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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
<TABLE>
<C> <S>
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
--------------- ---------------
COMMISSION FILE NUMBER 0-16714
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CONTEL CELLULAR INC.
(Exact name of registrant as specified in its charter)
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<S> <C>
DELAWARE 58-1413513
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
245 PERIMETER CENTER PARKWAY, ATLANTA, GEORGIA 30346
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code: (404) 804-3400
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
CLASS A COMMON STOCK, $1 PAR VALUE
(Title of Class)
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 the 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
----
The aggregate market value of the Class A Common Stock, the only class of
voting stock for which there is a market, held by non-affiliates of the
registrant as of March 13, 1995 is $251,926,468.
As of March 13, 1995 there were 9,970,953 shares of Class A Common Stock
outstanding and 90,000,000 shares of Class B Common Stock outstanding.
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PART I
ITEM 1. BUSINESS
OVERVIEW
Contel Cellular Inc. (the "Company"), through its subsidiaries and through
partnerships, provides or participates in the provision of cellular telephone
service in various metropolitan statistical areas ("MSAs") and rural service
areas ("RSAs") throughout the United States. As of March 13, 1995, the Company
had interests in cellular telephone systems in the United States representing
approximately 23.9 million "POPs". ("POPs" refer to the population of a market
area multiplied by the Company's percentage ownership in the cellular system
serving that market).
The Company was incorporated in Delaware on September 24, 1980, but did not
commence operations as a cellular communications provider until February 1984.
The Company is a ninety percent (90%) owned, indirect subsidiary of GTE
Corporation ("GTE"), the fourth-largest publicly held telecommunications company
in the world.
In addition to the Company, GTE has a wholly-owned subsidiary, GTE Mobilnet
Incorporated ("GTE Mobilnet"), which provides cellular service throughout the
United States. The management, operations and properties of the Company and GTE
Mobilnet remain independent and separate. Shareholders of the Company do not
have an interest in the properties owned by GTE Mobilnet.
The Company's corporate headquarters is located at 245 Perimeter Center
Parkway, Atlanta, Georgia 30346, and its phone number is (404) 804-3400.
On December 27, 1994, the board of directors of the Company (the "Board of
Directors") approved an Agreement and Plan of Merger (as amended, the "Merger
Agreement") pursuant to which Contel Cellular Acquisition Corporation, a
Delaware corporation ("CCI Acquisition") and an indirect wholly owned subsidiary
of GTE, will be merged into and with the Company (the "Merger"). In the Merger,
(i) each outstanding share of the Class A Common Stock of the Company, par value
$1.00 per share (each a "Class A Share") (other than Class A Shares as to which
appraisal rights have been properly exercised under the Delaware General
Corporation Law), will be converted into the right to receive $25.50 in cash,
without interest, subject to back-up withholding taxes (the "Merger
Consideration"), (ii) each Class A Share held by the Company and each
outstanding share of the common stock of CCI Acquisition will be cancelled, and
no payment will be made with respect thereto and (iii) each outstanding share of
the Class B Common Stock of the Company, par value $1.00 per share (each a
"Class B Share"), will continue to be outstanding.
The Company anticipates that the Merger will be completed on or about April
28, 1995. As a result of the Merger, there will cease to be any public market
for the Class A Shares, and after the filing of a certificate of merger with the
Secretary of State of the state of Delaware ("Effective Time"), the Class A
Shares will cease to be quoted on the Nasdaq National Market. When the Merger
occurs, the Company, who will be the corporation that survives the Merger (the
"Surviving Corporation") is expected to file with the Securities Exchange
Commission (the "Commission") a Certification and Notice of Termination of
Registration of the Class A Shares under the Securities Exchange Act of 1934
(the "Certification"). Upon filing of the Certification, the Surviving
Corporation will no longer be required to file reports and other information
under the Securities Exchange Act of 1934 (the "Exchange Act"). Once the
Certification has been filed, the Exchange Act (including the proxy solicitation
provisions of Section 14(a), the periodic reporting requirements of Section 13
and the short swing trading provisions of Section 16(b)) will no longer apply to
the Surviving Corporation. Additionally, upon the termination of the
registration of the Class A Shares, the shares will no longer constitute "margin
securities" under the regulations of the Board of Governors of the Federal
Reserve System.
The Company's 23.9 million POPs include cellular systems which the Company
controls or manages and cellular systems operated by partnerships in which the
Company is not the controlling partner. As of March 13, 1995, approximately 19.5
million of the Company's 23.9 million POPs were located in 59 MSAs. The Company
owned a controlling interest in and managed cellular systems servicing 32 of
these 59 MSAs (representing approximately 69% of the Company's MSA POPs). The
Company owned a non-controlling interest in cellular systems servicing the
remaining 27 MSAs.
The remaining 4.4 million of the Company's 23.9 million POPs were located
in 52 RSAs. As of March 13, 1995, the Company owned controlling interests in
entities licensed to provide cellular service in 24 RSAs, owned non-controlling
interests in and managed 10 RSA markets and held non-controlling interests
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in 18 RSAs. Most of the Company's RSA POPs are in areas adjacent to MSAs
currently served by the Company.
CELLULAR INTERESTS
The Company's controlled MSA interests, non-controlled MSA interests,
controlled RSA interests, managed, non-controlled RSA interests and
non-controlled RSA interests as of December 31, 1994 are set forth below.
<TABLE>
<CAPTION>
COMPANY COMPANY
PERCENTAGE 1994 ESTIMATED POPULATION
MARKET MSA RANK OWNERSHIP POPULATION(1) EQUIVALENTS
------------------------------------------- -------- ---------- -------------- -----------
<S> <C> <C> <C> <C>
CONTROLLED MSA INTERESTS
Memphis, TN................................ 36 100.00% 1,030,496 1,030,496
Louisville, KY............................. 37 100.00% 931,413 931,413
Birmingham, AL............................. 41 100.00% 904,436 904,436
Norfolk, VA................................ 43 95.01% 1,020,794 969,856
Nashville, TN.............................. 46 100.00% 1,051,872 1,051,872
Richmond, VA............................... 59 95.01% 797,942 758,125
Fresno, CA................................. 74 92.00% 735,494 676,654
Knoxville, TN.............................. 79 94.12% 544,045 512,055
El Paso, TX................................ 81 100.00% 652,655 652,655
Mobile, AL................................. 83 100.00% 510,599 510,599
Johnson City, TN........................... 85 100.00% 452,809 452,809
Chattanooga, TN............................ 88 100.00% 451,120 451,120
Bakersfield, CA............................ 97 92.00% 618,209 568,752
Davenport, IA.............................. 98 100.00% 362,249 362,249
Newport News, VA........................... 104 95.01% 474,518 450,840
Huntsville, AL............................. 115 100.00% 393,160 393,160
Lexington, KY.............................. 116 100.00% 367,623 367,623
Evansville, IN............................. 119 88.87% 318,396 282,959
Binghamton, NY............................. 122 41.00% 309,418 126,861
Pensacola, FL.............................. 127 100.00% 374,969 374,969
Rockford, IL............................... 131 59.00% 301,026 177,605
Visalia, CA................................ 150 92.00% 347,899 320,067
Roanoke, VA................................ 157 40.00% 239,829 95,932
Clarksville, TN............................ 209 100.00% 172,410 172,410
Tuscaloosa, AL............................. 222 80.40% 161,333 129,705
Florence, AL............................... 226 91.09% 138,073 125,771
Petersburg, VA............................. 235 95.01% 130,585 124,069
Anniston, AL............................... 249 100.00% 116,063 116,063
Gadsden, AL................................ 272 90.00% 101,153 91,038
Elmira, NY................................. 284 100.00% 95,612 95,612
Las Cruces, NM............................. 285 100.00% 153,838 153,838
Owensboro, KY.............................. 293 88.87% 89,993 79,977
-------------- -----------
32 TOTAL CONTROLLED MSAs.................................. 14,350,031 13,511,590
=========== =========
NON-CONTROLLED MSA INTERESTS
Los Angeles, CA............................ 2 11.20% 14,718,542 1,648,477
San Francisco, CA.......................... 7 11.25% 3,832,050 431,106
Washington, DC............................. 8 35.27% 3,783,479 1,334,433
Houston, TX................................ 10 4.40% 3,897,637 171,496
Minneapolis, MN............................ 15 30.00% 2,569,391 770,817
</TABLE>
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<TABLE>
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COMPANY COMPANY
PERCENTAGE 1994 ESTIMATED POPULATION
MARKET MSA RANK OWNERSHIP POPULATION(1) EQUIVALENTS
------------------------------------------- -------- ---------- -------------- -----------
<S> <C> <C> <C> <C>
San Jose, CA............................... 27 11.25% 1,541,573 173,427
San Antonio, TX............................ 33 30.00% 1,382,982 414,895
Sacramento, CA............................. 35 0.98% 1,479,697 14,501
Jacksonville, FL........................... 51 14.24% 1,003,832 142,946
Greenville, SC............................. 67 10.83% 667,011 72,237
Oxnard, CA................................. 73 11.20% 697,369 78,105
Austin, TX................................. 75 3.00% 874,277 26,228
Albuquerque, NM............................ 86 49.00% 590,335 289,264
Beaumont, TX............................... 101 4.40% 384,136 16,902
Stockton, CA............................... 107 0.98% 517,135 5,068
Vallejo, CA................................ 111 11.25% 489,096 55,023
Santa Rosa, CA............................. 123 11.25% 411,058 46,244
Santa Barbara, CA.......................... 124 39.00% 378,431 147,588
Salinas, CA................................ 126 11.25% 372,027 41,853
Modesto, CA................................ 142 0.98% 415,482 4,072
Galveston, TX.............................. 170 4.40% 237,243 10,439
Reno, NV................................... 171 0.98% 279,735 2,741
Santa Cruz, CA............................. 174 11.25% 230,417 25,922
Chico, CA.................................. 215 0.98% 197,623 1,937
Anderson, SC............................... 227 10.83% 146,845 15,903
Redding, CA................................ 254 0.98% 167,321 1,640
Yuba City, CA.............................. 274 0.98% 135,636 1,329
-------------- -----------
27 TOTAL NON-CONTROLLED MSAs.............................. 41,400,360 5,944,593
=========== =========
59 TOTAL MSAs............................................. 55,750,391 19,456,183
=========== =========
</TABLE>
<TABLE>
<CAPTION>
COMPANY COMPANY
PERCENTAGE 1994 ESTIMATED POPULATION
MARKET OWNERSHIP POPULATION(1) EQUIVALENTS
------------------------------------------------------- ---------- -------------- -----------
<S> <C> <C> <C>
CONTROLLED RSA INTERESTS
Alabama 2.............................................. 100.00% 127,611 127,611
California 6........................................... 100.00% 28,183 28,183
California 9........................................... 100.00% 140,612 140,612
Kentucky 2............................................. 100.00% 127,813 127,813
Kentucky 7............................................. 100.00% 166,424 166,424
Tennessee 1............................................ 100.00% 297,449 297,449
Tennessee 2............................................ 100.00% 159,071 159,071
Tennessee 3............................................ 100.00% 329,746 329,746
Tennessee 5............................................ 100.00% 336,480 336,480
Tennessee 6............................................ 100.00% 156,906 156,906
Tennessee 7............................................ 100.00% 248,005 248,005
Tennessee 9............................................ 100.00% 67,581 67,581
Virginia 7............................................. 100.00% 38,853 38,853
Virginia 8............................................. 95.01% 84,513 80,296
Virginia 9............................................. 95.01% 87,028 82,685
Virginia 11............................................ 95.01% 111,650 106,079
Virginia 12............................................ 95.01% 33,536 31,863
California 12.......................................... 92.00% 110,515 101,674
</TABLE>
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<TABLE>
<CAPTION>
COMPANY COMPANY
PERCENTAGE 1994 ESTIMATED POPULATION
MARKET OWNERSHIP POPULATION(1) EQUIVALENTS
------------------------------------------------------- ---------- -------------- -----------
<S> <C> <C> <C>
Illinois 1............................................. 91.50% 316,168 289,294
Virginia 5............................................. 77.00% 63,347 48,777
Texas 10............................................... 75.00% 29,489 22,117
New Mexico 6-I......................................... 71.43% 60,988 43,564
Virginia 3............................................. 51.00% 183,153 93,408
Virginia 4............................................. 51.00% 66,772 34,054
-------------- -----------
24 TOTAL CONTROLLED RSAs................................. 3,371,893 3,158,545
=========== =========
MANAGED, NON-CONTROLLED RSA INTERESTS
Kentucky 1............................................. 50.00% 187,079 93,540
New Mexico 3........................................... 50.00% 78,980 39,490
New Mexico 5........................................... 43.00% 56,850 24,446
Iowa 4................................................. 38.10% 155,924 59,407
Indiana 7.............................................. 38.09% 220,819 84,119
Indiana 8.............................................. 38.09% 252,283 96,105
Indiana 9.............................................. 38.09% 142,859 54,421
New York 3............................................. 22.50% 492,406 110,791
California 4........................................... 20.83% 338,983 70,610
Iowa 5................................................. 14.29% 108,063 15,442
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10 TOTAL MANAGED RSAs.................................... 2,034,246 648,371
=========== =========
NON-CONTROLLED RSA INTERESTS
New Mexico 1........................................... 44.44% 251,919 111,953
Illinois 8............................................. 41.13% 331,629 136,399
Illinois 9............................................. 41.13% 152,791 62,843
Illinois 2............................................. 40.00% 145,844 58,338
California 5........................................... 39.00% 218,249 85,117
California 3........................................... 27.73% 143,187 39,706
California 1........................................... 16.67% 212,401 35,407
New Mexico 6-II........................................ 12.50% 123,267 15,408
Illinois 3............................................. 11.77% 204,375 24,055
Virginia 6............................................. 10.00% 213,307 21,331
Minnesota 1............................................ 6.60% 51,014 3,367
Minnesota 2............................................ 6.60% 62,994 4,158
Minnesota 3............................................ 6.60% 57,315 3,783
Minnesota 5............................................ 6.60% 203,906 13,458
Minnesota 6............................................ 6.60% 244,817 16,158
Virginia 10............................................ 1.00% 231,404 2,314
Pennsylvania 3......................................... 0.10% 95,755 96
Pennsylvania 4......................................... 0.10% 97,172 97
-------------- -----------
18 TOTAL NON-CONTROLLED RSAs............................. 3,041,346 633,988
=========== =========
52 TOTAL RSAs............................................ 8,447,485 4,440,904
=========== =========
111 TOTAL MSAs and RSAs.................................. 64,197,876 23,897,087
=========== =========
</TABLE>
---------------
(1) Population figures are derived from the 1994 Donnelly marketing population
estimates for counties comprising MSAs and RSAs as defined by the Federal
Communications Commission.
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THE CELLULAR TELEPHONE INDUSTRY
Background. In 1983, the Federal Communications Commission (the "FCC")
issued the first license to provide cellular telephone service in the United
States. Since that time, cellular telephone service has become available to all
305 MSAs and 428 RSAs and is available to most of the population of the United
States.
Cellular telephone service was developed as a response to the shortcomings
of conventional mobile telephone systems. By providing high quality, high
capacity communication to and from vehicle-mounted telephones ("mobiles") and
hand-held radio telephones ("portables"), the cellular telephone industry has
grown at a very rapid pace and, as of year-end 1994, exceeded 22 million
subscribers. In 1994, the cellular telephone industry recorded an overall growth
rate of approximately 37%.
Technology. Cellular telephone service achieves its high quality and
capacity capability by dividing the radio spectrum allocated to it by the FCC
into smaller groups or "sets" of frequencies and re-using those frequencies many
times in geographically distant parts of the network. Each set of frequencies is
allocated to a specific geographic area called a "cell." Adjacent cells must use
a different set of frequencies to avoid cell-to-cell frequency interference.
Cells which are sufficiently distant from one another may use the same
frequencies because the radio signals naturally decay over distance until they
reach a low enough level that does not cause interference. Therefore, by use of
frequency planning techniques, the radio spectrum allocated to a cellular
provider can be re-used many times in various parts of the system to achieve
high overall call capacities and very low call interference rates.
The cells in a system are connected to a computer-controlled switch called
a mobile telephone switching office ("MTSO"). The MTSO monitors all calls to all
cell sites within the system and routes them to their intended destinations.
Once a call request is received, it is directed to the cell site where the
signal strength is greatest, and is then continuously monitored for quality
signal strength. If the signal strength begins to decline as a vehicle travels
through the radio coverage area of one cell, the MTSO recognizes the cell which
is getting weaker in signal strength and which is the next cell in the path of
the vehicle where signal strength is increasing. At the appropriate point in
time, the MTSO instructs the new cell to take over the call and the original
cell to release the call. This allows an in-process call to achieve a
cell-to-cell handoff with no interruption in the conversation. The MTSO is
capable of achieving this handoff as many times as necessary for each call.
Today's cellular systems utilize digital switching equipment, digital
connections between the switch and the cells, and analog radio frequency ("RF")
technology between the cells and the mobile units. The analog RF technology is
limited because a finite number of channels can be used at any one cell within a
system without causing system problems. The capacity of the system can be
increased in areas with heavy call traffic by either cell splitting or cell
sectoring. Cell splitting involves constructing numerous cells to serve the
coverage area of the original cell. If a large cell is split into four smaller
cells, the total channels available within the original coverage area is
increased up to four times. Cell sectoring is accomplished by replacing a cell's
omni-directional antennas with either three or six directional antennas. This
allows for different sets of channels to be used in each sector. The advantage
of this method is that capacity can be increased in the cell without increasing
system interference and that the same frequency sets can be reused at closer
spacing.
The cellular telephone industry is moving toward implementing digital RF
technology in existing cellular systems. Two technologies are currently under
consideration by major cellular providers -- Time Division Multiple Access
("TDMA") and Code Division Multiple Access ("CDMA"). Either technology will
offer a considerable capacity increase over today's technology.
Market Structure. Historically, FCC regulations provided that licenses
would be granted to two cellular service providers in each MSA and RSA; a
wireline licensee and a non-wireline licensee. Each of the two licensees has 25
MHz of radio spectrum allocated to it, and each further subdivides this spectrum
into 415 two-way channels. Each license is granted for a period of ten years and
is subject to renewal at the end of that period. FCC rules require all cellular
system operators to provide, on a nondiscriminatory basis, cellular
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service to resellers who may purchase blocks of numbers at a wholesale rate and
resell such service to the public.
The FCC is in the process of auctioning additional licenses for the
provision of personal communications services in the 1.8 GHz to 1.99 GHz
frequency band. These auctions will not be completed until later this year and
will result in new licensees in each of the Company's service areas. The first
part of the auction was completed on March 13, 1995, and resulted in the
purchase of 99 licenses by 18 entities. A GTE subsidiary, GTE Macro
Communications Corporation, purchased four licenses (Atlanta, Seattle,
Cincinnati and Denver).
THE COMPANY'S CELLULAR OPERATIONS
General. The Company, or partnerships which the Company controls or
manages, provides cellular service in 32 MSAs and 34 RSAs ("Company Controlled
Systems" or "Company Controlled Markets"). Company Controlled Systems represent
approximately 72% of the Company's total POPs. The information provided below
with respect to the Company's cellular operations applies only to the Company
Controlled Systems because these are the only systems whose operations the
Company controls. The Company's non-controlled cellular interests are described
below in "Non-Controlled Systems."
The Company obtained the right to provide cellular service in the Company
Controlled Markets either (i) as the result of the FCC's licensing process, or
(ii) through an acquisition program. Since the Company was an affiliate of a
wireline telephone company, it had the right to apply for the wireline cellular
license in any area served by its landline affiliate. As a result of this
licensing process, the Company is the wireline licensee in 43 Company Controlled
Markets (approximately 8.7 million POPs). As a result of its acquisition
program, the Company is the non-wireline licensee in 23 Company Controlled
Markets (approximately 8.6 million POPs).
In acquiring and developing these cellular telephone systems, the Company
has utilized a strategy of focusing on coastal and sun belt areas where the
Company believes the demographics and business climate are favorable to the
development of cellular systems. In addition, the Company has attempted to
develop cellular systems in regional clusters of significant size.
The cellular telephone systems originally licensed to the Company as part
of the FCC licensing process for MSAs and RSAs are generally located in 5
geographic areas: Virginia, California, the Midwest, Texas/New Mexico, and the
Gulf of Mexico. The cellular telephone systems acquired by the Company are
located in Tennessee, Alabama and Kentucky.
Acquisitions and Divestitures. To further its strategy of acquiring and
developing large regional clusters in economically strong areas, the Company has
developed and followed a program of selling certain properties which are not
strategically located and purchasing certain other properties which are
strategic. For a description of certain acquisitions and divestitures by the
Company in 1994 see "ITEM 7 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- Acquisitions and Dispositions of
Interests in Cellular Systems." After such acquisitions and dispositions
described above, the Company will provide or participate in the provision of
cellular services in 56 MSA markets and 49 RSA markets with total combined POPs
of approximately 23.3 million.
Cellular Exchange Transaction. The Company, GTE Mobilnet Incorporated, GTE
Mobilnet of Oregon Limited Partnership, GTE Mobilnet of Northwest Oregon Limited
Partnership and GTE Mobile Communications Service Corporation (the "GTE
Parties") have entered into an Asset Exchange Agreement dated February 3, 1995
(the "Asset Exchange Agreement") with US WEST NewVector Group, Inc.
("NewVector"). Pursuant to the Asset Exchange Agreement, the GTE Parties will
exchange certain cellular assets currently owned by them for 100% of the assets,
including the non-wireline cellular license, currently owned by NewVector in San
Diego, California. The Company's assets included in the exchange are its 49%
interest in the cellular assets, including the wireline cellular license, in
Albuquerque, New Mexico, and its 30% interest in the cellular assets, including
the wireline cellular license, in Minneapolis, Minnesota. The assets of the
other GTE Parties consist of (i) 91.4% of the assets of the cellular system
serving the MSAs of Portland
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and Salem, Oregon, (ii) 100% of the assets of the cellular system serving Oregon
RSA 1, and (iii) either a 10% partnership interest in the partnership providing
cellular service in Seattle, Bremerton and Tacoma, Washington or a 10% interest
in the assets of that system. The Company will acquire a 28% interest, as a
tenant-in-common, in the San Diego assets received from NewVector, and will
operate the system pursuant to a management agreement with the other GTE
Parties.
Operations
Partnerships. A substantial number of the Company's cellular systems in
MSAs are owned by limited partnerships in which the Company is a general partner
("MSA Partnerships"). Most of these partnerships are governed by partnership
agreements with similar terms, including, among other things, customary
provisions concerning capital contributions, sharing of profits and losses, and
dissolution and termination of the partnership. Most of these partnership
agreements vest complete operational control of the partnership with the general
partner. The general partner typically has the power to manage, supervise and
conduct the affairs of the partnership, make all decisions appropriate in
connection with the business purposes of the partnership, and incur obligations
and execute agreements on behalf of the partnership. The general partner also
may make decisions regarding the timing and amount of cash contributions and
distributions, and the nature, timing and extent of construction, without the
consent of the other partners. The Company owns more than fifty percent (50%) of
almost all of the MSA Partnerships.
A substantial number of the Company's cellular systems in RSAs are also
owned by limited or general partnerships in which the Company is either the
general or managing partner (the "RSA Partnerships"). These partnerships are
governed by partnership agreements with varying terms and provisions. In many of
these partnerships, the non-controlling partners have the right to vote on major
issues such as the annual budget and system design. In addition, in certain of
these partnerships, the partners have the right to build, under certain
circumstances, independent cells in areas of the RSA not served by the
partnership. Finally, in a few of these partnerships, the Company's management
position is for a limited term (similar to a management contract) and the other
partners in the partnership have the right to change managers, with or without
cause. The Company owns less than fifty percent (50%) of many of the RSA
Partnerships.
The partnership agreements for both the MSA Partnerships and RSA
Partnerships generally contain provisions granting all partners a right of first
refusal in the event a partner desires to transfer a partnership interest. This
restriction on transfer can make these partnership interests difficult to sell
to a third party.
Provision of Services by GTE Personal Communications Services. During
1993, the Company maintained a headquarters staff and two regional staffs which
provided strategic as well as day-to-day operational support to the Company's
operations in its 66 Company Controlled Markets. In 1994, the Company
implemented a new organizational structure pursuant to which the two regional
staffs were replaced with eight area staffs which are located in the Company's
eight clusters of MSAs and RSAs. These eight areas are Virginia, Tennessee,
Kentucky, Alabama, the Midwest, Texas/New Mexico, the Gulf of Mexico and
California. The purpose of this reorganization was to move essential, customer
impacting resources closer to the marketplace to enhance the Company's
competitive advantage and position the Company for future growth.
The Company also receives general and administrative as well as functional
support from GTE Personal Communications Services ("GTE PCS"), a division of
GTE. Pursuant to an agreement dated May 1, 1991, as amended, between GTE Mobile
Communications Service Corporation ("GTEMC") and the Company (the "Services
Agreement"), GTE PCS provides finance, accounting, tax, human resources, legal,
regulatory and information management services to the Company. The Services
Agreement provides that the Company is allocated a portion of GTE PCS expenses
based on a two-step process. The first step is the designation of GTE PCS
expenses as cellular or non-cellular. The second step is the allocation of
cellular expenses between the Company and GTE Mobilnet (a GTE subsidiary also
engaged in the cellular communications business) based on a cost-causative
allocation methodology. Under this methodology, pools of costs are allocated to
operating units based on one of several factors. The factors were developed and
applied to cost categories in an effort to allocate the cost to areas in
proportion to the use and benefit of the cost. Under this Services
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Agreement, the Company was allocated approximately 34% of GTE PCS's cellular
expenses for the twelve months ended December 31, 1994.
Construction and Maintenance. The construction and maintenance of cellular
systems is capital intensive. Although all of the Company's MSA and RSA systems
were operational in 1994, the Company continually adds cells to increase
coverage, provide additional capacity and improve the quality of these systems.
In 1994, the Company completed construction of 153 new cells in Company
Controlled Systems. In addition the Company completed a replacement program for
most of its older technology cell site equipment. The newer technology equipment
provides higher quality and increased flexibility in providing analog services,
as well as positions a platform that supports deployment of future digital
technologies. Total capital expenditures related to Company Controlled Systems
were approximately $253 million in 1994 and are anticipated to be approximately
$315 million in 1995.
Marketing
General. The Company markets its cellular telephone services through
several distribution channels, including independent agents, its direct sales
force and retail outlets. Agents are independent contractors who solicit
customers on a commission basis exclusively for the Company. The Company's
agents are diverse in size and type of business. Most are agents for the Company
within a limited geographic area, while a few agents sell the Company's cellular
service regionally or nationally. Some of the Company's agents sell cellular
products and services exclusively, while others sell a variety of products (such
as radio and electronics equipment). Finally, some of the Company's agents are
small shops, while others are large retail stores. The Company's agents
generally receive a commission payment for each cellular subscriber they add to
the Company's systems.
The Company's direct sales force is made up of sales people who are
employees of the Company and are compensated on an incentive basis. These
employees earn a portion of their compensation as a guaranteed salary and
receive additional payments for each subscriber added. These employees are
required to meet certain quotas set by the Company. Another distribution channel
utilized by the Company is retail outlets, including kiosks and retail stores.
The retail outlets are staffed by salaried employees, part-time employees and
temporary employees who receive a base salary and incentive compensation for
each unit sold. Finally, the Company is constantly attempting to develop new
distribution channels, including telemarketing, co-promotions with various other
industry leaders and door-to-door sales.
National Industry Alliance. During the past several years, cellular
providers have been forming industry alliances to market cellular service
nationwide. Many cellular providers holding non-wireline licenses have become
Cellular One(R) franchisees. Many cellular providers holding wireline licenses
have joined a consortium to market under the brand name, MobiLink(R), a
registered mark of B-Side Carriers L.P. Because the Company holds both wireline
and non-wireline licenses, it participates in both of these alliances.
Subscribers
Total Number. The Company had 789,580 subscribers at December 31, 1994, an
increase of 51.5% over its subscribers at December 31, 1993. The Company's
subscribers at December 31, 1994 were distributed as follows: 33% in Tennessee,
21% in Virginia and 46% in all other markets combined.
Cost of Acquisition. The sales and marketing costs of obtaining new
subscribers are substantial. The Company not only has to pay for advertising,
but also incurs a direct expense for most new subscribers, either in the form of
a commission payment to an agent or a salary/incentive payment to a direct sales
person. In addition, the Company periodically runs promotions which discount the
cost of cellular telephone equipment, or provide some amount of initial access
or airtime free to new subscribers. Each of these promotions results in costs to
the Company. Although the Company has continued to lower the cost of acquisition
per subscriber, it remains one of the Company's single largest expenses.
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<PAGE> 10
Churn. A factor common throughout the cellular industry is that many
subscribers either completely discontinue cellular service or switch from one
cellular provider to another. In 1994, this monthly turnover or "churn" in the
Company's subscribers averaged 2.7% of all subscribers per month.
Subscriber Revenue. The Company charges its subscribers for access to its
systems, for minutes of use and for enhanced services, such as voice mail and
Mr. RescueSM. A subscriber may purchase each of these services separately for a
set price or may purchase any number of rate plans which bundle these services
in different ways. For example, a high usage subscriber may purchase a
pre-determined number of minutes of use per month for a set fee rather than pay
a fixed amount per minute. Similarly, a user who purchases cellular service for
security reasons may choose a plan with a low monthly access fee but higher per
minute usage fees. Rates charged by the Company and the number and type of rate
plans vary from market to market.
The average monthly revenue the Company receives per subscriber has been
declining over the last several years. The Company believes that this industry
trend is caused in part by an increase in the number of casual and security
cellular users. The Company expects this trend to continue in 1995 and future
years.
Roaming
Roamers. The Company also provides cellular service to cellular users who
are customers of other carriers but who are visiting and wish to use their
cellular phone in the Company's service area ("roamers"). When roamers enter the
Company's service area and attempt to use their cellular phones, the Company,
through participation in an industry clearinghouse, establishes the identity and
validity of the roamer and provides cellular service. The Company then bills the
roamer's home cellular carrier for the service. Likewise, subscribers of the
Company use their cellular phones in areas outside the Company's service areas.
Roaming Revenue. The charges applicable to roamers are determined by
agreements between the Company and other carriers in the industry and vary among
markets and carriers. Roaming revenue has increased over the last several years
and for the year ending December 31, 1994 represented approximately 18.6% of the
Company's total service revenues. This increase is a result of the higher number
of cellular subscribers nationwide and the Company's larger service areas due to
an increasing number of cell sites. The Company believes that roaming will
become more frequent in future years due to advances in intelligent networking
which will simplify roaming procedures and make roaming transparent to the
roamer.
Roamer Fraud. Roamer fraud remains a cellular industry problem. Roamer
fraud occurs when cellular telephone equipment is programmed to conceal the true
identity and location of the user. While the Company and the industry have
implemented an extensive fraud control process, they have not been able to
eliminate fraud altogether.
Employees
At December 31, 1994, the Company had 2,387 employees. Of these, 230 were
employed in the Company's headquarters offices in Atlanta and the remaining
2,157 were employed throughout the Company's Controlled Markets.
NON-CONTROLLED SYSTEMS
The Company participates as a non-controlling general or limited partner in
27 MSAs and 18 RSAs. These interests represent approximately 28% of the
Company's total POPs and are typically limited partnership interests in
partnerships providing cellular service to the larger MSAs, such as Los Angeles,
San Francisco, Washington D.C., Minneapolis and Houston. The partnership
agreements which govern these partnerships are similar to those described above
in "-- The Company's Cellular Operations -- Operations -- Partnerships". Since
these partnership agreements vest the power to manage, supervise and conduct the
affairs of the partnership with someone other than the Company, there can be no
assurance that decisions made by these partnerships would be the same as those
made by the Company under similar circumstances.
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<PAGE> 11
INTERNATIONAL INTERESTS
The Company owns a 10% interest in a corporation which provides cellular
service in the Sonora and Sinaloa regions of Mexico. The Company currently
receives services related to international ventures from GTE PCS.
COMPETITION
The cellular telephone industry is part of the much broader
telecommunications industry. Direct competition is in the form of the other
cellular licensee in any given market. Competition between the two cellular
licensees is principally on the basis of service quality, price and coverage
area. In addition to the direct cellular competitor in each market, there will
also be competition from newly emerging Enhanced Specialized Mobile Radio
("ESMR") operators who generally provide dispatch and other private radio
systems. With new digital technology it may be possible for ESMR operators to
provide services in the future that may be difficult to distinguish from
traditional cellular service.
In 1993, the FCC announced that it would license additional frequencies in
the 1.8 GHz to 1.99 GHz frequency band to enable up to six additional wireless
competitors to enter each market. These new licenses consist of two licenses in
each of 51 large, often multi-state, geographical areas known as Major Trading
Areas ("MTAs") and four licenses in each of 492 smaller geographical areas known
as Basic Trading Areas ("BTAs"). Auctions for such licenses began in 1994 and
will continue in 1995. The first part of the auction was completed on March 13,
1995, and resulted in the purchase of 99 licenses by 18 entities. A GTE
subsidiary, GTE Macro Communications Corporation, purchased four licenses
(Atlanta, Seattle, Cincinnati and Denver).
REGULATION
General. The FCC regulates the licensing, construction, operation, sale
and acquisition of cellular carriers as well as interconnection arrangements
between cellular carriers. In addition, certain aspects of cellular system
operation also may be subject to public utility regulation in the state in which
service is provided. Changes in federal or state regulation of the Company's and
its competitors' activities, such as increased rate regulation or deregulation
of interconnection arrangements, could adversely affect the Company's results. A
brief summary of federal and applicable state regulation of cellular service is
set forth below.
Federal Regulation. The FCC initially authorized cellular telephone
service in 1981 by allocating 40 MHz of spectrum for two competing cellular
systems in each market. A 20 MHz block of spectrum was given to each carrier.
Due to cellular's rapid growth, the FCC allocated to each carrier an additional
5 MHz of spectrum in 1986.
The initial cellular licenses granted by the FCC expire ten years from
their date of issuance and are renewable upon application to, and approval by,
the FCC. The FCC has established the criteria under which existing licensees may
have their cellular licenses renewed. Basically, a comparative preference will
be given to any current cellular licensee who can prove that it substantially
used its spectrum for its intended purpose, complied with applicable FCC rules,
and did not engage in substantial relevant misconduct. This preference will be
the most important factor to be considered by the FCC during its hearing on each
license renewal request in comparing the current licensee's application with any
competing applications. Failure to comply with FCC rules can be raised as an
issue during the license renewal proceedings and could result in termination of
the license.
The first of the Company's cellular licenses came up for renewal in October
1994. The Company filed renewal applications for its licenses in Mobile,
Alabama, El Paso, Texas and Richmond and Norfork, Virginia in August 1994. No
entity filed competing applications or oppositions to any of those renewal
applications. The remainder of the Company's licenses will expire over the next
several years, including two which expire in
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<PAGE> 12
1995, seven which expire in 1996 and eleven which expire in 1997. All of the
licenses expiring between 1995 and 1997 are MSA licenses. The Company expects to
file renewal applications for such licenses upon their expiration.
The FCC is currently in the process of auctioning additional licenses in
the 1.8 GHz to 1.99 GHz range for the provision of personal communications
services. Existing cellular companies are eligible to bid at auction for new
licenses. Existing cellular companies may bid for an MTA license where they have
no current substantial cellular holdings and one BTA license in all BTA's,
including areas where they are currently the cellular provider. The first part
of the auction was completed on March 13, 1995, and resulted in the purchase of
99 licenses by 18 entities. A GTE subsidiary, GTE Macro Communications
Corporation, purchased four licenses (Atlanta, Seattle, Cincinnati and Denver).
In addition to regulating cellular service, the FCC also regulates
point-to-point microwave facilities which are often utilized by cellular
providers to link base stations to each other and to the MTSO. The Company holds
certain microwave licenses for these purposes. Such licenses, which are issued
for a ten year period, were all renewed by the Company in 1991 for an additional
ten year period. The FCC has issued regulations pursuant to which a significant
portion of the Company's microwave licenses may have to be relocated to a higher
spectrum at the request of a party receiving a license to use such spectrum for
a new technology. The regulations currently provide that incumbent microwave
licensees will be reimbursed for expenses associated with this relocation by the
new licensee.
State Regulation. In 1981, the FCC preempted the states from exercising
jurisdiction in the areas of cellular technical standards and market structure.
Under the Communications Act of 1934, as amended, however, certain aspects of
the economic regulation of common carriers were reserved to the states. The
states had exclusive jurisdiction with respect to charges, classifications,
practices and service or facilities for or in connection with intrastate
communications. Although many states have deregulated cellular service, some
still require the filing of tariffs and operational reports pursuant to statutes
governing public utilities.
In August 1994, certain provisions of the Omnibus Budget Reconciliation Act
of 1993 (the "Omnibus Act") became effective. These provisions prohibited the
states from continuing to exercise jurisdiction over rates and entry into the
wireless telecommunications business. The Omnibus Act did, however, provide that
states could file a petition with the FCC to continue rate jurisdiction. Only
two states in which the Company provides service, California and New York, filed
to continue such regulation. All states may continue to regulate other aspects
of cellular service not preempted by federal law, although it is unclear at this
time the extent to which the other states will continue to do so.
ITEM 2. PROPERTIES
In each of the cellular systems managed or controlled by the Company, the
Company or its subsidiaries or partnerships own or lease the sites on which the
MTSO and all cells are located. In addition, in most of its markets, the Company
leases space for its sales and customer service operations, as well as numerous
retail locations. The Company also leases office space for its corporate
headquarters in Atlanta, Georgia and for its eight regional offices.
ITEM 3. LEGAL PROCEEDINGS
PROCEEDINGS INVOLVING THE COMPANY AS A NAMED PARTY
On November 18, 1992, Alan R. Kahn, a shareholder of the Company ("Kahn"),
filed a shareholder derivative action in the Court of Chancery of the State of
Delaware in and for New Castle County against the Company, Contel Corporation,
GTE and each member of the Company's Board of Directors. The complaint alleges
that the defendants breached their fiduciary duties to the Company by causing
the Company to enter into four specified transactions that the plaintiff alleges
were disadvantageous to the Company. These transactions were (i) the allocation
of reorganization costs which resulted from the 1991 merger of GTE and Contel
Corporation, (ii) the resignation of Paul Kozlowski from the Company in 1991 to
become the head of GTE's combined cellular businesses, (iii) the tax sharing
arrangement between the Company and GTE, and
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<PAGE> 13
(iv) the financing of the Company's debt obligations by GTE, which resulted in
finance charges to the Company. The lawsuit was dismissed with prejudice on July
27, 1994.
On October 5, 1993, Sparky, Inc., d/b/a Don Cook's Cellular ("Don Cooks"),
Air Mobile Communications, Inc., Red Monkey Communications, and Vincent's
Communications, Inc. filed suit in the Superior Court in the County of Fresno,
California against Contel Cellular of California, Inc. ("Contel-California"),
Fresno MSA Limited Partnership, GTE California Corporation and GTE Mobilnet. Don
Cooks was an agent of the Fresno MSA Limited Partnership until its contract
expired in February 1993. Each of the other plaintiffs was a subagent of Don
Cooks. The suit alleges breach of contract, fraud and deceit through affirmative
misrepresentations, fraud and deceit through concealment of material facts,
breach of implied covenant of good faith and fair dealing, discrimination, price
fixing, unfair, fraudulent and deceptive business practices and illegal
restraint of trade, anti-trust and price fixing, bad faith refusal to consent to
assignment, misappropriation of confidential business information and certain
statutory claims relating to the California Unfair Practices Act. These causes
of action are based on allegations that Contel-California (i) failed to provide
separate accounting of fees and residuals earned by Don Cooks and each of the
three subagents, (ii) failed to provide Don Cooks with leads and instead
provided leads to other agents and its direct sales force, (iii) failed to
provide adequate market support and training to its agents, (iv) refused to sell
equipment to its agents at cost, (v) failed to pay a $100 bonus per activation
which Don Cooks alleged was an oral commitment intended to last the length of
the written contract, (vi) failed to treat information received from its agents
as confidential, (vii) unfairly discriminated against Don Cooks by unreasonably
insisting that Don Cooks' potential customers pay security deposits before
obtaining service, (viii) competed directly with Don Cooks for potential
subscribers, (ix) sold telephone equipment to subscribers below cost, (x)
unlawfully tied the sale of equipment to the sale of cellular service, (xi)
unreasonably refused to allow Don Cooks to assign its contract to another agent,
(xii) fraudulently concealed its alleged plan to reduce the involvement of
agents in the sale of cellular service, (xiii) charged $31 as its basic rate,
which was the same basic rate charged by the competitor, and (xiv) met with
representatives of the competitor to fix prices at industry meetings and at
meetings to discuss the sale of certain other cellular properties originally
owned by the competitor and sold to the Company. The plaintiffs are seeking $5.5
million in damages.
On November 24, 1993, Arthur Garabedian d/b/a Western Mobile Telephone
Company brought an action in the Superior Court of the State of California for
the County of Orange on behalf of himself and all persons or entities who have
subscribed to cellular radio service in the Los Angeles Standard Metropolitan
Statistical Area against Los Angeles SMSA Limited Partnership (the "LA
Partnership"), Pacific Telesis Group, AirTouch Cellular (formerly Pactel
Cellular) ("AirTouch"), AirTouch Communications Inc., GTE Mobilnet Incorporated,
the Company and U.S. Cellular Corporation. The Company is an 11.2% limited
partner in the LA Partnership. The complaint alleges retail and wholesale price
fixing of cellular radio service. The plaintiff is seeking in excess of $100
million in damages. The ultimate outcome of this suit is unclear at this time
because discovery has not been completed. In addition, it is unclear whether the
Company will remain as a named party in this lawsuit or will be involved only
because of its limited partnership interest in the LA Partnership.
On September 8 and 9, 1994, four separate shareholders of the Company;
Blimy Itkowitz, Airmont Plaza Associates, Paul Gambal and Arnel Gonzalez, filed
lawsuits on behalf of all shareholders against the Company, the Company's
directors and GTE alleging that the announced purchase price of $22.50 per Class
A Share to be paid in connection with the proposed Merger was grossly
inadequate. All four lawsuits were filed in the Court of Chancery in the State
of Delaware in and for New Castle County. On December 23, 1994, a tentative
settlement agreement was reached with plaintiffs in all four suits, subject to
confirmatory discovery. The tentative settlement approves an increased price of
$25.50 per Class A Share and the payment by GTE of $525,000 in plaintiffs'
counsel fees and expenses. The confirmatory discovery was subsequently completed
by plaintiffs' counsel and all documentation necessary to effect the settlement
was approved by the parties to the lawsuits and their counsel. Such
documentation is in the process of being submitted to the court. Following
submission, a date will be set for a final hearing to approve the settlement.
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PROCEEDINGS INVOLVING PARTNERSHIPS IN WHICH THE COMPANY IS A LIMITED PARTNER
On October 7, 1993, AirTouch was served with an Orange County Superior
Court complaint filed by Goldenwest Cellular Corporation, an agent of Los
Angeles Cellular Telephone Company ("LACTC"), the non-wireline cellular carrier
in Los Angeles, California. The complaint was filed against LACTC, the LA
Partnership, AirTouch and The Good Guys!, a retail agent of LACTC. On February
15, 1994, AirTouch was served with an Orange County Superior Court complaint
filed by Autophone, Inc., another agent of LACTC. This complaint was filed
against LACTC, the LA Partnership and AirTouch. The Company is an 11.2% limited
partner in the LA Partnership. The two cases were consolidated on April 5, 1994.
The complaints contain causes of actions which set forth violations of
California's Cartwright Act and Unfair Practices Act and involve allegations
that the LA Partnership conspired with LACTC to increase the commissions paid to
the "larger" agents so that those agents could use the larger commissions to
reduce the price of cellular equipment below cost, thereby increasing their
sales of cellular equipment and their sales of cellular service. The complaints
also contain allegations that the LA Partnership and LACTC conspired to fix the
rate at which cellular service is sold at both retail and wholesale. The damages
for each cause of action are alleged to be $50,000 "or more to be shown
according to proof at trial", and plaintiff is seeking to have these amounts
trebled pursuant to statute.
On May 5, 1994, Cellular Activators and numerous other agents of LACTC
filed suit in the Superior Court of the State of California in and for the
County of Orange against LACTC, the LA Partnership, AirTouch, AirTouch
Communications Inc., and certain agents of LACTC. The Company is a limited
partner and owns 11.2% of the LA Partnership. The complaint alleges numerous
causes of actions, only one of which is against the LA Partnership. This cause
of action is a conspiracy to fix prices for cellular service in violation of the
California Business and Professions Code. Plaintiffs base this cause of action
on their allegation that the rates charged by LACTC and the LA Partnership for
cellular service are the same and have not changed over time. The plaintiffs are
seeking damages in excess of $100,000 for each of the plaintiff agents.
On July 18, 1994, AirTouch was served with a lawsuit filed by Intercell
Communications, Inc., an agent for AirTouch in certain California markets. The
lawsuit was filed in the Superior Court of the State of California for the
County of San Diego on behalf of itself and all authorized agents of AirTouch in
California. AirTouch is the general partner of the LA Partnership in which the
Company is an 11.2% limited partner. The complaint alleges breach of contract,
fraud and deceit and violations of the California Business and Professions Code
and the Unfair Practices Act. The allegations involve selling cellular equipment
below cost, tying the sale of below-cost cellular equipment to the purchase of
cellular service, failing to provide adequate support to agents, increasing the
direct sales channel and paying higher commissions to certain retail agents. The
plaintiff is seeking damages in excess of $1.6 million per agent, plus statutory
treble damages.
On October 17, 1994, Richard Kagan and Monica Sifuentes filed a lawsuit in
the United States District Court for the Central District of California against
LACTC, the LA Partnership and AirTouch. The suit was filed on behalf of all
persons or entities similarly situated who have subscribed to cellular service
in the Los Angeles market at any time since March 1, 1987 and alleges that the
defendants conspired to fix the rates of cellular service in the Los Angeles
market. The complaint seeks unspecified damages. An order granting summary
judgment against the named plaintiffs was entered in favor of the LA Partnership
and AirTouch on March 20, 1995.
On November 30, 1994, Eurus Cady filed a lawsuit in the Superior Court of
the State of California in and for the County of Orange against LACTC, the LA
Partnership and AirTouch. The suit was filed on behalf of all persons or
entities similarly situated who have subscribed to cellular service provided by
the LA Partnership since March 1, 1987 and alleges that the defendants conspired
to fix the rates of cellular service in the Los Angeles market. The complaint
seeks unspecified damages.
On October 6, 1994, Barbara Curtice filed a lawsuit in the Superior Court
of the State of California for the County of San Francisco against GTE Mobilnet
and Bay Area Cellular Inc. GTE Mobilnet is the general partner of the GTE
Mobilnet of California Limited Partnership in which the Company is an 11.3%
limited partner. The suit was filed on behalf of cellular telephone users in San
Francisco, Santa Rosa, Oakland and
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<PAGE> 15
San Jose MSAs and alleges that GTE Mobilnet and Bay Area Cellular Inc. fixed the
price for cellular service in violation of the California Business and
Professions Code. The complaint seeks unspecified damages.
The Company's potential financial liability in connection with all of the
lawsuits against partnerships in which the Company is a limited partner is
uncertain at this time. Because the Company is involved only as a limited
partner, it is not involved in the strategic analysis of these cases with
litigation counsel and does not direct the litigation decisions made by these
partnerships. In addition, it is unclear whether any portion of an adverse
judgement could be passed to the Company, as a limited partner.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's Class A Shares are publicly traded in the over the counter
market and quoted on the Nasdaq National Market under the symbol "CCXLA". There
is no established trading market for the Class B Shares. As of March 13, 1995,
the Company had 378 Class A Stockholders of record. The Class A common
stockholders are entitled to one vote per share and the Class B common
stockholder is entitled to 5 votes per share. Hence GTE, through Contel,
controls approximately 97.8% of the aggregate voting power of the Company
through its ownership of all 90 million outstanding Class B Shares. The Company
has not paid any cash dividends on the Class A Shares or Class B Shares, and it
is not anticipated that the Company will pay any cash dividends in the
foreseeable future.
The following table indicates the high and low sales prices for the Class A
Shares during the designated periods:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------ --------
<S> <C> <C> <C> <C>
1994
High.............................. $ 18.75 $ 17.25 $24.00 $ 25.25
Low............................... 14.00 13.00 16.00 23.50
1993
High.............................. $ 18.63 $ 16.25 $18.75 $ 22.00
Low............................... 13.25 13.50 15.50 15.00
</TABLE>
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ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data presented below as of December 31,
1990-1994 and for each of the years then ended have been derived from the
audited consolidated financial statements of the Company. The consolidated
financial statements as of December 31, 1994 and 1993, and for each of the years
in the three-year period ended December 31, 1994, have been included in this
Annual Report on Form 10-K on pages 24 to 45. This financial information should
be read in conjunction with such financial statements and notes thereto.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------
1994 1993 1992 1991 1990
---------- ---------- ---------- ---------- ----------
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues and sales................................. $ 562,955 $ 374,014 $ 286,999 $ 235,107 $ 167,178
Operating income (loss)(1)......................... 41,011 (28,305) (50,113) (68,577) (38,143)
Loss from consolidated operations.................. (143,332) (188,011) (196,347) (223,726) (158,865)
Equity in earnings of unconsolidated
partnerships..................................... 62,792 37,351 29,027 15,687 19,069
Gains on sales of partnership interests............ 96,607 48,023 60,806 18,387 --
Net income (loss) before cumulative effect of
change in accounting principles.................. 1,871 (74,918) (73,061) (118,900) (102,794)
Cumulative effect of change in accounting
principles(2).................................... -- (241) (2,080) -- --
Net income (loss).................................. 1,871 (75,159) (75,141) (118,900) (102,794)
Net income (loss) per share before cumulative
effect of change in accounting principles........ 0.02 (0.75) (0.73) (1.19) (1.03)
Net income (loss) per share........................ 0.02 (0.75) (0.75) (1.19) (1.03)
Number of weighted average shares outstanding (in
thousands)....................................... 99,953 99,948 99,943 99,942 99,931
OTHER OPERATING DATA:
Capital expenditures............................... 255,174 130,042 183,504 107,792 70,841
Number of ending subscribers....................... 789,580 521,226 327,645 236,282 155,285
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------------------------------------------------------
1994 1993 1992 1991 1990
---------- ---------- ---------- ---------- ----------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets....................................... $2,346,466 $2,052,984 $1,930,469 $1,870,669 $1,665,395
Long-term obligations
Notes payable -- affiliates...................... 2,136,263 1,901,726 1,814,327 1,735,034 1,540,000
Other............................................ 30,792 36,792 36,280 42,280 14,280
Stockholders' equity (deficit)..................... (238,920) (241,221) (166,084) (91,085) 27,525
</TABLE>
---------------
(1) The operating loss in 1991 includes approximately $12 million of integration
costs associated with the merger of Contel with a wholly owned subsidiary of
GTE.
(2) In 1993, the Company adopted Statement of Financial Accounting Standards No.
112, "Employers' Accounting for Postemployment Benefits." In 1992, the
Company adopted Statement of Financial Accounting Standards No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions" and
No. 109, "Accounting for Income Taxes."
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<PAGE> 17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Contel Cellular Inc. (the "Company"), through its subsidiaries or through
partnerships, provides cellular telephone services in various metropolitan
statistical areas ("MSAs") and rural service areas ("RSAs") throughout the
United States. As of March 13, 1995, the Company owned controlling interests in
and managed cellular systems in 32 MSAs and owned non-controlling interests in
cellular systems serving 27 other MSAs. In addition, the Company held
controlling interests in cellular systems in 24 RSAs, held non-controlling
interests in and managed cellular systems in 10 RSAs, and held non-controlling
interests in cellular systems in 18 other RSAs and one cellular system in
Mexico. All of the Company's systems were operational at March 13, 1995.
Included in the consolidated statements of operations are all revenues and
expenses of the MSA and RSA systems in which the Company holds a controlling
interest. The Company's pro rata share of the net income or losses of the MSA
and RSA systems in which the Company holds a non-controlling interest,
regardless of whether the Company manages the system, is included in "Equity in
earnings of unconsolidated partnerships" in the consolidated statements of
operations.
BACKGROUND
In March 1991, Contel Corporation ("Contel"), the Company's parent, merged
with a subsidiary of GTE Corporation ("GTE") in a tax-free exchange. The Company
is a 90% owned subsidiary of Contel, which became a wholly owned subsidiary of
GTE. During 1991, many of the staff and support functions previously performed
separately by the Company were consolidated under GTE Mobile Communications
Service Corporation ("GTEMC") and allocated to the Company under an interim cost
allocation methodology. In January 1992, a finalized cost allocation methodology
was implemented.
In January 1993, a new management structure was announced, under which the
GTEMC structure was functionally eliminated. Certain functions previously
provided by GTEMC are now provided by GTE Personal Communications Services, a
division of GTE. Certain other functions, such as marketing and engineering, are
performed directly by the Company. Refer to Note 10 of the "Notes to
Consolidated Financial Statements" for additional information regarding related
party transactions.
In December 1994, an Agreement and Plan of Merger (as amended, the "Merger
Agreement") was executed between the Company and GTE after the Company's Board
of Directors voted to accept GTE's proposal to acquire the remaining 10%
ownership of the Company. Under the terms of the agreement, a GTE subsidiary
will merge into the Company and the Company will survive the merger. The holders
of the approximately 10 million Class A Shares will receive $25.50 per share in
cash. The Company's Class B Shares owned by GTE will remain outstanding.
The Company anticipates that the Merger will be completed on or about April
28, 1995. As a result of the Merger, there will cease to be any public market
for the Class A Shares and the Class A Shares will cease to be quoted on the
Nasdaq National Market.
ACQUISITIONS AND DISPOSITIONS OF INTERESTS IN CELLULAR SYSTEMS
The Company regularly evaluates its properties to assess their strategic
attributes in terms of meeting its financial goals and objectives. The Company
will purchase properties where the demographics and business climate are
favorable to the development of core and contiguous cellular systems and will
pursue the sale of properties which are deemed to be non-strategic.
On February 3, 1995, the Company signed a definitive agreement relating to
the cellular exchange of certain of the Company's cellular assets in the
Minneapolis, Minnesota MSA and the Albuquerque, New Mexico MSA for a portion of
US WEST NewVector Group, Inc.'s cellular assets in the San Diego, California MSA
("San Diego MSA") (the "Exchange"). The Exchange will give the Company a 28
percent interest as a tenant-in-common in the assets of the cellular system
serving the San Diego MSA. The Exchange will
17
<PAGE> 18
reduce the Company's POPs ("POPs" refers to the population of a market area
multiplied by a company's percentage ownership in the cellular system serving
that market) by approximately 290,000. The transaction is subject to regulatory
approvals and is expected to close during 1995.
In 1994, the Company purchased 100% of the cellular system serving
Tennessee RSA 2, the remaining 51% interest in the cellular system serving
Tennessee RSA 3, and 100% of the cellular systems serving the Huntsville,
Alabama MSA and Alabama RSA 2, representing an aggregate increase of
approximately 831,000 POPs. Through the purchase of the Huntsville, Alabama MSA,
the Company gained an 80% interest in the partnership that currently operates
the cellular system in Alabama RSA 1A pursuant to an interim operating license.
Additionally, the Company increased its ownership interests in the cellular
systems serving the Tuscaloosa, Alabama MSA, Indiana RSAs 7, 8 and 9, and
Alabama RSA 1B, representing an aggregate increase of approximately 33,000 POPs.
Also during 1994, the Company sold its interest in several northeastern
cellular properties (the "Northeast Properties"), pursuant to the agreement
signed in December 1993 with NYNEX Mobile Communications Company ("NYNEX"),
including the cellular systems serving Manchester, New Hampshire and Burlington,
Vermont MSAs; New Hampshire RSA 2, Vermont RSAs 1 and 2A, and New York RSA 2.
The Company recognized a pretax gain of approximately $80.0 million, on the sale
of these Northeast Properties representing approximately 734,000 POPs.
Additional sales completed during 1994 include the Company's interest in Iowa
RSAs 1, 8 and 14, Oregon RSA 5, South Dakota RSAs 5B1 and 6B1, North Carolina
RSA 1, Kentucky RSA 11, California RSA 7 and Alabama RSA 1B. The Company
recognized an aggregated pretax gain of approximately $14.3 million with respect
to these additional sales, representing approximately 711,000 POPs.
Additionally, as part of the agreement, NYNEX will purchase the Company's
interests in the Binghamton and Elmira, New York MSAs, Pennsylvania RSAs 3A and
4A, and New York RSA 3 pending certain regulatory approvals, which are expected
to be completed in 1995.
After the acquisitions and dispositions described above, the Company will
provide or participate in the provision of cellular services in 56 MSA markets
and 49 RSA markets with total combined POPs of approximately 23.3 million.
During 1993, the Company purchased 100% of the cellular systems serving
Tennessee RSAs 6 and 9, representing approximately 202,000 POPs. In addition,
the Company increased its ownership interests in the cellular systems serving
the Tuscaloosa, Alabama MSA, the San Francisco, San Jose, Vallejo, Santa Rosa,
Santa Cruz, and Salinas, California MSAs and New York RSA 3, representing an
aggregate increase of approximately 21,000 POPs.
Also during 1993, the Company sold its interests in a number of
non-strategic RSAs, primarily in Arizona, Minnesota and Washington, as well as
its interests in the cellular systems serving the Rapid City, South Dakota MSA,
and the Orange County and Poughkeepsie, New York MSAs. The pretax gain on the
sale of these cellular interests was approximately $48.0 million and represented
approximately 686,000 POPs.
On December 31, 1992, the Company sold its stock in Contel Cellular of
Arkansas, Inc. to Alltel Mobile Communications, Inc. Included in the sale were
the Company's interests in the MSAs serving Fort Smith and Fayetteville,
Arkansas RSAs 1 and 8, and Oklahoma RSA 4, resulting in a pretax gain of $60.8
million.
Refer to Note 5 of the "Notes to Consolidated Financial Statements" for
additional information regarding the acquisitions and dispositions of cellular
interests.
RESULTS OF OPERATIONS
Service revenues, which include airtime, access, roaming, long-distance and
other service revenues, increased $178.3 million in 1994 and $84.0 million in
1993. These increases are primarily attributable to revenues generated from
subscriber gains and roaming revenues. The Company's subscriber base, net of the
18
<PAGE> 19
subscribers sold, increased from 521,200 as of December 31, 1993 to 789,600 as
of December 31, 1994, an annual growth rate of 51% in 1994 compared to 59% in
1993 and 39% in 1992. Rates for airtime and access remained relatively unchanged
from 1992 to 1994. Partially offsetting the increases in revenues resulting from
subscriber growth were declines in average usage per subscriber. The declines in
usage per subscriber are attributable to the increased number of casual users in
the subscriber base, and are consistent with the industry. Average revenue per
subscriber per month for 1994, 1993 and 1992 was $70, $73 and $78, respectively.
Cost of services, which includes network expenses, facilities and
maintenance, and the cost of long-distance, increased $37.2 million in 1994 and
$6.3 million in 1993. The 1994 and 1993 increases are primarily the result of
increased usage, cell sites and cost of toll, as well as increased salaries and
other employee-related costs to support the increased network investment.
Increased salaries, other employee costs and cost of toll represented
approximately $14.9 million of the 1994 increase. Additionally, roaming related
expenses increased from $1.9 million in 1993 to $9.8 million in 1994 primarily
due to increased roaming usage and additional charges associated with offering
subscribers lower roaming rates in other carriers' markets. Cost of services as
a percent of service revenues was between 14 percent and 16 percent for each of
the past three years.
Negative equipment margins of 106%, 79%, and 54% for the years ended
December 31, 1994, 1993 and 1992, respectively, continue to reflect the
intensely competitive market environment and the fact that equipment promotions
are frequently used to attract new subscribers. Equipment unit sales for 1994,
1993 and 1992 were approximately 292,000, 165,000 and 99,000 which represent an
annual increase for 1994 and 1993 of 77% and 67%, respectively.
Selling, general and administrative expenses increased $46.1 million and
$34.6 million in 1994 and 1993, respectively. Employee commissions, related
compensation benefits and agent commissions associated with the acquisition of
new subscribers and higher marketing and promotional fees related to expanding
the type and number of distribution channels accounted for $23.5 million and
$25.5 million of the increase in 1994 and 1993, respectively. These increases
are directly related to the increase in customer additions during 1994 and 1993.
The 1994 increase also includes an additional $8.4 million of bad debt expenses
primarily attributable to increased sales and $3.7 million of relocation
expenses associated with implementing a new organization structure that involved
relocating and adding resources to eight new strategic market areas (Kentucky,
Midwest, Tennessee, Virginia, California, Alabama, Gulf Coast and Southwest).
Depreciation expense increased $11.3 million in 1994 compared to an
increase of $12.2 million in 1993. These increases were primarily due to higher
property and equipment balances resulting from enhancements to and expansion of
existing cellular systems required to support the growth in the number of
subscribers and quality of service expectations.
Interest expense increased $16.3 million in 1994 and $14.8 million in 1993.
The 1994 increase is primarily attributable to higher effective interest rates
in 1994 of approximately 9.3% versus 8.8% in 1993 and increased variable-rate,
affiliated debt. The rates of interest on both the variable-rate and the
fixed-rate debt approximate the rate that the Company could obtain in the
marketplace from non-affiliated lenders. The 1993 increase is primarily due to
higher effective interest rates in 1993 of approximately 8.8% versus 8.1% in
1992 and a result of the refinancing through GTE of variable-rate debt to
fixed-rate debt at higher market-based rates. Refer to Note 10 of the "Notes to
Consolidated Financial Statements" for further information related to cash
management and financing.
Equity in earnings of unconsolidated partnerships increased $25.4 million
in 1994 and $8.3 million in 1993. These increases are a result of improved
operating results primarily in unconsolidated partnerships such as the Los
Angeles SMSA Limited Partnership and the Washington D.C. SMSA Limited
Partnership (the "Washington D.C. Partnership"). The increase in the 1993
earnings was partially offset by reduced equity in earnings in the Washington
D.C. Partnership of $3.8 million resulting from a legal settlement against the
Washington D.C. Partnership, which settlement was subsequently reduced to $1.9
million during 1994. Refer
19
<PAGE> 20
to Note 4 of the "Notes to Consolidated Financial Statements" for further
information relating to unconsolidated partnerships.
The Company recognized combined federal and state income tax expense of
$14.2 million for 1994 compared with income tax benefits recognized during 1993
and 1992 of $27.7 million and $33.5 million, respectively. The 1994 effective
tax rate was impacted by $4.9 million of state income taxes related to the gains
on sales of cellular interests and the amortization of goodwill. The reduced
benefit rate in 1993 is primarily due to the change in the federal income tax
rate from 34% to 35% subsequent to the enactment of the Omnibus Budget
Reconciliation Act of 1993. Refer to Note 6 of the "Notes to Consolidated
Financial Statements" for further information relating to federal and state
income taxes expense.
During the fourth quarter of 1993, the Company adopted Statement of
Financial Accounting Standards ("FAS") 112, "Employers' Accounting for
Postemployment Benefits". As a result of the adoption of FAS 112, a one-time,
non-cash charge of $241 thousand was recorded to give effect to past service
costs. During the fourth quarter of 1992, the Company adopted FAS 106,
"Employers' Accounting for Postretirement Benefits Other than Pensions" and FAS
109, "Accounting for Income Taxes," retroactive to January 1, 1992. As a result
of the adoption of FAS 106, a one-time, non-cash charge of $2.1 million was
recorded to give effect to past service costs. The adoption of FAS 109 had no
impact on the financial statements in 1992. Refer to Note 3 of the "Notes to
Consolidated Financial Statements" for additional information.
The Company has experienced losses prior to the year ended December 31,
1994. The Company's results are highly affected by (a) interest expense and
amortization of carrying costs associated with past acquisitions, (b) the cost
of constructing the Company's network, and (c) the cost of acquiring new
subscribers. The Company expects to continue to aggressively acquire new
subscribers. As the subscriber base continues to grow, the Company believes that
the higher level of revenues generated coupled with the operating efficiencies
achieved will ultimately lead to more profitable results. The Company has
achieved an average subscriber growth rate of approximately 50% for the past
three years, while the industry has experienced a growth rate of approximately
43%. Additionally, management has taken steps to reduce its acquisition costs
per subscriber through the introduction of innovative distribution channels and
methods. This year's improved performance is reflected in the Company's
operating income which increased $69.3 million, from an operating loss of $28.3
million in 1993 to operating income of $41.0 million in 1994.
FINANCIAL CONDITION
The Company requires capital to construct and enhance its cellular systems,
make periodic interest payments on outstanding debt, fund operating costs for
systems which the Company manages, fund acquisitions and continue investments in
unconsolidated partnerships.
Cash provided from operating activities in 1994 was $21.8 million, an
increase of $17.2 million from the prior year. This increase was primarily
attributable to the increase in revenues, partially offset by additional cost of
services and selling, general and administrative expenses. Cash provided from
operating activities in 1993 was $4.6 million, a decrease of $33.6 million from
the prior year. This decrease was primarily due to increased interest payments
on outstanding debt as well as reduced income tax benefits, partially offset by
improved cash flow margins resulting from higher revenues.
Capital expenditures were $255.2 million, $130.0 million and $183.5 million
in 1994, 1993 and 1992, respectively. Capital expenditures are primarily for
network expansion and enhancements to maintain system capacity, quality and
coverage as the customer base increases and demands greater service performance.
Total capital expenditures for consolidated and unconsolidated markets for 1995
are estimated to be approximately $314 million. As the Company positions itself
for the future, additional capital is required to expand network capacity,
provide portable grade coverage in all core markets, enhance system quality and
coverage, and position the network for digital technology in order to provide
high value wireless communications services. It is currently estimated that
these capital expenditures will be funded by additional borrowings from GTE,
contributions from minority partners and cash provided from operations.
The Company is required to fund its proportionate share of the construction
and working capital requirements in unconsolidated partnerships. Funds
contributed to unconsolidated partnerships for the year ended December 31, 1994,
were $15.1 million compared to $13.8 million and $12.6 million for 1993 and
1992,
20
<PAGE> 21
respectively. The increase in funds used is primarily attributable to increased
construction requirements for unconsolidated partnerships.
In certain unconsolidated partnerships where the Company is managing
partner, funds required for construction and working capital may be advanced by
the Company and subsequently reimbursed from the limited partners or from
operating results. Alternatively, the Company may request that capital
contributions be made to the partnerships in advance of expenditures. Funds
provided by changes in advances to unconsolidated partnerships for the year
ended December 31, 1994, were $12.4 million compared to $6.9 million for 1993
and funds used of $0.6 million for 1992, respectively. The improvement in 1994
and 1993 is primarily the result of improved timing of the collection of
advances from unconsolidated partnerships in managed RSAs.
In order to minimize the volatility associated with interest rate
fluctuations, the Company's Board of Directors adopted a policy of maintaining
variable-rate debt within a target range of 5% to 20% of total debt. In
September 1992, the Company converted $300 million of variable-rate debt to $150
million of fixed-rate debt with a five-year maturity, and $150 million of
fixed-rate debt with a seven-year maturity. In December 1992, the Company
converted an additional $400 million of variable-rate debt to $200 million of
fixed-rate debt with a three-year maturity and $200 million of fixed-rate debt
with a four-year maturity. In August 1994, the Company converted $75 million of
variable-rate debt to $75 million fixed-rate debt with a six-year maturity.
Terms, interest rates and other information regarding affiliated debt are
included in Note 10 of the "Notes to Consolidated Financial Statements."
In addition to fixed-rate debt, the Company maintains a line of credit
arrangement with GTE. Effective January 1, 1993, GTE adopted a policy wherein
rates charged for variable-rate debt changed from GTE's cost of borrowing such
debt plus 1.5% per annum, to the prime rate quoted in The Wall Street Journal
plus 0.75% per annum. This change increased the Company's cost of borrowing
variable-rate debt by 1.5% effective January 1, 1993.
During 1994, the Company borrowed an additional $159.6 million under its
line of credit arrangement primarily to fund network capital requirements and
the Huntsville acquisition. At December 31, 1994, the Company had borrowed
approximately $511.3 million through its intercompany borrowing arrangements at
variable rates. Total borrowings are expected to increase in 1995 and for
several years in the future, as the Company borrows to fund interest payments on
its debt and fund network capital requirements due to growth and development of
its operations.
In Company controlled and managed markets, the Company maintains adequate
financing through the line of credit arrangement with GTE to ensure proper
management of the operations. A portion of this financing is reimbursed through
contributions from minority partners. During 1994, the Company received $6.4
million from minority partners for collection of capital calls. The Company
expects to continue making capital contributions to the unconsolidated
partnerships and receiving capital contributions from minority partners. The
timing and amounts of such contributions and advances are subject to future
construction and working capital requirements of these partnerships as
determined by the managing partner.
Over the past three years, the capital required to enhance the existing
cellular network and to finance the carrying costs of acquisitions and new
investments has been substantially provided from operations, sales of
non-strategic properties, and GTE or the Company's minority partners. Although
net income before depreciation and amortization has increased over the past
three years, additional financing will be required to fund the Company's growth
and its debt service for the foreseeable future. These requirements are expected
to be funded largely by GTE as a 90% owner of the Company and a major investor
and operator of cellular networks nationwide and the Company's minority
partners. Additionally, in January 1995, GTE provided the Company with a letter
stating that GTE had no plans or intentions to discontinue providing financial
support to the Company through intercompany credit facilities to meet ongoing
operating and capital requirements, and that GTE would not demand payment under
intercompany credit facilities before June 30, 1996.
Refer to Notes 4 and 8 of the "Notes to Consolidated Financial Statements"
for information regarding legal and regulatory matters affecting the Company and
its unconsolidated partnerships.
21
<PAGE> 22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
PAGE REFERENCE
--------------
<S> <C>
Report of Independent Public Accountants -- Consolidated Financial
Statements................................................................... 23
Consolidated Statements of Operations.......................................... 24
Consolidated Statements of Cash Flows.......................................... 25
Consolidated Balance Sheets.................................................... 26-27
Consolidated Statements of Changes in Stockholders' Deficit.................... 28
Notes to Consolidated Financial Statements..................................... 29-45
Schedule II -- Valuation and Qualifying Accounts............................... 46
Report of Independent Public Accountants -- Compilation of Combined Financial
Statements................................................................... 47
Combined Statements of Operations.............................................. 48
Combined Statements of Cash Flows.............................................. 49
Combined Balance Sheets........................................................ 50
Combined Statements of Changes in Partners' Capital............................ 51
Notes to Combined Financial Statements......................................... 52-56
</TABLE>
22
<PAGE> 23
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors
and Stockholders of
Contel Cellular Inc.:
We have audited the consolidated balance sheets of CONTEL CELLULAR INC. (a
Delaware corporation and majority owned subsidiary of GTE Corporation) AND
SUBSIDIARIES as of December 31, 1994 and 1993 and the related consolidated
statements of operations, changes in stockholders' deficit, and cash flows for
each of the three years in the period ended December 31, 1994. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the financial statements of certain unconsolidated
partnerships as described in Note 4 to the financial statements. The investment
in these partnerships is reflected in the accompanying balance sheets using the
equity method of accounting and represented $102,618,000 and $82,140,000 (or 4%)
of total consolidated assets at December 31, 1994 and 1993, respectively. The
equity in their earnings is included in the statements of operations and
represented $39,806,000, $28,024,000, and $20,070,000 for the years ended
December 31, 1994, 1993, and 1992, respectively. The summarized financial
information contained in Note 4 to the consolidated financial statements
includes financial information for the aforementioned partnerships. The
financial statements of these unconsolidated 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 these unconsolidated 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 provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of the other auditors,
the financial statements (pages 24 to 45) referred to above present fairly, in
all material respects, the financial position of Contel Cellular Inc., and
subsidiaries as of December 31, 1994 and 1993 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1994 in conformity with generally accepted accounting principles.
A report of other auditors referred to above indicates that the Los Angeles
SMSA Limited Partnership is involved in litigation with several agents as
discussed in Note 4 and with cellular subscribers as discussed in Notes 4 and 8,
the outcome of which cannot presently be determined. Accordingly, no provision
for any liability that may result upon adjudication has been made in the
accompanying financial statements.
As discussed in Note 4, the cellular partnership in San Francisco,
California, of which the Company holds a non-controlling interest, is involved
in litigation with a class of cellular subscribers, the outcome of which cannot
presently be determined. Accordingly, no provision for any liability that may
result upon adjudication has been made in the accompanying financial statements.
As discussed in Note 3 to the financial statements, effective January 1,
1992, the Company changed its method of accounting for postretirement benefits
other than pensions.
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. Schedule II is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic 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 financial statements taken as a
whole.
/s/ Arthur Andersen LLP
---------------------------------------------------------
Arthur Andersen LLP
Atlanta, Georgia
March 13, 1995
23
<PAGE> 24
CONTEL CELLULAR INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
-------------------------------------
1994 1993 1992
--------- --------- ---------
<S> <C> <C> <C>
REVENUES AND SALES:
Service revenues...................................... $ 524,772 $ 346,460 $ 262,479
Equipment sales....................................... 38,183 27,554 24,520
--------- --------- ---------
562,955 374,014 286,999
--------- --------- ---------
COSTS AND EXPENSES:
Cost of services...................................... 85,095 47,942 41,686
Cost of equipment sales............................... 78,634 49,449 37,678
Selling, general and administrative................... 242,840 196,738 162,093
Depreciation.......................................... 77,865 66,573 54,401
Amortization of FCC licenses, goodwill and other
intangibles........................................ 37,510 41,617 41,254
--------- --------- ---------
521,944 402,319 337,112
--------- --------- ---------
OPERATING INCOME (LOSS)................................. 41,011 (28,305) (50,113)
Interest expense, net................................... 179,183 162,907 148,092
Other expense (income), net............................. 840 (2,360) 516
--------- --------- ---------
LOSS BEFORE MINORITY INTERESTS.......................... (139,012) (188,852) (198,721)
Minority interests...................................... (4,320) 841 2,374
--------- --------- ---------
LOSS FROM CONSOLIDATED OPERATIONS....................... (143,332) (188,011) (196,347)
Equity in earnings of unconsolidated partnerships....... 62,792 37,351 29,027
Gains on sales of cellular interests.................... 96,607 48,023 60,806
--------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES....................... 16,067 (102,637) (106,514)
Provision for (Benefit from) income taxes............... 14,196 (27,719) (33,453)
--------- --------- ---------
NET INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLES................................. 1,871 (74,918) (73,061)
Cumulative Effect of Change in Accounting Principles.... -- (241) (2,080)
--------- --------- ---------
NET INCOME (LOSS)....................................... $ 1,871 $ (75,159) $ (75,141)
========= ========= =========
NET INCOME (LOSS) PER SHARE BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLES....................... $ 0.02 $ (0.75) $ (0.73)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLES PER
SHARE................................................. -- -- (0.02)
--------- --------- ---------
NET INCOME (LOSS) PER SHARE............................. $ 0.02 $ (0.75) $ (0.75)
========= ========= =========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING.............. 99,953 99,948 99,943
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
24
<PAGE> 25
CONTEL CELLULAR INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
---------------------------------
1994 1993 1992
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $ 1,871 $ (75,159) $ (75,141)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities --
Depreciation........................................... 77,865 66,573 54,401
Amortization of FCC licenses, goodwill and other
intangibles.......................................... 37,510 41,617 41,254
Gains on sales of cellular interests................... (96,607) (48,023) (60,806)
Deferred income tax provision.......................... 38,313 37,397 39,523
Provision for losses on accounts receivable............ 14,704 6,298 7,528
Undistributed earnings of unconsolidated
partnerships......................................... (35,309) (17,548) (12,258)
Other, net............................................. 618 (12,198) (1,174)
Changes in current assets and current liabilities
excluding the effects of acquisitions and
dispositions
Increase in accounts receivable...................... (35,890) (24,318) (2,275)
Change in taxes receivable/payable -- affiliates..... (19,635) 9,774 36,936
Increase in other current assets..................... (5,594) (5,559) (134)
Increase (Decrease) in accrued
interest -- affiliates............................ 21,380 (2,392) 6,245
Increase in other current liabilities................ 22,553 28,154 4,108
--------- --------- ---------
Net Cash Provided...................................... 21,779 4,616 38,207
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................................... (255,174) (130,042) (183,504)
Acquisitions, net of cash acquired........................ (112,793) (25,887) --
Proceeds from sales of cellular interests................. 113,682 60,795 71,252
Change in advances to unconsolidated partnerships, net.... 12,352 6,866 (609)
Contributions to unconsolidated partnerships.............. (15,082) (13,831) (12,631)
Other, net................................................ 4,763 71 (659)
--------- --------- ---------
Net Cash Used.......................................... (252,252) (102,028) (126,151)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable -- affiliates, net............ 234,912 85,468 79,293
Proceeds from other long-term obligations................. -- 6,512 --
Payment of other long-term obligations.................... (6,000) (6,000) --
Contributions from minority partners...................... 6,372 10,047 1,731
Other, net................................................ 431 22 142
--------- --------- ---------
Net Cash Provided...................................... 235,715 96,049 81,166
--------- --------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents........ 5,242 (1,363) (6,778)
Cash and Cash Equivalents at Beginning of Period............ 278 1,641 8,419
--------- --------- ---------
Cash and Cash Equivalents at End of Period.................. $ 5,520 $ 278 $ 1,641
========= ========= =========
SUPPLEMENTAL DISCLOSURES:
Income tax benefits received.............................. $ (5,500) $ (70,960) $(108,966)
========= ========= =========
Interest paid............................................. $ 162,485 $ 168,977 $ 143,791
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
25
<PAGE> 26
CONTEL CELLULAR INC.
CONSOLIDATED BALANCE SHEETS
(THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-----------------------
1994 1993
---------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................................... $ 5,520 $ 278
Accounts receivable -- trade, net of allowance for doubtful
accounts of $8,556 and $4,674.................................... 77,816 53,673
Advances to unconsolidated partnerships............................. -- 8,039
Inventories......................................................... 6,012 6,765
Other............................................................... 13,605 4,616
---------- ----------
102,953 73,371
---------- ----------
INVESTMENTS AND OTHER ASSETS:
FCC licenses, goodwill and other intangibles, net of
accumulated amortization of $195,316 and $157,806................ 1,354,677 1,287,437
Investments in and advances to unconsolidated partnerships.......... 204,771 163,755
Long-term notes receivable.......................................... 21,430 3,565
Deferred charges and other.......................................... 913 2,065
---------- ----------
1,581,791 1,456,822
---------- ----------
PROPERTY AND EQUIPMENT, AT COST:
Land................................................................ 22,388 20,001
Buildings and towers................................................ 154,828 121,993
Equipment........................................................... 618,157 477,589
Furniture and fixtures.............................................. 4,881 4,299
Assets under construction........................................... 95,212 82,660
---------- ----------
895,466 706,542
Accumulated depreciation............................................ (233,744) (183,751)
---------- ----------
661,722 522,791
---------- ----------
$2,346,466 $2,052,984
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
26
<PAGE> 27
CONTEL CELLULAR INC.
CONSOLIDATED BALANCE SHEETS
(THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------------
1994 1993
---------- ----------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Current portion of other long-term obligations.................... $ 6,000 $ 6,000
Accounts payable -- construction and trade........................ 53,548 60,407
Accounts payable -- affiliates.................................... 4,728 23,552
Advance billings and customer deposits............................ 4,015 3,638
Accrued interest -- affiliates.................................... 58,971 37,591
Accrued taxes -- other............................................ 23,702 18,536
Accrued expenses and other current liabilities.................... 30,960 25,054
---------- ----------
181,924 174,778
---------- ----------
LONG-TERM OBLIGATIONS:
Notes payable -- affiliates....................................... 2,136,263 1,901,726
Other............................................................. 30,792 36,792
---------- ----------
2,167,055 1,938,518
---------- ----------
DEFERRED INCOME TAXES............................................... 191,694 151,881
OTHER DEFERRED CREDITS.............................................. 26,102 14,333
MINORITY INTERESTS.................................................. 18,611 14,695
STOCKHOLDERS' DEFICIT:
Class A common stock, $1 par value; authorized 100,000,000 shares,
issued 10,000,000 shares....................................... 10,000 10,000
Class B common stock, $1 par value; authorized 100,000,000 shares,
issued 90,000,000 shares....................................... 90,000 90,000
Paid-in capital................................................... 33,331 33,358
Accumulated deficit............................................... (371,434) (373,305)
Cost of 33,047 and 51,347 shares of Class A common stock in
treasury....................................................... (817) (1,274)
---------- ----------
(238,920) (241,221)
---------- ----------
$2,346,466 $2,052,984
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
27
<PAGE> 28
CONTEL CELLULAR INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
(THOUSANDS)
<TABLE>
<CAPTION>
CLASS A CLASS B
COMMON COMMON TOTAL
STOCK, STOCK, PAID-IN ACCUMULATED TREASURY STOCKHOLDERS'
$1 PAR VALUE $1 PAR VALUE CAPITAL DEFICIT STOCK DEFICIT
------------- ------------- -------- ----------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December
31, 1991........... $10,000 $90,000 $33,424 $(223,005) $(1,504 ) $ (91,085)
Net Loss............. -- -- -- (75,141) -- (75,141)
Issuance of
restricted stock
and stock under
employee stock
option plans....... -- -- (57 ) -- 199 142
------------- ------------- -------- ----------- -------- -----------
Balance at December
31, 1992........... 10,000 90,000 33,367 (298,146) (1,305 ) (166,084)
Net Loss............. -- -- -- (75,159) -- (75,159)
Issuance of
restricted stock
and stock under
employee stock
option plans....... -- -- (9 ) -- 31 22
------------- ------------- -------- ----------- -------- -----------
Balance at December
31, 1993........... 10,000 90,000 33,358 (373,305) (1,274 ) (241,221)
Net Income........... -- -- -- 1,871 -- 1,871
Issuance of
restricted stock
and stock under
employee stock
option plans....... -- -- (27 ) -- 457 430
------------- ------------- -------- ----------- -------- -----------
Balance at December
31, 1994........... $10,000 $90,000 $33,331 $(371,434) $ (817 ) $(238,920)
============ ============ ======= ============ ======== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
28
<PAGE> 29
CONTEL CELLULAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND NATURE OF BUSINESS
The Company, a 90-percent-owned subsidiary of Contel, was incorporated in
Delaware on September 24, 1980. Contel is a wholly owned subsidiary of GTE. The
Company, through its subsidiaries or through partnerships, provides or
participates in providing cellular telephone services in various metropolitan
statistical areas ("MSAs") and rural service areas ("RSAs") throughout the
United States. Refer to the "Interests in MSAs and RSAs" following the Notes to
Consolidated Financial Statements for additional information.
A definitive agreement dated as of December 27, 1994 was executed between
the Company and GTE based on the approval by the Company's Board of Directors to
accept the proposal by GTE to acquire the remaining 10 percent ownership of the
Company. Under the terms of the agreement, a GTE subsidiary will merge into the
Company and the holders of the approximately 10 million Class A common shares
will receive $25.50 per share in cash. The Company's Class B common shares owned
by GTE will be converted into shares of the merged entity.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include all wholly owned subsidiaries
and partnerships in which the Company holds a controlling interest. Investments
in partnerships in which the Company does not hold a controlling interest are
accounted for using the equity method of accounting. Significant intercompany
transactions are eliminated in consolidation.
REVENUE RECOGNITION
The Company earns service revenues by providing access to its cellular
systems ("access revenue") and usage of its cellular systems ("airtime
revenue"). Access and airtime revenue, including roaming and long-distance, is
recognized when the service is rendered. Other service revenues are recognized
after services are performed and include connection and installation revenues.
Equipment sales are recognized upon delivery of the equipment to the customer.
PROPERTY, EQUIPMENT AND DEPRECIATION
The Company records depreciation using the straight-line method over the
estimated useful life of the asset, which is 20 years for buildings, 15 years
for towers, 7 to 10 years for cell and switching equipment, and 3 to 5 years for
furniture and fixtures. The Company removes the cost and accumulated
depreciation of retirements from the accounts and recognizes the related gain or
loss upon the disposition or disposal of assets.
INTEREST EXPENSE
Interest expense related to construction activity is capitalized as a cost
of construction. Interest capitalized amounted to $4.1 million, $2.5 million and
$2.6 million for 1994, 1993 and 1992, respectively.
INCOME TAXES
Income tax expense (benefit) is based on reported income (loss) before
income taxes. Deferred taxes reflect the impact of temporary differences between
the amount of assets and liabilities recognized for financial reporting purposes
and such amounts recognized for tax purposes. In 1992, the Company adopted the
provisions of Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes" ("FAS 109"). In accordance with FAS 109, deferred income taxes
have been established for all temporary differences between the book and tax
basis of assets and liabilities, including those which had not been
29
<PAGE> 30
CONTEL CELLULAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
previously recognized. In addition, deferred tax balances are adjusted to
reflect tax rates, based on currently enacted tax laws, that will be in effect
in the years in which the temporary differences are expected to reverse.
NET INCOME (LOSS) PER SHARE
Net income (loss) per share for all years presented was computed using the
weighted average number of Class A and Class B Common Stock outstanding in
accordance with Accounting Principles Board Opinion No. 15.
CASH EQUIVALENTS
The Company considers all highly liquid unrestricted cash investments with
an original maturity of three months or less to be cash equivalents.
INVENTORIES
Inventories include cellular telephone equipment held for sale and are
valued at the lower of cost or market. Cost is determined using the specific
identification method. Accessories are expensed when purchased and are not
material in amount.
LONG-TERM NOTES RECEIVABLE
Long-term notes receivable consist primarily of amounts and accrued
interest due from partnerships disposed of between 1992 and 1994. The notes bear
interest at rates ranging from a fixed-rate of 8% to a variable-rate of prime
plus 3% (the prime rate at December 31, 1994 was 8.5%) and mature in varying
amounts between the years 1997 and 2002.
FCC LICENSES, GOODWILL AND OTHER INTANGIBLES
Costs incurred in connection with the acquisition of partnership interests
in excess of the net tangible assets acquired are capitalized as Federal
Communications Commission ("FCC") license costs, customer base or goodwill and
are amortized on a straight-line basis. FCC license costs and goodwill are
amortized over 40 years based on the high probability that the licenses will be
renewed upon expiration of their initial terms. Customer base is amortized over
4 years.
ASSETS UNDER CONSTRUCTION
The Company's network construction expenditures are recorded as assets
under construction until the system or assets are placed in service. When the
assets are placed in service, they are transferred to the appropriate property
and equipment category and depreciation begins. The Company's construction
employees' salaries, benefits and travel expenses, as well as other related
departmental expenses, are capitalized to assets under construction during the
construction period.
FINANCIAL INSTRUMENTS
The fair values of financial instruments, other than long-term obligations,
closely approximate their carrying value. The estimated market value of
long-term obligations, based on either reference to quoted market prices or an
option pricing model, was approximately $54 million below the carrying value at
December 31, 1994, and exceeded the carrying value by approximately $74 million
at December 31, 1993. The change in the market value between years was caused by
rising interest rates during 1994.
30
<PAGE> 31
CONTEL CELLULAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
PRESENTATION
Certain prior year amounts have been reclassified to conform to the current
year presentation.
3. ACCOUNTING CHANGES
During the fourth quarter of 1993, the Company adopted Statement of
Financial Accounting Standards No. 112, "Employers' Accounting for
Postemployment Benefits" ("FAS 112"). FAS 112 requires the expected cost of
postemployment benefits to be recognized during the years that employees render
service. Prior to adoption, the cost of these benefits was charged to expense on
a pay-as-you-go basis. As a result of adoption, a one-time, non-cash charge of
$241 thousand (net of deferred tax benefits) was recorded to recognize the
annual effect of this change in accounting principle.
During the fourth quarter of 1992, the Company adopted Statement of
Financial Accounting Standards No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions" ("FAS 106") and FAS 109,
retroactive to January 1, 1992.
FAS 106 requires the expected cost of postretirement health care and life
insurance benefits to be recognized during the years that employees render
service. Prior to adoption, the cost of these benefits was charged to expense on
a pay-as-you-go basis. The Company elected to adopt FAS 106 on the immediate
recognition basis. As a result, a one-time, non-cash charge of $2.1 million (net
of deferred tax benefits of $1.1 million), or $.02 per share, was recorded to
give effect to past service costs.
4. INVESTMENT IN AND ADVANCES TO UNCONSOLIDATED PARTNERSHIPS
The Company holds non-controlling interests in various MSA and RSA
partnerships (referred to as "Unconsolidated Partnerships") which were formed to
provide cellular telephone services. Unconsolidated Partnerships are accounted
for using the equity method of accounting. Refer to Note 5 for information
regarding acquisitions and dispositions of cellular interests.
Combined condensed results of operations and net assets of the Company's
Unconsolidated Partnerships are as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------
1994 1993 1992
----------- ---------- ---------
(THOUSANDS)
<S> <C> <C> <C>
Results of Operations:
Revenues............................................ $ 1,594,349 $1,201,815 $ 949,903
Costs and Expenses.................................. (1,141,987) (866,504) (694,139)
Other Income (Expense).............................. 1,764 (12,698) 11,546
----------- ---------- ---------
Net Income............................................ 454,126 322,613 267,310
Other Partners' Share of MSA Net Income............... 394,528 283,494 234,921
----------- ---------- ---------
Company's Share of MSA Net Income..................... 59,598 39,119 32,389
Company's Share of RSA Net Income (Loss).............. 3,194 (1,768) (3,362)
----------- ---------- ---------
$ 62,792 $ 37,351 $ 29,027
========== ========= =========
</TABLE>
31
<PAGE> 32
CONTEL CELLULAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1994 1993
---------- ----------
(THOUSANDS)
<S> <C> <C>
Net Assets:
Current Assets.................................................... $ 336,564 $ 265,060
Noncurrent Assets................................................. 1,203,044 977,475
Current Liabilities............................................... (274,255) (184,265)
Noncurrent Liabilities............................................ (12,134) (12,278)
---------- ----------
Net Assets.......................................................... 1,253,219 1,045,992
Other Partners' Share of MSA Net Assets............................. 1,068,991 898,967
---------- ----------
Company's Share of MSA Net Assets................................... 184,228 147,025
Company's Share of RSA Net Assets................................... 20,543 16,730
---------- ----------
$ 204,771 $ 163,755
========= =========
</TABLE>
The managing partner of each of the Unconsolidated Partnerships generally
has the authority to manage, supervise and conduct the affairs of the
partnership, make all decisions appropriate in connection with the business
purposes of the partnership and incur obligations and execute agreements on
behalf of the partnership. Under the terms of the partnership agreements, the
Company is entitled to review and audit the records of the partnership in those
Unconsolidated Partnerships it does not manage.
In certain of the Unconsolidated RSA Partnerships, the Company serves as
the managing partner. In such cases, the Company retains all other rights and
responsibilities of a non-controlling partner. As managing partner, the Company
may provide the initial capital, through cash advances, required to meet the
financial obligations of the partnerships. Alternatively, the Company may
request capital contributions to be invested by the partnerships in advance of
expenditures. At December 31, 1994, the Company had a payable to limited
partners of approximately $1.5 million, of which approximately $0.7 million
represents the Company's proportionate share. The remainder represents a current
payable to other partners and is included in Accounts payable -- affiliates in
the accompanying consolidated balance sheets. At December 31, 1993, the Company
had provided cash advances of $12.7 million, of which approximately $4.7
million, represents the Company's proportionate share. The remainder represents
a current receivable from the other partners or the partnerships and is included
in Advances to unconsolidated partnerships in the accompanying consolidated
balance sheets.
The amount of undistributed earnings of Unconsolidated Partnerships
included in Accumulated deficit in the accompanying consolidated statements of
changes in stockholders' deficit was approximately $84.1 million, $48.7 million
and $31.2 million at December 31, 1994, 1993 and 1992, respectively. There were
no restricted earnings of Unconsolidated Partnerships at December 31, 1994, 1993
or 1992.
In January 1992, the California Public Utilities Commission ("CPUC")
commenced an investigation of all cellular companies operating in the state of
California to determine their compliance with General Order number 159 ("G.O.
159"). The investigation will address whether cellular utilities have complied
with local, state or federal regulations governing the approval and construction
of cellular sites in the state. The CPUC may advise other agencies of violations
in their jurisdictions. Presently, the Los Angeles SMSA Limited Partnership (the
"L.A. Partnership") and the GTE Mobilnet of California Limited Partnership (the
"California Partnership") have prepared and filed the information requested by
the CPUC. The CPUC will review the information and, if violations of G.O. 159
are found, it may assess penalties against these partnerships.
On October 7, 1993, and February 15, 1994, two agents of the competing
carrier have named the L.A. Partnership in several complaints against the
carrier. The general allegations include violations of California Unfair
Practices Act and price fixing.
32
<PAGE> 33
CONTEL CELLULAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
On November 24, 1993, October 17, 1994 and November 30, 1994, three
separate class action (not yet certified) suits were filed against the L.A.
Partnership alleging conspiracy with a competing carrier to fix the price of
cellular service in violation of state and federal antitrust laws. The
plaintiffs are seeking injunctive relief and substantial monetary damages in
excess of $100 million before trebling.
In May 1994, several former and current agents of the competing carrier
have named the L.A. Partnership in only one cause of action. This cause of
action alleges a conspiracy with the competing carrier to fix the prices of
cellular service in violation of state antitrust laws. The plaintiffs are
seeking damages in excess of $100,000 for each of the plaintiff agents.
On July 18, 1994, AirTouch Cellular was served with a class action (not yet
certified) suit on behalf of the L.A. Partnership's authorized agents. The
complaint alleges "predatory practices" and seeks damages in excess of $1.6
million per agent, plus statutory treble damages.
On October 10, 1994, the California Partnership in which the Company holds
an 11.3% limited interest was served a complaint on behalf of users of cellular
service in the San Francisco, California area. The Complaint alleges that the
California Partnership has violated the California Business and Profession Code
by taking various actions to restrain trade, prevent competition and fix prices.
The Company's potential financial liability in connection with all of the
lawsuits discussed above is uncertain at this time because the Company is
involved in these lawsuits only as a limited partner. As a limited partner, the
Company is not involved in the strategic analysis of these cases with litigation
counsel and does not direct the litigation decisions made by these partnerships.
In addition, it is unclear whether any portion of an adverse judgment would be
passed to the Company, as a limited partner. For these reasons, no provision for
any liability that may result has been made in the accompanying financial
statements.
5. ACQUISITIONS AND DISPOSITIONS OF CELLULAR INTERESTS
The Company regularly evaluates its properties to assess their strategic
attributes in terms of meeting its financial goals and objectives. The Company
will purchase properties where the demographics and business climates are
favorable to the development of core and contiguous cellular systems and will
pursue the sale of properties deemed to be non-strategic.
On February 3, 1995, the Company signed a definitive agreement to exchange
its cellular assets (the "Exchange") in the Minneapolis, Minnesota MSA and the
Albuquerque, New Mexico MSA for a portion of US WEST NewVector Group, Inc.'s
cellular assets in the San Diego, California MSA ("San Diego MSA"). The Exchange
will give the Company a 28 percent interest, as a tenant-in-common, in the
assets of the cellular system serving the San Diego MSA. The Exchange will
reduce the Company's POPs by approximately 290,000. The transaction is subject
to regulatory approvals and is expected to close during 1995.
In December 1993, the Company signed a definitive agreement whereby NYNEX
Mobile Communications Company ("NYNEX") agreed to purchase the Company's
interest in the MSA systems serving Orange County, Poughkeepsie, Binghamton and
Elmira, New York; Manchester, New Hampshire; and Burlington, Vermont. Also
included are New Hampshire RSA 2; Vermont RSAs 1 and 2A; New York RSAs 2 and 3;
and Pennsylvania RSAs 3A and 4A. The Orange County and Poughkeepsie MSAs were
sold in 1993. During 1994, the Company sold its interests in the Manchester, New
Hampshire and Burlington, Vermont MSAs, New Hampshire RSA 2 , Vermont RSAs 1 and
2A and New York RSA 2. Additionally, as part of the agreement, NYNEX will
purchase the Company's interest in the Binghamton and Elmira, New York MSAs,
Pennsylvania RSAs 3A and 4A, and New York RSA 3 pending the receipt of certain
regulatory approvals.
In addition to the acquisitions and dispositions that occurred between 1992
and 1994, the Company purchased 13 MSAs located in Tennessee, Kentucky and
Alabama (the "Southeast Properties") from McCaw Cellular Communications Inc.
("McCaw") for approximately $1.32 billion during 1990. The
33
<PAGE> 34
CONTEL CELLULAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
acquisition was financed through an interim intercompany loan from Contel
Capital Corporation ("Contel Capital"), a wholly owned subsidiary of Contel.
Refer to Note 10 for additional information regarding this loan.
Acquisition and disposition transactions completed as of December 31, 1994,
by the Company are included in the table below.
<TABLE>
<CAPTION>
MSA RSA
PERCENTAGE COMPANY COMPANY
ESTIMATED PURCHASED/ POPULATION POPULATION
1994 MARKET POPULATION(1) SOLD EQUIVALENTS EQUIVALENTS
--------------------- --------------------- ------------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Acquisitions: Tennessee 2 155.8 100.00% 155.8
Tennessee 3 323.0 51.00% 164.8
Indiana 7,8,9 608.9 3.09% 18.8
Alabama 1B 164.7 8.33% 13.7
Alabama 2 125.8 100.00% 125.8
Huntsville, AL 384.9 100.00% 384.9
Tuscaloosa, AL 158.0 .35% .6
----------- -----------
Total Acquisitions.......................................................... 385.5 478.9
======== ========
Dispositions: Manchester, NH 336.3 60.00% 201.8
Oregon 5 247.1 100.00% 247.1
Iowa 8 54.6 16.67% 9.1
Iowa 14 108.4 5.56% 6.0
South Dakota 5 B1 12.9 33.33% 4.3
North Carolina 1 174.1 50.00% 87.0
South Dakota 6 B1 35.5 14.29% 5.1
New Hampshire 2 205.8 36.59% 75.3
Burlington, VT 139.9 100.00% 139.9
Vermont 1 & 2A 310.0 83.27% 258.2
Kentucky 11 168.6 100.00% 168.6
California 7 124.2 100.00% 124.2
New York 2 234.3 25.00% 58.6
Alabama 1B 164.7 33.33% 54.9
Iowa 1 61.6 7.07% 4.4
----------- -----------
Total Dispositions.......................................................... 341.7 1,102.8
======== ========
Total Company Population Equivalents at December 31, 1994........................................ 23,897.1
========
Total Gains on Sales of Cellular Interests for the year ended December 31, 1994 ................. $ 96,607
</TABLE>
---------------
(1) Population figures are reported by the Donnelly marketing population
estimates each year for counties comprising FCC defined MSAs and RSAs.
Note: Population figures and dollar amounts are in thousands.
34
<PAGE> 35
CONTEL CELLULAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
<TABLE>
<CAPTION>
MSA RSA
PERCENTAGE COMPANY COMPANY
ESTIMATED PURCHASED/ POPULATION POPULATION
MARKET POPULATION(1) SOLD EQUIVALENTS EQUIVALENTS
------------------------------ ------------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
1993
Acquisitions: San Francisco, San Jose,
Vallejo, Santa Rosa, Salinas &
Santa Cruz, CA 6,800.2 0.06% 4.3
Tuscaloosa, AL 154.7 2.80% 4.3
New York 3 476.4 2.50% 11.9
Tennessee 6 & 9 202.4 100.00% 202.4
----------- -----------
Total Acquisitions......................................................... 8.6 214.3
======== ========
Dispositions: Orange County & Poughkeepsie,
NY 581.5 25.00% 145.4
Rapid City, SD 106.6 100.00% 106.6
Marion & Winston Co. - AL 1 52.1 100.00% 52.1
Arizona 2, 3, 4 & 6 649.4 Various 191.1
Idaho 2 & 3 75.8 Various 17.0
Iowa 2, 7 10 286.3 Various 29.8
Minnesota 4, 7, 8, 9, 10 & 11 803.9 Various 61.5
North Dakota 3 92.0 7.69% 7.1
South Dakota 5-B2 & 6-B2 15.4 Various 4.5
Washington 1, 2, 3 & 4 505.5 Various 122.8
----------- -----------
Total Dispositions......................................................... 252.0 485.9
======== ========
Total Company Population Equivalents at December 31, 1993 .................................... 24,089.0
========
Total Gains on Sales of Cellular Interests for the year ended December 31, 1993 .............. $ 48,023
========
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C>
1992
Acquisitions: Arkansas 1 & 8 94.4 6.22% 5.9
Idaho 2 59.9 3.04% 1.8
Minnesota 11 200.8 0.20% 0.4
----------- -----------
Total Acquisitions......................................................... 0.0 8.1
======== ========
Dispositions: Fayetteville & Fort Smith, AR 431.9 Various 322.3
Arkansas 1 & 8 94.4 57.22% 54.0
Idaho 4 & 5 266.1 Various 51.0
Oklahoma 4 183.5 66.67% 122.3
----------- -----------
Total Dispositions......................................................... 322.3 227.3
======== ========
Total Company Population Equivalents at December 31, 1992 .................................... 24,181.8
========
Total Gains on Sales of Cellular Interests for the year ended December 31, 1992 .............. $ 60,806
========
</TABLE>
---------------
(1) Population figures are reported by the Donnelly marketing population
estimates each year for counties comprising FCC defined MSAs and RSAs.
Note: Population figures and dollar amounts are in thousands.
35
<PAGE> 36
CONTEL CELLULAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
6. INCOME TAXES
In 1994, 1993 and 1992, the Company was included in the consolidated
federal income tax return of GTE. In accordance with GTE's tax sharing policy,
the Company computes its federal income taxes on a separate company return basis
without regard to separate company utilization of operating losses. GTE
reimburses its subsidiaries for utilization of taxable losses on a quarterly
basis. Refer to Note 10 for further information regarding income taxes payable
to affiliates.
The net expense (benefit) from income taxes consists of the following:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------
1994 1993 1992
-------- -------- --------
(THOUSANDS)
<S> <C> <C> <C>
Current:
Federal...................... $(33,093) $(65,823) $(74,176)
State........................ 8,976 707 1,200
-------- -------- --------
(24,117) (65,116) (72,976)
Deferred:
Federal...................... 39,092 36,228 39,499
State........................ (779) 1,169 24
-------- -------- --------
38,313 37,397 39,523
-------- -------- --------
$ 14,196 $(27,719) $(33,453)
======== ======== ========
</TABLE>
The following is a summary of the items which caused recorded income taxes
to differ from taxes computed using the statutory federal income tax rate:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------
1994 1993 1992
------- -------- --------
(THOUSANDS)
<S> <C> <C> <C>
Income tax expense (benefit) at statutory rate.......... $ 5,623 $(35,923) $(36,215)
Increase in tax expense/decrease in tax benefit
resulting from:
State income taxes, net of federal tax benefit........ 5,327 1,219 808
Amortization of goodwill.............................. 2,695 1,755 1,462
Retroactive impact of change in statutory federal tax
rate............................................... -- 3,329 --
Other, net............................................ 551 1,901 492
------- -------- --------
Actual income tax expense (benefit)..................... $14,196 $(27,719) $(33,453)
======= ======== ========
</TABLE>
The Omnibus Budget Reconciliation Act of 1993 was enacted on August 10,
1993 and includes a provision for an increase in the corporate federal income
tax rate by 1% to 35%, retroactive to January 1, 1993. As a result, $3.3 million
of additional deferred tax expense was recorded in September, 1993. Gains on
sales of cellular interests during 1994 attributed approximately $4.9 million of
state income taxes, net of federal tax benefit.
36
<PAGE> 37
CONTEL CELLULAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
A summary of the components of the deferred income tax provision is as
follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
-------------------------------
1994 1993 1992
------- ------- -------
(THOUSANDS)
<S> <C> <C> <C>
Depreciation and amortization................................. $43,344 $37,902 $36,671
Limited partnership losses.................................... (1,817) 1,990 3,380
Merger integration costs...................................... -- -- 2,408
Other, net.................................................... (3,214) (2,495) (2,936)
------- ------- -------
$38,313 $37,397 $39,523
======= ======= =======
</TABLE>
Deferred tax assets and liabilities are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1994 1993
-------- --------
(THOUSANDS)
<S> <C> <C>
Deferred Tax Liabilities:
Depreciation and amortization........................................ $188,035 $144,691
Limited partnership losses........................................... 8,995 10,812
Other, net........................................................... 1,596 1,998
-------- --------
Total Deferred Tax Liabilities.................................... 198,626 157,501
-------- --------
Deferred Tax Assets:
Gains on sale of partnership interests............................... 3,425 2,439
Other postretirement benefits........................................ 2,163 2,704
Self-constructed assets.............................................. 1,248 792
Bad debt reserve..................................................... 2,550 1,339
Other, net........................................................... 797 --
-------- --------
Total Deferred Tax Assets......................................... 10,183 7,274
-------- --------
Net Deferred Taxes..................................................... 188,443 150,227
Total Net Deferred Tax Asset (classified as other current assets)...... 3,251 1,654
-------- --------
Total Net Deferred Tax Liability..................................... $191,694 $151,881
======== ========
</TABLE>
7. EMPLOYEE BENEFIT PLANS
RETIREMENT PLANS
As of January 1, 1992, all of the Company's employees began participating
in GTE Service Corporation's defined benefit pension plan. The benefits to be
paid under this plan are generally based on years of credited service and
average final earnings. GTE's funding policy, subject to the minimum funding
requirements of employee benefit and tax laws, is to contribute such amounts as
are determined on an actuarial basis to provide the plan with assets sufficient
to meet the benefit obligations of the plan. The assets of the plan consist
primarily of corporate equities, government securities and corporate debt
securities.
37
<PAGE> 38
CONTEL CELLULAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The net pension cost included in consolidated operations for the years
ended December 31, 1994, 1993 and 1992 included the following components:
<TABLE>
<CAPTION>
1994 1993 1992
------ ------ ------
(THOUSANDS)
<S> <C> <C> <C>
Benefits earned during the period................................ $2,111 $1,509 $1,618
Interest cost on projected benefit obligations................... 620 254 15
Actual return on plan assets..................................... 53 (11) (8)
Other, net....................................................... (372) (53) (9)
------ ------ ------
Net pension cost................................................. $2,412 $1,699 $1,616
====== ====== ======
</TABLE>
The expected long-term rate of return on plan assets was 8.5% for 1994 and
8.25% for each of 1993 and 1992.
The funded status of the plan at December 31, 1994 and 1993 was as follows:
<TABLE>
<CAPTION>
1994 1993
------- -------
(THOUSANDS)
<S> <C> <C>
Plan assets at fair value................................................ $ 3,742 $ 912
Projected benefit obligation............................................. (9,621) (4,860)
------- -------
Excess of projected obligation over assets............................... (5,879) (3,948)
Other, net............................................................... 147 628
------- -------
Accrued pension cost..................................................... $(5,732) $(3,320)
======= =======
</TABLE>
The projected benefit obligations at December 31, 1994 and 1993 include
accumulated benefit obligations of $4.7 million and $2.1 million, respectively
and vested benefit obligations of $2.5 million and $0.8 million, respectively.
Assumptions used to develop the projected benefit obligations for 1994 and
1993 were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1994 1993
----- -----
<S> <C> <C>
Discount rate....................................... 8.25% 7.50%
Rate of salary progression.......................... 5.50% 5.25%
</TABLE>
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
Substantially all of the Company's employees are covered under
postretirement health care and life insurance benefit plans. The health care
benefits paid under the Company plans are generally based on comprehensive
hospital, medical and surgical benefit provisions.
The postretirement benefit cost for the years ended December 31, 1994, 1993
and 1992 included the following components:
<TABLE>
<CAPTION>
1994 1993 1992
----- ---- ------
(THOUSANDS)
<S> <C> <C> <C>
Benefits earned during the year.................................. $ 256 $693 $ 781
Interest on accumulated postretirement benefit obligations....... 155 291 315
Other, net....................................................... (153) (36) --
----- ---- ------
Postretirement benefit cost...................................... $ 258 $948 $1,096
===== ==== ======
</TABLE>
38
<PAGE> 39
CONTEL CELLULAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The following table sets forth the funded status and accrued obligation as
of December 31, 1994 and 1993:
<TABLE>
<CAPTION>
1994 1993
------- ------
(THOUSANDS)
<S> <C> <C>
Accumulated postretirement benefit obligations attributable to:
Retirees................................................................ $ 482 $ 182
Fully eligible plan participants........................................ 12 --
Other active plan participants.......................................... 1,594 1,814
------- ------
Total accumulated postretirement benefit obligation....................... 2,088 1,996
Unrecognized prior service benefit........................................ 4,286 2,547
Unrecognized net gain (loss).............................................. (1,170) 415
------- ------
Accrued postretirement benefit obligation................................. $ 5,204 $4,958
======= ======
</TABLE>
The assumed discount rates used to measure the accumulated postretirement
benefit obligation were 8.25% and 7.5% at December 31, 1994 and 1993,
respectively. The assumed health care cost trend rates in 1994 and 1993 were 12%
and 13%, respectively for pre-65 participants and 9.0% and 9.5%, respectively
for post-65 retirees, each rate declining on a graduated basis to an ultimate
rate in the year 2004 of 6%. A one-percentage point increase in the assumed
health care cost trend rates for each future year would have increased 1994
postretirement benefit cost by approximately $7 thousand and the accumulated
postretirement benefit obligation as of December 31, 1994 by approximately $47
thousand.
During 1993, the Company made certain changes to its postretirement health
care and life insurance benefits for non-union employees retiring on or after
January 1, 1995. These changes include, among others, newly established limits
to the Company's annual contribution to postretirement medical costs and a
revised sharing schedule based on a retiree's years of service. The net effect
of these changes reduced the accumulated benefit obligation at December 31, 1993
by $3.9 million. The resulting unrecognized prior year service benefit is being
amortized over the average remaining lives of the employees.
8. COMMITMENTS AND CONTINGENCIES
LEASES
Lease expense relates to the lease of office space, tower facilities, real
estate, office equipment and vehicles. Rents charged to expense were $11.9
million, $8.8 million and $6.9 million for 1994, 1993 and 1992, respectively.
At December 31, 1994, future minimum lease payments under noncancelable
operating leases are as follows (thousands):
<TABLE>
<S> <C>
1995...................................................... $11,196
1996...................................................... 9,517
1997...................................................... 6,398
1998...................................................... 3,722
1999...................................................... 1,880
Subsequent Years.......................................... 3,605
--------
$36,318
========
</TABLE>
39
<PAGE> 40
CONTEL CELLULAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
CONSTRUCTION AND CAPITAL COMMITMENTS
Capital expenditures for markets controlled and managed by the Company are
expected to be funded with additional borrowings from affiliates, internally
generated funds, contributions from minority partners and net distributions from
Unconsolidated Partnerships.
The Company also intends to fund its share of future capital requirements
of the Unconsolidated Partnerships. The timing and amounts of such contributions
are subject to the future capital requirements as determined by the managing
partner, and therefore cannot be accurately estimated by the Company.
LEGAL AND REGULATORY MATTERS
On November 24, 1993, Arthur Garabedian d.b.a. Western Mobile Telephone
Company brought a class action lawsuit on behalf of himself and on behalf of all
persons or entities who have subscribed to cellular radio service in the Los
Angeles area against the L.A. Partnership, Pacific Telesis Group, AirTouch
Communications Inc., AirTouch Cellular, GTE Mobilnet Incorporated, Contel
Cellular Inc. and U.S. Cellular Corporation. The complaint alleges retail and
wholesale price fixing of cellular radio service. The plaintiff is seeking in
excess of $100 million in damages. The ultimate outcome of this suit is unclear
at this time because discovery has not been completed. In addition, it is
unclear whether the Company will remain as a named party in this lawsuit or will
be involved only because of its limited ownership in the L.A. Partnership.
The Company is subject to legal and regulatory matters in the normal course
of business. No provision for any liability that may result has been made in the
accompanying financial statements.
LINE OF CREDIT
Refer to Note 10 for information regarding the Company's line of credit
arrangements with GTE.
9. OTHER LONG-TERM OBLIGATIONS
Other long-term obligations are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1993
------- -------
(THOUSANDS)
<S> <C> <C>
9% Promissory Notes due January 1999..................................... $ 6,512 $ 6,512
8% Promissory Notes payable in annual installments through 1996.......... 16,000 22,000
Industrial Development Revenue Bonds:
Due 2004, interest rate of 5.6% at December 31, 1994................... 8,400 8,400
Due 2005, interest rate of 5.6% at December 31, 1994................... 2,000 2,000
Due 2006, interest rate of 6.1% at December 31, 1994................... 3,880 3,880
------- -------
Total Other Long-Term Obligations........................................ $36,792 $42,792
------- -------
Less Current Portion of Other Long-Term Obligations.................... (6,000) (6,000)
------- -------
$30,792 $36,792
======= =======
</TABLE>
On December 28, 1993, the Company issued long-term promissory notes in the
amount of approximately $6.5 million at a fixed interest rate of 9% in
connection with the acquisition of 100% interest in Tennessee RSA 9. Accrued
interest on the outstanding principal amount of this note shall be paid
quarterly on the first day of January, April, July and October of each year.
In July 1991, the Company issued $28.0 million of 8% long-term promissory
notes in connection with the acquisition of 100% interests in Tennessee RSAs 5
and 7. The notes are guaranteed by GTE and include
40
<PAGE> 41
CONTEL CELLULAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
various covenants, none of which are expected to restrict future operations.
Aggregate annual repayments of this debt are $6.0 million in 1995 and $10.0
million in 1996.
The Industrial Development Revenue Bonds are floating/fixed-rate bonds
secured by irrevocable letters of credit issued by the Bank of Nova Scotia which
begin to expire December 1, 1996, unless otherwise extended. The letters of
credit carry a commitment fee of 1/2 of 1% per annum. The Company may, upon
written notice to the bond trustee, convert the interest rate to a fixed market
rate. Until converted to a fixed rate, the bonds bear interest, payable
quarterly, at a rate equal to a variable percentage (ranging from 65% to 71% at
December 31, 1994) of the Trust Company Bank of Atlanta's prime interest rate.
Refer to Note 10 for information regarding the Notes Payable to Affiliates.
10. RELATED PARTY TRANSACTIONS
GENERAL SERVICES
Prior to the 1991 merger of GTE and Contel, the Company operated under a
general services agreement with Contel. Subsequent to the merger, a new
management structure was put in place. The Company's field operations,
properties and corporate officers continue to remain separate from those of GTE
Mobilnet Incorporated ("Mobilnet"), GTE's wholly owned cellular subsidiary. GTE
Mobile Communications Service Corporation ("GTEMC") consolidated many of the
staff and support functions previously performed separately by the Company and
Mobilnet. On May 1, 1991, the Company entered into a services agreement with
GTEMC whereby support for major functions such as accounting, information
management, human resources, legal, marketing, network and technology planning
were provided to the Company.
A new management structure was implemented in January 1993, under which the
GTEMC headquarters structure was functionally eliminated. Marketing and network
functions, previously provided by GTEMC, are now provided directly by the
Company, while the remaining functions are provided by GTE Personal
Communication Services ("GTE PCS"), a division of GTE. During 1994 and 1993,
costs for these services were allocated from GTE PCS to the Company. The costs
allocated under the 1994 and 1993 structure do not differ significantly from the
costs allocated to the Company under the 1992 methodology.
Amounts expensed by the Company for these services were approximately $50
million, $45 million and $44 million for the years 1994, 1993 and 1992,
respectively. In management's opinion, the cost allocation methodology for all
periods is reasonable.
CASH MANAGEMENT AND FINANCING
The following table summarizes the Company's Notes Payable -- Affiliates:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1994 1993
-------- --------
(IN MILLIONS)
<S> <C> <C>
Line of Credit with GTE......................................... $ 511.3 $ 351.7
Note Payable at 9.90% interest; due 8/17/00..................... 75.0 --
Note Payable at 10.47% interest; due 3/01/98.................... 700.0 700.0
Note Payable at 7.71% interest; due 2/25/97..................... 150.0 150.0
Note Payable at 8.97% interest; due 9/27/99..................... 150.0 150.0
Note Payable at 8.38% interest; due 9/25/97..................... 150.0 150.0
Note Payable at 8.08% interest; due 12/31/95.................... 200.0 200.0
Note Payable at 8.56% interest; due 12/31/96.................... 200.0 200.0
-------- --------
Total Notes Payable -- Affiliates............................... $2,136.3 $1,901.7
======= =======
</TABLE>
41
<PAGE> 42
CONTEL CELLULAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
As of January 1, 1992, the Company began using cash management services
provided by GTE. The notes payable to GTE are due on demand. The line of credit
with GTE may be renegotiated at any time based on the Company's working capital
and construction requirements. Based on the expressed intent and ability of GTE
to make funds available to the Company on a long-term basis, the accompanying
consolidated balance sheets reflect the Notes payable-affiliates as long-term
obligations. As of December 31, 1994, outstanding borrowings from GTE under this
line of credit were $511.3 million. The interest rate on the borrowings was
approximately 9.25% on December 31, 1994. This rate represents the prime rate at
December 31, 1994, as quoted in the Wall Street Journal, plus a .75% per annum
fee on the outstanding balance. Prior to January 1993, the rate was calculated
based on GTE's cost of borrowing the funds, plus 1.5% per annum. Interest
expense relating to the line of credit, which is payable monthly in arrears, was
$30.8 million, $19.4 million and $23.5 million for the years 1994, 1993 and
1992, respectively.
During 1991, the Company's $1.3 billion loan previously provided by Contel
Capital was replaced with a combination of fixed- and variable-rate intercompany
notes as follows: (i) $700 million at 10.47% payable to GTE, due March 1, 1998;
(ii) $150 million at 9.22% payable to GTE Finance Corporation, a wholly owned
subsidiary of GTE, due February 25, 1997; and (iii) $450 million due to GTE
under the same terms and provisions as borrowings under GTE's line of credit
facility. Included in the interest rates above was an additional 1.5% per annum,
which the Company agreed to pay GTE and GTE Finance Corporation, for GTE's
agreement to become obligated under these financings.
On September 25, 1992, the Company refinanced $300 million variable-rate
debt with two $150 million fixed-rate notes, at 8.97% and 8.38% payable to GTE
Finance Corporation, due on September 27, 1999 and September 25, 1997,
respectively. Additionally, on December 31, 1992, the Company refinanced the
variable-rate $450 million note mentioned in (iii) above with a $200 million
fixed-rate note at 8.08% payable to GTE, due December 31, 1995 (as evidenced by
a letter dated January 25, 1995, GTE intends to refinance this note at
maturity), and a $200 million fixed-rate note at 8.56% payable to GTE, due
December 31, 1996. The remaining $50 million is included in the line of credit
facility previously discussed.
On February 25, 1993, the Company refinanced the $150 million fixed-rate
note mentioned in (ii) above with a $150 million fixed-rate note bearing
interest at 7.71% payable to GTE Finance Corporation, due on February 25, 1997.
On August 17, 1994, the Company refinanced $75 million of variable-rate debt
with a $75 million fixed-rate note bearing interest at 9.90% payable to GTE
Finance Corporation, due on August 17, 2000.
Effective June 1992, the Company is charged the comparable Treasury Rate
plus 3.0% per annum upon conversion of variable-rate debt to fixed-rate debt.
This rate closely approximates rates that would be charged by non-affiliated
commercial lenders to corporations of similar credit quality for fixed-rate
debt.
Interest expense for these notes payable to affiliates is payable to GTE
semi-annually and amounted to $148.0 million, $145.4 million, and $121.0 million
in 1994, 1993 and 1992, respectively. The effective interest rate under these
borrowings was approximately 9.3% for the year ended December 31, 1994.
PURCHASES
The Company purchased cellular telephone equipment and accessories during
1994 and 1993 from GTE PCS, and during 1992 from GTEMC, totaling $56.9 million,
$45.7 million and $29.6 million, respectively, which approximates cost.
TRANSFER OF INTERESTS IN RSA MARKETS
During 1988 and 1989, the Company participated in the FCC's license award
process to provide cellular service in 428 RSAs throughout the country. At that
time, the Company and Contel entered into an agreement whereby other
subsidiaries of Contel were given the right to control or hold interests in RSA
42
<PAGE> 43
CONTEL CELLULAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
markets where the Company chose not to participate. In 1990, Contel decided to
maintain all cellular interests within one company. Accordingly, in the third
quarter of 1990, Contel transferred, at book value, its interests in 49 RSAs to
the Company. None of the RSAs were operational. The Company agreed that if any
of these RSA interests were sold within a three-year period expiring August 1,
1993, the Company would remit the proceeds of such sales, net of the Company's
investment, to Contel. Accordingly, no gain or loss would be recognized by the
Company in connection with the sale of any such interest. The Company did not
sell any interests in the transferred RSA markets from January 1, 1993 to August
1, 1993. In 1992, the Company sold interests in two such RSA markets and
remitted to Contel $2.5 million in net proceeds in 1993.
ACCOUNTS PAYABLE -- AFFILIATES
In addition to the affiliated financing agreements disclosed above, the
Company has affiliated accounts payable of $3.9 million for accrued income taxes
and $0.8 million for accounts payable to limited partners at December 31, 1994,
and $23.6 million for accrued income taxes at December 31, 1993.
11. COMMON STOCK
The Company's Class A and Class B Common Stock are identical in all
respects except for the following: 1) The Class A common stockholders are
entitled to one vote per share and the Class B common stockholders are entitled
to five votes per share; 2) the holders of each class of stock will be entitled
to receive stock dividends only of the same class of stock; and, 3) shares of
Class B Common Stock are convertible into Class A Common Stock at the option of
the holder at any time.
Both classes of the common stock have non-cumulative voting rights.
Dividends may be declared and paid to one class only if an equal per share
dividend is declared and paid to the other class. Both classes share equally on
a pro rata basis in the event of liquidation or dissolution. GTE, through
Contel, owns all shares of Class B Common Stock, or 90% of the total number of
shares outstanding and approximately 98% of the combined voting power of both
classes of stock.
The Company also has 3 million authorized shares of preferred stock (the
"Preferred Stock") which may be issued in one or more series at the discretion
of the Board of Directors. The Board of Directors is authorized to determine the
terms, rights, privileges, preferences and restrictions of any unissued series
of Preferred Stock prior to issuance. The Company presently has no plans to
issue any shares of Preferred Stock.
12. STOCK OPTIONS AND RESTRICTED STOCK UNITS
In accordance with the 1987 Key Employee Stock Plan (the "Stock Plan"), the
Company may grant stock options, stock appreciation rights and restricted stock
units related to Class A Common Stock to key employees. The maximum number of
shares of Class A Common Stock reserved for issuance under the Stock Plan is
1,000,000 of which 916,900 shares were available for future grants as of
December 31, 1994.
43
<PAGE> 44
CONTEL CELLULAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The following schedule summarizes stock option transactions under the Stock
Plan:
<TABLE>
<CAPTION>
NUMBER OF OPTION PRICE
SHARES PER SHARE
--------- ------------
<S> <C> <C>
Outstanding at January 1, 1992............................... 97,700 15.31-22.81
(20,465 exercisable)
Granted................................................. 8,250 17.25
Exercised............................................... (8,000) 15.31
Forfeited............................................... (5,100) 15.31-22.81
---------
Outstanding at December 31, 1992............................. 92,850 15.31-22.81
(53,700 exercisable)
Granted................................................. 11,400 15.00
Exercised............................................... (1,000) 15.31
Forfeited............................................... (23,900) 15.31-22.81
---------
Outstanding at December 31, 1993............................. 79,350 15.00-22.81
(56,550 exercisable)
Granted................................................. 34,300 16.25
Exercised............................................... (18,300) 15.31-22.81
Forfeited............................................... (12,250) 15.31-22.81
---------
Outstanding at December 31, 1994............................. 83,100 15.00-22.81
========
</TABLE>
Of the 83,100 stock options outstanding at December 31, 1994, 43,850 were
exercisable. Included in the total number of options outstanding at December 31,
1994, are 51,950 shares which include 2/3 tandem stock appreciation rights.
Stock appreciation rights provide the right to surrender all or a portion of a
stock option for cash or additional shares of stock equal to the excess of fair
market value on the date of exercise over the option price. The 2/3 tandem
provision requires that for every two shares of stock surrendered for the
appreciation right attached, one share of stock be purchased at the option
price.
44
<PAGE> 45
CONTEL CELLULAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
13. QUARTERLY INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
1994 QUARTERS
-----------------------------------------------
FOURTH THIRD SECOND FIRST
-------- -------- -------- --------
(THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues and Sales.............................. $157,886 $149,373 $136,479 $119,217
Operating Income (Loss)......................... 5,749 25,903 11,841 (2,482)
Loss from Consolidated Operations............... (41,538) (21,960) (32,615) (47,219)
Equity in Earnings of Unconsolidated
Partnerships.................................. 14,282 21,682 16,405 10,423
Gains on Sales of Cellular Interests............ 20,259 43,220 3,941 29,187
Net Income (Loss)............................... (4,489) 24,438 (9,475) (8,603)
Net Income (Loss) Per Share..................... (0.04) 0.24 (0.09) (0.09)
Common Stock Market Price:
High....................................... $ 25.25 $ 24.00 $ 17.25 $ 18.75
Low........................................ 23.50 16.00 13.00 14.00
Close...................................... 24.94 23.63 16.50 14.25
</TABLE>
<TABLE>
<CAPTION>
1993 QUARTERS
-----------------------------------------------
FOURTH THIRD SECOND FIRST
-------- -------- -------- --------
(THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues and Sales.............................. $108,752 $ 98,176 $ 89,390 $ 77,696
Operating Loss.................................. (15,769) (1,018) (1,966) (9,552)
Loss from Consolidated Operations............... (51,758) (43,459) (40,524) (52,270)
Equity in Earnings of Unconsolidated
Partnerships.................................. 9,487 12,236 11,153 4,475
Gains on Sales of Cellular Interests............ 39,697 8,326 -- --
Net Loss Before Cumulative Effect of Change in
Accounting Principle.......................... (4,536) (17,061) (19,834) (33,487)
Cumulative Effect of Change in Accounting
Principle..................................... (241) -- -- --
Net Loss........................................ (4,777) (17,061) (19,834) (33,487)
Net Loss Per Share.............................. (0.05) (0.17) (0.20) (0.33)
Common Stock Market Price:
High....................................... $ 22.00 $ 18.75 $ 16.25 $ 18.63
Low........................................ 15.00 15.50 13.50 13.25
Close...................................... 16.38 17.00 15.50 14.75
</TABLE>
45
<PAGE> 46
CONTEL CELLULAR INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
---------------------------------------------- ------------ ---------- ----------- ----------
BALANCE AT ADDITIONS WRITE-OFFS, BALANCE AT
BEGINNING OF CHARGED TO NET OF END OF
CLASSIFICATION PERIOD INCOME RECOVERIES PERIOD
---------------------------------------------- ------------ ---------- ----------- ----------
<S> <C> <C> <C> <C>
FOR THE YEAR ENDED DECEMBER 31, 1994
Allowance for Doubtful Accounts............. $4,674 $ 14,704 $ (10,822) $8,556
========= ======== ======== ========
FOR THE YEAR ENDED DECEMBER 31, 1993
Allowance for Doubtful Accounts............. $4,356 $ 6,298 $ (5,980) $4,674
========= ======== ======== ========
FOR THE YEAR ENDED DECEMBER 31, 1992
Allowance for Doubtful Accounts............. $4,306 $ 7,528 $ (7,478) $4,356
========= ======== ======== ========
</TABLE>
46
<PAGE> 47
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON COMPILATION OF COMBINED FINANCIAL STATEMENTS
To the Board of Directors
and Stockholders of
Contel Cellular Inc.:
The accompanying combined financial statements as of December 31, 1994 and
1993, and for each of the three years in the period ended December 31, 1994,
have been prepared from the separate financial statements of the Los Angeles
SMSA Limited Partnership, the Washington D.C. SMSA Limited Partnership, the GTE
Mobilnet of California Limited Partnership, the GTE Mobilnet of South Texas
Limited Partnership, the San Antonio SMSA Limited Partnership, and the Albucell
Limited Partnership as described in Note 1 to the combined financial statements.
We have audited the financial statements (not presented separately herein) of
the GTE Mobilnet of California Limited Partnership, the GTE Mobilnet of South
Texas Limited Partnership, and the Albucell Limited Partnership as of December
31, 1994 and 1993, and for the years then ended, as set forth in our reports
included elsewhere in this document. Our report on the financial statements of
the GTE Mobilnet of California Limited Partnership contains an explanatory
paragraph with respect to the matter discussed in Note 8 to the combined
financial statements. We did not audit the financial statements (also not
presented separately herein) of the Los Angeles SMSA Limited Partnership, the
Washington D.C. SMSA Limited Partnership, and the San Antonio SMSA Limited
Partnership as of December 31, 1994 and 1993 and for the years then ended, which
statements reflect assets and revenues of 55% and 63%, respectively, of the
related combined 1994 totals. These statements were audited by other auditors,
as set forth in their reports also included elsewhere in this document. The
report of other auditors of the Los Angeles SMSA Limited Partnership contains an
explanatory paragraph with respect to the matters discussed in Note 8 to the
accompanying combined financial statements.
Because of the significance of the amounts of the combined assets and
revenues that have been audited by other auditors, we are unable to express, and
we do not express, any opinion with respect to the fairness of the presentation
of the accompanying combined financial statements. However, we have checked, for
compilation only, the accompanying combined financial statements and, in our
opinion, those statements have been properly compiled from the separate
financial statements of the Los Angeles SMSA Limited Partnership, the Washington
D.C. SMSA Limited Partnership, the GTE Mobilnet of California Limited
Partnership, the GTE Mobilnet of South Texas Limited Partnership, the San
Antonio SMSA Limited Partnership, and the Albucell Limited Partnership on the
basis described in Note 1 to the combined financial statements.
/s/ Arthur Andersen LLP
---------------------------------------------------------
Arthur Andersen LLP
Atlanta, Georgia
March 13, 1995
47
<PAGE> 48
LOS ANGELES SMSA LIMITED PARTNERSHIP
WASHINGTON D.C. SMSA LIMITED PARTNERSHIP
GTE MOBILNET OF CALIFORNIA LIMITED PARTNERSHIP
GTE MOBILNET OF SOUTH TEXAS LIMITED PARTNERSHIP
SAN ANTONIO SMSA LIMITED PARTNERSHIP
ALBUCELL LIMITED PARTNERSHIP
COMBINED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS)
UNAUDITED
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
------------------------------------
1994 1993 1992
---------- -------- --------
<S> <C> <C> <C>
Service and Sales Revenues................................ $1,296,208 $987,371 $783,009
Costs and Expenses:
Cost of services and sales........................... 343,993 250,947 192,250
Selling, general and administrative.................. 413,301 335,686 265,863
Depreciation and amortization........................ 126,941 97,507 85,339
---------- -------- --------
Operating Income.......................................... 411,973 303,231 239,557
Interest Income, net...................................... 378 779 263
Other Income, net......................................... 923 2,966 13,943
---------- -------- --------
Net Income................................................ $ 413,274 $306,976 $253,763
========= ======== ========
</TABLE>
The accompanying notes to the combined financial statements
are an integral part of these statements.
48
<PAGE> 49
LOS ANGELES SMSA LIMITED PARTNERSHIP
WASHINGTON D.C. SMSA LIMITED PARTNERSHIP
GTE MOBILNET OF CALIFORNIA LIMITED PARTNERSHIP
GTE MOBILNET OF SOUTH TEXAS LIMITED PARTNERSHIP
SAN ANTONIO SMSA LIMITED PARTNERSHIP
ALBUCELL LIMITED PARTNERSHIP
COMBINED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
UNAUDITED
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
---------------------------------
1994 1993 1992
--------- --------- ---------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income................................................ $ 413,274 $ 306,976 $ 253,763
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization.......................... 126,941 97,507 85,339
Provision for losses on accounts receivable............ 19,987 15,221 9,839
Other, net............................................. 4,703 6,369 8,353
Changes in current assets and liabilities:
Increase in receivables.............................. (57,928) (72,067) (26,328)
Increase in other current assets..................... (15,011) (2,287) (3,602)
Increase in current liabilities...................... 65,273 20,960 40,851
--------- --------- ---------
Net cash provided by operating activities......... 557,239 372,679 368,215
Cash Flows from Investing Activities:
Capital expenditures...................................... (315,604) (205,919) (205,802)
Other, net................................................ 668 1,861 84
--------- --------- ---------
Net cash used in investing activities............. (314,936) (204,058) (205,718)
Cash Flows from Financing Activities:
Contributions from partners............................... 2,103 10,868 3,513
Distributions to partners................................. (239,922) (178,659) (164,031)
Other, net................................................ (800) (612) (442)
--------- --------- ---------
Net cash used in financing activities............. (238,619) (168,403) (160,960)
--------- --------- ---------
Increase in Cash and Cash Equivalents....................... 3,684 218 1,537
Beginning Cash and Cash Equivalents......................... 1,988 1,770 233
--------- --------- ---------
Ending Cash and Cash Equivalents............................ $ 5,672 $ 1,988 $ 1,770
========= ========= =========
</TABLE>
The accompanying notes to the combined financial statements
are an integral part of these statements.
49
<PAGE> 50
LOS ANGELES SMSA LIMITED PARTNERSHIP
WASHINGTON D.C. SMSA LIMITED PARTNERSHIP
GTE MOBILNET OF CALIFORNIA LIMITED PARTNERSHIP
GTE MOBILNET OF SOUTH TEXAS LIMITED PARTNERSHIP
SAN ANTONIO SMSA LIMITED PARTNERSHIP
ALBUCELL LIMITED PARTNERSHIP
COMBINED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
UNAUDITED
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1994 1993
---------- ----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents........................................ $ 5,672 $ 1,988
Accounts receivable, net of allowance for doubtful accounts
of $14,041 in 1994 and $11,069 in 1993........................ 189,649 147,643
Due from general partners........................................ 56,998 61,063
Other current assets............................................. 31,064 16,053
---------- ----------
Total current assets..................................... 283,383 226,747
Other Assets, net of accumulated amortization of $6,121 in 1994
and $5,177 in 1993............................................... 2,236 2,797
Property, Plant and Equipment, at cost............................. 1,354,968 1,047,515
Less accumulated depreciation.................................... (411,949) (296,641)
---------- ----------
943,019 750,874
---------- ----------
Total assets............................................. $1,228,638 $ 980,418
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
Current Liabilities:
Accounts payable-trade........................................... $ 100,226 $ 69,458
Accounts payable-affiliates...................................... 23,173 11,191
Advance billings and customer deposits........................... 18,642 17,000
Accrued expenses and other current liabilities................... 75,192 47,286
---------- ----------
Total current liabilities................................ 217,233 144,935
Other Noncurrent Liabilities....................................... 9,709 9,242
Partners' Capital:
Contel Cellular Inc.............................................. 147,376 116,832
Other partners................................................... 854,320 709,409
---------- ----------
Total partners' capital.................................. 1,001,696 826,241
---------- ----------
Total liabilities and partners' capital.................. $1,228,638 $ 980,418
========== ==========
</TABLE>
The accompanying notes to the combined financial statements
are an integral part of these statements.
50
<PAGE> 51
LOS ANGELES SMSA LIMITED PARTNERSHIP
WASHINGTON D.C. SMSA LIMITED PARTNERSHIP
GTE MOBILNET OF CALIFORNIA LIMITED PARTNERSHIP
GTE MOBILNET OF SOUTH TEXAS LIMITED PARTNERSHIP
SAN ANTONIO SMSA LIMITED PARTNERSHIP
ALBUCELL LIMITED PARTNERSHIP
COMBINED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
(AMOUNTS IN THOUSANDS)
UNAUDITED
<TABLE>
<CAPTION>
OTHER
GENERAL CONTEL LIMITED
PARTNER CELLULAR INC. PARTNERS TOTAL
-------- ------------- -------- ----------
<S> <C> <C> <C> <C>
Balance at January 1, 1992................... $476,776 $ 77,851 $ 39,184 $593,811
1992 Net income............................ 204,401 29,933 19,429 253,763
Contributions.............................. 2,459 1,054 0 3,513
Distributions.............................. (133,915) (16,012) (14,104) (164,031)
-------- ------------- -------- ----------
Balance at December 31, 1992................. 549,721 92,826 44,509 687,056
1993 Net income............................ 245,413 38,920 22,643 306,976
Sale of partnership interest............... 869 114 (983) 0
Contributions.............................. 7,608 3,260 0 10,868
Distributions.............................. (147,445) (18,288) (12,926) (178,659)
-------- ------------- -------- ----------
Balance at December 31, 1993................. 656,166 116,832 53,243 826,241
1994 Net income............................ 327,427 55,143 30,704 413,274
Contributions.............................. 1,640 163 300 2,103
Distributions.............................. (194,580) (24,762) (20,580) (239,922)
-------- ------------- -------- ----------
Balance at December 31, 1994................. $790,653 $ 147,376 $ 63,667 $1,001,696
======== ========= ======== =========
</TABLE>
The accompanying notes to the combined financial statements
are an integral part of these statements.
51
<PAGE> 52
LOS ANGELES SMSA LIMITED PARTNERSHIP
WASHINGTON D.C. SMSA LIMITED PARTNERSHIP
GTE MOBILNET OF CALIFORNIA LIMITED PARTNERSHIP
GTE MOBILNET OF SOUTH TEXAS LIMITED PARTNERSHIP
SAN ANTONIO SMSA LIMITED PARTNERSHIP
ALBUCELL LIMITED PARTNERSHIP
NOTES TO COMBINED FINANCIAL STATEMENTS (UNAUDITED)
1. ORGANIZATION AND BASIS OF COMBINATION
The accompanying combined financial statements represent a combination of
the financial statements of the Los Angeles SMSA Limited Partnership (the "Los
Angeles Partnership"), the Washington D.C. SMSA Limited Partnership (the
"Washington D.C. Partnership"), the GTE Mobilnet of California Limited
Partnership (the "California Partnership"), the GTE Mobilnet of South Texas
Limited Partnership (the "South Texas Partnership"), the San Antonio SMSA
Limited Partnership (the "San Antonio Partnership") and the Albucell Limited
Partnership (the "Albucell Partnership") collectively referred to as the
"Partnerships" and individually as a "Partnership." Contel Cellular Inc. (the
"Company") is a minority limited partner in each of the Partnerships, and
accounts for its investment in the Partnerships using the equity method of
accounting. These combined financial statements have been prepared to present
the combined financial position, results of operations and cash flows of the
Partnerships and the Company's interest in the Partnerships to comply with
certain disclosure requirements of the Securities and Exchange Commission (the
"SEC"). Under these SEC rules, each Partnership qualified as a significant
equity investee of the Company in 1994.
Each Partnership was formed to provide cellular telephone service in its
respective standard metropolitan statistical area ("MSA"). The California, South
Texas and Albucell Partnerships provide cellular service in the San Francisco,
Houston and Albuquerque MSAs, respectively.
The partners' ownership interests in the Partnerships are as follows (the
general partners' interests include the limited partnership interests if the
general partner also participates as a limited partner):
<TABLE>
<CAPTION>
LOS ANGELES WASHINGTON D.C. CALIFORNIA SOUTH TEXAS SAN ANTONIO ALBUCELL
----------- --------------- ---------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
General Partners.............. 82% 65% 86% 79% 70% 51%
Limited Partners:
Contel Cellular Inc...... 11 35 11 4 30 49
Other Partners........... 7 -- 3 17 -- --
--- --- --- --- --- ---
100% 100% 100% 100% 100% 100%
</TABLE>
The general partners in the Los Angeles, Washington D.C., California, South
Texas, San Antonio and Albucell Partnerships are AirTouch Cellular (formerly
Pactel Cellular), Bell Atlantic Mobile Systems of Washington, Inc. ("BAMS"), GTE
Mobilnet Incorporated, GTE Mobilnet of Houston Inc., Southwestern Bell Mobile
Systems, Inc. and US WEST NewVector Group, Inc., respectively.
Profits, losses, contributions and distributable cash are allocated to the
individual partners based on the respective partnership interests of each of the
partners. The Los Angeles Partnership represents the most significant portion of
combined total assets and net income for the years presented.
2. SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
Generally the Partnerships earn service revenues by providing access to
their cellular network ("access revenue") and for usage of their cellular
network ("airtime revenue"). Access revenue is billed one month in
52
<PAGE> 53
LOS ANGELES SMSA LIMITED PARTNERSHIP
WASHINGTON D.C. SMSA LIMITED PARTNERSHIP
GTE MOBILNET OF CALIFORNIA LIMITED PARTNERSHIP
GTE MOBILNET OF SOUTH TEXAS LIMITED PARTNERSHIP
SAN ANTONIO SMSA LIMITED PARTNERSHIP
ALBUCELL LIMITED PARTNERSHIP
NOTES TO COMBINED FINANCIAL STATEMENTS (UNAUDITED) -- CONTINUED
advance and recognized when earned. Airtime (including roaming) revenue is
recognized when the service is rendered. Equipment sales are recognized upon
delivery of the equipment to the customer.
Income Taxes
Under the provisions of the Internal Revenue Code and related state
statutes, the Partnerships are not taxable entities for income tax purposes. The
individual partners include their share of Partnership income or loss in their
respective income tax returns. Accordingly, no provision for income taxes has
been made in the accompanying combined financial statements.
Depreciation and Amortization
Depreciation and amortization are calculated using the straight-line method
over the estimated useful lives of related assets. Upon sale or retirement of
property, plant and equipment, the cost of such assets and related accumulated
depreciation or amortization are eliminated from the accounts and any related
gain or loss is reflected in the combined statements of operations.
Cash Equivalents
Cash equivalents include amounts which are readily convertible into cash
and which are not subject to significant risk from fluctuations in interest
rates.
Reclassifications
Certain accounts of the Partnerships have been reclassified to conform to a
consistent presentation.
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following at December 31 (in
thousands):
<TABLE>
<CAPTION>
1994 1993
---------- ----------
<S> <C> <C>
Land and improvements...................................... $ 13,448 $ 8,442
Buildings.................................................. 205,805 160,835
Equipment.................................................. 950,712 765,606
Furniture and fixtures..................................... 50,434 33,043
Assets under construction.................................. 134,569 79,589
---------- ----------
1,354,968 1,047,515
Less -- Accumulated depreciation........................... (411,949) (296,641)
---------- ----------
$ 943,019 $ 750,874
========== ==========
</TABLE>
53
<PAGE> 54
LOS ANGELES SMSA LIMITED PARTNERSHIP
WASHINGTON D.C. SMSA LIMITED PARTNERSHIP
GTE MOBILNET OF CALIFORNIA LIMITED PARTNERSHIP
GTE MOBILNET OF SOUTH TEXAS LIMITED PARTNERSHIP
SAN ANTONIO SMSA LIMITED PARTNERSHIP
ALBUCELL LIMITED PARTNERSHIP
NOTES TO COMBINED FINANCIAL STATEMENTS (UNAUDITED) -- CONTINUED
4. LEASE COMMITMENTS
Future minimum rental payments required under operating leases (primarily
for real estate) with initial or remaining noncancelable lease terms in excess
of one year as of December 31, 1994, are as follows (in thousands):
<TABLE>
<S> <C>
1995.............................................. $ 24,181
1996.............................................. 22,724
1997.............................................. 20,632
1998.............................................. 19,146
1999.............................................. 15,874
Thereafter........................................ 45,896
--------
Total $148,453
========
</TABLE>
Rent expense was approximately $27.4 million, $29.0 million and $17.3
million for the years ended December 31, 1994, 1993 and 1992, respectively.
5. RELATED PARTY TRANSACTIONS
In accordance with the Partnership agreements, the general partners are
reimbursed by the Partnerships for costs incurred by the general partners on
behalf of the Partnerships. These costs are expensed in the accompanying
combined statements of operations and include accounting, information systems,
cash management, human resources, legal, operations, marketing and other
administrative services. Total charges billed by the general partners to the
Partnerships were $149.4 million, $115.7 million and $106.4 million included in
the accompanying combined statements of operations as selling, general and
administrative expenses, and $66.6 million, $44.3 million and $34.6 million
included in the accompanying combined statements of operations as cost of
services and sales for the years ended December 31, 1994, 1993 and 1992,
respectively.
Certain general partners advance funds to the Partnerships as necessary to
finance operations. Interest expense is charged to the Partnerships on these
advances at rates consistent with the general partners' average borrowing rates.
6. MAJOR CUSTOMERS AND SUPPLIERS
The Los Angeles Partnership purchases substantially all its equipment from
one supplier.
7. REGULATORY INVESTIGATIONS
Los Angeles Partnership
On December 21, 1993, the California Public Utilities Commission ("CPUC")
adopted a new Order Instituting Investigation into the regulation of mobile
telephone service and wireless communications, Order Number I.93-12-007. The
investigation proposes a regulatory program which would encompass all forms of
mobile telephone service.
On August 22, 1994, the CPUC issued an interim Decision that imposes a
methodology in which existing cellular carriers be subject to rate cap
regulation and other regulations, and requiring carriers, upon request, to
permit resellers to operate reseller switches interconnected to the cellular
carrier's facilities, to unbundle
54
<PAGE> 55
LOS ANGELES SMSA LIMITED PARTNERSHIP
WASHINGTON D.C. SMSA LIMITED PARTNERSHIP
GTE MOBILNET OF CALIFORNIA LIMITED PARTNERSHIP
GTE MOBILNET OF SOUTH TEXAS LIMITED PARTNERSHIP
SAN ANTONIO SMSA LIMITED PARTNERSHIP
ALBUCELL LIMITED PARTNERSHIP
NOTES TO COMBINED FINANCIAL STATEMENTS (UNAUDITED) -- CONTINUED
cellular access charges to resellers on a market basis and to subsidize
resellers' roaming revenues. The Decision further authorized the CPUC to file a
petition with the Federal Communications Commission to extend the CPUC's
jurisdiction over cellular carriers for at least 18 months. Application for
Rehearing and Suspension has been filed by various carriers and is pending with
the CPUC. Currently, the Los Angeles Partnership is unable to quantify the
precise impact of this Order on its future operations, but that impact may be
material to the Los Angeles Partnership under certain circumstances.
In January 1992, the CPUC commenced a separate investigation of all
cellular companies operating in California to determine their compliance with
General Order number 159 ("G.O. 159"). The investigation addresses whether
cellular utilities have complied with local, state or federal regulations
governing the approval and construction of cellular sites in California. The
CPUC may advise other agencies of violations in their jurisdictions. Currently,
certain other carriers have agreed to monetary settlements as a result of this
investigation.
The Los Angeles Partnership has prepared and filed the information
requested by the CPUC. The CPUC will review the information provided by the Los
Angeles Partnership and, if violations of G.O. 159 are found, it may assess
penalties against the Los Angeles Partnership. The outcome of this investigation
is uncertain and, accordingly, no accrual for this matter has been made.
California Partnership
The California Partnership has also submitted information requested by the
CPUC regarding compliance with G.O. 159. The CPUC will review the information
provided by the California Partnership, and if violations of G.O. 159 are found,
it may assess penalties against the California Partnership. The final outcome of
this matter cannot now be determined; however, in management's opinion, the
final outcome will not have a material adverse effect on the California
Partnership's financial statements.
8. CONTINGENCIES
Los Angeles Partnership
Two agents of the competing carrier have named the Los Angeles Partnership
in several complaints against the carrier. The general allegations include
violations of California Unfair Practices Act and price fixing. At a recent
mandatory settlement conference, plaintiffs asked for $6 million from all
defendants to settle the above claims ($2.5 million from AirTouch Cellular,
including the Los Angeles Partnership). The proposed settlement offer has not
been accepted.
On November 24, 1993, October 17, 1994 and November 30, 1994, three
separate class action (not yet certified) suits were filed against the Los
Angeles Partnership alleging conspiracy with a competing carrier to fix the
price of cellular service in violation of state and federal antitrust laws. The
plaintiffs are seeking injunctive relief and substantial monetary damages in
excess of $100 million before trebling.
In May 1994, several former and current agents of the competing carrier
have named the Los Angeles Partnership in only one cause of action. This cause
of action alleges a conspiracy with the competing carrier to fix the prices of
cellular service in violation of state antitrust laws. The plaintiffs are
seeking damages in excess of $100,000 for each of the plaintiff agents.
55
<PAGE> 56
LOS ANGELES SMSA LIMITED PARTNERSHIP
WASHINGTON D.C. SMSA LIMITED PARTNERSHIP
GTE MOBILNET OF CALIFORNIA LIMITED PARTNERSHIP
GTE MOBILNET OF SOUTH TEXAS LIMITED PARTNERSHIP
SAN ANTONIO SMSA LIMITED PARTNERSHIP
ALBUCELL LIMITED PARTNERSHIP
NOTES TO COMBINED FINANCIAL STATEMENTS (UNAUDITED) -- CONTINUED
On July 18, 1994, AirTouch Cellular was served with a class action (not yet
certified) suit on behalf of the Los Angeles Partnership's authorized agents.
The complaint alleges "predatory practices" and seeks damages in excess of $1.6
million per agent, plus statutory treble damages.
Washington D.C. Partnership
During 1992 and 1993, BAMS was involved in litigation with a former sales
agent in the Superior Court of Washington D.C. In December 1993, BAMS entered
into a settlement agreement with the plaintiff for $11.4 million. As a result of
this agreement, the Washington D.C. Partnership was allocated $10.4 million and
$0.4 million (included in selling, general and administrative expenses) for
their portion of the settlement and interest expense, respectively.
Subsequently, in 1994 a dispute arose between BAMS and the Company because of
the portion allocated to the Washington D.C. Partnership. On December 30, 1994,
BAMS and the Company entered into a settlement agreement wherein BAMS agreed to
reduce the allocated settlement of $10.8 million and associated legal fees by
fifty percent. This resulted in a reduction to the general and administrative
expenses in 1994 of $5.8 million.
South Texas Partnership
An agent of the South Texas Partnership brought suit against the South
Texas Partnership alleging that the South Texas Partnership is in violation of
its agency contract. The agent alleges that the South Texas Partnership failed
to comply with a provision contained in the agent contract which allegedly
requires the South Texas Partnership to offer to the plaintiff commission
payments offered to any other South Texas Partnership agents which are
substantially and materially better than the commission payments set forth in
the plaintiff's contract.
In early 1994, a jury trial returned a verdict in favor of the plaintiff in
an amount which is to be determined in the judgment. The exposure may be up to
$7 million. The general partner believes that the trial court committed several
reversible errors which may result on appeal in either a reversal or a new
trial. The ultimate outcome of this litigation is unknown at the present time;
however, in management's opinion, the final outcome will not have a material
adverse effect on the South Texas Partnership's financial statements.
California Partnership
On October 10, 1994 a class action suit was filed on behalf of the cellular
users in the San Francisco market against the two cellular carriers serving the
area. The plaintiffs allege unlawful combination and collusion by the carriers
resulting in a lack of rate reduction for cellular users which has led to
excessive profits for the carriers. The complaint seeks a restraining order
concerning basic rates for cellular service, treble damages, plus interest and
attorney's fees. At this time the general partner has not discovered any fact
which supports the plaintiffs' claims and believes that any prediction of the
outcome would be premature. Accordingly, no provision for any liability that
might result has been made in the California Partnership's financial statements.
56
<PAGE> 57
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
57
<PAGE> 58
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS OF THE REGISTRANT
<TABLE>
<CAPTION>
NAME, AGE AND YEAR PRINCIPAL OCCUPATION AND
ELECTED AS DIRECTOR OTHER INFORMATION
------------------------------------- ------------------------------------------------------
<S> <C>
LEO JAFFE............................ Chairman Emeritus of Columbia Pictures, Inc., an
85 1987 entertainment complex, Chairman Emeritus of United
States Information Agency -- Motion Picture and
Television Sector.
JAMES L. JOHNSON..................... Chairman Emeritus of GTE, a telecommunications
67 1991 company. Mr. Johnson joined GTE in 1949 and has held a
variety of management positions within the Telephone
Operations Group. He was elected President of the
GTE Telephone Operations Group in 1981, Senior Vice
President of GTE and President and Chief Operating
Officer of its Telephone Operations Group in
December 1983, President and Chief Operating Officer
of GTE in March 1986 and Chairman and Chief
Executive Officer in May 1988. Mr. Johnson is a
director of GTE, MONY (The Mutual Life Insurance
Company of New York), Valero Energy Corporation,
Greyhound Financial Corp., AllStar Corporation BC
TEL, Compania Anonima Nacional Telefonos de
Venezuela, VenWorld and Harte Hanks Communications,
Inc.; Member of the Texas Tech University Board of
Regents and Trustee of the Joint Council on Economic
Education.
ROBERT E. LABLANC.................... President of Robert E. LaBlanc Associates, Inc., a
61 1987 telecommunications consulting firm. Mr. LaBlanc
founded and has served as President of Robert E.
LaBlanc Associates, Inc. since 1981. Prior to that
Mr. LaBlanc was Vice Chairman of Contel and a
general partner in Salomon Brothers, Inc., an
investment banking firm. Mr. LaBlanc is a director
of M/A -- COM, Inc., Storage Technology Corporation,
TIE/communications, Inc., Tribune Company,
Prudential Global Fund, Inc., Prudential Short-Term
Global Income Fund, Inc., Prudential Pacific Growth
Fund, Inc., and Trustee of Prudential U.S.
Government Fund. Mr. LaBlanc is also the Vice
Chairman of the Manhattan College Board of Trustees.
</TABLE>
58
<PAGE> 59
<TABLE>
<CAPTION>
NAME, AGE AND YEAR PRINCIPAL OCCUPATION AND
ELECTED AS DIRECTOR OTHER INFORMATION
------------------------------------- ------------------------------------------------------
<S> <C>
CHARLES R. LEE....................... Chairman and Chief Executive Officer of GTE. Mr. Lee
55 1991 joined GTE in 1983 as Senior Vice President -- Finance
and in 1986 he was named Senior Vice
President -- Finance and Planning. He was elected
President and Chief Operating Officer effective
January 1, 1989, and became Chairman and Chief
Executive Officer in 1992. Prior to joining GTE, he
held various financial and management positions in
the steel, transportation and entertainment
industries. Mr. Lee is a director of GTE, United
Technologies Corporation, USX Corporation and The
Procter & Gamble Company. He is a member of the
Business Roundtable, a Trustee of the Board of
Trustees of Cornell University, a Trustee of the
National Planning Association and Chairman of the
New American Realities Committee of the National
Planning Association, a member of The Conference
Board, Harvard Business School's Board of Directors
of the Associates, and a Director of the Stamford
Hospital Foundation.
MICHAEL T. MASIN..................... Vice Chairman of the Board of Directors of GTE. Mr.
50 1991 Masin was elected Vice Chairman on October 20, 1993.
Prior to that Mr. Masin was Managing Partner of the
New York office of the law firm of O'Melveny &
Myers. In addition, Mr. Masin was Co-Chair of the
firm's International Practice Group. Mr. Masin
joined the firm in 1969 and became a partner in
1977. He is a Director of GTE, Trust Company of the
West (Los Angeles) and DynCorp. Mr. Masin is a
Trustee of The American University, a member of the
Business Committee of the Board of Trustees of the
Museum of Modern Art and a member of the Council on
Foreign Relations.
RUSSELL E. PALMER.................... Chairman and Chief Executive Officer of The Palmer
60 1991 Group. Mr. Palmer was formerly Dean, The Wharton
School, University of Pennsylvania from 1983 until
June 1990. Prior to that, he was managing director
and Chief Executive Officer of Touche Ross
International (now Deloitte & Touche), a worldwide
accounting firm. Mr. Palmer joined Touche Ross in
1956 and was elected managing director of Touche
Ross International in 1974. Mr. Palmer is a director
of GTE, Bankers Trust New York Corporation, and its
subsidiary, Bankers Trust Company, May Department
Stores Company, Allied-Signal, Inc., Safeguard
Scientifics, Inc., Imasco Limited and Federal Home
Loan Mortgage Corporation.
IRWIN SCHNEIDERMAN................... Senior Counsel of the law firm of Cahill Gordon &
71 1990 Reindel. Prior to becoming senior counsel, Mr.
Schneiderman was a partner with this law firm.
</TABLE>
59
<PAGE> 60
<TABLE>
<CAPTION>
NAME, AGE AND YEAR PRINCIPAL OCCUPATION AND
ELECTED AS DIRECTOR OTHER INFORMATION
------------------------------------- ------------------------------------------------------
<S> <C>
NICHOLAS L. TRIVISONNO............... Executive Vice President -- Strategic Planning of GTE
47 1991 and Group President, Mr. Trivisonno assumed his
present position with GTE in November 1993. Prior to
assuming his current position, Mr. Trivisonno was
Senior Vice President -- Finance of GTE. Prior to
becoming Senior Vice President of GTE, Mr.
Trivisonno served as Vice President and Controller
of GTE from November 1988 to January 1989. From 1968
to 1988, he was associated with Arthur Andersen &
Co. (now Arthur Andersen LLP) and served as the
managing partner of its Stamford, Connecticut office
from April 1986 to November 1988. Mr. Trivisonno is
a director of Rayonier, Inc., Allendale Mutual
Insurance Company, Yankee Energy Systems, Babson
College, Junior Achievement and St. Joseph's Medical
Center.
JAMES W. WALTER...................... Founder of Walter Industries, Inc. (formerly Jim
72 1991 Walter Corporation), a home construction-building
materials manufacturer, in 1946 and Chairman of its
Board since 1962. Mr. Walter is a director of GTE
and Anchor Glass Container Corporation.
DENNIS L. WHIPPLE.................... President and Chief Executive Officer of the Company.
51 1991 Mr. Whipple became President of the Company in March
1991. From April 1990 to March 1991, Mr. Whipple
served as Vice President -- Marketing and Business
Planning of GTE Mobile Communications. From 1987 to
1990, Mr. Whipple served as General Manager of the
Florida Region of GTE Mobilnet. From 1985 to 1987,
Mr. Whipple served as Assistant Vice
President -- Employee Relations of GTE Telephone
Operating Group.
CHARLES WOHLSTETTER.................. Vice Chairman of the Board of Directors of GTE. Prior
84 1987 to joining GTE's Board, Mr. Wohlstetter was Chairman
of the Board of Contel Corporation. He was one of
the three co-founders of Contel and served on its
Board since 1960. Mr. Wohlstetter was an investment
banker and a member of the New York Stock Exchange,
Inc. earlier in his career. Mr. Wohlstetter is
Chairman of the Board of Tesoro Petroleum
Corporation and a Director of GTE and Fifth Dimen-
sion Inc.
</TABLE>
Directors of the Company are elected annually by the shareholders of the
Company.
EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
NAME AND AGE PRESENT POSITION
--------------------------------------------- ---------------------------------------------
<S> <C>
Dennis L. Whipple, 51........................ President and Chief Executive Officer
Pamela F. Lopez, 34.......................... Vice President -- Marketing
Randall L. Crouse, 49........................ Vice President -- Network Operations
Theodore J. Carrier, 41...................... Chief Financial Officer and Treasurer
Jay M. Rosen, 57............................. Secretary
Laura E. Binion, 38.......................... General Counsel and Assistant Secretary
</TABLE>
60
<PAGE> 61
Executive officers of the Company are elected annually by, and serve at the
pleasure of, the Company's Board of Directors.
Biographical information regarding each executive officer is set forth
below:
Dennis L. Whipple. Mr. Whipple has served as President and Chief Executive
Officer of the Company since March 1991. From April 1990 to March 1991, he
served as Vice President -- Marketing and Business Planning of GTE Mobile
Communications. From June 1987 to April 1990, Mr. Whipple served as General
Manager -- Florida for GTE Mobilnet.
Pamela F. Lopez. Ms. Lopez was elected Vice President -- Marketing in
December 1993. Prior to becoming an officer of the Company, Ms. Lopez was
Marketing and Distribution Manager of the Company's National Region, a position
she held from March 1991 to December 1993. From September 1987 to March 1991 Ms.
Lopez was the Regional Agent Manager in the Company's Virginia operations.
Randall L. Crouse. Mr. Crouse was elected Vice President -- Network
Operations in January 1993. Prior to becoming an officer of the Company, Mr.
Crouse was Director -- Technology Projects for GTEMC (from March 1991 to January
1993) and Director -- Advanced Technology Planning for GTEMC (from August 1987
to March 1991).
Theodore J. Carrier. Mr. Carrier has served as Chief Financial Officer and
Treasurer of the Company since March 1991. From 1989 to March 1991, he served as
Controller of the Company. Mr. Carrier served as Assistant
Controller -- Financial Planning and Analysis of Contel Corporation from 1987 to
1989, and he was employed by Contel as Director of Budgets and Financial
Planning and Analysis from 1986 to 1987.
Jay M. Rosen. Mr. Rosen became Secretary of the Company in April 1991. He
also currently serves as Vice President -- Government Affairs and General
Counsel for GTE Telecommunications Products and Services, a position he has held
since April 1991. From 1989 to April 1991, Mr. Rosen served as Vice President
and Associate General Counsel -- GTE Electrical Products and Government Systems
Group. From 1986 to 1989, Mr. Rosen was employed by GTE as Vice President and
Associate General Counsel -- GTE Diversified Products and Systems Group.
Laura E. Binion. Ms. Binion became General Counsel and Assistant Secretary
of the Company in March 1991. From October 1986 to March 1991, Ms. Binion was
Corporate Counsel for Contel Corporation.
DIRECTORS AND OFFICER SECURITIES REPORTS
The Federal securities laws require the Company's directors and executive
officers, and persons who own more than 10% of a registered class of the
Company's equity securities, to file with the Securities and Exchange Commission
initial reports of ownership and reports of changes in ownership of any equity
securities of the Company.
To the Company's knowledge, based solely on review of the copies of such
reports furnished to the Company and written representations that no other
reports were required, all persons subject to these reporting requirements filed
the required reports on a timely basis.
61
<PAGE> 62
ITEM 11. EXECUTIVE COMPENSATION
DIRECTOR'S COMPENSATION
Retainer and Meeting Fees
Directors who are also employees of the Company, GTE or any subsidiary of
GTE are not paid any fees or other remuneration, as such, for service on the
Board of Directors or on any committee of the Board of Directors (a
"Committee").
Each nonemployee director receives an annual retainer for service on the
Board of Directors equal to $12,000. In addition, each nonemployee director
receives $1,000 for each Board of Directors or Committee meeting such director
attends. Nonemployee directors are not eligible to participate in the employee
incentive programs, savings plans, or stock purchase plans.
All directors receive reimbursement of all out-of-pocket expenses they
incur in attending meetings of the Board of Directors or its Committees.
In connection with the proposed Merger, a Special Committee of independent
directors of the Board of Directors was formed to negotiate the Merger on behalf
of the holders of Class A Shares and make a recommendation to the Board of
Directors in connection with this transaction. Members of the Special Committee
each received a fee of $35,000 and the Chairman received a fee of $45,000.
EXECUTIVE COMPENSATION
Report of the Compensation Committee
The original compensation committee (the "Original Committee") of the Board
of Directors of the Company was established on December 3, 1992. The Original
Committee was formed to review and approve the annual compensation of the
Company's Chief Executive Officer and senior management personnel (the
"Executive Group"). On December 27, 1994, in conjunction with the approval by
the Board of Directors of the Merger, the Board of Directors created a second
compensation committee (the "Second Committee"; the Original Committee and the
Second Committee are sometimes collectively referred to herein as the
"Committees") to perform certain, but not all, of the functions of the Original
Committee. The Second Committee was formed to review the base and incentive
compensation of the Executive Group. The Original Committee retained the
authority to determine any stock-based awards to be granted to the Executive
Group. Both Committees have the same compensation philosophy.
Compensation Philosophy. The Committees believe that the compensation for
the Executive Group should attract superior individuals, reward sustained
performance and maximize shareholder value. The Committees also believe that
because the Company is a majority owned subsidiary of GTE, the compensation for
the Executive Group should be compatible with the compensation of other GTE
subsidiaries. This compatibility allows employees to transfer from the Company
to other GTE business units and in turn allows the Company to draw superior
employees from other parts of GTE, thereby providing vital workforce renewal.
GTE has a uniform system of compensation among all of its subsidiaries
designed to compensate executives at competitive compensation levels of
comparable companies. This system is modified within each subsidiary, including
the Company, based on the unit's unique business demands and comparable industry
statistics. Information about GTE's compensation system has been provided to the
Committees by representatives of GTE.
To determine how GTE's uniform system of compensation should be modified
and applied to the Company, the Company participates in surveys conducted by
nationally recognized compensation consultants. Based on these surveys, the
Committees believe that the Company's executives are compensated at or near the
median of the range of comparable companies.
The companies participating in these surveys include the cellular
subsidiaries of the Regional Bell Operating Companies ("RBOC Subsidiaries") as
well as independent publicly traded cellular companies. The companies included
in the compensation surveys are not identical to the companies included in the
Industry
62
<PAGE> 63
Peer Group utilized in the Performance Graph on page 69 because the RBOC
Subsidiaries are included in the compensation surveys but not in the Industry
Peer Group. The RBOC Subsidiaries are included in the compensation surveys
because they are in the same industry as the Company and are frequently
competitors of the Company. They are not included in the Industry Peer Group
because the stocks of the RBOC Subsidiaries are not publicly traded
independently of the stocks of their parent holding companies.
Although the Committees have attempted to keep the Company's executive
compensation uniform with GTE's other subsidiaries, the Committees recognize
that the Company is not wholly owned by GTE. This fact requires some deviations
from GTE's standard practices. These deviations are noted, as applicable,
throughout the following description of the Company's executive compensation.
In keeping with the compensation philosophy of the Committees, the
Executive Group's compensation is comprised of three components: base salary,
incentive pay and stock awards.
Base Compensation. The first component of executive pay is base salary.
Each management position is given a grade level with an attendant salary range.
The grade levels are determined using the Hay Job Evaluation System, an orderly
and widely recognized job leveling system. The individual's performance, years
of experience and prior salary increase history determine where within the
salary range the individual's base salary falls.
The base salary of each member of the Executive Group is determined by
reviewing the individual's performance as well as the duties and
responsibilities of the respective executive management position. The grade
levels of the Executive Group are generally comparable to other similar
management positions within GTE. However, because the Company is not wholly
owned by GTE, the Committee reviews the grade levels and the base salary of each
member of the Executive Group.
The base compensation of Dennis L. Whipple, Chief Executive Officer of the
Company, was increased from $170,700 to $190,000 effective January 3, 1994. This
increase was the decision of the Original Committee. This change represented an
11.3% increase in Mr. Whipple's base salary and was based upon both the
performance of the Company and Mr. Whipple in 1993. This increase also reflected
a job grade adjustment based on industry trends regarding executive
compensation. The Original Committee reviewed the Company's and Mr. Whipple's
performance with respect to objectives related to revenue, operating income, net
income, capital expenditures, reduction in bad debt, service revenue, year-end
subscribers, annual subscriber churn rate, revenue per subscriber, network
quality, acquisition costs and facilities costs. The Original Committee also
reviewed certain qualitative objectives of Mr. Whipple including network
improvement, increased customer satisfaction, increased market share, margin
improvement and revenue enhancement. Each of Mr. Whipple's objectives were of
substantially equivalent importance.
The base compensation of each member of the Executive Group was also
increased during 1994. The percentage increases ranged from 5% to 6% and were
based upon the Company's performance of the objectives outlined above, each
individual's performance, each individual's position in the assigned salary
range and general industry trends regarding base compensation. All of these
salary increases were determined by the Original Committee.
The base salaries of the Chief Executive Officer and the other four most
highly compensated officers of the Company are included under the "Salary"
column of the Summary Compensation Table on page 66.
Incentive Compensation. The second component of compensation of the
Executive Group is incentive pay. The Chief Executive Officer participates in
the GTE Executive Incentive Plan. Each other member of the Executive Group
participates in the GTE Unit Incentive Plan. Under both of these plans, awards
are made based upon the Company's performance during the last fiscal year and
upon the individual participant's achievement of certain objectives. Both of
these plans are administered by the Executive Compensation and Organization
Structure Committee of the Board of Directors of GTE. However, because the
Company is not a wholly owned subsidiary of GTE, decisions with respect to the
amount of any award is made by the Committees. Awards for the year 1994 were
determined by the Second Committee.
63
<PAGE> 64
The award to Mr. Whipple under the GTE Executive Incentive Plan ("EIP") was
$110,300 for 1994. This award represented approximately 37% of Mr. Whipple's
total cash compensation for the year and was based on both the performance of
the Company and Mr. Whipple with respect to certain quantitative and qualitative
objectives. The objectives reviewed by the Second Committee to determine Mr.
Whipple's EIP award were essentially the same as those reviewed to determine the
merit increase in his base salary. The Second Committee determined that Mr.
Whipple met or exceeded the majority of these objectives.
Each other member of the Executive Group also received an award under the
GTE Unit Incentive Plan ("UIP") for 1994 performance. The total amount of these
awards was $139,600. The Second Committee determined the amount of these awards
based upon the same performance objectives for the Company as used to determine
Mr. Whipple's EIP award, as well as each individual's performance with respect
to certain pre-established goals.
EIP and UIP awards for the Chief Executive Officer and the other four most
highly compensated officers of the Company are included in the "Bonus" column of
the Summary Compensation Table on page 66.
Stock-Based Awards. The third and final component of compensation of the
Executive Group is eligibility to receive certain stock-based awards under the
Contel Cellular Inc. 1987 Key Employee Stock Plan (the "Option Plan"). The plan
authorizes the Board of Directors or duly authorized committee thereof to grant
stock options, stock appreciation rights and restricted stock units to key
employees of the Company. The Board of Directors has given the Original
Committee the authority to grant stock-based awards. The exercise price per
share cannot be less than 100% of the fair market value of a share of Class A
Common Stock on the date of grant.
This component is designed to be a long-term incentive program for key
executives of the Company which provides a direct link between the performance
of the Company stock and the compensation of the Executive Group. This component
is also designed to be equivalent to the stock options granted under GTE's 1991
Long Term Incentive Plan ("LTIP") for the executives of GTE's other business
units. Under the LTIP, GTE grants executive and other management employees at
certain levels a specified number of GTE stock options on an annual basis.
Because the Company is not a wholly owned subsidiary of GTE, key executives of
the Company receive Contel Cellular Inc. option grants, instead of GTE option
grants. In determining the number of stock options granted, the Original
Committee considered the value of long-term incentives granted by comparable
companies and attempted to award option grants in amounts designated to ensure
that the members of the Executive Group were compensated competitively within
the industry. The Original Committee did not consider the number of options or
other forms of long-term compensation currently held by any individual
participant in the Option Plan, since such action may create an incentive to
accelerate the exercise of such options and sale of shares.
Mr. Whipple received a grant of 7,100 stock options and the Executive Group
collectively received a grant of 9,100 stock options at an exercise price of
$16.25 on March 22, 1994 under the Option Plan.
The Summary Compensation Table and the Option/SAR Grants in Last Fiscal
Year Table on page 66 and 67, respectively, summarize stock under this Plan.
New Internal Revenue Service Rules. In late December 1993, the Internal
Revenue Service issued proposed regulations limiting the deduction a publicly
held corporation may take for compensation paid to its chief executive officer
and its four other most highly compensated officers. The IRS regulations limit
the amount that a company may deduct to one million dollars per person unless
the compensation constitutes "performance based" compensation. Final rules have
not yet been issued. Currently no Company executive receives compensation which
would subject the Company to this regulation.
Other Compensation. Employees of the Company also participate in various
broad-based GTE employee benefit plans. Members of the Executive Group
participate in these plans on the same terms as eligible non-executive
employees, subject to any legal limits on the amounts that may be contributed or
paid to executives under the plans. GTE offers an Employees' Stock Plan pursuant
to the provisions of Section 423 of the Internal Revenue Code of 1986, as
amended (the "Code") under which employees may purchase GTE Common Stock at a
discount. The GTE Savings Plan (the "Savings Plan") offered pursuant to
provisions of
64
<PAGE> 65
Section 401(k) of the Code permits employees to invest in a variety of funds on
a pre- or after-tax basis. Matching contributions under the Savings Plan are
made in GTE Common Stock. Company employees participate in pension plans,
insurance and other benefit plans.
Original Committee
Russell E. Palmer, Chairman
Terry S. Parker
Irwin Schneiderman
Second Committee
Charles R. Lee
Michael T. Masin
Nicholas L. Trivisonno
Date: March 28, 1995
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The directors whose names appear at the conclusion of the Report of the
Compensation Committee currently serve as either members of the Original
Committee or the Second Committee. Mr. Russell E. Palmer is a member of the
Board of Directors of GTE. During the time period discussed in the Report of the
Compensation Committee, Mr. Terry S. Parker was Senior Vice President of GTE,
Chairman of the Company and President of Personal Communications Services, a
division of GTE. Mr. Parker will retire from GTE and resigned his positions with
GTE and the Company effective March 1, 1995. Mr. Charles R. Lee is the Chairman
of the Board of Directors of GTE and its Chief Executive Officer. Mr. Michael T.
Masin is the Vice Chairman of the Board of Directors of GTE. Mr. Nicholas L.
Trivisonno is Executive Vice President -- Strategic Planning of GTE and Group
President.
65
<PAGE> 66
EXECUTIVE COMPENSATION TABLES
The following tables provide information about executive compensation.
SUMMARY COMPENSATION TABLE
The following table sets forth information about the compensation of the
Chief Executive Officer and each of the other four executive officers of the
Company at December 31, 1994 for services in all capacities to the Company and
its subsidiaries.
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
----------------------------------
ANNUAL COMPENSATION
-------------------------------- AWARDS PAYOUTS ALL
OTHER ------------------------ ------- OTHER
ANNUAL RESTRICTED OPTIONS/ LTIP COMPEN-
NAME AND PRINCIPAL SALARY BONUS COMPEN- STOCK SARS PAYOUTS SATION
POSITION YEAR ($)(1) ($) SATION ($) AWARDS (#) (#)(2) ($)(3) ($)(4)
------------------------------------ ---- -------- -------- ---------- ---------- ----------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Dennis L. Whipple................... 1994 $190,004 $110,300 0 0 7,100/4,733 N/A $5,041
President, Chief Executive Officer 1993 169,142 69,300 0 0 3,300/2,200 N/A 4,927
and Director 1992 166,407 60,600 0 0 8,250/5,500 N/A 4,739
Todd E. Eliason..................... 1994 138,838 66,400 0 0 3,700/2,467 N/A 3,669
Vice President -- Operations(5) 1993 122,285 45,500 0 0 1,800/1,200 N/A 0
1992 41,538 49,300 0 0 0 N/A 3,526
Randall L. Crouse................... 1994 125,769 46,200 0 0 1,700/1,133 N/A 3,586
Vice President -- Network 1993 119,592 38,400 0 0 1,400/933 N/A 0
Operations(6)
Laura E. Binion..................... 1994 108,108 41,400 0 0 1,000/667 N/A 0
General Counsel(7) 1993 101,946 26,100 0 0 700/467 N/A 0
Pamela F. Lopez..................... 1994 95,346 47,600 0 0 1,700/1,133 N/A 2,280
Vice President -- Marketing(8) 1993 70,408 15,800 0 0 0 N/A 2,208
</TABLE>
---------------
(1) Company executives are paid bi-weekly. As a result of this cycle, executives
received 27 payments of base salary in 1992, rather than the usual 26. The
data in the table includes the extra payment and, accordingly, overstates
the 1992 base salary rate by 1/26th, or 3.8%.
(2) Two-thirds of the stock options granted allow stock appreciation rights to
be substituted for the corresponding options.
(3) The Company has not adopted a long-term incentive plan.
(4) All other compensation for 1994 includes Company contributions to the GTE
Savings Plan and Company contributions to the GTE Executive Salary Deferral
Plan.
(5) Mr. Eliason became Vice President -- Operations on January 3, 1994. Prior to
that time he was Vice President/General Manager -- National Region
effective August 1992. The 1992 salary listed in the table for Mr. Eliason
reflects only his salary for the portion of the year he was employed by the
Company. Mr. Eliason became President -- GTE Telecommunications Services,
Inc. effective January 16, 1995. Accordingly, Mr. Eliason resigned as Vice
President -- Operations of the Company effective January 16, 1995.
(6) Mr. Crouse became Vice President -- Network Operations on January 18, 1993.
The 1993 salary listed in the table for Mr. Crouse reflects only his salary
for the portion of the year he was employed by the Company.
(7) Ms. Binion became an officer of the Company on January 18, 1993.
(8) Ms. Lopez became Vice President -- Marketing on December 6, 1993.
66
<PAGE> 67
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
The following table shows all grants of options and tandem stock
appreciation rights (SARs) to the named executive officers of the Company in
1994. The options and SARs were granted under the Option Plan. Pursuant to
Securities and Exchange (the "SEC") rules, the table also shows the value of the
options granted at the end of the option term (ten years) if the stock price
were to appreciate annually by 5% and 10% respectively.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
AT ASSUMED ANNUAL RATES
OF STOCK PRICE
APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM
-------------------------------------------------------------------- --------------------------
PERCENT OF TOTAL
NUMBER OF SECURITIES OPTIONS/SARS
UNDERLYING GRANTED TO EXERCISE OR
OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION
NAME GRANTED(1) FISCAL YEAR ($/SH) DATE 0% 5% 10%
----------------------- ---------------------- ---------------- ----------- ---------- --- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Dennis L. Whipple...... 7,100/4,733 20.07% $ 16.25 03/21/04 $ 0 $72,559 $183,878
Todd E. Eliason(2)..... 3,700/2,467 10.79 16.25 03/21/04 0 37,812 95,824
Randall L. Crouse...... 1,700/1,133 4.96 16.25 03/21/04 0 17,373 44,027
Pamela F. Lopez........ 1,700/1,133 4.96 16.25 03/21/04 0 17,373 44,027
Laura E. Binion........ 1,000/667 2.92 16.25 03/21/04 0 10,220 25,898
</TABLE>
---------------
(1) Two-thirds of the stock options granted allow SARs to be substituted for the
corresponding options.
(2) Since Mr. Eliason resigned from his position with the Company on January 16,
1995 to become President -- GTE Telecommunications Services, Inc., all
options granted to Mr. Eliason have lapsed.
GTE intends to acquire the Company's Class A Common Stock through the
Merger. In the Merger, each share of Class A Common Stock will be converted into
the right to receive $25.50 in cash. Accordingly, the price of the Company's
Class A Common Stock is not expected to increase above its current level.
In connection with the Merger, GTE has offered to make cash payments to the
holders of the options granted under the Option Plan who agree to surrender all
of their options. Each optionholder who agrees to surrender all of his or her
options will receive a cash payment for each option canceled, whether or not
currently vested (so long as the exercise period has not lapsed), equal to
$25.50 multiplied by the number of Class A Shares subject to such options, less
the exercise price for such option. If the vesting of the options is accelerated
and if all of the options are surrendered, the maximum amount paid to Messrs.
Whipple and Crouse and Ms. Lopez and Ms. Binion will be $168,388, $30,425,
$15,725, and $16,660, respectively.
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<PAGE> 68
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION/SAR VALUES
The following table provides information as to options and stock
appreciation rights exercised by each of the named executive officers of the
Company during 1994 and the value of options and stock appreciation rights held
by such officers at fiscal year end measured in terms of the closing price of
the Class A Shares on December 31, 1994.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS/SARS AT IN-THE-MONEY OPTIONS/SARS
FISCAL YEAR END(1) AT FISCAL YEAR END($)
SHARES ACQUIRED VALUE --------------------------- ---------------------------
NAME ON EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
--------------------- --------------- ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Dennis L. Whipple.... 0 $0 6,600/4,400 12,050/8,033 $53,213 $61,681
Todd E. Eliason(2)... 0 0 600/400 4,900/3,267 5,963 44,069
Randall L. Crouse.... 0 0 467/311 2,633/1,755 4,641 24,040
Pamela F. Lopez...... 0 0 0 1,700/1,133 0 14,769
Laura E. Binion...... 0 0 233/155 1,467/978 2,315 13,328
</TABLE>
---------------
(1) The SARs granted may be substituted for the corresponding stock options.
(2) Since Mr. Eliason resigned from his position with the Company on January 16,
1995 to become President -- GTE Telecommunications Services, Inc., all
options granted to Mr. Eliason have lapsed.
RETIREMENT PROGRAMS
Pension Plans
Employees of the Company participate in the pension plan maintained by GTE
Service Corporation (the "GTE Pension Plan"), which is a non-contributory
pension plan based on years of service. The estimated annual benefits payable,
calculated on a single life annuity basis, under the GTE Pension Plan at normal
retirement at age 65, based upon final average earnings and years of employment,
is illustrated in the table below:
PENSION PLAN TABLE
<TABLE>
<CAPTION>
YEARS OF SERVICE
FINAL AVERAGE ----------------------------------------------------------
EARNINGS 15 20 25 30 35
------------- ------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
$ 125,000 $ 26,166 $ 34,888 $ 43,610 $ 52,332 $ 61,054
150,000 31,532 42,042 52,553 63,063 73,574
175,000 37,041 49,388 61,735 74,082 86,429
200,000 42,407 56,542 70,678 84,813 99,949
300,000 64,157 85,542 106,928 128,313 149,699
400,000 85,907 114,542 143,178 171,813 200,449
</TABLE>
Pension benefits to be paid from the GTE Pension Plan and contributions to
the GTE Pension Plan are related to basic salary exclusive of overtime,
differentials, incentive compensation (except as otherwise described) and other
similar types of payment. Under the GTE Pension Plan, pensions are computed on a
two-rate formula basis of 1.15% to 1.45% for each year of service, with the
1.15% service credit being applied to that portion of the average annual salary
for the five highest consecutive years that does not exceed the Social Security
Integration Level (the portion of salary subject to the Federal Social Security
Act), and the 1.45% service credit being applied to that portion of the average
annual salary that exceeds said level. As of March 15, 1995, the credited years
of service under the GTE Pension Plans for Messrs. Whipple, Eliason and Crouse
and for Ms. Lopez and Ms. Binion are 23, 18, 30, 8 and 8, respectively.
Under federal law, an employee's benefits under a qualified pension plan
such as the GTE Pension Plan are limited to certain maximum amounts. Certain
qualified employees of the Company also participate in the
68
<PAGE> 69
GTE Supplemental Executive Retirement Plan ("SERP") which supplements the
benefits of any participant in the qualified pension plan by direct payment of a
lump sum or by an annuity, on an unfunded basis, of the amount by which any
participant's benefits under the GTE Pension Plan are limited by law. In
addition, the SERP includes a provision permitting the payment of additional
retirement benefits determined in a similar manner as under the qualified
pension plan on remuneration accrued under the management incentive plans. The
amounts of the additional payments are included in the Pension Plan Table set
forth above under the column entitled "Final Average Earnings". In 1994, Messrs.
Whipple, Eliason and Crouse and Ms. Lopez and Ms. Binion participated in SERP.
Executive Retired Life Insurance Plan
Messrs. Whipple and Eliason also participated in the GTE Executive Retired
Life Insurance Plan ("ERLIP"), which provides for a post-retirement life
insurance benefit of up to three times final base salary. Upon retirement, ERLIP
benefits may be paid as life insurance, or, optionally, an equivalent amount may
be paid as a lump sum payment equal to the present value of life insurance
amount (based on actuarial factors and the interest rate then in effect), as an
annuity or as installment payments. If an optional payment method is selected,
the ERLIP benefit will be based on the actuarial equivalent of the present value
of the life insurance amount.
TRANSITION ARRANGEMENTS
In order to provide a degree of continuity during the merger transition
process, GTE has entered into a Transition Bonus Agreement with two executives,
Dennis L. Whipple, President and Chief Executive Officer of the Company, and
Theodore J. Carrier, Treasurer and Chief Financial Officer of the Company. If
Mr. Whipple agrees to remain with GTE from the date of the Merger until December
31, 1995 or such earlier date as the parties may determine, he will be eligible
for a transition bonus equal to 100% of the sum of his final GTE annual base
rate of pay and the average of his GTE Executive Incentive Plan ("EIP") awards
for the 1993 and 1994 plan years. If Mr. Carrier agrees to remain with GTE
through December 31, 1995, he will be eligible for a transition bonus equal to
100% of the sum of his final GTE annual base rate of pay and the average of his
EIP awards for the 1992, 1993, and 1994 plan years. In addition, Mr. Whipple
will receive an initial bonus of $20,000. In 1995, Mr. Whipple will participate
in the 1994-1995 and 1994-1996 GTE Long-Term Incentive Plan performance bonus
award cycles and the 1995-1997 cycle. If Mr. Whipple remains on the payroll to
the end of the agreed upon period then, in lieu of an award for the 1995-1997
bonus award cycle, he will receive an equivalent bonus award prorated to
December 31, 1995.
Any executive officer whose employment is involuntarily terminated will
receive an enhanced retirement benefit paid out of GTE's qualified pension
assets pursuant to the terms of the GTE's Involuntary Separation Plan ("ISEP").
ISEP provides for a benefit based on length of service and/or grade level and
the benefit will not exceed 120% of one year's salary. Mr. Whipple's and Mr.
Carrier's ISEP benefits also include a non-qualified benefit attributable to
their EIP award for the three previous years.
69
<PAGE> 70
PERFORMANCE GRAPH(1)
The following table shows a comparison of the total return to holders of
the Class A Shares of the Company, its Industry Peer Group, and the Nasdaq
Composite Index ("NASDAQ Index").
[GRAPH]
<TABLE>
<CAPTION>
Measurement Period Contel Industry Peer
(Fiscal Year Covered) Cellular Group(2) NASDAQ Index
<S> <C> <C> <C>
Dec. 29, 1989 100 100 100
Dec. 31, 1990 78.22 65.33 84.92
Dec. 31, 1991 89.11 87.26 136.28
Dec. 31, 1992 70.30 94.73 158.58
Dec. 31, 1993 64.85 138.04 180.93
Dec. 31, 1994 98.76 163.71 176.91
</TABLE>
(1) Assumes $100 invested on December 29, 1989.
(2) Industry Peer Group is comprised of LIN Broadcasting Corp., United
States Cellular, Inc., Vanguard Cellular Systems and McCaw Cellular
Communications, Inc.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
CERTAIN BENEFICIAL OWNERS
The following table contains certain information regarding the only persons
known to the Company as of February 13, 1995 to be beneficial owners of more
than 5% of any class of the Company's voting securities:
<TABLE>
<CAPTION>
AMOUNT OF
NAME AND ADDRESS OF BENEFICIAL PERCENTAGE
TITLE OF CLASS BENEFICIAL OWNER OWNERSHIP OF CLASS
----------------------------- ----------------------------- ---------- ----------
<S> <C> <C> <C>
Class A Common Stock......... CS First Boston, Inc. 551,480(2) 5.54%
Park Avenue Plaza
55 East 52nd Street
New York, NY 10055(1)
Class B Common Stock......... GTE Corporation 90,000,000(4) 100%
One Stamford Forum
Stamford, CT 06904(3)
</TABLE>
---------------
(1) This information was obtained from a Schedule 13G filed with the SEC on
February 13, 1995 by CS First Boston, Inc.
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<PAGE> 71
(2) The Schedule 13G filed by CS First Boston, Inc. discloses that CS First
Boston, Inc. exercises sole voting power and sole dispositive power over
these shares.
(3) GTE acquired beneficial ownership of these shares as a result of the merger
of a subsidiary of GTE into Contel. Contel remains the holder of record of
these shares. The address of Contel is One Stamford Forum, Stamford,
Connecticut 06904.
(4) GTE, through Contel, exercises sole voting power and sole dispositive power
over these shares.
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The number of Class A Shares and shares of GTE Common Stock owned by each
director and executive officer of the Company as of February 13, 1995 is set
forth in the table below. Unless otherwise indicated, all persons shown in the
table have sole voting and investment power with respect to the shares shown.
<TABLE>
<CAPTION>
NUMBER OF SHARES
OF CLASS A COMMON
STOCK NUMBER OF SHARES OF
BENEFICIALLY GTE COMMON STOCK
NAME OF DIRECTOR OWNED(1) BENEFICIALLY OWNED(2)
------------------------------------------------ ----------------- ---------------------
<S> <C> <C>
Leo Jaffe....................................... 2,000 0
James L. Johnson................................ 0 722,085(3)(4)
Robert E. LaBlanc............................... 4,000 0
Charles R. Lee.................................. 0 634,148(3)(4)
Michael T. Masin................................ 0 75,291(3)(5)
Russell E. Palmer............................... 0 2,000(6)
Irwin Schneiderman.............................. 0 0
Nicholas L. Trivisonno.......................... 0 181,956(3)(4)
James W. Walter................................. 0 12,000(7)
Dennis L. Whipple............................... 18,650(8) 9,724(3)(4)
Charles Wohlstetter............................. 0 232,655
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF SHARES OF
CLASS A COMMON STOCK NUMBER OF SHARES OF
BENEFICIALLY GTE COMMON STOCK
NAME OF EXECUTIVE OFFICER OWNED(1) BENEFICIALLY OWNED(2)
---------------------------------------------- -------------------- ---------------------
<S> <C> <C>
Dennis L. Whipple............................. 18,650(8) 9,724(3)(4)
Randall L. Crouse............................. 3,100(8) 5,505(4)
Pamela F. Lopez............................... 1,700(8) 2,585(4)
Laura E. Binion............................... 1,700(8) 1,905(3)(4)
All directors and executive officers as a
group
(the "Executive Group")(9).................. 46,150 1,928,065(3)(4)
</TABLE>
---------------
(1) Each of these amounts, and all of them in the aggregate, represented less
than 1% of the outstanding Class A Shares as of February 13, 1995.
(2) Each of these amounts, and all of them in the aggregate, represented less
than 1% of the outstanding shares of GTE Common Stock as of January 31,
1995.
(3) Included in the number of shares beneficially owned by Messrs. Johnson, Lee,
Masin, Trivisonno, Whipple and Ms. Binion and the Executive Group are:
633,300; 553,399; 72,599; 170,233; 5,300; 816; and 1,461,279 shares,
respectively, which such persons have the right to acquire within 60 days
pursuant to stock options.
(4) This amount includes shares acquired through participation in GTE's
Consolidated Employee Stock Ownership Plan and/or Savings Plan.
(5) In addition to the shares of GTE Common Stock shown above, Mr. Masin owns
10,088 GTE Common Stock Units, which are payable in cash under the Deferred
Compensation Plan and Phantom Stock Plan for Nonemployee Members of the
Board of Directors of GTE Corporation (the "Deferred Compensation Plan").
Mr. Masin was a non-employee director of GTE prior to joining GTE as Vice
Chairman in 1993.
71
<PAGE> 72
(6) In addition to the shares of GTE Common Stock shown above, Mr. Palmer owns
1,294 GTE Common Stock Units, which are payable in cash under the Deferred
Compensation Plan.
(7) In addition to the shares of GTE Common Stock shown above, Mr. Walter owns
121,116 GTE Common Stock Units, which are payable in cash under the Deferred
Compensation Plan.
(8) Included in the number of shares beneficially owned by Messrs. Whipple and
Crouse and Ms. Lopez and Ms. Binion and the Executive Group are 18,650,
3,100, 1,700, 1,700 and 40,150 shares, respectively, which such persons have
the right to acquire upon the exercise of certain stock options. Pursuant to
an offer made by the Company in connection with the Merger, such options,
whether or not currently vested, may be surrendered for a cash payment equal
to $25.50 times the number of shares issuable upon exercise thereof, less
the exercise price applicable thereto. If Messrs. Whipple and Crouse and Ms.
Lopez and Ms. Binion and the Executive Group agree to surrender the options
they hold, the maximum amount payable to those individuals and the Executive
Group is $168,388, $30,425, $15,725, $16,600 and $290,898, respectively.
(9) Since Mr. Eliason resigned from his position with the Company on January 16,
1995 to become President -- GTE Telecommunications Services, Inc., all
options granted to Mr. Eliason have lapsed and are not included in this
table.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ARRANGEMENTS AND TRANSACTIONS WITH CONTEL AND GTE
The Company was initially formed as a wholly owned subsidiary of Contel
Corporation. On March 14, 1991, GTE Exchange Corporation, a wholly owned
subsidiary of GTE, merged into and with Contel (the "Contel Merger"), and Contel
became a wholly owned subsidiary of GTE. On January 7, 1993, Contel adopted a
Plan of Merger pursuant to which Contel will merge into and with GTE no later
than December 31, 1995.
GTE, through Contel, currently owns all of the Company's Class B Common
Stock, which constitutes approximately 90% of the Company's outstanding capital
stock. As a result of the disproportionate voting rights between Class A Common
Stock and Class B Common Stock (one vote for each share of the Class A Common
Stock compared with five votes for each share of the Class B Common Stock), GTE
controls approximately 97.8% of the combined voting power of both classes of the
Company's capital stock. Eight of the Company's eleven members of the Board of
Directors of the Company are currently executive officers or directors of GTE,
or one of its subsidiaries. Based on its continuing ownership of Class B Common
Stock, GTE will continue to have the ability, without the approval of the
Company's public stockholders, to elect all of the Company's directors, to
direct or substantially influence the Company's affairs and policies, to amend
the Company's Amended and Restated Certificate of Incorporation, to effect a
merger, sale of assets, or other corporate transaction and to defeat any hostile
tender offer.
On December 27, 1994, the Company's Board of Directors approved the Merger
and the Merger Agreement pursuant to which (i) each Class A Share (other than
Class A Shares as to which appraisal rights have been properly exercised under
the Delaware General Corporation Law), will be converted into the right to
receive $25.50 in cash, without interest, subject to back-up withholding taxes,
(ii) each Class A Share held by the Company and each outstanding share of the
common stock of CCI Acquisition will be cancelled, and no payment will be made
with respect thereto and (iii) each outstanding share of the Class B Common
Stock of the Company, par value $1.00 per share, will continue to be
outstanding.
The Company, Contel and GTE have a number of financial, operating and other
arrangements and have engaged in certain transactions believed to be of mutual
benefit. The terms of these arrangements have been established by Contel and GTE
in consultation with the Company but are not the result of arms-length
negotiations. The following is a summary of the principal arrangements and
transactions among the Company, Contel and GTE.
Taxes. The Company and GTE have a tax sharing arrangement under which the
Company and its subsidiaries are included in the consolidated federal income tax
returns and in certain state income and
72
<PAGE> 73
franchise tax returns of GTE. Tax payments, if applicable, are made by the
Company to GTE on a quarterly basis using methods prescribed by GTE. When the
Company and its subsidiaries generate a federal tax loss or excess credits
(credits exceeding tax liability), the Company is reimbursed by GTE on a
quarterly basis based on the actual loss or credit which may be utilized in the
consolidated GTE federal tax returns.
With respect to states permitting unitary or combined tax filings, GTE
includes the Company and its subsidiaries in its unitary or combined tax filing.
The Company pays to GTE an amount equal to the state income or franchise tax
that would have been payable by the Company or its subsidiaries if a separate
tax return had been filed.
Financing and Cash Management. During 1994, the Company relied on GTE for
its short term and long term cash needs. The Company's long term cash needs are
mainly the result of its acquisition in February 1990 of the cellular telephone
properties previously owned by McCaw Cellular Communications, Inc. in Kentucky,
Alabama and Tennessee (the "Southeast Properties") for approximately $1.3
billion and subsequent borrowings to pay interest on such amount. The $1.3
billion was originally funded by a loan from Contel Capital Corporation, which
at that time was a wholly owned subsidiary of Contel, which became due in July
1991. This original loan was replaced in 1991 with (i) a $700 million loan from
GTE to the Company bearing interest at 10.47% and maturing on March 1, 1998,
(ii) a $150 million loan from GTE Finance Corporation ("GTE Finance"), a wholly
owned subsidiary of GTE, bearing interest at 9.22% and maturing on February 15,
1993 (subsequently refinanced as set forth below), and (iii) a variable rate
note from GTE bearing interest at one and one-half percentage points above GTE's
external cost of borrowing these funds. The interest rate on the notes described
in (i) and (ii) above include an additional one and one-half percentage point of
interest in excess of the interest paid by GTE for these funds.
During 1992, the Company began a program of converting a portion of its
variable rate debt, including a portion of the debt incurred in connection with
the acquisition of the Southeast Properties, to fixed rate debt. As a result of
this program, the Company entered into the following loans in 1992, 1993 and
1994: (i) a $150 million loan from GTE Finance to the Company bearing interest
at 8.38% and maturing on September 25, 1997, (ii) a $150 million loan from GTE
Finance to the Company bearing interest at 8.97% and maturing on September 27,
1999, (iii) a $200 million loan from GTE to the Company bearing interest at
8.56% and maturing on December 31, 1996, (iv) a $200 million loan from GTE to
the Company bearing interest at 8.08% and maturing on December 31, 1995, (v) a
$150 million loan from GTE Finance to the Company bearing interest at 7.71% and
maturing on February 25, 1997 and (vi) a $75 million loan from GTE Finance to
the Company bearing interest at 9.90% and maturing on August 17, 2000. The
interest rates on these loans were comparable to rates for United States
Treasury securities of similar maturity plus 3% per annum at the time such loans
were entered into and are the rates which GTE believes approximate the interest
rates the Company could have obtained in the marketplace from nonaffiliated
lenders. These rates exceed the interest paid by GTE for these funds. As of
December 31, 1994, the Company has borrowed approximately $1.63 billion from GTE
and GTE Finance in fixed rate debt.
The Company fulfills its immediate cash needs with an intercompany note
from GTE (the "ICN"). The amount borrowed and the rate of interest on the ICN
fluctuate daily. As of December 31, 1994 the amount of the ICN was approximately
$495 million. During 1994, the interest rate on the ICN was the daily Prime Rate
quoted in The Wall Street Journal plus .75%, which is the interest rate which
GTE believes approximates the interest rate the Company could have obtained in
the marketplace from nonaffiliated lenders and exceeds the interest paid by GTE
for these funds.
In January 1995, GTE provided the Company with a letter stating that GTE
had no plans or intentions to discontinue providing financial support to the
Company through intercompany credit facilities to meet ongoing operating and
capital requirements, and that GTE would not demand payment under intercompany
credit facilities before June 30, 1996.
During 1994, the Company also received cash management services from GTE.
Trademark License Agreement. The Company and Contel have entered into an
agreement under which the Company has been granted a non-exclusive,
non-transferrable license and right to use the trademark,
73
<PAGE> 74
service mark and design "CONTEL CELLULAR". This grant may be terminated at the
sole discretion of Contel and will automatically terminate if Contel no longer
owns a majority of the outstanding common stock of the Company.
General Services. During 1994, the Company received numerous services,
both primary and supplemental, from GTE PCS pursuant to the Services Agreement
between the Company and GTEMC. These services were also provided to GTE's wholly
owned cellular subsidiary, GTE Mobilnet, and included accounting, finance,
marketing, human resources, legal, regulatory, governmental relations,
international, engineering, network design and maintenance services. In exchange
for these services, the Company reimbursed GTE PCS for its expenses in
accordance with a cost causative allocation formula which allocated pools of
costs to operating units based on one of several factors. These factors were
developed and applied to cost categories in an effort to allocate expenses to
operating units in proportion to the use and benefit of the underlying cost.
Under this Services Agreement, the Company paid GTE PCS approximately $49.8
million in 1994, which was approximately 34% of all of the expenses of GTE PCS.
Insurance. The Company and its officers, directors and employees are
insured under a master contract negotiated by GTE with a private insurance
carrier. The premium due the insurance carrier under this master policy is
allocated among all GTE subsidiaries based on the loss history, total payroll
and total number of vehicles owned by each subsidiary. The premium is paid
directly to the private insurance carrier by each subsidiary.
Competition. The Company, Contel and GTE have entered into the Competition
Agreement pursuant to which Contel and GTE have agreed that they will not engage
in the cellular business except in accordance with the terms of the Competition
Agreement. Under the Competition Agreement, GTE Mobilnet may continue to engage
in the cellular business. However, the Company has a right of first refusal with
respect to future acquisitions by GTE of cellular businesses except for (i)
acquisitions of minority interests in cellular properties held by GTE Mobilnet
and (ii) acquisitions contemplated at the time of the Contel Merger which were
specifically listed in the Competition Agreement. After the Merger is effective,
the Competition Agreement will be terminated.
Government Systems Contract. In 1994 the Company entered into an agreement
with GTE Government Systems Corporation ("GTE Systems") pursuant to which GTE
Systems will construct not less than 40 cell sites for the Company in 1994 and
50 cell sites in 1995. The cost to be charged the Company in 1994 will consist
of (i) an administrative fixed fee of $3.1 million, (ii) reimbursement of
materials and equipment estimated to be $7.8 million and (iii) reimbursement of
external labor costs estimated to be $3.0 million. Contract pricing in 1995 will
be agreed upon by the parties.
Cellular Exchange Transaction. The Company and the GTE Parties entered
into an Asset Exchange Agreement dated February 3, 1995. Under the terms of the
Asset Exchange Agreement the Company will receive a 28% interest in the San
Diego MSA in exchange for certain cellular assets in Albuquerque, New Mexico and
Minneapolis, Minnesota. The Company will operate the San Diego system pursuant
to a management agreement with the other GTE Parties. See "BUSINESS -- The
Company's Cellular Operations".
PAYMENTS TO OPTIONHOLDERS
Certain officers and employees of the Company are participants under the
Option Plan. Options were granted under the Option Plan at prices ranging from
$15.00 to $22.81. In connection with the Merger, the Company has offered to make
cash payments to those holders of options to purchase Class A Shares issued
pursuant to the Option Plan who agree to surrender all of their options. Each
optionholder who agrees to surrender all of his or her options will receive a
cash payment for each option cancelled, whether or not currently vested (so long
as the exercise period has not lapsed), equal to $25.50 multiplied by the number
of Class A Shares subject to such options, less the exercise price for such
option. If the vesting of the options is accelerated and if all of the options
are surrendered as described above, Dennis L. Whipple will receive $168,388. No
other officer will receive an amount greater than $60,000.
74
<PAGE> 75
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) Financial Statements
The following consolidated financial statements of Contel Cellular Inc. are
included in Part II, Item 8:
<TABLE>
<CAPTION>
PAGE
REFERENCE
---------
<S> <C>
Report of Independent Public Accountants................................... 23
Consolidated Statements of Operations -- For the Years Ended December 31,
1994, 1993 and 1992...................................................... 24
Consolidated Statements of Cash Flows -- For the Years Ended December 31,
1994, 1993 and 1992...................................................... 25
Consolidated Balance Sheets -- As of December 31, 1994 and 1993............ 26-27
Consolidated Statements of Changes in Stockholders' Deficit -- For the
Years Ended December 31, 1994, 1993 and 1992............................. 28
Notes to Consolidated Financial Statements................................. 29-45
</TABLE>
(a) (2) Financial Statement Schedules
<TABLE>
<S> <C>
Valuation and Qualifying Accounts -- For the Years Ended December 31, 1994,
1993 and 1992............................................................ 46
Report of Independent Public Accountants on Compilation of Combined
Financial Statements..................................................... 47
Combined Statements of Operations -- For the Years Ended December 31, 1994,
1993 and 1992............................................................ 48
Combined Statements of Cash Flows -- For the Years Ended December 31, 1994,
1993 and 1992............................................................ 49
Combined Balance Sheets -- As of December 31, 1994 and 1993................ 50
Combined Statements of Changes in Partners' Capital -- For the Years Ended
December 31, 1994, 1993 and 1992......................................... 51
Notes to Combined Financial Statements..................................... 52-56
</TABLE>
All other schedules are omitted because they are not applicable, not
required, or because the required information is included in the accompanying
financial statements or notes thereto.
(a) (3) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO.
-----------
<C> <S> <C>
2. -- Agreement and Plan of Merger, as Amended, dated as of December 27, 1994, among
GTE Corporation, Contel Corporation, Contel Cellular Acquisition Corporation,
and Contel Cellular Inc., filed herewith.
3(a). -- Restated Certificate of Incorporation, incorporated by reference from the
Registration Statement on Form S-1 (Registration No. 33-17323).
3(b). -- By Laws, incorporated by reference from the Registration Statement on Form S-1
(Registration No. 33-17323).
4(a). -- Promissory Note dated April 5, 1991, in the principal amount of $700,000,000
payable by Contel Cellular Inc. to GTE Corporation, incorporated by reference
from the Annual Report on Form 10-K for the fiscal year ended December 31, 1990.
</TABLE>
75
<PAGE> 76
<TABLE>
<CAPTION>
EXHIBIT NO.
-----------
<C> <S> <C>
4(b). -- Promissory Note dated April 5, 1991 in the principal amount of $150,000,000
payable by Contel Cellular Inc. to GTE Finance Corporation, incorporated by
reference from the Annual Report on Form 10-K for the fiscal year ended December
31, 1990.
4(c). -- Promissory Note dated January 1, 1991, payable by Contel Cellular Inc. to GTE
Corporation, incorporated by reference from the Annual Report on Form 10-K for
the fiscal year ended December 31, 1991.
4(d). -- Promissory Note dated September 25, 1992, in the principal amount of
$150,000,000 payable by Contel Cellular Inc. to GTE Finance Corporation,
incorporated by reference from the Annual Report on Form 10-K for the fiscal
year ended December 31, 1992.
4(e). -- Promissory Note dated September 25, 1992, in the principal amount of
$150,000,000 payable by Contel Cellular Inc. to GTE Finance Corporation,
incorporated by reference from the Annual Report on Form 10-K for the fiscal
year ended December 31, 1992.
4(f). -- Promissory Note dated December 31, 1992, in the principal amount of $200,000,000
payable by Contel Cellular Inc. to GTE Corporation, incorporated by reference
from the Annual Report on Form 10-K for the fiscal year ended December 31, 1992.
4(g). -- Promissory Note dated December 31, 1992, in the principal amount of $200,000,000
payable by Contel Cellular Inc. to GTE Corporation, incorporated by reference
from the Annual Report on Form 10-K for the fiscal year ended December 31, 1992.
4(h). -- Promissory Note dated February 25, 1993, in the principal amount of $150,000,000
payable by Contel Cellular Inc. to GTE Finance Corporation, incorporated by
reference from the Annual Report on Form 10-K for the fiscal year ended December
31, 1992.
4(i). -- Promissory Noted dated August 17, 1994, in the principal amount of $75,000,000
payable by Contel Cellular Inc. to GTE Finance Corporation, filed herewith.
10(a). -- 1987 Contel Cellular Inc. Key Employee Stock Plan incorporated by reference from
the Registration Statement on Form S-1 (Registration No. 33-17323). Amendment
dated September 9, 1989, incorporated by reference from the Annual Report on
Form 10-K for the fiscal year ended December 31, 1989.
10(b). -- Third Restated Competition Agreement among Contel Corporation, GTE Corporation
and Contel Cellular Inc., dated as of March 14, 1991, incorporated by reference
from the Annual Report on Form 10-K for the fiscal year ended December 31, 1990.
10(c). -- Services Agreement between Contel Cellular Inc. and GTE Mobile Communications
Service Corporation dated May 1, 1991, incorporated by reference from the Annual
Report on Form 10-K for the fiscal year ended December 31, 1991. First Amendment
to the Service Agreement dated as of September 5, 1991, incorporated by
reference from the Annual Report on Form 10-K for the fiscal year ended December
31, 1992. Second Amendment to the Services Agreement dated as of January 1,
1992, incorporated by reference from the Annual Report on Form 10-K for the
fiscal year ended December 31, 1992. Third Amendment to the Services Agreement
dated March 11, 1993, incorporated by reference from the Annual Report on Form
10-K for the fiscal year ended December 31, 1993.
10(d). -- GTE Corporation Executive Incentive Plan, as amended, incorporated by reference
from the Annual Report on Form 10-K for the fiscal year ended December 31, 1992.
10(e). -- GTE Corporation Model Unit Incentive Plan incorporated by reference from the
Annual Report on Form 10-K for the fiscal year ended December 31, 1991.
Amendment to GTE Corporation Model Unit Incentive Plan, incorporated by
reference from the Annual Report on Form 10-K for the fiscal year ended December
31, 1992.
10(f). -- GTE Corporation Executive Retired Life Insurance Plan, as amended, incorporated
by reference from the Annual Report on Form 10-K for the fiscal year ended
December 31, 1991.
</TABLE>
76
<PAGE> 77
<TABLE>
<CAPTION>
EXHIBIT NO.
-----------
<C> <S> <C>
10(g). -- GTE Corporation Supplemental Executive Retirement Plan, as amended, incorporated
by reference from the Annual Report on Form 10-K for the fiscal year ended
December 31, 1992. Amendment to GTE Corporation Supplemental Executive
Retirement Plan dated December 30, 1993, incorporated by reference from the
Annual Report on Form 10-K for the fiscal year ended December 31, 1993.
10(h). -- GTE Mobile Communications Management Incentive Plan, incorporated by reference
from the Annual Report on Form 10-K for the fiscal year ended December 31, 1992.
10(i). -- Purchase Agreement between Contel Cellular Inc. and NYNEX Mobile Communications
Company dated as of December 3, 1993, incorporated by reference from the Annual
Report on Form 10-K for the fiscal year ended December 31, 1993.
21. -- Subsidiaries of the Registrant, filed herewith.
23(a). -- Consents of Arthur Andersen LLP, filed herewith.
23(b). -- Consent of Ernst & Young LLP, filed herewith.
23(c). -- Consents of Coopers & Lybrand LLP, filed herewith.
27 -- Financial Data Schedule (for SEC use only).
99(a). -- Report of Independent Accountants -- Los Angeles SMSA Limited Partnership, filed
herewith.
99(b). -- Report of Independent Accountants -- Washington D.C. SMSA Limited Partnership,
filed herewith.
99(c). -- Report of Independent Public Accountants -- GTE Mobilnet of California Limited
Partnership, filed herewith.
99(d). -- Report of Independent Public Accountants -- GTE Mobilnet of South Texas Limited
Partnership, filed herewith.
99(e). -- Report of Independent Auditors -- San Antonio SMSA Limited Partnership, filed
herewith.
99(f). -- Report of Independent Public Accountants -- Albucell Limited Partnership, filed
herewith.
</TABLE>
77
<PAGE> 78
(b) Report on Form 8-K:
None
78
<PAGE> 79
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.
CONTEL CELLULAR INC.
By: /s/ THEODORE J. CARRIER
------------------------------------
Theodore J. Carrier
Treasurer and Principal Financial
and
Accounting Officer
Date: March 31, 1995
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------------------------------------------- ------------------------------ ---------------
<C> <S> <C>
/s/ DENNIS L. WHIPPLE President and Principal March 31, 1995
--------------------------------------------- Executive Officer and
Dennis L. Whipple Director
/s/ THEODORE J. CARRIER Treasurer and Principal March 31, 1995
--------------------------------------------- Financial and Accounting
Theodore J. Carrier Officer
/s/ LEO JAFFE Director March 31, 1995
---------------------------------------------
Leo Jaffe
/s/ JAMES L. JOHNSON Director March 31, 1995
---------------------------------------------
James L. Johnson
/s/ ROBERT E. LABLANC Director March 31, 1995
---------------------------------------------
Robert E. LaBlanc
/s/ CHARLES R. LEE Director March 31, 1995
---------------------------------------------
Charles R. Lee
/s/ MICHAEL T. MASIN Director March 31, 1995
---------------------------------------------
Michael T. Masin
/s/ RUSSELL E. PALMER Director March 31, 1995
---------------------------------------------
Russell E. Palmer
/s/ IRWIN SCHNEIDERMAN Director March 31, 1995
---------------------------------------------
Irwin Schneiderman
</TABLE>
79
<PAGE> 80
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------------------------------------------- ------------------------ ---------------------
<C> <S> <C>
/s/ NICHOLAS L. TRIVISONNO Director March 31, 1995
---------------------------------------------
Nicholas L. Trivisonno
/s/ JAMES W. WALTER Director March 31, 1995
---------------------------------------------
James W. Walter
Director
---------------------------------------------
Charles Wohlstetter
</TABLE>
80
<PAGE> 1
EXHIBIT 2
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER dated as of December 27, 1994 (the
"Agreement") among GTE Corporation, a New York corporation ("GTE"), Contel
Corporation, a Delaware corporation and a wholly-owned subsidiary of GTE
("Contel"), Contel Cellular Acquisition Corporation, a Delaware corporation
("Purchaser") and a wholly-owned subsidiary of Contel, and Contel Cellular Inc.,
a Delaware corporation (the "Company").
R E C I T A L S
WHEREAS, Contel has adopted a plan of liquidation;
WHEREAS, GTE, through its wholly-owned subsidiary, Contel, is presently the
beneficial owner of all of the outstanding shares of Class B Common Stock of the
Company (as defined below);
WHEREAS, Contel desires to acquire beneficial ownership of the remaining
equity interest in the Company (the "Acquisition"), and has caused Purchaser to
be formed to accomplish such purpose;
WHEREAS, Contel and Purchaser intend to accomplish the Acquisition through
a merger of Purchaser with and into the Company (the "Merger"), upon the terms
and subject to the conditions set forth herein; and
WHEREAS, the respective Boards of Directors of Purchaser and the Company
and the Special Committee appointed by the Board of Directors of the Company to
consider the Acquisition have approved the Merger upon the terms and subject to
the conditions set forth herein.
NOW, THEREFORE, the parties hereto agree as follows:
ARTICLE I
DEFINED TERMS
The following terms used in this Agreement shall have the following
meanings:
"Acquisition" has the meaning set forth in the recitals hereto.
"Actions" has the meaning set forth in Section 6.2 hereof.
"Certificates" has the meaning set forth in Section 3.2(b) hereof.
"Class A Common Stock" means the Class A Common Stock of the Company, par
value $1.00 per share.
"Class B Common Stock" means the Class B Common Stock of the Company, par
value $1.00 per share.
"Commission" means the Securities and Exchange Commission and/or any other
governmental entity which administers either the Securities Act or the Exchange
Act.
"Common Stock" means the Class A Common Stock and Class B Common Stock.
"Company" has the meaning set forth in the preamble hereto.
"Constituent Corporations" has the meaning set forth in Section 2.1 hereof.
"Contel" has the meaning set forth in the preamble hereto.
"Depositary" has the meaning set forth in Section 3.2 hereof.
"DGCL" means the Delaware General Corporation Law.
"Dissenting Shares" has the meaning set forth in Section 3.1 hereof.
81
<PAGE> 2
"Effective Time" has the meaning set forth in Section 2.2 hereof.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, and
the rules and regulations promulgated thereunder.
"GTE" has the meaning set forth in the preamble hereto.
"Indemnified Parties" has the meaning set forth in Section 6.2 hereof.
"Indemnitor" has the meaning set forth in Section 6.2 hereof.
"Information Statement" means the information statement on Form 14C
relating to the Merger, as amended or supplemented, to be prepared and
circulated as contemplated by Section 6.3 hereof.
"Merger" has the meaning set forth in the recitals hereto.
"Merger Consideration" has the meaning set forth in Section 2.4 hereof.
"Permitted Investments" has the meaning set forth in Section 3.2 hereof.
"Purchaser" has the meaning set forth in the preamble hereto.
"Securities Act" means the Securities Act of 1933, as amended, and the
rules and regulations promulgated thereunder.
"Stockholder Materials" has the meaning set forth in Section 6.3 hereof.
"Surviving Corporation" has the meaning set forth in Section 2.1 hereof.
"Transaction Statement" means the transaction statement on Form 13e-3
relating to the Merger, as amended or supplemented, to be prepared and
circulated as provided in Section 6.3 hereof.
ARTICLE II
THE MERGER
SECTION 2.1 The Merger. Upon the terms and subject to the conditions
hereof, and in accordance with the applicable provisions of the DGCL, Purchaser
shall be merged with and into the Company. The Company shall continue as the
surviving corporation (the "Surviving Corporation") in the Merger and the
separate corporate existence of Purchaser shall cease (Purchaser and the Company
are sometimes referred to herein as the "Constituent Corporations"). From and
after the Effective Time, the Surviving Corporation shall possess all of the
rights, privileges, immunities and franchises, and shall be responsible and
liable for all of the liabilities and obligations, of each of the Constituent
Corporations, all as set forth in Section 259 of the DGCL.
SECTION 2.2 Effective Time. The Merger shall be consummated by filing with
the Secretary of State of Delaware a Certificate of Merger executed in
accordance with the relevant provisions of the DGCL. The Merger shall become
effective at the time of filing with the Secretary of State of Delaware of a
Certificate of Merger. The date and time when the Merger shall become effective
is herein referred to as the "Effective Time."
SECTION 2.3 Closing. Upon the terms and subject to the conditions hereof,
as soon as practicable after the execution of the written consents of
shareholders contemplated by Sections 6.3(b) and (c) hereof, the Company and
Purchaser shall file the Certificate of Merger in accordance with Section 2.2
hereof, and the Company and Purchaser shall take all such other and further
actions as may be required by law to make the Merger effective.
SECTION 2.4 Conversion of Shares of Common Stock. (a) Each share of Class
A Common Stock issued and outstanding immediately prior to the Effective Time
(other than Dissenting Shares, if any, and shares of Class A Common Stock held
by the Company, Purchaser, Contel or GTE) shall, by virtue of the Merger and
without any action on the part of the holder thereof, be cancelled and shall
cease to exist and shall
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be converted into the right to receive cash in the amount of $25.50 in
accordance with Section 3.2 hereof. The consideration to be paid in respect of
each share of Class A Common Stock in accordance with the foregoing is
hereinafter referred to as the "Merger Consideration."
(b) Each share of Class A Common Stock held by the Company, Purchaser,
Contel or GTE immediately prior to the Effective Time shall, by virtue of the
Merger and without any action on the part of the holder thereof, be cancelled
and cease to exist, without any conversion thereof and without any Merger
Consideration being paid with respect thereto.
(c) Each share of Class B Common Stock issued and outstanding immediately
prior to the Effective Time shall by virtue of the Merger, and without any
action on the part of the holder thereof, be converted into one newly issued
share of the Class B Common Stock of the Surviving Corporation.
SECTION 2.5 Cancellation of Purchaser Capital Stock. Each share of common
stock of Purchaser issued and outstanding immediately prior to the Effective
Time shall, by virtue of the Merger, and without any action on the part of the
holder thereof, be cancelled and cease to exist, without any conversion thereof
and without any Merger Consideration being paid with respect thereto.
SECTION 2.6 Certificate of Incorporation. The Certificate of Incorporation
of the Company, as in effect immediately prior to the Effective Time, shall be
the Certificate of Incorporation of the Surviving Corporation, until thereafter
amended.
SECTION 2.7 By-Laws. The By-Laws of the Company, as in effect immediately
prior to the Effective Time, shall be the By-Laws of the Surviving Corporation,
until thereafter amended.
SECTION 2.8 Directors. The directors of the Company at the Effective Time
shall be the directors of the Surviving Corporation and shall hold office from
the Effective Time until their respective successors are duly elected or
appointed and qualified in the manner provided in the Certificate of
Incorporation and By-Laws of the Surviving Corporation, or as otherwise provided
by law.
SECTION 2.9 Officers. The officers of the Company at the Effective Time
shall be the initial officers of the Surviving Corporation, all such officers to
hold office from the Effective Time until their respective successors are duly
elected or appointed and qualified in the manner provided in the Certificate of
Incorporation and By-Laws of the Surviving Corporation, or as otherwise provided
by law.
SECTION 2.10 Further Assistance. If at any time after the Effective Time,
the Surviving Corporation shall consider or be advised that any deeds, bills of
sale, assignments or assurances or any other acts or thing are necessary,
desirable or proper (i) to vest, perfect or confirm, of record or otherwise, in
the Surviving Corporation, its right, title or interest in, to or under any of
the rights, properties or assets of the Constituent Corporations acquired or to
be acquired as a result of the Merger, or (ii) otherwise to carry out the
purposes of this Agreement, the Surviving Corporation and its proper officers
and directors or their designees shall be authorized to execute and deliver, in
the name and on behalf of the Constituent Corporations, all such deeds, bills of
sale, assignments and assurances and do, in the name and on behalf of the
Constituent Corporations, all such other acts and things necessary, desirable or
proper to vest, perfect or confirm its right, title or interest in, to or under
any of the rights, properties or assets of the Constituent Corporations acquired
or to be acquired as a result of the Merger and otherwise to carry out the
purposes of this Agreement.
ARTICLE III
DISSENTING SHARES; EXCHANGE AND PAYMENT FOR SHARES
SECTION 3.1 Dissenting Shares. Notwithstanding anything in this Agreement
to the contrary, shares of Class A Common Stock that are issued and outstanding
immediately prior to the Effective Time and that are held by a stockholder who
has the right (to the extent such right is available by law) to demand and
receive payment of the fair value of such holder's stock pursuant to Section 262
of the DGCL (the "Dissenting Shares") shall not be converted into the right to
receive the Merger Consideration provided for in Section 2.4(a) of this
Agreement (unless and until such holder shall have failed to perfect or shall
have
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effectively withdrawn or lost such right under the DGCL, as the case may be),
but the holder thereof shall only be entitled to such rights as are granted by
Delaware law. If such holder shall have so failed to perfect or shall have
effectively withdrawn or lost such right, such holder's shares of Class A Common
Stock shall thereupon be deemed to have been converted at the Effective Time
into the right to receive the Merger Consideration without any interest thereon.
If the holder of any shares of Class A Common Stock shall become entitled to
receive payment for such shares pursuant to Section 262 of the DGCL, such
payment shall be made by the Surviving Corporation.
SECTION 3.2 Payment for Shares. Prior to the Effective Time, Purchaser
shall or, in the event Purchaser shall fail to do so, GTE shall:
(a) designate a bank or trust company to act as Depositary in the Merger
(the "Depositary") and Purchaser or GTE shall enter into a mutually acceptable
agreement with the Depositary pursuant to which, after the Effective Time, the
Depositary will distribute the Merger Consideration on a timely basis and (b)
according to the terms of the agreement with Depositary, deposit or cause to be
deposited with the Depositary cash in the aggregate amount required with respect
to the conversion of shares of Class A Common Stock at the Effective Time
pursuant to Section 2.4(a) hereof. Pending distribution of the cash deposited
with the Depositary, Purchaser may from time to time direct the Depositary to
invest such cash, provided that such investments (i) shall be (A) obligations of
(or guaranteed by) the United States of America or its agencies or
instrumentalities, (B) commercial paper obligations receiving the highest rating
from either Moody's Investors Services, Inc. or Standard & Poor's Corporation,
(C) certificates of deposit, bank repurchase agreements or bankers acceptances
on interest bearing accounts of commercial banks with capital exceeding $250
million (collectively, "Permitted Investments") or (D) money market funds that
are required by their most current prospectus to have at least 80% of their
assets invested in Permitted Investments and (ii) shall have maturities that
will not prevent or delay payments to be made pursuant to this section.
(b) As soon as practicable after the Effective Time, the Depositary shall
be instructed to mail to each record holder (other than any holder of Dissenting
Shares, the Company, Purchaser, Contel and GTE) of a certificate or certificates
that immediately prior to the Effective Time represented shares of Class A
Common Stock (the "Certificates") a form of letter of transmittal (which shall
specify that delivery shall be effected, and risk of loss shall pass, only upon
proper delivery of the Certificates to the Depositary) and instructions for use
in effecting the surrender of the Certificates in exchange for the Merger
Consideration. Upon surrender to the Depositary of a Certificate, together with
such letter of transmittal duly executed and completed in accordance with the
instructions thereon, the holder of such Certificate shall be entitled to
receive in exchange therefor consideration equal to the number of shares of
Class A Common Stock represented by such Certificate multiplied by the Merger
Consideration and such Certificate shall forthwith be cancelled. No interest
will be paid or accrued on the Merger Consideration. All distributions to
holders of Certificates shall be subject to any applicable income tax
withholding. If the Merger Consideration is to be distributed to a person other
than the person in whose name the Certificate surrendered is registered, it
shall be a condition of such distribution that the Certificate so surrendered
shall be properly endorsed or otherwise in proper form for transfer (including
signature guarantees if required by Purchaser) and that the person requesting
such distribution shall pay any transfer or other taxes required by reason of
such distribution to a person other than the registered holder of the
Certificate surrendered or, in the alternative, establish to the satisfaction of
the Surviving Corporation that such tax has been paid or is not applicable.
After one hundred and eighty (180) days following the Effective Time, the
Surviving Corporation shall be entitled to require the Depositary to deliver to
it any cash (including any interest received with respect thereto) that it has
made available to the Depositary and that has not been disbursed to holders of
Certificates, and thereafter such holders shall be entitled to look to the
Surviving Corporation only as general creditors thereof with respect to the cash
payable upon due surrender of their Certificates. The Surviving Corporation
shall pay all charges and expenses, including those of the Depositary, in
connection with the distribution of the Merger Consideration for shares of Class
A Common Stock. Until surrendered in accordance with the provisions of this
Section 3.2, each Certificate (other than Certificates representing Dissenting
Shares or shares of Class A Stock held by the Company, Purchaser, Contel or GTE)
shall represent for all purposes the right to receive consideration equal
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to the Merger Consideration multiplied by the number of shares of Class A Common
Stock evidenced by such Certificate. From and after the Effective Time, holders
of Certificates immediately prior to the Merger shall have no right to vote or
to receive any dividends or other distributions with respect to any shares of
Class A Common Stock that were theretofore represented by such Certificates,
other than any dividends or other distributions payable to holders of record as
of a date prior to the Effective Time, and shall have no other rights in respect
thereof other than as provided herein or by law.
(c) From and after the Effective Time, there shall be no transfers on the
stock transfer books of the Surviving Corporation of the shares of Class A
Common Stock that were outstanding immediately prior to the Effective Time. If,
after the Effective Time, Certificates are presented to the Surviving
Corporation, other than Certificates in respect of Dissenting Shares, the rights
to which have been perfected or not withdrawn or lost under the DGCL, they shall
be cancelled and exchanged for Merger Consideration as provided in this Article
III.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to Purchaser, Contel and GTE as
follows:
SECTION 4.1 Organization and Qualification. The Company is a corporation
duly organized, validly existing and in good standing under the laws of Delaware
and has the requisite corporate power to carry on its business as now conducted.
SECTION 4.2 Authority Relative to this Agreement. The Company has the
requisite corporate power and authority to enter into this Agreement and to
perform its obligations hereunder. The execution and delivery of this Agreement
by the Company and the consummation by the Company of the transactions
contemplated hereby have been duly authorized by the Board of Directors of the
Company, and no other corporate proceeding on the part of the Company is
necessary to authorize the execution, delivery and performance of this Agreement
and the transactions contemplated hereby (other than the approval of
stockholders of the Company required to consummate the Merger). This Agreement
has been duly executed and delivered by the Company and constitutes its valid
and binding obligation, enforceable against it in accordance with its terms,
except to the extent that enforceability may be limited by applicable
bankruptcy, insolvency, reorganization or other laws affecting the enforcement
of creditors' rights generally or by general equitable principles.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF CONTEL, GTE AND PURCHASER
SECTION 5.1 Representations and Warranties of Purchaser
Purchaser represents and warrants to the Company as follows:
(a) Organization and Qualification. It is a corporation duly
organized, validly existing and in good standing under the laws of its
jurisdiction of organization and has the requisite corporate power to carry
on its business as now conducted.
(b) Authority Relative to this Agreement. It has the requisite
corporate power and authority to enter into this Agreement and to perform
its obligations hereunder. The execution and delivery of this Agreement by
it and the consummation by it of the transactions contemplated hereby have
been duly authorized by its Board of Directors, and no other corporate
proceeding on its part is necessary to authorize the execution, delivery
and performance of this Agreement and the transactions contemplated hereby
(other than the approval of its stockholders required to consummate the
Merger). This Agreement has been duly executed and delivered by it and
constitutes its valid and binding obligation, enforceable against it in
accordance with its terms, except to the extent that enforceability may be
limited
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by applicable bankruptcy, insolvency, reorganization or other laws
affecting the enforcement of creditors' rights generally or by general
equitable principles.
(c) No Prior Activities. It has not incurred, nor will it incur,
directly or through any subsidiary, any liabilities or obligations, except
those incurred in connection with its organization or with the negotiation
of this Agreement and the consummation of the transactions contemplated
hereby, including the Merger. Except as set forth in the previous sentence,
it has not engaged, directly or through any subsidiary, in any business
activities of any type or kind whatsoever, or entered into any agreements
or arrangements with any person or entity.
SECTION 5.2 Representations and Warranties of GTE and Contel.
Contel and GTE each represents and warrants to the Company as follows:
(a) Organization and Qualification. It is a corporation duly
organized, validly existing and in good standing under the laws of its
jurisdiction of organization and has the requisite corporate power to carry
on its business as now conducted.
(b) Authority Relative to this Agreement. It has the requisite
corporate power and authority to enter into this Agreement and to perform
its obligations hereunder. The execution and delivery of this Agreement by
it and the consummation by it of the transactions contemplated hereby have
been duly authorized by its Board of Directors, and no other corporate
proceeding on its part is necessary to authorize the execution, delivery
and performance of this Agreement and the transactions contemplated hereby.
This Agreement has been duly executed and delivered by it and constitutes
its valid and binding obligation, enforceable against it in accordance with
its terms, except to the extent that enforceability may be limited by
applicable bankruptcy, insolvency, reorganization or other laws affecting
the enforcement of creditors' rights generally or by general equitable
principles.
ARTICLE VI
COVENANTS
SECTION 6.1 Conduct of Business of the Company. Except as otherwise
expressly provided in this Agreement, from the date of this Agreement to the
Effective Time, the Company will conduct its business in the ordinary course.
SECTION 6.2 Indemnification, Etc. The Company shall indemnify and hold
harmless, and, after the Effective Time, the Surviving Corporation and GTE (the
Company, the Surviving Corporation and GTE, for the purpose of this Section 6.2
being the "Indemnitor") will indemnify and hold harmless, each present and
former director and officer of the Company (the "Indemnified Parties") against
any losses, claims, damages, liabilities, costs, expenses, judgments and amounts
paid in settlement in connection with any claim, action, suit, proceeding or
investigation (collectively, "Actions") arising out of or pertaining to any
action or omission occurring prior to the Effective Time (including without
limitation, any Actions which arise out of or relate to the transactions
contemplated by this Agreement) to the full extent permitted under the DGCL (and
the Indemnitor will advance reasonable expenses to each such person to the full
extent so permitted); provided, however, that any determination required to be
made with respect to whether an Indemnified Party's conduct complied with the
standards set forth in the DGCL shall be made in accordance with the DGCL, and
the Indemnitor shall pay the reasonable fees and expenses incurred in connection
with such determination. If any such Action is brought against any Indemnified
Party (whether arising before or after the Effective Time), (a) the Indemnified
Parties may retain counsel reasonably satisfactory to them and the Indemnitor,
(b) the Indemnitor shall pay all reasonable fees and expenses of such counsel
for the Indemnified Parties promptly as statements therefor are received, and
(c) the Indemnitor and the Indemnified Parties will cooperate in the vigorous
defense of any such matter, provided, that the Indemnitor shall not be liable
for any such settlement effected without its written consent, which consent,
however, shall not be unreasonably withheld. Any Indemnified Party wishing to
claim indemnification under this Section 6.2, upon learning of any such Action
shall notify the Indemnitor thereof and shall deliver to the Indemnitor an
undertaking to repay any amounts
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advanced pursuant hereto when and if a court of competent jurisdiction shall
ultimately determine, after exhaustion of all avenues of appeal, that such
Indemnified Party was not entitled to indemnification under this Section. The
Indemnified Parties as a group may retain only one law firm in each jurisdiction
to represent them with respect to any such matter unless there is, under
applicable standards of professional conduct, a conflict on any significant
issue between the positions of any two or more Indemnified Parties. GTE and
Purchaser agree to cause to be maintained in effect the present policy of
directors' and officers' liability insurance (or an equivalent policy) covering
those persons who are currently covered by such policy for three years from the
Effective Time. This Section 6.2 shall survive consummation of the Merger.
SECTION 6.3 Stockholders' Approval; SEC Filings.
(a) Subject to the terms and conditions contained herein, this
Agreement and the transactions contemplated hereby shall be submitted by
the Company and Purchaser to their respective stockholders for approval.
Promptly after the execution of this Agreement, the Company and Purchaser
shall together, or pursuant to an allocation of responsibility to be agreed
upon between them, (i) use their best efforts to obtain all information
required to be included in the Information Statement, the Transaction
Statement and related materials (the "Stockholder Materials"), (ii) prepare
and file with the Commission the Stockholder Materials, (iii) use all
reasonable efforts to have the Stockholder Materials cleared by the
Commission as promptly as practicable, and (iv) promptly following
clearance by the Commission, mail the Stockholders Materials to
shareholders of the Company. Purchaser and the Company also shall take any
action required to be taken under state blue sky or securities laws or the
rules and regulations of any securities exchanges or markets on which their
securities are listed for trading in connection with transactions
contemplated hereby including the Merger. The Information Statement and the
Transaction Statement shall, when first mailed to the stockholders of the
Company and as amended or supplemented thereafter, comply as to form in all
material respects with all applicable requirements of federal securities
laws. Purchaser and the Company shall each furnish to the other and their
counsel all such information as may be required to prepare the Stockholders
Materials. All such information provided and to be provided by Purchaser
and the Company respectively, for use in the Stockholder Materials shall,
on the date the Information Statement or Transaction Statement is first
mailed to the Company's stockholders and as amended or supplemented
thereafter, be true and correct in all material respects and shall not omit
to state any material fact necessary in order to make such information in
light of the circumstances in which it was given not misleading, and the
Company and the Purchaser each agree to correct any information provided by
it for use in the Information Statement or Transaction Statement which
shall have become false or misleading in any material respect.
(b) Subject to the terms and conditions set forth in the next
sentence, GTE, the Company and Contel agree that Contel shall execute a
written consent as majority shareholder of the Company approving this
Agreement and the Merger. Such consent shall be executed by Contel only
after the passage of any waiting periods, following the mailing of the
Stockholders' Materials to the stockholders of the Company, required for
compliance with the Securities Act, the Exchange Act, the DGCL and any
other laws, rules or regulations applicable to Company.
(c) Contel shall also execute a written consent as majority
shareholder of Purchaser approving this Agreement and the Merger. Such
consent shall be executed concurrently with the execution of the consent
referred to in paragraph (b).
Section 6.4 Consents. Subject to the terms and conditions herein provided,
each of the parties hereto agrees to use its commercially reasonable efforts to
take, or cause to be taken, all action and to do, or cause to be done, all
things necessary, proper or advisable to consummate and make effective as
promptly as practicable the transactions contemplated by this Agreement, and to
cooperate with each other in connection with the foregoing, including using
commercially reasonable efforts to (i) obtain all necessary waivers, consents
and approvals from other parties to loan agreements, leases and other contracts,
(ii) obtain all necessary consents, approvals and authorizations as are required
to be obtained under any federal, state or foreign law or regulations, (iii)
defend all lawsuits or other legal proceedings challenging this Agreement or the
consummation of the transactions contemplated hereby, (iv) lift or rescind any
injunction or restraining
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order or other order adversely affecting the ability of the parties to
consummate the transactions contemplated hereby, and (v) effect all
registrations and filings necessary to consummate the transactions contemplated
hereby.
ARTICLE VII
CONDITIONS TO CONSUMMATION OF THE MERGER
The respective obligations of each party to effect the Merger are subject
to the satisfaction at or prior to the Effective Time of the following
conditions:
(a) This Agreement and the transactions contemplated hereby shall have
been approved by any necessary vote of the stockholders of the Company and
Purchaser in accordance with applicable law and Sections 6.3(b) and (c);
(b) No statute, rule, regulation, executive order, decree or
injunction (preliminary or permanent) shall have been enacted, entered,
promulgated or enforced by any federal or state court of competent
jurisdiction in the United States or other governmental authority which
prohibits the consummation of the Merger and remains in effect after GTE,
the Company and Purchaser shall have used all commercially reasonable
efforts to lift any injunction;
(c) No consents of or filings with any governmental entity shall be
required for consummation of the Merger which have not been obtained or
filed; and
(d) The Special Committee of the Board of Directors of the Company
shall not have modified or rescinded its recommendation with respect to the
Merger.
ARTICLE VIII
TERMINATION; AMENDMENT; WAIVER
SECTION 8.1 Termination. This Agreement may be terminated and the Merger
contemplated hereby may be abandoned at any time notwithstanding approval
thereof by the stockholders of the Company, but prior to the Effective Time:
(a) by mutual written consent of each of Purchaser and the Company; or
(b) by Purchaser or the Company if any court of competent jurisdiction
in the United States or other United States governmental body shall have
issued an order, decree or ruling or taken any other action restraining,
enjoining or otherwise prohibiting the Merger and such order, decree,
ruling or other action shall have become final and non-appealable; or
(c) by Purchaser or the Company if the Merger does not occur within
120 days of the date of this Agreement unless the Merger shall not have
occurred primarily as the result of a delay occasioned by review of filings
by regulatory agencies.
SECTION 8.2 Effect of Termination. In the event of the termination and
abandonment of this Agreement pursuant to Section 8.1, this Agreement shall
forthwith become void and have no effect, without liability on the part of any
party or its directors, officers, stockholders or partners.
SECTION 8.3 Amendment. This Agreement may be amended by action taken by
Purchaser and the Company at any time, provided that following approval of this
agreement by the shareholders of Company or Purchaser any amendment of this
Agreement shall be subject to compliance with Section 251(d) of the DGCL. The
prior approval of a majority of the members of the Special Committee shall be
required in connection with any amendment or modification by or on behalf of the
Company. This Agreement may not be amended, modified or supplemented except by
an instrument in writing signed on behalf of the party against whom enforcement
is sought.
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SECTION 8.4 Extension; Waiver. At any time prior to the Effective Time,
the parties may (i) extend the time for the performance of any of the
obligations or other acts of the other parties hereto, (ii) waive any
inaccuracies in the representations and warranties contained herein or in any
document, certificate or writing delivered pursuant hereto or (iii) waive
compliance with any of the agreements or conditions contained herein, except as
otherwise provided by law and except that the provisions of Section 6.2 hereof
shall not be waived. Any agreement on the part of any party to any such
extension or waiver shall be valid only if set forth in an instrument in writing
on behalf of such party, and, in the case of an extension or waiver by the
Company, if such extension or waiver has been approved by a majority of the
members of the Special Committee.
ARTICLE IX
MISCELLANEOUS
SECTION 9.1 Survival of Representations, Warranties and Agreements. The
representations, warranties and agreements made herein shall not survive beyond
the Effective Time, except for the agreements set forth in Sections 2.10, 3.1,
3.2 and 6.2.
SECTION 9.2 Entire Agreement; Assignment. This Agreement (a) constitutes
the entire agreement between the parties with respect to the subject matter
hereof and supersedes all other prior agreements and understandings, both
written and oral, between the parties or any of them with respect to the subject
matter hereof, and (b) shall not be assigned by operation of law or otherwise;
provided that Purchaser may assign its rights and obligations to any wholly
owned, direct or indirect subsidiary, but no such assignment shall relieve
Purchaser of its obligations hereunder if such assignor does not perform such
obligations.
SECTION 9.3 Validity. The validity or unenforceability of any provision of
this Agreement shall not affect the validity or enforceability of any other
provisions of this Agreement, which shall remain in full force and effect.
SECTION 9.4 Notices. All notices, requests, claims, demands and other
communications hereunder shall be in writing and shall be deemed to have been
duly given when delivered in person, by cable, telegram or telex, or by
registered or certified mail (postage prepaid, return receipt requested) to the
respective parties at the following addresses or at such other addresses as
shall be specified by the parties by like notice.
(i) if to the Purchaser, to:
Marianne Drost, Secretary
CCI Acquisition Corporation
One Stamford Forum
Stamford, CT 06904
with a copy to:
Jeffrey Rosen
O'Melveny & Myers
555 Thirteenth Street, N.W.
Suite 500 West
Washington, DC 20004
(ii) if to the Company, to:
Marianne Drost
Contel Cellular Inc.
c/o GTE Corporation
One Stamford Forum
Stamford, CT 06904
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with a copy to:
W. Leslie Duffy
Cahill Gordon & Reindel
80 Pine Street
New York, NY 10005
(iii) if to Contel, to:
Marianne Drost, Secretary
Contel Corporation
One Stamford Forum
Stamford, CT 06904
(iv) if to GTE, to:
Marianne Drost, Secretary
GTE Corporation
One Stamford Forum
Stamford, CT 06904
SECTION 9.5 Governing Law. This Agreement shall be governed by and
construed in accordance with the law of the State of Delaware, regardless of the
laws that might otherwise govern under applicable principles of conflict of laws
thereof.
SECTION 9.6 Descriptive Headings. The descriptive headings herein are
inserted for convenience of reference only and are not intended to be part of or
to affect the meaning or interpretation of this Agreement.
SECTION 9.7 Parties in Interest. This Agreement shall be binding upon and
inure solely to the benefit of the parties hereto, and nothing in this
Agreement, express or implied, is intended to confer upon any other person any
rights, benefits or remedies of any nature whatsoever under or by reason of this
Agreement, except as expressly provided in Section 6.2 (which is intended to be
for the benefit of the persons referred to therein and may be enforced by such
persons).
SECTION 9.8 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original, but all of which
shall constitute one and the same agreement.
SECTION 9.9 Expenses. All costs and expenses incurred in connection with
the transactions contemplated by this Agreement shall be paid by the party
incurring such expenses.
SECTION 9.10 Specific Performance. The parties hereto agree that if for
any reason any party hereto shall have failed to perform its obligations under
this Agreement, then any other party hereto seeking to enforce this Agreement
against such non-performing party shall be entitled to specific performance and
injunctive and other equitable relief, and the parties hereto further agree to
waive any requirement for the securing or posting of any bond in connection with
the obtaining of any such injunctive or other equitable relief. This provision
is without prejudice to any other rights that any party hereto may have against
any other party hereto for any failure to perform its obligations under this
Agreement.
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IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed on its behalf by its officers thereunto duly authorized, all as of the
day and year first above written.
CONTEL CELLULAR INC.
By: /s/ DENNIS WHIPPLE
--------------------------------------
Title: President
CONTEL CELLULAR ACQUISITION
CORPORATION
By: /s/ MARIANNE DROST
--------------------------------------
Title: Secretary
CONTEL CORPORATION
By: /s/ MARIANNE DROST
--------------------------------------
Title: Secretary
GTE CORPORATION
By: /s/ JAMES MURPHY
--------------------------------------
Title: Vice President and Treasurer
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FIRST AMENDMENT TO THE AGREEMENT AND PLAN OF MERGER
First Amendment to the Agreement and Plan of Merger dated as of January 27,
1995 (the "First Amendment") among GTE Corporation, a New York corporation
("GTE"), Contel Corporation, a Delaware corporation and a wholly-owned
subsidiary of GTE ("Contel"), Contel Cellular Acquisition Corporation, a
Delaware corporation ("Purchaser") and a wholly-owned subsidiary of Contel, and
Contel Cellular Inc., a Delaware corporation (the "Company").
RECITALS
WHEREAS, GTE, Contel, Purchaser and the Company have entered into an
Agreement and Plan of Merger dated as of December 27, 1994 (the "Agreement");
WHEREAS, GTE, Contel, Purchaser and the Company desire to amend the
Agreement as set forth herein.
NOW, THEREFORE, the parties hereto agree as follows:
Section 1. Definitions. All capitalized terms used herein shall have
the meaning ascribed to them in the Agreement.
Section 2. Amendment of Section 2.3. Section 2.3 of the Agreement is
hereby amended in its entirety to read as follows:
Upon the terms and subject to the conditions hereof, as soon as
practicable after the execution of the written consents of shareholders
contemplated by Sections 6.3(b) and (c) hereof and after the passage of
waiting periods required for compliance with the Securities Act, the
Exchange Act, the DGCL and any other rules or regulations applicable to
the Company, the Company and Purchaser shall file the Certificate of
Merger in accordance with Section 2.2 hereof, and the Company and
Purchaser shall take all such other and further actions as may be
required by law to make the Merger effective.
Section 3. Amendment of Section 6.3(b). Section 6.3(b) of the
Agreement is hereby amended in its entirety to read as follows:
(b) GTE, the Company and Contel agree that Contel shall execute a
written consent as majority shareholder of the Company approving this
Agreement and the Merger as soon as practicable after the execution of
this Agreement.
The Agreement, as amended hereby, shall remain in full force and effect and
shall constitute the agreement of the parties.
92
<PAGE> 13
IN WITNESS WHEREOF, each of the parties has caused this First Amendment to
be executed on its behalf by its officers thereunto duly authorized, all as of
the day and year first above written.
CONTEL CELLULAR INC.
By: /s/ DENNIS WHIPPLE
--------------------------------------
Title: President
CONTEL CELLULAR ACQUISITION
CORPORATION
By: /s/ MARIANNE DROST
--------------------------------------
Title: Secretary
CONTEL CORPORATION
By: /s/ MARIANNE DROST
--------------------------------------
Title: Secretary
GTE CORPORATION
By: /s/ JAMES MURPHY
--------------------------------------
Title: Vice President and
Treasurer
By: /s/ MARIANNE DROST
--------------------------------------
Title: Secretary
93
<PAGE> 14
SECOND AMENDMENT TO THE AGREEMENT AND PLAN OF MERGER
Second Amendment to the Agreement and Plan of Merger dated as of March 10,
1995 (the "Second Amendment") among GTE Corporation, a New York corporation
("GTE"), Contel Corporation, a Delaware Corporation and a wholly-owned
subsidiary of GTE ("Contel"), Contel Cellular Acquisition Corporation, a
Delaware Corporation ("Purchaser") and a wholly-owned subsidiary of Contel, and
Contel Cellular Inc., a Delaware Corporation (the "Company").
RECITALS
WHEREAS, GTE, Contel, Purchaser and the Company have entered into an
Agreement and Plan of Merger dated as of December 27, 1994, which Agreement was
amended pursuant to the First Amendment to the Agreement and Plan of Merger
dated as of January 27, 1995 (as amended, the "Agreement"); and
WHEREAS, GTE, Contel, Purchaser and the Company desire further to amend the
Agreement as set forth herein.
NOW, THEREFORE, the parties hereto agree as follows:
Section 1. Definitions. All capitalized terms used herein shall have
the meanings ascribed to them in the Agreement.
Section 2. Amendment of Section 2.4. Section 2.4 of the Agreement is
hereby amended in its entirety to read as follows:
SECTION 2.4 CONVERSION OF SHARES OF COMMON STOCK. (a) Each share
of Class A common Stock issued and outstanding immediately prior to the
Effective Time (other than Dissenting Shares, if any, and shares of
Class A Common Stock held by the company, Purchaser, Contel or GTE)
shall, by virtue of the Merger and without any action on the part of the
holder thereof, be cancelled and retired and shall cease to exist as
issued and outstanding shares and shall be converted into the right to
receive cash in the amount of $25.50 in accordance with Section 3.2
hereof. The consideration to be paid in respect of each share of Class A
Common Stock in accordance with the foregoing is hereinafter referred to
as the "Merger Consideration."
(b) Each share of Class A Common Stock held by the Company,
Purchaser, Contel or GTE immediately prior to the Effective Time shall,
by virtue of the Merger and without any action on the part of the holder
thereof, be cancelled and retired and cease to exist as an issued and
outstanding share, without any conversion thereof and without any Merger
Consideration being paid with respect thereto.
(c) The shares of Class B Common Stock shall not be changed or
converted in the Merger, and each share of Class B Common Stock issued
and outstanding immediately prior to the Effective Time shall continue
to be outstanding subsequent to the Effective Time as one share of Class
B Common Stock of the Surviving Corporation.
The Agreement, as amended hereby, shall remain in full force and effect and
shall constitute the agreement of the parties.
94
<PAGE> 15
IN WITNESS WHEREOF, each of the parties has caused this Second Amendment to
be executed on its behalf by its officers thereunto duly authorized, all as of
the day and year first above written.
CONTEL CELLULAR INC.
By: /s/ DENNIS WHIPPLE
--------------------------------------
Title: President
CONTEL CELLULAR ACQUISITION
CORPORATION
By: /s/ MARIANNE DROST
--------------------------------------
Title: Secretary
CONTEL CORPORATION
By: /s/ MARIANNE DROST
--------------------------------------
Title: Secretary
GTE CORPORATION
By: /s/ JAMES MURPHY
--------------------------------------
Title: Vice President and
Treasurer
By: /s/ MARIANNE DROST
--------------------------------------
Title: Secretary
95
<PAGE> 1
EXHIBIT 4(i)
PROMISSORY NOTE
$75,000,000.00 August 17, 1994
Contel Cellular Inc. (herein called the "Company"), a corporation duly
organized and existing under the laws of the State of Delaware for value
received, hereby promises to pay to GTE FINANCE CORPORATION, a Delaware
corporation, the principal sum of Seventy-Five Million ($75,000,000.00) United
States Dollars on August 17, 2000, together with interest on the unpaid
outstanding principal amount from the date hereof payable semi-annually on the
17th day of each February and August, commencing February 17, 1995, at a rate
per annum of 9.90% (with the actual number of days being computed on the basis
of a 360-day year).
Payments of both principal and interest are to be made in lawful money of
the United States of America at the offices of GTE Finance Corporation at One
Stamford Forum, Stamford, Connecticut, or such other place as the holder thereof
shall designated by written notice to the Company.
Notwithstanding any other provision of this Promissory Note to the
contrary, all principal and interest due and owing on this Promissory Note shall
become immediately due and payable on such date that the majority of the Common
Stock of the Company shall no longer be owned by GTE Corporation or any of its
direct or indirect subsidiaries.
This Note may not be prepaid at any time without the prior written
permission of GTE Finance Corporation.
Contel Cellular Inc.
By: /s/ DENNIS WHIPPLE
--------------------------------------
Dennis Whipple
President
By: /s/ THEODORE J. CARRIER
--------------------------------------
Theodore J. Carrier
CFO and Treasurer
96
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF CONTEL CELLULAR INC.
CORPORATE SUBSIDIARIES
Contel Cellular Holding, Inc., a Washington corporation
Contel Cellular International, Inc., a Delaware corporation
Contel Cellular of Alabama, Inc., an Alabama corporation d/b/a Cellular One
Contel Cellular of Birmingham, Inc., a Washington corporation d/b/a Cellular One
Contel Cellular of California, Inc., a California corporation
Contel Cellular of Chattanooga, Inc., a Washington corporation d/b/a Cellular
One
Contel Cellular of Chattanooga II, Inc., a Washington corporation d/b/a Cellular
One
Contel Cellular of Chautauqua, Inc., a Delaware corporation
Contel Cellular of Davenport, Inc., an Iowa corporation
Contel Cellular of Gadsden, Inc., an Alabama corporation d/b/a Cellular One
Contel Cellular of Huntsville, Inc., a Delaware corporation
Contel Cellular of Illinois, Inc., an Illinois corporation
Contel Cellular of Illinois Funding, Inc., a Delaware corporation
Contel Cellular of Indiana, Inc., an Indiana corporation
Contel Cellular of Knoxville, Inc., a Washington corporation d/b/a Cellular One
Contel Cellular of Kentucky, Inc., a Washington corporation d/b/a Cellular One
Contel Cellular of Kentucky B, Inc., a Delaware corporation
Contel Cellular of Memphis, Inc., a Washington corporation d/b/a Cellular One
Contel Cellular of Memphis II, Inc., a Washington corporation d/b/a Cellular One
Contel Cellular of Nashville, Inc., a Washington corporation d/b/a Cellular One
Contel Cellular of New York, Inc., a New York corporation
Contel Cellular of New Hampshire RSA, Inc., a New Hampshire corporation
Contel Cellular of Richmond, Inc., a Virginia corporation
Contel Cellular of Tennessee, Inc., a Virginia corporation d/b/a Cellular One
Contel Cellular of the South, Inc., an Alabama corporation
Contel Cellular of the Southwest, Inc., a Texas corporation
Cumberland Cellular Telephone Company, Inc., a South Carolina corporation d/b/a
Cellular One
Florence Cellular Telephone Company, Inc., a Delaware corporation d/b/a Cellular
One
Movitel, a Mexico corporation
97
<PAGE> 2
PARTNERSHIP SUBSIDIARIES -- CONTROLLED:
Alabama 1 -- Franklin RSA Partnership, an Alabama g.p.
Binghamton MSA Limited Partnership, a New York l.p.
California RSA No. 4 Limited Partnership, a California l.p.
Chattanooga Cellular Telephone Company, a Tennessee g.p.
d/b/a Cellular One
Evansville MSA Limited Partnership, an Indiana l.p.
Fresno MSA Limited Partnership, a California l.p.
Gadsden Celltelco Partnership, an Alabama g.p.
d/b/a Cellular One
Illinois RSA 1 Limited Partnership, an Illinois l.p.
Iowa RSA No. 4 Limited Partnership, a Delaware l.p.
Iowa RSA 5 Limited Partnership, a Delaware l.p.
Kentucky RSA No. 1 Partnership, a Delaware g.p.
Knoxville Cellular Telephone Company, a Tennessee g.p.
d/b/a Cellular One
Memphis Cellular Telephone Company, a Tennessee g.p.
d/b/a Cellular One
New Mexico RSA 3 Limited Partnership, a Delaware l.p.
New Mexico RSA No. 5 Limited Partnership, a Delaware l.p.
New Mexico RSA 6-I Partnership, a New Mexico g.p.
New York RSA No. 3 Cellular Partnership, a New York g.p.
Pennsylvania 3 Section 2 Limited Partnership, a Delaware l.p.
Pennsylvania 4 Section 2 Limited Partnership, a Delaware l.p.
Roanoke MSA Limited Partnership, a Virginia l.p.
Roanoke MSA Retail Limited Partnership, a Virginia l.p.
Rockford MSA Limited Partnership, an Illinois l.p.
Southern Indiana RSA Limited Partnership, an Indiana l.p.
Texas RSA 10B3 Limited Partnership, a Delaware l.p.
Tuscaloosa Cellular Partnership, an Alabama g.p.
d/b/a Cellular One
Virginia Cellular Limited Partnership, a Virginia l.p.
Virginia Cellular Retail Limited Partnership, a Virginia l.p.
Virginia RSA 3 Limited Partnership, a Virginia l.p.
Virginia RSA 4 Limited Partnership, a Virginia l.p.
Virginia RSA 5 Limited Partnership, a Virginia l.p.
Virginia RSA 5 Retail Limited Partnership, a Virginia l.p.
Virginia Cellular Limited Partnership, a Virginia l.p.
Virginia Cellular Retail Limited Partnership, a Virginia l.p.
98
<PAGE> 3
PARTNERSHIP SUBSIDIARIES -- NON CONTROLLED:
Albucell Limited Partnership, a Delaware l.p.
California RSA No. 3 Limited Partnership, a California l.p.
Cel-One Cellular Limited Partnership, a California l.p.
GTE Mobilnet of Austin Limited Partnership, a Delaware l.p.
GTE Mobilnet of California Limited Partnership, a Delaware l.p.
GTE Mobilnet of Santa Barbara Limited Partnership, a Delaware l.p.
GTE Mobilnet of South Texas Limited Partnership, a Delaware l.p.
Illinois Independent RSA No. 3 General Partnership, an Illinois g.p.
Illinois Valley Cellular RSA 2-I Partnership, an Illinois g.p.
Jacksonville MSA Limited Partnership, a Delaware l.p.
Los Angeles SMSA Limited Partnership, a California l.p.
Minneapolis SMSA Limited Partnership, a Delaware l.p.
New Mexico RSA 1 -- San Juan Limited Partnership, a Delaware l.p.
New Mexico RSA 6-II Partnership, a New Mexico g.p.
Oxnard-Ventura-Simi Limited Partnership, a California l.p.
Sacramento Valley Limited Partnership, a California l.p.
San Antonio SMSA Limited Partnership, a Delaware l.p.
Southern Illinois RSA Partnership, an Illinois g.p.
Virginia RSA 6 Cellular Limited Partnership, Virginia l.p.
Virginia RSA 6 Resale Limited Partnership, a Virginia l.p.
Virginia RSA 10 Limited Partnership, a Virginia l.p.
Virginia RSA 10 Resale Limited Partnership, a Virginia l.p.
Washington D.C. SMSA Limited Partnership, a Virginia l.p.
99
<PAGE> 1
EXHIBIT 23(a)
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
by reference in the Registration Statement of Contel Cellular Inc. on Form S-8
(No. 33-25735), pertaining to the 1987 Key Employee Stock Plan of Contel
Cellular Inc., of our report dated February 13, 1995 with respect to the
financial statements of Albucell Limited Partnership as of December 31, 1994 and
1993 and for the years ended December 31, 1994, 1993, and 1992, which reports
are included in this Form 10-K.
/s/ Arthur Andersen LLP
---------------------------------------------------------
Arthur Andersen LLP
Denver, Colorado
March 29, 1995
100
<PAGE> 2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
by reference of our reports on Contel Cellular Inc. and subsidiaries, GTE
Mobilnet of California Limited Partnership, and GTE Mobilnet of South Texas
Limited Partnership, included in this Form 10-K into Contel Cellular Inc.'s
previously filed Registration Statement File No. 33-25735.
/s/ Arthur Andersen LLP
---------------------------------------------------------
Arthur Andersen LLP
Atlanta, Georgia
March 29, 1995
101
<PAGE> 1
EXHIBIT 23(b)
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
of Contel Cellular, Inc. on Form S-8 (No. 33-25735) pertaining to the 1987 Key
Employee Stock Plan of Contel Cellular, Inc. of our report dated February 10,
1995, with respect to the financial statements of San Antonio SMSA Limited
Partnership for the year ended December 31, 1994 and 1993, included in the
Filing on Form 10-K of Contel Cellular, Inc. for the year ended December 31,
1994, (such financial statements are not included separately in the Form 10-K.)
/s/ Ernst & Young LLP
---------------------------------------------------------
Ernst & Young LLP
Dallas, Texas
March 28, 1995
102
<PAGE> 1
EXHIBIT 23(C)
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement
of Contel Cellular Inc. on Form S-8 (File No. 33-25735) of our reports dated
February 6, 1995 and March 16, 1994, on our audits of the financial statements
of the Washington D.C. SMSA Limited Partnership as of December 31, 1994 and 1993
and for the two years then ended and as of December 31, 1993 and 1992, and for
the two years then ended, respectively, which reports are included in this
Annual Report on Form 10-K. The financial statements referred to above are not
included separately in this Annual Report on Form 10-K.
/s/ Coopers & Lybrand LLP
---------------------------------------------------------
Coopers & Lybrand LLP
New York, New York
March 28, 1995
103
<PAGE> 2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the registration
statement of Contel Cellular, Inc. on Form S-8 (File No. 33-25735) of our
report, which includes explanatory paragraphs relating to contingencies, dated
February 17, 1995, on our audits of the financial statements of the Los Angeles
SMSA Limited Partnership as of December 31, 1994 and 1993, and for each of the
three years in the period ended December 31, 1994, which reports are included in
this Form 10-K, such financial statements were not included separately in this
Form 10-K.
/s/ Coopers & Lybrand LLP
---------------------------------------------------------
Coopers & Lybrand LLP
Newport Beach, California
March 28, 1995
104
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> DEC-31-1994
<CASH> 5,520
<SECURITIES> 0
<RECEIVABLES> 86,372
<ALLOWANCES> (8,556)
<INVENTORY> 6,012
<CURRENT-ASSETS> 102,953
<PP&E> 895,466
<DEPRECIATION> (233,744)
<TOTAL-ASSETS> 2,346,466
<CURRENT-LIABILITIES> 181,924
<BONDS> 0
<COMMON> 100,000
0
0
<OTHER-SE> (338,920)
<TOTAL-LIABILITY-AND-EQUITY> 2,346,466
<SALES> 38,183
<TOTAL-REVENUES> 562,955
<CGS> 78,634
<TOTAL-COSTS> 521,944
<OTHER-EXPENSES> 840
<LOSS-PROVISION> 14,704
<INTEREST-EXPENSE> 179,183
<INCOME-PRETAX> 16,067
<INCOME-TAX> 14,196
<INCOME-CONTINUING> 1,871
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,871
<EPS-PRIMARY> .02
<EPS-DILUTED> .02
</TABLE>
<PAGE> 1
EXHIBIT 99(a)
REPORT OF 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 1993, and the related statements of operations,
partners' capital and cash flows for each of the three years in the period ended
December 31, 1994. 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 the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Los Angeles SMSA Limited
Partnership as of December 31, 1994 and 1993, and results of its operations and
its cash flows for each of the three years in the period ended December 31,
1994, in conformity with generally accepted accounting principles.
As discussed in Note 9 to the financial statements, the Partnership has
been named in two separate actions, now consolidated, and a separate complaint
served by cellular agents. The outcome of these matters is uncertain and,
accordingly, no accrual for these matters has been made in the financial
statements.
In addition, as discussed in Note 9, four class action suits were filed
against the Partnership alleging violations of state and federal antitrust laws.
The outcome of these matters is uncertain and, accordingly, no accrual for these
matters has been made in the financial statements.
/s/ Coopers & Lybrand LLP
---------------------------------------------------------
Coopers & Lybrand LLP
Newport Beach, California
February 17, 1995
105
<PAGE> 1
EXHIBIT 99(b)
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of the
Washington D.C. SMSA Limited Partnership
We have audited the balance sheets of the Washington D.C. SMSA Limited
Partnership (the Partnership) as of December 31, 1994 and 1993, and the related
statements of income, changes in partners' capital, and cash flows for the years
then ended. 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 the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As further discussed in Note #6, during 1994 a settlement agreement was
entered into amongst the partners of the Partnership. This agreement resulted in
a reduction of litigation costs previously charged to the Partnership.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Washington D.C. SMSA
Limited Partnership as of December 31, 1994 and 1993, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
/s/ Coopers & Lybrand LLP
---------------------------------------------------------
Coopers & Lybrand LLP
New York, New York
February 6, 1995
106
<PAGE> 1
EXHIBIT 99(c)
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of
GTE Mobilnet of California Limited Partnership
We have audited the balance sheets of GTE Mobilnet of California Limited
Partnership (a California limited partnership) as of December 31, 1994 and 1993
and the related statements of operations, changes in partners' capital, and cash
flows for the years then ended. 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 the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of GTE Mobilnet of California
Limited Partnership as of December 31, 1994 and 1993, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
As more fully discussed in Note 3 to the financial statements, an
uncertainty exists with respect to a lawsuit filed against the Partnership. The
outcome of this litigation cannot be determined at this time. Accordingly, no
provision for any liability that may result upon adjudication has been made in
the financial statements.
/s/ Arthur Andersen LLP
---------------------------------------------------------
Arthur Andersen LLP
Atlanta, Georgia
February 13, 1995
107
<PAGE> 1
EXHIBIT 99(d)
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of
GTE Mobilnet of South Texas Limited Partnership
We have audited the balance sheets of GTE Mobilnet of South Texas Limited
Partnership (a Delaware limited partnership) as of December 31, 1994 and 1993
and the related statements of operations, changes in partners' capital, and cash
flows for the years then ended. 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 the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of GTE Mobilnet of South Texas
Limited Partnership as of December 31, 1994 and 1993, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
/s/ Arthur Andersen LLP
---------------------------------------------------------
Arthur Andersen LLP
Atlanta, Georgia
February 13, 1995
108
<PAGE> 1
EXHIBIT 99(e)
REPORT OF INDEPENDENT AUDITORS
The Partners
San Antonio SMSA Limited Partnership
We have audited the balance sheets of San Antonio SMSA Limited Partnership
as of December 31, 1994 and 1993, and the related statements of income, changes
in partners' capital, and cash flows for the years then ended. 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 the audit to obtain
reasonable assurance about whether the financial statements are free from
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 San Antonio SMSA Limited
Partnership at December 31, 1994 and 1993, and the results of its operations and
its cash flows for the years then ended in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
---------------------------------------------------------
Ernst & Young LLP
Dallas, Texas
February 10, 1995
109
<PAGE> 1
EXHIBIT 99(f)
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of
Albucell Limited Partnership
We have audited the balance sheets of Albucell Limited Partnership (a
Delaware limited partnership) as of December 31, 1994 and 1993, and the related
statements of operations, changes in partners' capital and cash flows for each
of the three years in the period ended December 31, 1994. 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 the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Albucell Limited Partnership
as of December 31, 1994 and 1993, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1994, in
conformity with generally accepted accounting principles.
As explained in Note 4 to the Partnership financial statements, effective
January 1, 1992, the Partnership changed its method of accounting for
postretirement benefits other than pensions and postemployment benefits.
/s/ Arthur Andersen LLP
---------------------------------------------------------
Arthur Andersen LLP
Denver, Colorado
February 13, 1995
110
