) Limited Partnership
USCOC of South Carolina RSA #4, Inc.
United States Cellular Investment Co. of Nashville
Tennessee RSA #3, Inc.
Tennessee RSA #4 Sub 2, Inc.
Tennessee RSA #6 B, Inc.
United States Cellular Operating Company of Knoxville
United States Cellular Telephone Company (Greater Knoxville), L.P.
Texas #20 Rural Cellular, Inc.
TDS V2B Acquisition Corp.
2
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UNITED STATES CELLULAR CORPORATION EXHIBIT 21
LIST OF SUBSIDIARIES
AS OF DECEMBER 31, 1995
Lake Champlain Cellular Partnership
Vermont Independent Cellular Telephone General Partnership
USCOC of Virginia RSA #2, Inc.
USCOC of Virginia RSA #4, Inc.
Virginia RSA #4, Inc.
Virginia RSA #7, Inc.
USCOC of Washington-4, Inc.
Washington RSA #5, Inc.
Western Sub-RSA Limited Partnership
McDaniel Cellular Telephone Company
USCOC of West Virginia RSA #2, Inc.
Hardy Cellular Telephone Company
Georgia RSA #13, Inc.
USCOC of Wisconsin RSA #6, Inc.
Wisconsin RSA #7, Inc.
Wisconsin RSA #8, Inc.
Wisconsin RSA General Partner, Inc.
Wisconsin RSA No. 8 Limited Partnership
United States Cellular Investment Company of Fresno, Inc.
USCIC of Colorado RSA #3, Inc.
Western Colorado Cellular, Inc.
Western Colorado Cellular of Colorado Limited Partnership
Idaho Invco of RSA #1, Inc.
Idaho RSA No. 1 Limited Partnership
Minnesota Invco of RSA #5, Inc.
Minnesota Invco of RSA #7, Inc.
Minnesota Invco of RSA #8, Inc.
Minnesota Invco of RSA #9, Inc.
Minnesota Invco of RSA #10, Inc.
Minnesota Invco of RSA #11, Inc.
USCIC of North Carolina RSA #1, Inc.
North Carolina RSA 1 Partnership
Pennsylvania Invco of RSA #5, Inc.
Pennsylvania Invco of RSA #6, Inc.
Texas Invco of RSA #6, Inc.
Community Cellular Telephone Company
Texas Invco of RSA #17, Inc.
USCIC of Seattle, Inc.
Wisconsin Invco of RSA #7, Inc.
United States Cellular Investment Company of Rockford
United States Cellular Operating Company of Atlantic City, Inc.
United States Cellular Operating Company of Bangor
Bangor Cellular Telephone, L.P.
United States Cellular Operating Company of Biloxi
United States Cellular Operating Company of Cedar Rapids
Cedar Rapids Cellular Telephone, L.P.
USCOC of Charlottesville, Inc.
3
<PAGE>
UNITED STATES CELLULAR CORPORATION EXHIBIT 21
LIST OF SUBSIDIARIES
AS OF DECEMBER 31, 1995
Charlottesville Cellular Partnership
USCOC of Corpus Christi, Inc.
United States Cellular Operating Company - Quad Cities
Davenport Cellular Telephone Company, Inc.
Davenport Cellular Telephone Company
United States Cellular Operating Company of Dubuque
Dubuque Cellular Telephone, L.P.
United States Cellular Operating Company of Evansville, Inc.
Evansville Cellular Telephone Company
United States Cellular Operating Company of Ft. Pierce
Central Florida Cellular Telephone Company, Inc.
USCOC of Gainesville, Inc.
United States Cellular Operating Company of Joplin
Joplin Cellular Telephone Company, Inc.
Tri-States Cellular Communications, Inc.
Joplin Cellular Telephone Company, L.P.
United States Cellular Operating Company of LaCrosse, Inc.
LaCrosse Cellular Telephone Company, Inc.
Lar-Tex Cellular Telephone Company, Inc.
United States Cellular Operating Company of Lewiston-Auburn
Lewiston CellTelCo Partnership
United States Cellular Operating Company of Manchester-Nashua, Inc.
Manchester-Nashua Cellular Telephone, L.P.
United States Cellular Operating Company of Medford
United States Cellular Operating Company of Owensboro
Owensboro Cellular Telephone, L.P.
USCOC of Portland, Inc.
United States Cellular Operating Company of Poughkeepsie, Inc.
Dutchess County Cellular Telephone Company, Inc.
United States Cellular Operating Company of Richland
United States Cellular Operating Company of Rochester
DRGP, Inc.
Rochester Cellular Telephone Company, L.P.
USCOC of Tallahassee, Inc.
Tulsa General Partner, Inc.
United States Cellular Telephone Company (Greater Tulsa)
USCOC of Victoria, Inc.
Victoria Cellular Partnership
Victoria Cellular Corporation
United States Cellular Operating Company of Waterloo
Waterloo/Cedar Falls CellTelCo Partnership
United States Cellular Operating Company of Wausau, Inc.
Wausau Cellular Telephone Company Limited Partnership
United States Cellular Operating Company of Yakima
Yakima MSA Limited Partnership
Yakima Valley Paging Limited Partnership
United States Cellular Investment Co. of Allentown
4
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UNITED STATES CELLULAR CORPORATION EXHIBIT 21
LIST OF SUBSIDIARIES
AS OF DECEMBER 31, 1995
USCIC of Amarillo, Inc.
United States Cellular Investment Company of Baton Rouge
Capitol Cellular, Inc.
CSII of Baton Rouge, Inc.
Star Cellular Communications, Inc.
Star Cellular Telephone Company, Inc.
Baton Rouge MSA Limited Partnership.
United States Cellular Investment Company of Binghamton, Inc.
Cellular America Telephone Company
USCIC of Brownsville, Inc.
United States Cellular Investment Company of Eau Claire, Inc.
Universal Cellular for Eau Claire MSA, Inc.
Chibardun Cellular Telephone Corporation
Lavaca Cellular Telephone Company
United States Cellular Investment Company of Galveston
United States Cellular Investment Company of Green Bay, Inc.
United States Cellular Investment Company of Huntsville, Inc.
United States Cellular Investment Company of Iowa City
USCIC of Jackson, Inc.
United States Cellular Investment Company of Lafayette
United States Cellular Investment Corporation of Los Angeles
USCIC of McAllen, Inc.
USCIC of Ocala, Inc.
Four D, Ltd.
United States Cellular Investment Co. of Oklahoma City, Inc.
United States Cellular Investment Company of Portsmouth, Inc.
United States Cellular Investment Company of Raleigh-Durham
Carolina Cellular, Inc.
United States Cellular Investment Company of Santa Cruz, Inc.
United States Cellular Investment Company of Sarasota
United States Cellular Investment Company of St. Cloud, Inc.
United States Cellular Investment Company of Wheeling
5
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EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this Form 10-K of United States Cellular Corporation of our report
dated February 6, 1996, on the consolidated financial statements of United
States Cellular Corporation and Subsidiaries (the "Company") included in the
Company's 1995 Annual Report to Shareholders, to the inclusion in this Form 10-K
of our report dated February 6, 1996, on the financial statement schedule of the
Company, and to the inclusion of our compilation report dated February 9, 1996,
on the combined financial statements of the Los Angeles SMSA Limited
Partnership, the Nashville/Clarksville MSA Limited Partnership and the Baton
Rouge MSA Limited Partnership, and to the incorporation of such reports into the
Company's previously filed S-3 Registration Statement, File No. 33-58911, into
the Company's previously filed S-4 Registration Statement, File No. 33-41826,
and into the Company's previously filed S-8 Registration Statements, File No.
33-42558, File No. 33-56361, File No. 33-57255, File No. 33-59777, and File No.
33-61291.
ARTHUR ANDERSEN LLP
Chicago, Illinois
March 21, 1996
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectuses
constituting part of the Registration Statements on Form S-3 (No. 33-58911) and
Form S-4 (No. 33-41826) and in the Registration Statements on Form S-8 (Nos.
33-42558, 33-56361, 33-57255, 33-59777 and 33-61291) of United States Cellular
Corporation of our report dated January 25, 1996 relating to the financial
statements of Los Angeles SMSA Limited Partnership, which appears in United
States Cellular Corporation's Annual Report on Form 10-K for the year ended
December 31, 1995.
PRICE WATERHOUSE LLP
San Francisco, California
March 21, 1996
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the inclusion in this Form 10-K of United States
Cellular Corporation of our report dated February 17, 1995, on our audits of the
financial statements of the Los Angeles SMSA Limited Partnership as of December
31, 1994, and for each of the two years in the period ended December 31, 1994;
such financial statements are not included separately in this Form 10-K.
COOPERS & LYBRAND L.L.P
Newport Beach, California
March 20, 1996
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the inclusion in this Form 10-K of United States
Cellular Corporation of our reports dated February 9, 1996, February 10, 1995,
and February 11, 1994, on our audits of the financial statements of the
Nashville/Clarksville MSA Limited Partnership as of December 31, 1995, 1994 and
1993, and for the years ended December 31, 1995, 1994 and 1993; such financial
statements are not included separately in this Form 10-K.
COOPERS & LYBRAND L.L.P.
Atlanta, Georgia
March 20, 1996
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the inclusion in this Form 10-K of United States
Cellular Corporation of our reports dated February 9, 1996, February 10, 1995,
and February 11, 1994, on our audits of the financial statements of the Baton
Rouge MSA Limited Partnership as of December 31, 1995, 1994 and 1993, and for
the years ended December 31, 1995, 1994 and 1993; such financial statements are
not included separately in this Form 10-K.
COOPERS & LYBRAND L.L.P.
Atlanta, Georgia
March 20, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF UNITED STATES CELLULAR CORPORATION
AS OF DECEMBER 31, 1995, AND FOR THE YEAR THEN ENDED, AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000821130
<NAME> UNITED STATES CELLULAR CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 38,404
<SECURITIES> 0
<RECEIVABLES> 46,754
<ALLOWANCES> 3,820
<INVENTORY> 9,198
<CURRENT-ASSETS> 129,786
<PP&E> 674,450
<DEPRECIATION> 144,423
<TOTAL-ASSETS> 1,880,144
<CURRENT-LIABILITIES> 155,109
<BONDS> 334,406
0
0
<COMMON> 82,972
<OTHER-SE> 1,246,482
<TOTAL-LIABILITY-AND-EQUITY> 1,880,144
<SALES> 15,761
<TOTAL-REVENUES> 492,395
<CGS> 54,948
<TOTAL-COSTS> 449,640
<OTHER-EXPENSES> (124,668)
<LOSS-PROVISION> 12,532
<INTEREST-EXPENSE> 27,287
<INCOME-PRETAX> 132,234
<INCOME-TAX> 32,492
<INCOME-CONTINUING> 99,742
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 99,742
<EPS-PRIMARY> 1.19
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</TABLE>
